Earnings Call Transcript - SNDR Q3 2025

Operator, Operator

Thank you for being here, and welcome to the Schneider's Third Quarter 2025 Earnings Conference Call. I will now hand the call over to Christyne McGarvey, Vice President of Investor Relations. Please go ahead.

Christyne McGarvey, Vice President of Investor Relations

Thank you, operator, and good morning, everyone. Joining me on the call today are Mark Rourke, President and Chief Executive Officer; Darrell Campbell, Executive Vice President and Chief Financial Officer; and Jim Filter, Executive Vice President and Group President of Transportation and Logistics. Earlier today, the company issued an earnings press release. This release and an investor presentation are available on the Investor Relations section of our website at schneider.com. Our call includes remarks about forward expectations, forecast plans, and prospects for Schneider. These constitute forward-looking statements for the purposes of the safe harbor provisions under applicable federal securities laws. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from current expectations. The company urges investors to review the risks and uncertainties discussed in our SEC filings, including, but not limited to, our most recent annual report on Form 10-K and those risks identified in today's earnings release. All forward-looking statements are made as of the date of this call, and Schneider disclaims any duty to update such statements, except as required by law. In addition, pursuant to Regulation G, reconciliation of any non-GAAP financial measures referenced during today's call can be found in our earnings release and investor presentation, which includes reconciliations to the most directly comparable GAAP measures. Now I'd like to turn the call over to our CEO, Mark Rourke.

