Conference Transcript - SNDR 2026-11-11

Dan Moore, Analyst — Beard

It's good to have everybody here. My name is Dan Moore. I'm the senior transportation analyst here at Beard. Very pleased to be joined by senior management of Schneider National, Jim Filter. We've also got Derek Campbell, so CEO and CFO, Christine in the audience. I've known for many years, both personally and professionally. Thank you for being here. Well, thank you for having us. Yeah, it's been good. A lot of good information here, I think, today and yesterday. You know, a unique cycle, right? I mean, it seems like I open up all of these to some extent saying the same thing, but it's been a very unique cycle. It's been a supply-led cycle. I remember when we were either in this room or another one a year ago, and wow, how much things have changed in a year. It's been pretty extraordinary. I'm curious, maybe just Kind of opening remarks, how are you guys thinking about the cycle? How do you feel about the market today relative to three and six months ago? Obviously, again, supply-driven, rate seems to be a tremendous focus on the part of everyone, margin repair, that sort of thing. Stop right there.

Jim Filter, CEO

Yeah. Well, let me just start with, you're right, it's primarily supply-led. That's what we've experienced up to this point. Demand has been stable, but nothing terribly exciting, although what we are experiencing right now is what I would call a typical peak season, which probably last time I could say that was probably 2016, because either we're in a situation where... We'll take it. Yeah, we are in a situation where the... You know, the incremental cost for some of the project type work that happens during this time of year. Customers just weren't willing to pay that price. And then we had a couple of years where they're willing to pay in excess of that rate to be able to extract capacity. Right now, we're at a spot where you're getting the price that would reflect that type of demand that isn't stable year-round, the incremental cost to reposition equipment, reposition drivers. And that's why I would say this one feels more like what you would normally experience in a fall season. So overall, you know, I believe that with demand, there's still opportunities with those big markets, like housing and autos that are driven largely by interest rates. That would, you know, cause us to change a little bit. Right. But in terms of capacity. You know, what most of the capacity I think that was going to exit has exited, but what's really different here is the top of the pipeline. You know, if you think about during 22 and, well, 21 and 22, there was about 50,000 long haul truck drivers that came into this industry. And most of them were coming through really quick ways to get their CDL. You know, two days, very low price, you can get a CDL. Schneider wasn't able to really tap into the market because you don't know how to drive a truck after just two days of training, especially if you're just sitting in a classroom. We just had a meeting with a number of our different schools, and they were feeling really optimistic because they said, we're actually seeing more demand now, knowing that it's six weeks of training, and it might be something more like $7,000. They're getting more demand going through those channels. Those are the channels that Schneider can tap into to start to grow capacity, but it's not going to grow at the same rate. And so, I mean, one other way to think about the cycle, if I throw one more on you, is typically up cycles, we believe, follow the down cycles that just preceded it. And in the past, you'd see these 18 months, about the same duration. This one took almost four years, very deep. We're one year into it. Yeah. Another way to think about it.

Dan Moore, Analyst — Beard

Yeah. Yeah, no, that's great context. It really kind of sets us up to talk a little bit about pricing. And so given the uniqueness of the market, given how difficult the driver market has been in general and the substandard returns that have been, you know, candidly industry-wide for a variety of reasons, have been bad actors, there's been a bad freight demand environment coming out of COVID, which was a period of, you know, rapid and meaningful capacity growth. You know, the need to repair margins is very real, which is something I kind of opened with. And my sense is, you know, what rate has been realized has, in large part, gone to offset as much as possible inflation, address driver-related issues. And that being said, you know, as we look into 27, when I talk to CEOs, when I talk to CFOs, when everybody's going through capital budgeting right now, so you know where I'm going next. But the backdrop seems to be one of, you know, unique focus on margin repair and rate as we go into 27. Can we talk a little bit about that?

Jim Filter, CEO

Yeah, I mean, just start about the scale of it and then talk about the repair. We've been talking about industry costs have gone up about 30% since the pandemic, like most industries. But most industries were able to recover that through prices, through yields. And initially, this industry, we were able to do that and then gave it all back. So we are just getting back to a level of parity. And then you do, you know, let's just get back to the performance where we were at before. I also expect that, yes, drivers to be able to come through this industry in a proper manner, it's going to be at a higher price point. Trucks are going to start becoming even more expensive. We're not going to get all of that back necessarily in an allocation cycle in 27. There's got to be a lot of different ways that we're going to be able to extract price. And the other factor for shippers right now, it's not just recovering that price, but understanding post-Montgomery, there's a difference here. It's not just price and service, but what's the insurance risk that they're putting on their company as well?

