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

So you think it extends to '28?

I think it extends potentially beyond 2027. However, we've reshaped the portfolio during the downturn. So our truckload business looks different than it did 4 years ago, right? We're more heavily focused in dedicated, which is we think is more resilient. We've taken a lot of cost out of the business. So $40 million last year, we have another $40 million this year. We've shown at least sequentially from the first quarter to the second quarter of this year, what happens when I get a bit of price in terms of our operating leverage. So with all that said, looking ahead, with supply still exiting and all the self-help actions still in place, we think there's line of sight to get to, kind of, mid-cycle margins. Now in Q2, for Truckload, we're at 8% margin, right? And I think we'd all agree that there's probably more price to be extracted and demand is only stable, has inflected. Intermodal, we're at 7%, right, with essentially no price. And then for logistics, we're already within our long-term margin range because we've been opportunistic in terms of executing on specific project work. So all that momentum, we're carrying into next year, and we should have some tailwinds from price.

Got it. But your cycle aside, idiosyncratically, can you remind us the 2Q to 3Q margin walk? I think there were a few items there, kind of anything to keep in mind versus...

Yes. So there are a couple of things that we mentioned. We talked about in our Logistics segment, we capitalized on some premium project work. Some of that project work, a lot of it ended, not to say that there's not more that's in the pipeline, but that's just something to kind of keep track of. We also said that for Dedicated, there was one large customer that we lost, but we also said that we had a very strong pipeline. So it would be visible in terms of our truck counts, at least in the near term. But as those implementations kind of get in place, that would all normalize. So we talked about those things, but we also talked about peak and what happens in peak, primarily in the fourth that we're ready to execute, right? But has to show up.

Yes. And as we changed our portfolio, we start growing with a lot more seasonal customers we're -- food and beverage, home improvement are stronger in the second quarter.

Understood. What is the right size for Dedicated within your portfolio? Kind of is this it? Or are you looking to kind of make that a bigger...

Yes, there is no defined number that it should only be a certain size. We are going to move capital to where we can get the best return. That might even mean that we move some trucks from Dedicated into network if we have a better option there as well. And so our goal is to be able to deploy capital to wherever we can get returns that are commensurate with our expectations.

Got it. I wanted to switch gears a little bit and kind of focus on the long term here. And I know that you guys are a very tech-focused company going back to Quest at the time of your IPO, kind of, which was an industry-leading platform at the time. So obviously, the focus of this conference has been on autonomous. I think I've brought it up at every fireside. I believe it's come up in every single meeting investors have had. I know you guys obviously are a leader here. You've done pilots. You're working with the autonomous technology companies. So a few questions on that front. Maybe I'll just let you free wheel at the start first. How do you see autonomous today? What works? What still needs work to work? And kind of where do you see this going in the short term?

Yes. Well, I believe we're very close that we'll start to see autonomous trucks with the driver out, not a driver, we're getting past that point. So now we're moving from just concepts moving into actually deploying this as a form of capacity. And when I think about that, and a lot of people compare this to Intermodal. In a lot of ways, I believe that, that is very true that what's important in an Intermodal network, and like there's very few intermodal companies that generate a return on capital that's higher than their weighted average cost of capital. And so we're very proud of that. But the way you do that is being very disciplined as well. Some we were talking about Intermodal. So you have to be disciplined in creating a network that has balance and not just the hub to hub, but also the dray networks around them because we do believe that we're still going to have drivers on both ends that are making final deliveries. The other part of making this work is the maintenance and the operations of that line haul truck. A truck after it has -- it's been gone 700,000 miles, 800,000 miles, the maintenance expense is about 5x higher than your first year. It also spends more -- has more downtime. This -- for the economics of this to work, that truck has to run 24/7 nonstop. And if it's breaking down, you have a lot of cost on your hands that you're not able to deploy. And so as we're thinking about this, where we think we will be successful is building very dense networks, and you have to have a lot of liable parties. And this where having a brokerage business, a truckload business, Intermodal really is helpful. And then I believe our ability to build the dray networks. We will -- I believe we'll have more drivers in the future when we have autonomous trucks than what we have today. But more and more of them will be going home every single day, enjoying the types of jobs that they have, and we'll be able to grow that much faster. So I believe we're very close to that point, excited about the opportunities there.

Got it. So is it fair to say that you guys feel like you have an amazing recipe for this great dish? It just isn't this slow cooker and kind of needs to -- the ingredients need to come together and get it done? Or do you think we are still at an early stage where there are still things we need to figure out that we don't have answers to.