Mark Rourke, CEO

Thank you, Christyne. Hello, everyone. Before Darrell provides a financial overview of the third quarter results and shares our updated 2025 guidance, I will start by sharing my perspective on the freight market as well as the ongoing structural improvements we are making in the business. After we'll answer your questions. One item I'd like to address before I turn to the broader market is claims-related costs. During the third quarter, we recorded roughly $16 million more in these costs than we had previously expected. This was also higher than we had incorporated into our previous guidance even at the low end. This was driven primarily by unfavorable developments on three claims from the 2021 and 2023 policy years. We do not expect the costs associated with these developments to repeat in the fourth quarter. Now with regard to the freight market. When we updated our expectations for the second half during our last earnings call, we experienced a solid uptick in market conditions in the back half of July that gave us some cause for optimism as we moved further into 2025. However, that strength faded as the quarter progressed with August and September market trends largely sub-seasonal. This was evident through pockets of softer volumes with existing customers, retreating spot rates, modest peak activity to date, and an overall softer September versus typical patterns that would see strength into quarter end. Looking forward, these conditions are likely to persist into the balance of the year. Despite this, we continue to see traction in several of our key initiatives, which I will discuss in more detail shortly. Though this down cycle has been extended, several new dynamics have been introduced over the last few months that are definitive catalysts for the removal of excess capacity after several years of expecting, but not seeing more significant supply rationalization. This includes dynamics such as English language proficiency enforcement and the impact of non-domicile CDL renewals. But importantly, it also reflects self-regulation driven by the mere threat of enforcement. At the same time, we are seeing a pickup in carrier bankruptcies and the industry is now approaching a year of Class 8 production below replacement levels, a trend that may accelerate given tariff dynamics. Collectively, we believe these have the potential to drive more supply rationalization than the impact we saw in 2017 from requiring electronic logging devices for hours of service enforcement. Against this backdrop, we continue to press on our efforts to drive structural improvements in our business, especially in three main areas: First, when it comes to our revenue strategy, we saw further traction on our continued efforts to lean into our areas of differentiation. Second, we are also continuing to execute on our productivity actions, which are driving asset efficiency and lowering our cost to serve in any cycle dynamic. Relatedly and, third, capital discipline is driving our focus on doing more with less, which leaves us well positioned for strategic investment and the ability to act opportunistically on ways to add shareholder value. I'll provide a bit more detail about each of these efforts, starting with the progress we have made on our revenue strategy by leaning into our areas of strength. In doing so, we are creating growth opportunities, and it has the added benefit of enabling us to stay more broadly disciplined. More specifically, Dedicated experienced some sub-seasonal demand in select areas such as consumer products and food and beverage, which weighed on volumes. However, wins from new and existing customers were realized at a rate three times the level we've seen in the first half of the year. We ended the quarter with our fleet count in line with the end of the second quarter as implementations are ongoing, and we continue to see productivity gains. Looking forward, our dedicated pipeline remains robust with a strong skew to our targeted areas of specialty equipment, which has historically been sticky and required a high level of execution and equipment capability. The strength of this pipeline will add accretive business in the coming quarters, and we plan to leverage this growth into upgrading the overall portfolio by moving away from select lower-yielding operations as the new start-ups come online. This shift, plus continued traction on our productivity efforts, will be reflected primarily in revenue per truck per week gains as opposed to just fleet growth, and it will contribute to our efforts to restore truckload margins. Within Network, while we finished the bid season achieving low to mid-single-digit contractual rate increases, we continue to believe the rates are not yet at a level that supports the service we deliver and the cost needed to achieve it. As a result, our spot exposure remains elevated to historical norms. While this was a headwind to our mix, having continued price discipline will position us to maximize our leverage as market trends improve. We continue to see a wide range of approaches to the market from our customers, but retention rates of incumbent business jumped ten points quarter-over-quarter. In Intermodal, the strength of our win rates throughout 2025 is translating to market share gains, which was a driving force behind our ten percent volume growth in the quarter, several times the industry rate. In Mexico, a solid track record for our service offering that is one to three days faster than our competitors continues to resonate with customers. Third quarter volumes grew over fifty percent in the region, and we've also seen the highest growth rate in the East since 2022. This volume strength allows us to effectively navigate the choppiness of the environment in the third quarter. Rate renewals were flat in the quarter with revenue per order negatively impacted by mix. The mix reflected softer outbound volumes from the West Coast, shorter length of haul, and relatedly more modest peak surcharges. This was intentional as we chose not to chase incremental transcon volume when rates were not commensurate for the service. By continuing to lean into areas of differentiation, we were able to grow operating income and even modestly improve margins while overcoming select cost headwinds, which I will discuss shortly. In Logistics, Power Only revenues grew for the sixth quarter in a row, driven by resilient volumes, which remain at ninety-eight percent of peak levels. Net revenue per order also showed high single-digit percentage improvement year-over-year, and this strength is helping to offset continued pressure in our traditional brokerage volumes as shippers remain inclined towards asset-based solutions as they anticipate a cycle turn. While we look forward to transitioning to a more supportive market, we are, as I mentioned, continuing to press on productivity actions, which will improve asset efficiency and lower our cost to serve. These actions will help drive the enterprise back to our long-term margin targets faster and in a wider range of market conditions. Third quarter saw progress on our established cost reduction target of over forty million dollars, including synergies from Cowan Systems, which will continue to ramp into 2026. Beyond synergies, the bulk of our savings will be driven by productivity enhancements. This includes targeted headcount reductions, though the full benefit is likely to be more pronounced next year as the run rate builds. Since the start of the year, we have reduced nondriver headcount by six percent. In Truckload, we saw Cowan margins improve even with revenues remaining roughly flat as synergies continue to ramp. Network represents the bulk of our productivity initiatives. These include reducing unbilled miles and improving tractor-to-driver ratios. The majority of headcount actions to date were concentrated in Truckload. The quarter saw short-term noise related to the timing gap associated with the previously highlighted Dedicated churns and start-ups. For Intermodal, third quarter saw impact from aforementioned claims-related costs and headwinds in third-party maintenance costs associated with trailing equipment. As it relates to the latter, actions are already underway to address this, and these challenges were combated by ongoing efforts to balance the network and reduce repositioning costs. Logistics has a long history of being the testing ground for our latest technology applications, and AI is no exception. For example, our overall orders per day per broker in the third quarter were up double digits from levels seen in 2023. And in areas where we have more actively deployed our AI tools, productivity is several times better. This technology is helping our brokers move away from routine less fruitful workloads and enabling them to spend more time on value-added activities. As we have seen success in our logistics offerings, we are also rolling out Agentic AI to all of our other service offerings in a variety of support functions. These efforts dovetail the ongoing use of our decision science platform, which has been deployed for some time, enabling automated decision-making and enhanced productivity while effectively balancing customer and network needs. Finally, we will remain disciplined but nimble in our capital allocations as we look forward. Darrell will discuss in more detail in a moment, but I'll say that our continued efforts to do more with less, the strength of our balance sheet, and the tactical decisions we have made related to our fleet equipment leave us with ample firepower to execute our strategic initiatives. Let's now turn it over to Darrell for his insights on the third quarter and our 2025 guidance.

