Schneider National, Inc. (SNDR) Earnings Call Transcript & Summary

Good afternoon, everyone. Hopefully, everybody got something to eat for lunch. My name is Dan Moore. I'm the senior transportation analyst at Baird. I got the pleasure of having a meaningful portion of the executive team of Schneider here with us today. I don't think we're doing a presentation, correct? No slides or anything. Just going to...

No.

Okay. Wanted to -- I have made that mistake a few times in the last 24 hours. So I wanted to make sure I didn't miss anything. I'll go through a list of questions, also save a little bit of time at the end for Q&A to the extent anybody has any questions.

If it's helpful, I can maybe just a little overview, Dan if...

Sure. Absolutely, go right ahead, Mark.

I know you've got a great industrial conference here,, everybody maybe not be transportation. So Schneider is a transportation logistics, asset-based transportation logistics provider across really 3 platforms most -- largest of $2.5 billion in size truckload. We've been through a process of recasting our truckload business to more of a dedicated focus. So 7 out of 10 of door trucks now are operating in some type of dedicated configuration, which from our standpoint, much longer contracts, revenue and earnings streams that you're getting much deeper with your customer. Doesn't mean that the network business, the remaining 30% isn't important. It's the most challenged presently, but still has great synergies with our dedicated business. Our second platform is intermodal. So we're an asset-based intermodal, meaning, we own our own chassis, containers, do our own dray about 90%. And in today's world, everybody wants to know who you're aligned with. So we're the Union Pacific in the West, CSX in the East and then we're the anchor on the CPKC, which I call the bullet service coming into and out of Mexico, which has been a great addition to our mix. And then third and finally, that's about $1.2 billion, $1.3 billion. And then on the logistics side, a pretty diversified contract logistics, brokerage, and our newest offering there is power only, which ties a little bit to our asset business by bringing our orange trailer into a trailer pool shipper on behalf of the shipper and bring small carriers to extend our reach into that customer share of wallet. So that's also about $1 billion, $1.2 billion in size. But more asset-centric, a lot of collaboration across those 3 platforms commercially with the customer, but really operate uniquely and separately and perform different functions. And they all have a little slightly different asset intensity and margin profile. Obviously, our truck business is more asset intensive, Intermodal, a little lighter and then our Brokerage and Logistics very much almost non-asset outside that use of that trailer in certain applications. So this is our 90th year of celebration for this year, which only means that we have to keep reinventing ourselves to be relevant, and that's really what we've been going through and changing our rail relationships, recasting our truckload business and obviously investing in new services and logistics like power only. So that's my 3-minute update.

It's perfect Update. Mark, Darrell, thank you both for being here again. Maybe to just pivot off of that, we like to start every session with a brief state of freight. It's been a pretty dynamic environment. Government shutdown certainly had some near-term influence in the broader freight market. Fourth quarter comparisons were always difficult. Maybe just to spend a minute, if you will, on what you're seeing in the market right now, how peak is developing. Any other observations in a macro sense you think is relevant?

Yes, you're right. It's been a moving target, lots of influences. As we came out of the -- talked about our third quarter, we felt coming out of July, last couple of weeks, we had seen some momentum, certainly in the demand picture, it felt maybe over seasonal, which was encouraging. And as we got through the quarter, that didn't really hold and became what we would consider August and September to be sub-seasonal. As we got into October, I think certainly, demand has been stable, particularly in our Network business and our Intermodal business. Seasonality is there, it's just not as typical as you would think, going into a more typical market peak season, but still we could consider a stable. And actually, even in the Intermodal space, we thought maybe we'll see at some point if we did some pull aheads, particularly imports that Intermodal would feel that first, and that still may occur as we get out through the end of the season. But as we sit here presently hanging in there pretty good. So I guess more of the same, Dan, is how I kind of described that, not getting dramatically better, but certainly not getting worse. As we've talked to our customers, particularly what you talked about on the government shutdown phase, from our view, it's interesting because we saw in our dedicated business, some of our existing customers on consumer products and food and beverage have less volume, which isn't necessarily typical. And as we talk to those customers, what they're really suggesting is with some of the uncertainty in the government, people are spending down their pantry and using everything they have in the house before they're going out in certain segments of the population and rebuy. Obviously, that can't go on forever, and they'll have to come out and replenish, but they're certainly felt in their brands and in their segments that people were being very cautious in spending down what they already had in the house.