Darrell Campbell, CFO

Yeah, so I think pricing is a big part of the margin repair, as you said. But we spent most, if not all, of the down cycle making sure that we're structurally more efficient as it relates to cost. So last year, we had a $40 million cost savings target. We doubled down on that target, you know, for 2020, you know, 2026, and we're on track to meet that. So you don't get to... You know, the results that we've seen over the last several quarters, if your cost base is not more efficient. So if you think about even intermodal, in intermodal, our volumes are slightly down in the third quarter. We're just beginning to get some of the contract price, but you've seen the impact on our earnings growing 35%. So it's both price and cost in addition to productivity, which we're very focused on.

Dan Moore, Analyst — Beard

I'm going to jump all over the place here, but we're into capital budgeting right now, probably starting to wind it down in some instances. I think given on the inflation, some people started a little bit earlier this year. You're in a unique position to talk just very generally about priorities for 27, not looking for guidance per se, but I'm just very interested in learning what the priorities are for Schneider given the current operating environment.

Darrell Campbell, CFO

I'll start and you can jump in. So, you know, we've talked about discipline growth and growing where we have differentiation.

Dan Moore, Analyst — Beard

Right.

Darrell Campbell, CFO

And that's been, you know, the process that we've been going through, you know, throughout all cycles. Right. So, when you think about truckload. We've said we're not focused on truck count. Specifically, we're focused on growing earnings. So there's a constrained driver capacity dynamic, but we're making sure that all investments that we're making in driver capacity are at the right time and that we're getting paid for it. So that's both a network and a dedicated story.

Dan Moore, Analyst — Beard

So the cart is not coming before the horse.

Darrell Campbell, CFO

The cart is not coming before the horse. In Intermodo, we've talked about a differentiation with our rail partners, and I'm sure one of your questions coming up will be about, you know, some of that dynamic and what we're doing with our rail alignments. And then even in brokerage, we're very specific in terms of using technology, going after premium freight. So those are the same playbook that we're going to use in 2027 in terms of being disciplined in terms of growth. We're not satisfied. We're never satisfied as it relates to just cost containment. So we're going to continue to focus on cost containment because the things that we're looking at, they're structural in nature. So we're not just slashing costs just for the sake of slashing costs. We're making sure that as pricing inflects and as the market recovers, we're not losing the discipline that kind of got us here. And then, obviously, as it relates to capital allocation, we're also looking at, you know, M&A to the extent that those opportunities arise, but we're positioning our balance sheet to be ready for those opportunities.

Dan Moore, Analyst — Beard

As well as share repurchases?

Darrell Campbell, CFO

Yeah, share repurchases.

Dan Moore, Analyst — Beard

That's a perfect opportunity to maybe pivot and talk a little bit about intermodal. Intermodal franchise at Schneider is a very important one. You're a market leader among a handful of them. Obviously, the M&A environment and the rail complex, it's going to present a lot of opportunities to some folks. You had a recent announcement. I had an opportunity to visit with Kevin Boone earlier today and ask him this question. But, you know, it strikes me that your pivot in terms of the network and in your alignment with NS and UP really... It realigns the business, I would argue, to what that merger may offer long term. I see a lot of benefits, potential benefits from it. There certainly seems to be a desire to convert a lot of loads. The spread between trucking rates and rail rates is quite significant. That'll come. That'll go. But the reality is, at least we've said, we really struggle to imagine an environment where truck rates don't continue to go up. The margin repair is very much needed. The reinvestment is very much needed, and you won't get there without improved returns, which should be a tailwind to intermodal. All that is to kind of set the foundation for why do you make the change? What do you think the opportunity is for Schneider amidst that change? And, you know, how are you thinking about Intermodal and 27 in general?