Darrell Campbell, CFO

Thank you, Mark, and good morning, everyone. I'll review our enterprise and segment financial results for the third quarter and provide insights on our updated full year 2025 EPS and net CapEx guidance. Summaries of our financial results and guidance can be found on Pages 24 to 30 of our investor presentation available on the Investor Relations section of our website. Starting with the third quarter results. Enterprise revenues, excluding fuel surcharge, were $1.3 billion, up ten percent compared to a year ago. Adjusted income from operations was $38 million, a thirteen percent decrease year-over-year. Enterprise adjusted operating ratio increased eighty basis points compared to the third quarter of 2024. Adjusted diluted earnings per share for the third quarter were $0.12 compared to $0.18 for the third quarter of 2024. Third quarter results also include the impact of claims-related costs that were $16 million more than anticipated, which, as Mark referenced, was primarily as a result of unfavorable developments of three prior year claims. Regardless, we remain committed to our ongoing investments in safety performance, including recently enhancing the camera technology we deployed with AI-enabled features, not just because frequency remains a lever most in our control to combat these costs, but also because it's the right thing to do. We previously announced a forty million dollar structural cost savings target, which will continue to build in the fourth quarter, and we're focused on pursuing additional opportunities that will structurally lower our cost to serve to improve our performance in all stages of the cycle going forward. From a segment perspective, Truckload revenue, excluding fuel surcharge, was $625 million in the third quarter, up seventeen percent year-over-year. This growth was primarily due to the Cowan acquisition as well as modest growth in network truck count, partially offset by dedicated churn and network spot rate headwinds. Truckload operating income was $20 million, a sixteen percent decline year-over-year. Operating ratio was 96.8%, an increase of one hundred thirty basis points compared to last year. The majority of claims-related costs discussed earlier were reflected in our Truckload segment. Restoring profitability in Network remains a key focus of our cost initiatives, including efforts to improve equipment ratios, consolidate facilities, streamline nondriver headcount, and reduce unbilled miles. Dedicated operating income benefited from the addition of Cowan, but was also adversely impacted by the claims-related costs as well as churn that was highlighted in the second quarter. The latter dynamic was exacerbated in the short term as a result of retaining equipment in areas where we had line of sight to new start-ups, though this was partially offset for the segment as a whole by deploying some equipment into the network. Intermodal revenues, excluding fuel surcharge, were $281 million for the third quarter, up six percent year-over-year. This reflected volume growth of ten percent, which more than offset the mix impact in revenue per order. The third quarter marks the sixth consecutive quarter of year-over-year volume growth in the segment. Intermodal operating income was $17 million, a seven percent increase compared to the same period last year, reflecting the strong volume growth, which more than offset headwinds from claims-related costs and maintenance expense. Operating ratio was ninety-four percent, an improvement compared to the third quarter of 2024. Logistics revenue, excluding fuel surcharge, totaled $332 million in the third quarter, up six percent from the same period a year ago, driven by Cowan acquisition and growth in Power Only. Logistics income from operations was $6 million, down sixteen percent year-over-year. Operating ratio was ninety-eight point one percent, an increase of fifty basis points, primarily due to lower brokerage volumes, partially offset by productivity gains. Turning to our balance sheet and capital allocation. As of September 30, 2025, we had $522 million in debt and lease obligations and $194 million of cash and cash equivalents. Our net debt leverage was 0.5x at the end of the quarter, an improvement from 0.6x at the end of the second quarter. In the third quarter, we paid $17 million in dividends and $50 million for the year. Net CapEx was $108 million compared to $93 million last year due to the timing of purchases of transportation equipment. As a result, free cash flow declined in the quarter. As we continue to grapple with macro uncertainty, disciplined capital allocation remains our focus. Our organic growth aligned with our strategic initiatives is our first priority, but our asset productivity efforts enable us to execute on this growth in a capital-efficient way. In Dedicated, we have the bandwidth to meet new demand by leveraging our productivity initiatives and reallocating resources away from lower-performing operations. In Intermodal, our investments to date have left us well positioned to grow up to twenty-five percent with our current trailing equipment. We now expect net CapEx to be approximately $300 million for the full year compared to $325 million to $375 million previously. The reduction was primarily related to our decision to pause tractor orders originally planned for November and December builds, which had been included in our previous capital plans. This decision was driven by the actions we outlined related to productivity and asset efficiency, and it allowed the enterprise to manage the impact of new tariffs as we reevaluate our total cost of ownership model. This will drive higher free cash flow without placing an undue burden on our fleet age. We continue to be well positioned to act opportunistically to enhance shareholder value, including through accretive acquisitions and share repurchases. Moving to our updated full year 2025 guidance. Our adjusted earnings per share guidance for the full year 2025 is now approximately $0.70, which assumes an effective tax rate of approximately twenty-four percent. The new guidance incorporates the impact of higher-than-expected claims-related costs in the third quarter, the majority of which we assume will not repeat in the fourth quarter, though insurance remains inflationary overall. As such, excluding this impact, the new guidance is aligned with the low end of our previous range, which had assumed more tempered seasonality in the second half of the year. For our Truckload network business, we expect volume trends to remain sub-seasonal and spot rate conditions will be an important swing factor. Dedicated earnings are expected to benefit from the pickup in new business implementations, though start-up friction costs will be felt as they ramp up. For our Intermodal segment, we continue to expect roughly flat pricing for the remainder of the year, which assumes minimal peak surcharges. Similarly, we believe there was some degree of pull forward in the third quarter, which could drive an earlier end to peak season than is typical, but we continue to expect our volume growth to be above market. Our Logistics segment outlook reflects continued pressure on Truckload volumes, which is likely to continue to weigh on operating income despite solid execution in managing net revenue per order. In closing, while market conditions have yet to materially improve, there are clear catalysts on the supply side that have emerged, which have the potential to significantly shift market dynamics. Regardless, we're not standing idly by. We're offsetting certain areas of tepid market conditions by leaning into our areas of strength, which is helping to drive incremental volume opportunity and enabling us to remain disciplined on our broader strategies. At the same time, we continue to execute on our acquisition synergies while looking to do more with less across the enterprise, a reflection of capital discipline and our efforts to lower cost to serve in any market condition. With that, we'll open the call for your questions.