Right. Right. Well, certainly, there's the initial impact with respect to the millions of people that are government employees that aren't receiving checks. But then in addition to that, you have the second and third-order consequences of companies that have government contracts, and so you I know there's a lot to process there. Maybe to pivot off of that and talk a little bit about the macro environment, but in context of the regulatory backdrop, rate environment, it's been weak for an extended period of time. We're starting to see some changes with respect to regulation, English language proficiency, non-domiciled CDLs, certainly been some development in that area. Curious what your views are around industry supply. I don't know that -- typically, supply narratives haven't been really present subject, not the sort of thing that drives the cycle, but this feels a little different and has the potential to be different as we look out in the '26 given the way things have been framed. I know there's a stay currently that seems more of an administrative stay than anything, procedural stay, maybe said that differently. What are your thoughts on regulation?

Yes. We've been talking what we were labeling shadow capacity because one of the questions we often get is how can we haven't had the supply rationalization like we've had in other periods. And our belief is just the oversupply and both immigration and through the pandemic, there was a lot of coming into the market and not all of that operating in the ways that we suggest that our ways that should be operated. And I think that's starting to play out. And while the rules and the regulations aren't being -- aren't different, they are being enforced differently. So the one that you didn't mention, the B1 Mexican driving program as well having some pressure at the border for those who are not exactly following all the cabotage laws. And then the other element is the -- not replenishing trucks in the subcycle as it relates to new truck orders. So we put kind of all of that together. I think all of that is real. All of that is meaningful. The question is, can we get to a cycle change with just the supply side? Because traditionally, to your point, it's been also required a demand change. I think we can have a little bit of both, a little bit of supply and a little bit of demand, I think, can really change. And all of these things are different going into 2026 than we came into 2025. So I think it's a much more constructive environment. Certainly, our customers are aware of the issues and aware of the concerns. And so if we can eke out some small gains contractually last year without all these effects, I'm more optimistic as we head into 2026.

And I guess, ELDs as well, people aren't talking about ELD enforcement or compliance...

Toggling and things like that. Maybe explain that for a minute for those that aren't familiar with that term.

So most of the manufacturers of the electronic logging devices, this is hours of service are within the U.S., but they're also Canadian manufacturers of the equipment. And their workarounds that some bad behavior -- bad players in the industry have found in terms of toggling or kind of switching around devices. And there's more of a focus in terms of administration on the manufacturers of those devices that are subject to manipulation. So there are already a few that have been disqualified from being compliant...

I think there are 90 or more in the United States today. Maybe more? Yes. I mean it's a tremendous number...

They're more, yes...

[indiscernible] 43 in Canada, but several hundred here in the U.S.

Right, right.

I guess the more focus there is on the compliance of those devices, less opportunity for bad players to do bad things.

And there's some overlap there, some of the same capacity that could be in the non-domicile utilizing some of those techniques as well. So...

Idea being that you have hours of service, that device is supposed to keep and monitor people for those hours. And essentially, they're able to.

To game the system...

Game the system...

More hours...

Yes, that's amazing.

Level the playing field...

Yes. I'm getting it from every end possible. The Intermodal market. Maybe I'll spend a few minutes on Intermodal. Certainly, a lot going on in the U.S. rail complex. We've got a pending merger between Union Pacific and Norfolk Southern. You mentioned earlier, you guys certainly have some exposure to this. Your partner in the East is CSX, partner in the West is UP. Our sense is competitive environment, certainly in the East has ratcheted up. I get the sense that there's some horse trading of accounts and assets potentially occurring. I think BN is certainly pushing some of the changes that are occurring across networks, forcing some of that. Could you talk to what you're seeing in the market today? What you think the implications of a merger like this are specifically for Schneider?

Yes. Maybe just kind of back up. I mean certainly, we have very good performance on a consistent basis over an extended period of time now with the rails. And...

Which is a change...