Jim Filter, CEO

Well, first, the change stands on its own, even if a merger doesn't advance. And we have a lot of data that we compare the different alternatives to, and it just put us in position that this is the right move for Schneider absent a merger. The merger is the icing on the cake, and there's a lot of icing on this cake. It's really deep because we made the move to the CPKC. We spent a lot of time with them as they were making their transition, understanding how they were going to operate their trains, knowing that there's actually more miles. It's a little bit of a circuitous route, but they were able to do it faster and more reliably. Been a great partnership. And low cost. And been a great partnership, 19 straight quarters of growth. When we look at this one and we lay out the map, we see the same thing at a much larger scale when you talk about transcontinental shipments. We have shippers today that don't use intermole transcontinentally because of the reliability and the speed. So that's number one. Number two is you have the center of the country that really isn't viable, doesn't have viable intermole options because you're going to use two different railroads. And imagine taking a short haul, a place like Minneapolis into Chicago, north side of Chicago, and now you've got to drive it, take it off the rail, drive to Bedford Park or someplace on Then we put on a different rail to go to Atlanta or someplace else.

Dan Moore, Analyst — Beard

It's not economical. And Jim, there's a lot of debate around this, as you might imagine. And so as a practitioner and somebody that lives this, to hear this, not from a rail, but from somebody that's in the market every day and can speak to it is really, I don't want to stymie your role here. So I'm anxious to learn a little bit more about the opportunity. So please. Yeah.

Jim Filter, CEO

Yeah. So, you know, and we don't We don't know precisely all of the lanes that they'll be able to create, and a number of these won't be specific to only intermodal. We've done this with CSX in the past where we've had mixed trains that you would say that's not a typical intermodal lane, but we've been able to look at the service levels and build really good intermodal routes that are nontraditional length of haul. We see more opportunities as we look at the center of the country. The third part that gets me excited, so those first two is just about creating a bigger pie. We like our differentiation here, knowing that on that network, we are the only one with 100% owned containers, chassis, high percent company drivers. Gives service levels that we can deliver that the others operating on that new network are not able to provide. And then you have one other large intermodal company that's going to be using multiple railroads to get to the same level. We really like how this would position our organization if it goes through.

Dan Moore, Analyst — Beard

Yeah, no, that makes a lot of sense. So you're a believer in the transcon opportunity, clearly. See real value in it. Let's maybe talk a minute about dedicated. I've framed it this way. I don't know if it's accurate, but post-Montgomery, it seems like maybe between the spot rate inflation, the cost inflation broadly in budgets, coupled with the counterparty risk, There seems to be an increased focus on the part of retailers and others to place more freight with high-quality service dedicated providers. And you guys have been in the market for a long time. Love to hear your perspective around dedicated, the potential for the cost of capital is going up, and I know the dedicated market has been a very challenged one, 24 and 25. But a rising tide tends to lift all ships. And so how would you frame the dedicated market today for Schneider and going forward?

Jim Filter, CEO

You know, long term, what we've seen is the reason for more dedicated fleets is customers have tighter and tighter supply chains that you just, you can't hit those expectations with one-way type shipments. Right. And that's been our focus on, as we're growing dedicated fleets, that we want to tap into those places where they either have high service requirements, high reliability, or specialty equipment. The ones that it's a shipper just looking for a capacity solution, those tend not to be durable. And so as we're looking at what's ahead of us here, there are shippers that are coming out of the woodwork saying, looking for a capacity type solution, that's not something we would necessarily want to get involved in. Because this isn't just about having more trucks in dedicated. But, you know, you do mention something else, that there are more shippers that are looking at what they called as dedicated. And it was more of a, I leased the trucks, and then I have agents that are operating those trucks. That's a really risky model in a post-Montgomery world. Highly cyclical. Yeah, you're just, you're really opening yourself up to lawsuits that they've never had to defend themselves against in the past. But clearly, they are the employer, and so now they're looking for a solution where they change some of that indemnity.

Dan Moore, Analyst — Beard

Insurance has been an area that's getting a lot of attention, and so love to hear your perspective. Brokers, I think, have seen more focus than asset providers, the duality that so many of you offer in the market being not only an asset-based provider, but also offering a non-asset-based service option to customers to fill out. You guys have a very broad portfolio of services. How do you think about brokerage today? How is Montgomery influencing the brokerage market more generally? And I asked C.H. Robinson this question. It seems to me there needs to be a coalition of the willing, to steal a phrase, that will sponsor legislation in DC so that we know what it means to engage and negligent hiring practices. Because I think you need a more specific check the box for brokers on what is negligent hiring and what isn't. We also don't really have a rating system. FMCSA has one, but it's not what people think it is. And it doesn't hold up in court at all. And so the point here is I think Congress has to act before these issues in brokerage are ultimately resolved. And since Democrats and Republicans agree on everything, I'm sure this is going to happen next week.