Operator, Operator

Your first question today comes from Jordan Alliger from Goldman Sachs.

Jordan Alliger, Analyst

I wanted to ask about Dedicated. You said that the win rate, I think, had accelerated three times or considerably versus the first half. And I'm just sort of curious, would you say those wins are sort of Schneider-specific taking business from other carriers? Or is it more industry-driven demand, such as private fleets deciding they want to move back to Dedicated, et cetera?

Mark Rourke, CEO

Jordan, thank you for the question. The vast majority of those wins were in our pipeline. And so our pipeline started to convert at a more accelerated rate in the second half, which we're really pleased about because it really does set us up well against our strategic intent, which is to grow predominantly in the Specialty segment, which is what we consider to be our most favored target because of its characteristics of durability and unique special services that we can bring with the strength of our dedicated offering, our balance sheet, et cetera. It's where we can really offer our most differentiation. So we're pleased. Now of course, when you have some churn that we outlined in the second quarter and when you have the new start-ups, you have some friction that goes on because all those things don't perfectly sync up between some accounts that are going away and the new ones that are coming onboarded. And we expect that we'll still have some of that in the fourth quarter, but are looking at least at this juncture that we'll have that largely behind us as we go into 2026. But our pipeline remains strong. We expect that we'll still have a great opportunity to continue our momentum in Dedicated, which is at the heart of our truckload strategy.

Jordan Alliger, Analyst

Yes. And then just a follow-up. The friction you mentioned in the start-up costs, it sounds like that will be behind you, I guess, you just said in '26, but is there a sense for timing? I know you've mentioned also you'll start to see gains in revenue per truck per week. Can you maybe talk about the timing of the friction easing and the ramping?

Mark Rourke, CEO

When you're growing Dedicated, Jordan, you're always having some element of start-up and friction associated with that. And we also have identified how we can best serve our margin restoration actions, which will also include working on some of our lower operating performing margin accounts. And our primary objective there is to work with the customer to come up with a collaborative way for both organizations to win. But when that's not possible either because the business changed or strategy changed or it's just not possible, then we're going to look to upgrade and use that capital to redeploy to more favorable margin profile business, which is what's in our pipeline. So we'll always have some level of that. We just had an extraordinary amount in the third quarter just because of the magnitude of the new business start-up and the timing sometimes of when you exactly expect the timing of the startup and exactly expect the ramp down is not always perfectly predictable, but we had an inordinate amount of that in the third quarter.

Operator, Operator

Your next question comes from the line of Tom Wadewitz from UBS.

Thomas Wadewitz, Analyst

So let's see. I guess one quick follow-up on the Dedicated and then I wanted to ask you about kind of broader truckload market view. Mark, I think you mentioned...

Mark Rourke, CEO

You're follow-up is going to be qualified on Jordan's question, Tom?

Thomas Wadewitz, Analyst

No.

Mark Rourke, CEO

Just kidding, go ahead.

Thomas Wadewitz, Analyst

Regarding specialized trailers, I believe there are aspects that make them quite distinct. Considering the information you provided from Cowan, it seems that the Dedicated business is quite stable. How much of our current Dedicated portfolio consists of specialized trailing equipment or other metrics that could be interpreted as specialized? Can you help us understand what portion falls into the more stable category, and whether this changes over time or how you perceive it?

Mark Rourke, CEO

Yes. Well, certainly, that's our focus around our pipeline and the things that we're most targeted towards, Tom. But we do and we always think that standard equipment will have a place in our portfolio. Some of it is not only our standard equipment, but it might be what the customer brings to bear. So there's a spectrum of Dedicated solutions across the board, and they're all important. But what we're really focused on is we want over time more percentage of our book, which we believe is, again, more sticky and the renewal rates are much, much higher because you're getting into more specialty services beyond just delivering products from point A to point B. So our new business and our portfolio is skewed to specialty equipment, but we still have and we will always have standard equipment solutions as well, particularly around the retail support, DC to store and some of those operations that are critical to our customer base.

Jim Filter, Executive Vice President and Group President of Transportation and Logistics

And Tom, this is Jim. Just one add-on to that as we've made acquisitions, specifically, we've been focusing in on our growth there and acquiring companies that have more of a specialty lens, something that they are able to help us differentiate out there in the market, and it's just become a larger percentage of our total pipeline.