Yes. I believe that I have this great opportunity. And by the way, I don't believe this really competes with Intermodal, even though I say it's similar to Intermodal. Intermodal has a very different price point than over the road. And so -- and different fuel consumption. So Intermodal is still going to compete very well. But I think about even long-haul trucking, Intermodal is, maybe 5% to 7% of those kind of lanes. It's all of that other freight is where I believe you will see this impact. But we're very close to it. At the same time, I think the caution is you can clear every single technical hurdle, but you have other hurdles that -- the adaptive issues. And so the one thing that has us excited about us being on the precipice of this going forward is the BUILD America 250 Act, which will create a nationwide framework for EVs. That same bill also has a provision that mandates 2-person crews inside of the train on a track with positive train control that even if both people fell asleep, the train is going to slow down. And so I mean, there are an awful lot of truck drivers in this country, and I'm sure concern make sure that they're getting these good paying jobs as well. And so we're going to be watching adaptive issues. And we want to support this and show people you're still going to have a job. We're going to have jobs where you get home more frequently. We want to help people through that. But that's going to be the key part of this. So you have to do this at an appropriate pace as well.

Got it. Sorry, just a couple of more questions on this topic. We see 4 stakeholders here, which is the autonomous technology companies, the truck OEMs, yourselves as fleet operators and the shippers. Whose court do you think the autonomous ball is in right now? Like, who has the next -- the burden of execution, the burden of proof for the next phase until we get to commercial?

Yes. I think it's getting to the carriers because we are at that spot where the trucks aren't available yet at a level of scale, but we're getting very close. So I would say that the OEMs do have to create the trucks with duplicative systems. So there is a little bit of work there. I believe by next year, we'll start to see those trucks be available. So I guess it's really in their court but for a short period of time, followed by a little bit with the AVs, but very quickly, it will be sitting in our hands and our opportunity to prove that we can create a really dense network that can provide a cost-effective and high service solution for our customers.

Got it. Last question on this topic. To whatever level of detail you want, kind of, what actual work are you doing on this today? Kind of, what pilots are you running? Are you talking to multiple OEMs and multiple providers, kind of just give us a sense.

Yes. We're working with 2 providers. We think Aurora is very good on the technology. But at the same time, they're not an OEM. So we're working with Torc who is aligned to our primary OEM as well. And so we want to be able to work with both models. I think both have applications. We want to be able to test both, and we'll continue to do that. And we've worked with others in the past. We've narrowed it down just to these 2. We think they're both have the opportunity to be winners. Now there might be some other winners as well. So we're focused on that. In terms of running a truck and doing one single load, we really don't learn anything new anytime we do that. There's -- we can do that, but you're not learning anything new by doing that. The rest of the work is identifying where do you want to operate? Do you have the facilities and other pieces starting to be put in place. We're a little bit early for that, but we do this type of work all the time with our modeling tools and Intermodal. There's times where we've added new locations, we've taken them away. We have a very good process for be able to identifying those and then also building into our pricing tools. So I think we're prepared.

Sorry, I lied. One more. I can get keeping -- I can get keeping time here. What are your conversations like with your shipper customers on this? Kind of is there a demand pull from their side because they know what's going on with drivers? You can't just have a driverless truck show up at a Walmart location, like we're not supposed to do this. So are you having those conversations now? Or does that happen in the future?

Yes. There's -- customers are asking about this. They want to make sure that we're leaning into it that there's an opportunity. We're assuring them we are when this is available. We're going to be able to do that. They want to make sure that if there's an opportunity to take cost out of our supply chain that Schneider is going to be there leading the way, and we're assuring them that we will.

Got it. I am done now. I want to open up to the audience to see if anyone has questions. We have one here.

Can you talk to kind of initiatives you have, wage increases with the drivers and just kind of how you're retaining talent here, just given none, all these initiatives here to bring [ into supply ].

Yes. So for retention, first of all, starting off, it was really important that we are focused on productivity. One, your drivers are making more money. But when drivers are productive, they're not out there looking at what should go and do something else. And so we saw high single digits improvements in both Q1 and Q2. And following that, we are already starting to look at some places that we need to start to increase some driver pay back in Q2. Primarily, our focus is on the retention side. How do we take care of our most productive drivers and raise then the pay scales as well. So that's an ongoing exercise because we have to make sure that our customers are funding it. And so it is a little bit iterative as we're focused on specific opportunities where customers are looking for capacity if they're funding it, a portion of that is flowing back to our drivers.

I know you talked about earlier how the supply side regulations are driving enough demand to you. Is that mostly on the One-Way side? Or is that able to help offset maybe some of the churn you've seen in Dedicated as well?

Yes. It's primarily in One-Way to include within logistics. It doesn't necessarily drive Dedicated because within Dedicated, we want to make sure the opportunities we're pursuing are truly dedicated. They're not a network type solution that's going to fall apart in the future. And so we spend a lot of time there. Same time, when that type of activity drives spot rates, and we're always looking for backhaul to feed into the Dedicated business. So it does have an impact on Dedicated, but not necessarily to grow the fleet.