Jim Filter, CEO

Yeah. Well, let me start broadly and then, you know, Darrell, come in on the insurance part of it. But, you know, there's been a dis-economy of scale for large trucking companies for a long time. You know, and... We do believe that if you're the cause of a large accident, that there should be some responsibility to the motoring public, but it's become disproportionate with actual outcomes. That's what we have an issue with. And what happened after Montgomery, because before it was this dis-economy of scale, well, now some of that has changed because even if you're a small trucking company, you might not have the ability to pay the types of lawsuits that are going on right now, but there are brokers and there are shippers that are going to be held accountable. And so some of this- Plaintiff's attorneys are creative. They're creative, and... You know, when I look at some of the carriers that have been used in these situations, some of those should have been addressed. And so we went from 65,000 carriers to 14,000 carriers. And we did that in 2023, well before this, and it was a result of cargo security. And what we started doing is working with a couple of third parties to go beyond the carrier and know who owns that carrier, because we understood the chameleon carrier was a real problem, and you had to get to the ownership to be able to understand who's actually hauling this freight, not just the name on the side of the truck, because that can change quite frequently. That's what caused us to go down so quickly. And we share, it's not just, you know, are they, you know, do they have any rating? Are they satisfactory? We had to go much further than that. And there are others doing the same thing at this point. Highway is, they're a great partner for us. There's actually a couple others. And then we implement some of our own information that we feed into it to be able to screen out. And we don't share that information because as soon as we do, the bad actors are going to figure that out and figure out how to counter us. And we're constantly trying to work on that. But that is, you know, it doesn't mean that we've removed all risk from our brokerage operations, but it does create an opportunity in our truckload side, but I think the insurance is a key part. We are seeing shippers starting to understand, I not only need to make decisions based on costs and service, but, you know, what are the potential safety risks of hiring this carrier? And it's not easy where you can just always say, oh, I'll just go and get insurance and it's going to be available.

Darrell Campbell, CFO

Yeah, there's a benefit to being a large asset-based, safe, compliant organization. So whereas the dynamic is changing where the cost of a claim is going to be borne in different parts of the supply chain, whether that's through brokers that didn't have to deal with that Before, or potentially shippers. We believe that ultimately the way that insurance carriers behave and underwriters in terms of how they evaluate risk will also change. So, you know, if you're an asset-based provider that's used to carrier qualifications, monitoring, investing in safety, training. You're more advantaged than a small carrier who would never have to deal with that or a broker who either is going to pay more, significantly more for insurance, or may not have insurance available. So we think that our risk profile puts us in a relatively better position, and I think the practices that we've implemented over several years and have experience doing resonates more with certain shippers.

Dan Moore, Analyst — Beard

That makes a lot of sense. You mentioned acquisitions. It's in your DNA. You've certainly done several in the past. When you think about acquisitions today, what sort of need are you trying to satisfy? Are you looking for increased service offerings? Are you looking for a bolt-on to an existing service offering? Maybe just talk about that for a minute.

Darrell Campbell, CFO

All of the above. So we start with just the ability to transact and the fact that we have spent a lot of time being disciplined on our balance sheet. So our leverage sits at 0.1 times, and that's because there are efforts that have been made over several years to put ourselves in that position. In fact, in the third quarter, with our new head of corporate finance here, we expanded our existing capacity for a debt agreement. So we have $300 million of additional liquidity. So there's one thing to have a desire to do things. We also have the ability to do things. So I think that's the initial framing. So over the past several years, five years, we've done three very successful acquisitions. They've been in the dedicated space. It doesn't mean that dedicated is the only opportunity that we look at, but in this environment, based on the needs that you just mentioned, whether it's service offering, end market, geography, there are opportunities that came that we're able to broaden our portfolio. We think that playbook still works. If you look at the three acquisitions that we've done. They're bigger today than when we acquired them. And that's not always the case. So we have a proven playbook and a team that's proven to be able to execute. Now, as disruptive factors happen in the industry, there are certain targets that may have been attractive before, may not have been attractive before, where that dynamic may change. So we talked about Montgomery, we're talking about AI and AV and all these disruptive forces, so we're not closed off to only dedicated, because we think that a lot of the capabilities that we have, and if we lean into disruption... Will enable us to look at other targets that maybe before we're not either available or attractive?