Thomas Wadewitz, Analyst

So if you say skewed, I guess it implies maybe over half would be specialty, something like that. I don't know. I don't want to parse words too much, but...

Mark Rourke, CEO

Yes, well over half. Well over half, yes.

Thomas Wadewitz, Analyst

Certainly. Here’s the rewritten Earnings Call remark: The broader truckload market has been a topic of discussion among various providers, and your perspective on the market is valuable. Regulatory actions could significantly impact the industry. Additionally, freight demand in October appears to be below normal seasonal trends, following sub-seasonal patterns in August and September. This raises questions about the supply-demand dynamics. When considering the outlook for 2026, which factors do you view as the most significant? For instance, if 200,000 trucks leave the market while freight demand remains weak, will the market experience tighter conditions? How should we weigh these aspects as we analyze the truckload market in 2026?

Mark Rourke, CEO

Sure, Tom. Won't have a full discussion about 2026 just yet, but I guess I would look at where we're going to finish this year, and let's maybe look back a year ago to this time. We do believe that the supply picture is much more constructive going into 2026 for all the notes that you just related there. We can see obvious impacts in our Power Only business. We can see obvious impacts to non-domiciled CDL in some of our brokerage carriers. We can see it really across the spectrum, and it's real, and it's having an impact now. And we only think that, that's going to continue to ramp. So the constructive nature of the supply side going into next year is, in our view, much different than what came into 2025, which also wasn't necessarily overly robust demand environment. So I think we have different factors at play. You throw in the lack of new Class 8 builds, the pipeline there, the tariff impacts that are yet to come and be felt. I just think all of that puts more pressure on the supply side. So a dynamic that we really haven't had for a number of years, which I think is going to be quite constructive. Of course, the wildcard is the demand side, harder to predict that. But I think I'm confident that Schneider is going to be able to better handle those dynamics across our portfolio with our optionality of offering and services. And I think that's going to be a more positive setup for the Schneiders of the world heading into 2026.

Jim Filter, Executive Vice President and Group President of Transportation and Logistics

And Mark, this is Jim. I just wanted to add that our customers are already discussing this with us because they are concerned about the mix of carriers they are using in this changing marketplace and are trying to get ahead of it.

Operator, Operator

Your next question comes from the line of Ravi Shanker from Morgan Stanley.

Ravi Shanker, Analyst

Great. Thanks for the comments on the supply side here. How is that influencing your bid rate conversations for 2026, the early conversations you're having? Kind of if customers are concerned, kind of can you try to be opportunistic here and maybe go for mid- to high single digits?

Mark Rourke, CEO

Thank you, Ravi, for your question. Looking ahead to 2025, we've managed to achieve mid- to low single-digit growth in our network business, specifically in the truck sector. We believe that both we and the industry will need to see more rate recovery in 2026. Currently, we are primarily in the strategic planning phase with our customers for the 2026 allocation season. We are engaged in discussions to understand their priorities and strategies and how we can align with them. I don’t have much to share yet regarding the 2026 renewals, but we feel that the supply side environment is becoming more favorable as we enter next year.

Ravi Shanker, Analyst

Understood. And maybe a follow-up there. Obviously, a very weird environment with demand continuing to remain reasonably soft, but then supply maybe tightening up a little bit. How does that influence Power Only, in particular, on the Logistics side going into next year? And kind of do you think supply alone will be able to drive kind of rates and market tightening next year? Or do you really need to see the demand side also pick up?

Mark Rourke, CEO

Yes. I believe we need to consider both aspects. However, I think being more positive about the supply side will be beneficial. There will likely be a trend towards higher quality from customers. We are observing effects on certain parts of our Power Only carrier base, particularly those reliant on capacity types that are currently facing challenges due to increased regulatory enforcement. Nonetheless, we have managed to adapt and work with others, maintaining this as a strong component of our Truckload Network for our customers. Challenges lie ahead, which is why we are committed to making a real effort. Our focus will be on increasing our asset productivity and leveraging emerging tools like AI to enhance our efficiency in serving our customers and managing costs. We will continue to adjust to the situation. Overall, the supply side issue is significant, something we have discussed in previous calls and is now becoming more apparent to others in the industry, especially our customers.

Operator, Operator

Your next question comes from the line of Jonathan Chappell from Evercore.

Jonathan Chappell, Analyst

Jim, regarding Intermodal, there has been significant growth in load or order volume. However, the recent decline in revenue per load stands out, contrasting with the trends seen in most Intermodal Marketing Companies and the railroads. I'm curious if this is related to mix and possibly shorter haul distances? You or Darrell mentioned that revenue per unit is expected to be flat for the remainder of the year. Are you currently focusing on managing volume throughput and efficiency, while planning to address pricing later in this cycle?