Even when we've had the influx of demand earlier in the year and maybe some of that pull ahead, the performance has been very, very solid. And so most of our customer conversations isn't about service reliability, it's about transit and what can we do to plan more thoughtfully towards the future. So that's encouraging. We grew 10% year-over-year in the third quarter when most of our competitors went the other way, which is, I think, a testament to our preparation through the allocation season, the differentiation because we really -- with our change to the UP of a few years ago with our change to the CPKC and out of Mexico, our strategy has been to be as differentiated and distinct as we can vis-a-vis our other competitors. And going through now our second -- our third allocation with the UP, the second allocation season with the CPKC, we're kind of proven in that regard, and that results really showed up for us in the third quarter. And so feel good about where we are positioned there. We have experienced changing railroads, which we talked about with the UP change. We haven't came out in our position on the merger. We're big fans of the UP and the CSX clearly. But we think details matter here, Dan. What are we going to see on the service design, what concessions are made? Is there going to be a 2-railroad solution for us? One solution we like to really put our effort and lean into a single railroad where we can, where we can get great integration of technology. We get very tight commercially so that we can jointly sell in the marketplace. That's generally been our strategy. We'll just have to see what our strategy will be once we see the design. That's coming soon, according to Mr. Veince. So we're really excited about that because anything that takes friction, takes waste out, allows us to have new origin destination pairs that can compete with truck is going to be good for our Intermodal business. And if everything lays out as prescribed, we think this is going to be a net-net positive for us and for our intermodal business for sure.

Right. Well, service has certainly improved a lot. And hopefully, as we get into '26, that -- it seems to be an intense focus, at least on the part of CN and CSX and NS and UP and really all the rail partners at this point to grow domestic Intermodal particularly. So -- which is a big change. So...

I think that's where the growth market is.

Finally, after years of battling cold. So dedicated, obviously, an area that you have a lot of exposure to, an area that you've grown through acquisition, an area that a lot of irregular carriers find themselves trying to pursue by virtue of the fact that the economics and the one-way market are not what they once were. Can you talk a little bit about the dynamics that are shaping dedicated today? What you're seeing from a customer standpoint, pipeline, development, things of that nature?

Yes. I think there's a lot going on there. Our focus in the dedicated market is predominantly in the specialty equipment. We're doing something besides moving a 53-foot box from A to B that can be -- at certain parts of the market, be more attractive on the network side, more attractive dedicated when it gets tight. That to us isn't really durable. We all have some level generally of exposure to that, but that's not the predominance of our portfolio nor any of our focus as we move forward. And each of those acquisitions, 3 in the last 3 years, had a specialty component, either lightweight equipment, relay networks or very high-touch, multi-stop retail type configuration that in a geography that's hard to serve. And so each of those have very defensible -- and that's what we're really looking for in our dedicated portfolio is a very defensible 3- to 5-year contracts that allow us to get deep with our customer. We do believe that scale does matter here, while if you may have a desire to get into dedicated. You have generally -- if you don't have the scale to bring your balance sheet to specialty equipment, the things, the technology, you generally have a limitation to how fast and how large you can grow, which is what happened on these acquisitions, that kind of stymied themselves after a few large customers. So I feel really good about that. What's transpired over the last couple of years, though, is that the private fleets had grown disproportionately as compared to for hire. I think pre-COVID, it would be 50-50. I think you got 45% for hire in the market, 55% private fleet. Our pipeline and our discussions would suggest that we're starting to see a correction to that. Part of that is capital. Part of that is insurance getting adequately represented that they can't just be under the general portfolio of the company they work with, they have to be risked. The insurance companies are risk profiling the fleet, which changes the dynamic. So very encouraged by what we're seeing there so that you understand probably why it happened more control, couldn't get capacity, made some decisions that I don't think are as prevalent today. And I think that will benefit us in other large-scale dedicated providers here. And certainly, our pipeline in the second half -- excuse me, in the third quarter, it was 3x the amount of closures that we had in the first half of the year. And that's continued here in the fourth. So we have a very good pipeline, and it's also converting, which is a good sign towards us going into 2026.

And it's skewed towards specialty.

Yes.

I'm curious, given this is probably the most difficult dedicated environment I've seen in my career. I'm assuming you'd probably say the same. I won't put words in your mouth, but are you seeing deal flow in Dedicated? Or is there enough risk around not knowing the durability of customer contracts and that sort of thing? And there's enough to work on as it is given just the overall state of freight in the goods economy that you prefer to maybe just focus more internally than pursue growth opportunities externally as you think about...