Yes, there's an indirect impact, especially we talked about a lot of these actions on the supply side we think are durable. So they're going to extend beyond 2026 and 2027. So spot rates obviously have an impact on contract rates. And we usually see a lag between Intermodal rates and truck rates. So there's some impact, we think, on Intermodal, right, as we're kind of repricing some of those. And then Dedicated, obviously, is contract-based. Not all the book comes up every year, right? Essentially 1/3 or so of the book comes up every year. So depending on where spot rates are, that's instructive to contract as well.

Maybe a couple more take us home here. I badgered you with autonomous questions. So I'll slightly shift gears, let's stick with the technology team and talk about AI because that was a huge focus for investors, kind of, maybe 6 months ago, it sort of died down a little bit, which is probably good, healthy, normal as the technology, kind of, matures a little bit. I know you guys have a number of initiatives there. Talk about what that means for the logistics business and indeed for the entire organization, kind of, what you've put in place and what the maybe margin opportunities over time?

Yes, I'd start with creating a structure for the organization because we want to make sure that as we're taking actions, we're doing this and protecting the enterprise, making sure that our entire team is AI literate to understand what the opportunities are. And then we're going out and building and understanding what is truly our sovereignty, the pieces of our business that we want to protect and we don't want to make available to others and also understanding where are those places where it really is a commodity and we should be working with partners. And so as we're doing that, we're looking at a number of domains and where we can deliver value back to the organization. And so we've had a number of those, and we've been very public on the logistics side because there's been some really great improvement in productivity multiple years in a row. The bots are negotiating rates and talking to carriers. They do a lot of back-office type work. But it was also really important that we didn't just go and build this to be efficient. We focus on effectiveness first, having decision science tools that we can trust so that you can allow that productivity to really go out and run. We are starting to take more of this now, and it's moving more towards the asset side, the work with our drivers. And so we've started this in our Intermodal business, where we have some Agentic AI that's helping our drivers out, be able to respond much faster. We're starting to apply that to other businesses. We're applying this into our recruiting business, make sure that we take every single call right now and actually proactively reach back out to candidates as they're moving through the process. We want to make sure that we keep touching them. And so we think we're not just investing because we see something that we think looks pretty cool or we have a capability, but we can generate a positive return.

Got it. Maybe Darrell, to close out. Just 2 questions on capital use. How are we thinking about CapEx, the fleet renewal versus growth here and also maybe M&A opportunities? And do you see anything out there?

Yes. So we -- similar to the theme, when we're talking about Intermodal and even Dedicated, we're focused on earnings growth and productivity. So that productivity translates into what we do in terms of our fleet. So if you look at our revenue per truck per week in truck, we've increased efficiency there. So that has the impact of allowing us to purchase less in terms of CapEx. But we're still focused on replacement CapEx because we want to protect our agent fleet. Now if there are opportunities to invest in growth that has a commensurate return, we're proven that we'll continue to do that. We're also very focused on equipment ratios. So we had scaled back on trailing CapEx because we want to make sure that our trailer to tractor ratios are tight. Just in terms of capital use in general, right, so we're focused on organic growth where necessary replacement CapEx, shareholder returns, but also M&A. We have a very successful playbook that we've used 3 successful acquisitions in the last 5 years. So we're looking at quality targets, accretive targets, not fixed or upwards, places where we can use our scale to grow those targets. And the proof is in the pudding we've seen that the 3 acquisitions that we've done are larger today than when we acquired them. So we're going to stick to that formula. And we said every 12 to 18 months was our targeted cadence, but we're not going to force something if it doesn't make sense. But we have a robust pipeline that we are always looking at targets and we're with 0.2x leverage or less, I think we have the ability to execute.

Yes. Any particular rank order of segments, Logistics, Dedicated, Intermodal, One-Way?

Yes. So we don't close the funnel necessarily. But in terms of our One-Way network, just based on where margins have been and returns have been, I don't think it will be the best use of capital to invest there, right? So Dedicated, the playbook has worked, and we're continuing to look at those targets. Intermodal, based on the concentration of the intermodal providers, the opportunity hasn't created itself or appeared, but that's a configuration that's in our strategic priority list that if something were to come up, we'd look at it. And then on the Logistics side, it's really looking at the multiple that we'd have to pay and figuring out how the multiple kind of correlates to our enterprise multiple, and that math hasn't worked. And obviously, there are other pieces to consider in terms of the cost, at least in the short term. So we haven't really looked at that right now.

Got it. Gentlemen, with that, we are unfortunately out of time, but that was very insightful. Tons going on. So a very exciting time as well. But thank you for being here at Laguna.

Thank you. Appreciate it.