Jim Filter, Executive Vice President and Group President of Transportation and Logistics

Yes, John, first of all, we'd say that if you adjust for mix, our rate didn't change. We were no different than anyone else. We were flat as we went through renewals this year. And the growth that we're seeing, it's really a function of the strategic actions we've taken over these last couple of years that's differentiating our business. We've been able to expand in new verticals like automotive, improve service levels. And that's what really drove the larger allocations as we went through the first half of the year that we have been talking about. And then this quarter, what you're really seeing is the realization of those awards that we had in the first half of the year. And we think that really positions us well when the market starts to recover that we'll grow that business even further. But yes, it's not just a reflection of price.

Mark Rourke, CEO

Yes. Year-over-year, the impact on our mix is that we are seeing less growth in transcon and more in the East and Mexico. This growth has outweighed some of the declines in the West, partly due to the pull forward being most noticeable in those areas. We are also being careful not to overextend our repositioning costs beyond what we can manage effectively in the business. We have tried to allocate our resources wisely, focusing more on Mexico and the East.

Jonathan Chappell, Analyst

Okay. Yes, that makes complete sense and is very relevant. There has been a lot of discussion this quarter about changes related to share shifts in Intermodal, especially in the Southeast. Jim, you mentioned that some of these are previous wins that are now starting to materialize. Are you also benefiting from the disruptions caused by the potential merger among the rail partners?

Jim Filter, Executive Vice President and Group President of Transportation and Logistics

Yes. I think it's still a little bit soon to say that there's a bunch of disruption related to the merger. I think really what you're saying is what I talked about earlier that we've had this differentiation, and we've been able to leverage that differentiation to grow our business.

Operator, Operator

Your next question comes from the line of David Hicks from Raymond James.

David Hicks, Analyst

I wanted to follow up on Intermodal. Yes, it's obviously been three months since you announced the acquisition. At the time, you were taking a wait-and-see approach. Where do we stand today? Are you positioning the network any differently in anticipation of a potential combination? What feedback have you received from your customers on this topic?

Jim Filter, Executive Vice President and Group President of Transportation and Logistics

Yes, David, this is Jim. Really, it's still very early in this process, and we're very engaged with the rails as the process is evolving. There's still a lot more details that need to reveal themselves. And when they do, we'll be able to start saying more about that. But we're really confident in our Intermodal team, our customers have a lot of confidence in our team. We've navigated two of these changes over the last couple of years. And obviously, we came out of it stronger than we went into those, and that's what really enabled our market share growth.

David Hicks, Analyst

Great. The box turns have increased significantly in the third quarter, and you are also removing containers from the intermodal network. What is your outlook for these box turns as we approach 2026? Additionally, considering your substantial growth potential, do you anticipate any need to invest in your container fleet moving forward?

Jim Filter, Executive Vice President and Group President of Transportation and Logistics

We don't see a need to make further investments in our trailing equipment. The improvement during this quarter was due to volume growth. The decrease in trailing equipment is mainly a result of normal asset salvages, and we don't plan to reduce it any further. The box count and container turns are dependent on our ability to onboard more customers, increase allocations, and enhance our differentiation. With a more favorable truckload market, we believe we can achieve growth in intermodal. We are also observing improved performance from the rails, and our company dray is effective. This leads me to believe we can return to historic container turns or even exceed them. As Darrell mentioned, we are seeing a twenty-five percent growth in volume with the current trailing equipment.

Operator, Operator

Your next question comes from the line of Brian Ossenbeck from JPMorgan.

Brian Ossenbeck, Analyst

Two ones on, I guess, the strategy and how you're balancing the assets during these times. So Mark, first for you in terms of the spot exposure, you mentioned there's still a little bit more of that than, I guess, you'd normally like or plan to have in the network business. So maybe you can put a little bit more context around where that is, how it's trended through the year? And if you think you're kind of at the high point of that spot exposure or if there's other things you might need to do to address that heading into next year?

Mark Rourke, CEO

On the network side, we have historically operated in the five to six percent range for repositioning normal market imbalances due to our focus on contracts. Recently, this approach has become more deliberate as we assess allocation and identify opportunities for operating leverage. We avoid engaging in business that we believe does not align with our long-term interests. Currently, we have two paths to consider: we can either lean into the improving spot market driven by various factors we've discussed earlier, or we can redirect resources to future contract business with better prospects. As it stands today, we're operating at nearly double our usual levels because we want to maintain flexibility and leverage in our business for more favorable returns. This elevated position is likely to continue into 2026.

Brian Ossenbeck, Analyst

Okay. And then, Jim, I guess, a similar question on intermodal network balance. I think you made some comments about the focus on where the growth was and I guess, where it wasn't. Again, was that purposeful from a rate and return perspective? Or was that more of a network balance when you think about East and West and balancing out some of the lanes across the network?