Yes, Dan maybe quite -- I have a little different view there. It's been a very good market. Our pipeline is at any level of our history would say you're in the growth mode when you have your pipe here, particularly because of what we're focused on in the specialty...

I think you guys have weathered it much better than everyone else, though, candidly.

Perhaps.

You and...

And so based upon that, we feel really good position. We would like to do an acquisition, if we can find something every 18 months or 12 months since the last one with Cowen and the lightweight that may or may not be able to keep that pace. But the demands keep getting higher and higher, and you can't always do that in a network configuration, particularly when you're doing something beyond just moving something A to B and doing some other value-added service within that supply chain for the customer. And so very bullish. And we also have improved opportunity to improve the bottom of the portfolio and redeploy equipment to raise margin and raise returns without just always just growing the truck count. How do we get more efficient with the trucks that we have? And how do we change our ratios and do a number of things that can just drop to the bottom line versus just adding the number of trucks on top? So we got a lot going on in that space. But I would tell you, I think we weathered the storm well and looking forward to leaning in further.

Sure. And I guess, at any point, we have a robust pipeline of targets that we're looking at in terms of acquisitions. And again, this environment also -- there's opportunities to be opportunistic, right? So you did see that with the last transaction that we did kind of with more carriers struggling, there is an opportunity.

Yes. One would think. '26, it's almost here.

Yes, so went fast.

Thank God. Pain hurts.

It's a big year for you. Yes.

So [indiscernible] there. The backdrop for '26 million, we stated this numerous times so far, but we finally have some semblance of fiscal and monetary stimulus that seems to be directionally favoring a domestic manufacturing recovery. I think the Fed certainly needs to be more active going forward, needs to continue to be active in terms of their efforts to ease financial conditions and improve liquidity. Shortening of the curve is likely to come down. The tax bill certainly has some stimulative measures to it. Comparisons, I think, are probably pretty easy. We already mentioned the supply story. It's always hard to call the bottom, but it feels pretty bad. How are you thinking about '26 given that framing? Expecting things incrementally better? How would you characterize '26 base on what you know today?

Yes. I think you hit a really important topic there because while the consumer side of the economy has been fairly stable, what's been contracting and not contributing nearly as much to the freight conditions, the industrial side of the economy. And certainly, the Big Beautiful Bill, Fed cuts, we've been in a 3-year dearth of residential home construction, which is nothing more correlated to our business because it draws labor into the trades out of the trucking, it draws local positions to fulfill the build and it creates demand, right? And so all of those things are positive for the supply-demand conditions that we're dealing with. So we're we're optimistic that there's some things in that bill and the environment that creates a bit more momentum in the industrial side of the economy. And then all things that we've talked about, I always like to tell our folks, hey, what's different as we sit here today than we sat here a year ago. We beat the heck out of the supply side pieces. But the other thing you mentioned there is what some of the stimulus activities that can help, and we've been missing all of that. So all in balance, I think it's just a much more constructive setup as we get -- because we -- really March before we get into the heavy lift of the allocation season start to see where things are shaking out. But if we could eke out mid- to low single-digit increases contractually in 2025, I'm hard-pressed to think that the environment isn't more constructive going into 2026.

Right, right.

And I guess during this cycle, we've been focused on cost to serve, right? So we're actually going into 2026 in a much better position as it relates to leverage across all of our segments. So from a truckload perspective, we've been focusing on headcount reductions. I think, Mark, in your remarks in our earnings call, we talked about 6% reduction in headcount -- non-driver headcount, and there's more to come as it relates to reducing unbilled miles, being more productive in terms of our assets and our people. We've seen in Intermodal that with no price, we're still able to grow earnings and margin. So that bodes well for the future where there is some price improvement and continued.

Yes, a little bit of price. There's a lot of leverage for us there. Right.

The whole network has been out of balance, too, with so much West Coast demand. Hopefully, we'll see some balance return to the intermodal market. Productivity efficiency kind of dovetailing off some of those cost initiatives. Automation is a buzzword. We've been hearing about it for some time. I think it's been really present this year across a variety of industries. Technology is creating opportunities to cost out in ways that might not have been possible. Previously, you guys have your own cost initiatives ongoing, Darrell, you just mentioned, you just highlighted. To what extent is increased automation providing you with opportunities to incrementally improve cost structure, landed cost, that sort of thing?

So we're in 24 minutes in, and we didn't have venture AI yet. So there's...