Dan Moore, Analyst — Beard

We've got new EPA emission standards. Everybody, I think, though, is uniquely focused on seating trucks and improving utilization. I know we touched on capital earlier. Just curious, as we think about the path ahead, any need to refresh the fleet, either at a tractor level or at a trailer level? Please remind us just general average ages, kind of whether or not there's any work that needs to be done there in 27, and maybe we can pivot to one or two more questions and close up.

Darrell Campbell, CFO

So even during the down cycle, we've been very focused on investing in our replacement CapEx. So the decline that you saw since the COVID highs were not on the replacement side, so we've been very disciplined in terms of maintaining and improving our Asia fleet. What we've seen is where there's no growth. Or there's no growth at a commensurate return, the growth capex is where we're at scale back, right? We've also become a lot more productive during the downturn. So the need to buy as many tractors has not been there. So as we look forward to 2027, we'd anticipate that we're continuing to improve our Asia fleet. And as Jim said, When the right investment opportunities come, we're going to, you know, we're going to grow accordingly, whether that's intermodal or in dedicated. From an EP standpoint, you want to touch on that?

Jim Filter, CEO

Yeah, so go back to 2010, last time there was an engine standard change, did a pull ahead that was probably about 30% higher than the prior year. But we've seen some value going through the pandemic and other times of maintaining that consistent buying pattern. We made some very minor adjustments, but not really noticeable. I think the other part to just consider here is that container and chassis fleet. Getting back to the productivity levels we had in 2022, 2021, that's about 20% more volume on that equipment. If we get back to 2017, 2018 level type equipment terms, that's about 30% higher volume. So there's still places that we think we can eke out some more utilization out of all of our equipment.

Darrell Campbell, CFO

And we've been growing our investment in replacement CapEx, especially year over year. But you don't see it as much because proceeds have also improved. So our net CapEx. You know, is impacted by more favorable proceeds.

Dan Moore, Analyst — Beard

Right. Well, maybe just to wind things down, we only have a couple of minutes left. As you think about 27, specifically, you know, where are the biggest opportunities for margin improvement? And if there are any milestones, one or two milestones that you think are especially important, evaluative measures for investors to consider, to measure Schneider buy, maybe just to hit on those.

Jim Filter, CEO

Yeah, key priorities. So we've, you know, Daryl mentioned removing costs over the last two years. That doesn't end just because the market's improving. We see great opportunities to continue to take out structural costs, including the use of AI, and I would expect autonomous vehicles at some point, create opportunity for us to continue to take costs out. A second one is providing a high level of service to be able to get reward from customers with higher price points. We're going to take price through allocation seasons, how we accept freight, different types of opportunities that come up, and then using portions of that strategically to grow our driver fleet, not just throwing money everywhere because you don't fix a capacity issue, just throwing money at it. It's a lot about how do you work with your drivers, create a better jobs for them. We think we have a lot of opportunities that will be exciting for drivers. You do those three things, and we are improving and moving towards long-term ranges.

Darrell Campbell, CFO

Yeah, and just in terms of a specific question on measurement, right? We have targets out there in terms of long-term margin targets, so truckload 12% to 16%, Intermodal 10% to 14%, logistics 3% to 5%. Even in an environment where we don't have full price recovery, we're on the path to contract recovery, and we don't have a demand inflection, you can see the trajectory that we're on. So as of the end of the third quarter, we're at 8% margin in truckloads, 7% in intermodal, and we're already within range for logistics, absent claims considerations. So, we believe that as capacity continues to exit, really, from the top of the funnel, You know, and the fact that we have a structurally lower cost, you know, the path to those long-term targets is accelerating.

Dan Moore, Analyst — Beard

Well, it seems like 27 is very much going to be a margin focus here for Schneider and most of the rest of the industry. We really appreciate you guys being here today. Thank you for your attendance. Thank you for entertaining.