Jim Filter, Executive Vice President and Group President of Transportation and Logistics

Yes. Thanks, Brian. It was intentional in terms of growing into our areas of strength, growing into Mexico, where we have a lot of differentiation, both in terms of our velocity and really superior claims ratio there. So we want to be able to grow there. In terms of what's going on with the West, we had an opportunity to take more backhaul freight and earn more backhaul freight. So that also had an impact in terms of our overall pricing as it shows here in our results. And then in the East, we were able to work with some customers that we knew we'd be able to provide a superior service and that enabled us to grow as well.

Mark Rourke, CEO

Yes. I would highlight on the intermodal margin business with not only growing the volume ten percent, but having some of the headwinds that associated with the claims expense and what we would anticipate more short-term setup issues on maintenance of the trailing equipment, we still improved margins. And so I think we continue to lean into having an effective balanced network playing to our differentiators, again, should allow us then to accelerate our margin performance in an improving truck market. As we're already starting to see some over-the-road conversion, but we think there's much more ahead of us relative to what we can adequately and effectively serve for our customers that is presently moving over the road.

Operator, Operator

Your next question comes from the line of Bascome Majors from Susquehanna.

Bascome Majors, Analyst

Mark, early on in your prepared remarks, you made a somewhat provocative comment about the supply side rationalization, not just the English language and immigration enforcement, but also what's happening with new truck orders could be more impactful to the market than the ELD saga of 2017, '18. Can you high-level walk us through looking back what Schneider's view on how much capacity exit the market because of the ELD mandate at the time? And maybe if you're willing to bottoms up from these two or three factors affecting the market into next year, just help us size those up in a really sort of succinct way.

Mark Rourke, CEO

Sure, Bascome. I'll do my best at a high level. We assessed back in 2017 that the electronic logging device had about a three to four percent impact on capacity leaving the industry. Now, considering the various factors we've discussed, we believe that the impact is greater than that. It's difficult to predict exactly how much higher it is, but we can already see evidence in certain areas of our business and among our trade partners. We believe this impact is real, evident, and likely to accelerate moving forward.

Operator, Operator

Your next question comes from the line of Reed Seay from Stephens.

Joe Enderlin, Analyst

This is Joe Enderlin on for Reed. It sounds like you have a more positive outlook on the supply side for 2026, given the regulatory changes. Could you maybe just give some additional thoughts on the demand environment, be it for the Network business, Dedicated, or Specialized? Are you seeing any green shoots of better demand from those customers, as more pivot to asset-based offerings and your value proposition? And then looking to next year, what do you view as the biggest potential demand catalysts? Or are you more so just expecting more stable demand with capacity rationalization to drive an acceleration from here?

Mark Rourke, CEO

Sure. The demand seems to be steady but not particularly remarkable. The consumer has managed to maintain a solid position, with metrics reflecting this consistency. However, the industrial sector of the economy has not been much of a driving force for us so far. When examining the ISM and other indicators, we have been in a contraction phase for quite some time. We wonder if upcoming initiatives, such as the Big Beautiful Bill, rate cuts, and project work in the industrial building sector, might eventually serve as demand catalysts in 2026. We believe the environment is somewhat more favorable for that. The main concern is how resilient the consumer will be and what implications that might have for next year. We are having discussions with our customers, who display varying degrees of optimism and concern depending on their specific market segment. This results in a somewhat mixed outlook. At this point, we can't make strong predictions about demand, but it has remained remarkably stable. Although it's below seasonal expectations, we noticed a slight increase in demand in the third quarter and some improvement in October compared to September. However, we would still consider it to be below the levels we would usually expect during peak holiday season preparation. That's where we stand in the short term. Jim, do you have any additional thoughts based on our recent discussions with customers?

Jim Filter, Executive Vice President and Group President of Transportation and Logistics

Yes, this is Jim. And the first thing we think about is having a really broad portfolio of customers that we're operating with within each one of these segments. And then we're specifically targeting who are those customers and those segments that are most likely to grow. And so that's where we've been allocating our assets just to prepare us for any market change that's ahead of us.

Operator, Operator

Your next question comes from the line of Ken Hoexter from Bank of America.

Ken Hoexter, Analyst

Mark, Darrell, Jim, Christyne, maybe following up on that, talk about the speed of change, right? So what's happened? You've cut estimates a couple of times this year, but it sounded like you were building into July and then into the second half, and then August, September, things really changed. And it sounds like you're still talking sub-seasonal into October. Maybe just to understand the backdrop here with the fading demand being sub-seasonal.