I didn't want to...

You are a void. I could tell you...

Automation. I prefer automation.

Yes. very, very promising and part of the -- I would consider ourselves in the AI world, which we're doing -- we call our own Malton, which is our own products, and there's also -- we're using others to help us, particularly on the voice side of things. And part of the 6% is getting after some of those low-value tasks that are necessary in this industry that don't add a lot of value to the supply chain. But very bullish. The technology works. We're now even telling our driver community care career. We're going to use this. They're going to -- Wally is going to be talking to you. The Wally is a robot, but if you get a better, faster service, no queuing with a robot, like we do 1,000 at a time. And if you get a better experience, a faster experience, I think what we're finding is -- I don't know if it doesn't really matter if it's a person talking to me or if it's a robot talking to me if I got what I needed at a faster cycle clip, that's what I'm after. And so it will be a big part of our future. We believe we can get at least what we got this year on people efficiency. And that is all self-help, right? We don't need Mr. Market to help us with that. Those are the things that we can do ourselves. And that will be the focus of our tech spend is how do we harness that? How do we do that in the way that's productive, but we don't get ourselves -- because bad actors find ways to do bad things, more you do some automation. And so we've learned a lot through the brokerage cargo theft world. So how we do that smartly, but it's incredibly fast. The cycle time is incredibly fast. It doesn't have to be all tech resources. There's a lot of benefits that you can move at a pace much different than typical technology. And for us, leaning into that very, very hard.

So -- sorry, just to round that out. We did set a $40 million annual savings target goal, including synergies from Cowen. And I'm pleased to say that as of today, we're past $40 million for the year, but we're not happy with that. We're going to keep going. So...

I'm happy with that. We just went too far, yes...

We're happy with what's coming too. So every time we hit our target, we re-up. So for the remainder of the year and going into 2026, there is momentum that the things that we've done are effective, and we can continue to build on that.

Maybe to just touch on CapEx, capital budgeting. It's November. I'm sure you guys are in the middle of your capital budgeting cycle right now. You've got some increased hands in that effort, which I think many of us are excited about. Could you just talk a little bit about how you're thinking about capital deployment at a very high level for '26, what your priorities are that sort of thing?

Yes. So organic growth is always going to be our #1. So Mark kind of touched on in his overview, our areas of differentiation. So we're leaning into those. So dedicated, obviously, is a big deal. We have a pipeline that's coming. We're going to deploy assets to support that pipeline. Obviously, we're going to redeploy into higher yielding to the extent that makes sense, but we're in growth Mode as well. So our capital is going to go there first, Intermodal. We've been growing very fast as it relates to volume. So keeping up with the dray capacity, so we're moving more that on our trucks. And then the tech investments that are not only in the brokerage space, but across organizations. Organic growth, number one. We're also looking at the pipeline of acquisition targets. So the beauty of our balance sheet is around 0.4x lever -- levered as of the end of September. We don't need to choose, right? So we can satisfy our organic growth priorities and focus on inorganic growth and return value to our shareholders.

Yes. Share repurchases, I mean, it's where you get an opportunity. You have a cyclical downturn when the best-in-class carriers in the space are all generating profits and returns that are close to breakeven, in some cases are just marginally above or in some cases actually below. How are you thinking about share repurchase?

So we think that there's an opportunity to -- at least in this part of the cycle given where our stock price is, we think it's undervalued. So we are leaning into that for the quarter.

Just the other thing, Dan, a little more clarity now on tariffs as it relates to trucks. That's been another area that's been a little bit foggy. We didn't buy as much during the fourth quarter. We kind of signaled that third quarter call so we got some clarity where the tariffs are going to come in, which is another headwind to the industry relative to the replenishment cycle that's already below industry replenishment. But at least we got enough clarity now, we'll be able to kind of make our final adjustments and tweaks as we head into 2026, pending no other changes, which sometimes [indiscernible]. So that's been, I think, a little bit of a lift that will help us as we come out and tell you in January where we are at.

To the extent we have any questions from anybody in the audience, certainly happy to entertain 1 or 2 of those. If not, I would just like to say thank you, for being here. Really appreciate the opportunity to visit and ask some questions. And hope you have a good rest of the conference and safe travel to home. Look forward to catching up with the quarter. Thanks.

Thanks.