Darrell Campbell, CFO

Yes. This is Darrell. I'll start here. So if you recall, when we gave our guidance in July, we talked about varying levels of seasonality that could play out. So on the low end of the range, which was $0.70, $0.75 at the time, we described that as a scenario where we saw subdued demand. That's largely how the third quarter played out. So if you adjust for the claims-related cost, that was a $0.07 headwind that I talked about in my prepared remarks, we're pretty much aligned with the low end of our previous range. So it's really a function of what did seasonality look like, which was more subdued, which was one of our scenarios in terms of a downside.

Ken Hoexter, Analyst

So if you add the $0.07 back and you get closer to the lower end, you're not indicating that things are getting worse more quickly in October. I just want to clarify the extent of your comment there.

Darrell Campbell, CFO

Yes. Absolutely.

Mark Rourke, CEO

Absolutely. It's improving from September, but still at a sub-seasonal level to a typical October is what we would frame it as Ken. So not suggesting it's getting worse in October.

Ken Hoexter, Analyst

Mark or Darrell, to clarify, you're observing some project business at this stage, correct? Is that what you mean by sub-seasonal? I believe you mentioned this in your opening comments. So, are those discussions still delayed? I would like to understand how the peak season is expected to develop from this point, particularly in relation to pre-shipping, since it seems like that is not progressing.

Mark Rourke, CEO

Yes. The peak season typically involves project work and specialty seasonal business, though it does not entirely define seasonality. There are several customers who also ship additional volumes that are not project-based. We've had numerous discussions with our customers and established structures to address seasonal project work. The key question is how strong the demand will be for these structures. We are prepared and ready to adapt, with capacity available, especially in our network business, to pursue these yield opportunities. So, the inquiry now is about how common these opportunities will be throughout the season and which customers are in a position to take advantage of them.

Ken Hoexter, Analyst

And then just totally big picture, if I can step back for a sec. Autonomous is not something we've heard about much yet we've got now two companies in the public market. What's your relationship and your testing phase? Where are you? And where do you think it's developing at this point?

Mark Rourke, CEO

All right. You're breaking our rules here. We did really well on the three-question rule today, Ken.

Ken Hoexter, Analyst

I'll take it offline.

Mark Rourke, CEO

But real quickly on the autonomous vehicle, yes, we've been aligned really since the beginning, looking at and assessing who we think the ultimate winners will be in this space. Our belief continues to be that those who are best aligned with OEMs, engineering from the ground up, will have the best solution. Currently, we are actively testing with both Aurora and Torc, our two primary partners. We have aligned with them and continue to advance the process.

Operator, Operator

Your next question comes from the line of Chris Wetherbee from Wells Fargo.

Christian Wetherbee, Analyst

I guess I just wanted to ask a question about sort of the current environment. So have you guys seen the spot market in October get stronger sequentially? I think there's been a little bit of debate around that. We see the load boards and what they tell us. But when you talk to companies, you can get sort of different answers about what they're seeing. So maybe some perspective on what you're seeing actually in the spot market in the month of October.

Jim Filter, Executive Vice President and Group President of Transportation and Logistics

Yes, thanks, Chris. This is Jim. You're absolutely right. There's a lot of variety across different markets, which ties back to our earlier discussion. In some areas, carriers are steering clear of states with increased enforcement. We've also seen some bankruptcies leading to pockets of demand emerging. While there is some seasonality, it feels a bit more typical compared to what we usually experience. Given these factors, the situation is somewhat unpredictable right now. Therefore, we are concentrating on deploying our assets where they will yield the best returns.

Christian Wetherbee, Analyst

Okay. So it sounds like maybe geographically isolated, there are some pockets, but not widespread in terms of improvement sequentially.

Jim Filter, Executive Vice President and Group President of Transportation and Logistics

Yes. Market by market. Yes.

Christian Wetherbee, Analyst

Okay. Super helpful. And then just really quick on the Dedicated side, revenue per truck per week. I think you talked about a little disruption. Just wanted to get a sense of the drivers of the sequential decline in that number. And then I think, Mark, you noted that, that probably gets better as we move. Is that a fourth quarter comment? I just want to understand some of the moving parts in revenue per truck per week in Dedicated.

Mark Rourke, CEO

Yes, Chris, when you're in a transition phase of either ramping up or ramping down, you tend to have underutilized assets. The number of trucks is part of the calculation, but the revenue can appear less straightforward because you're going through different stages of adjusting capacity. This creates inefficiencies, which are reflected in the revenue generated per truck each week. While pricing does play a role, the main issue here is the underutilization of assets due to that transitional phase.

Jim Filter, Executive Vice President and Group President of Transportation and Logistics

Yes, we have clear visibility to these new businesses that we're ramping up. We want to ensure that we have the necessary equipment available and ready to go. The timing isn't perfect as we transition equipment from one operation to another. I expect that as we move through Q4, we will see that business starting up, which will ultimately help us drive margin improvement.

Operator, Operator

Your next question comes from the line of Bruce Chan from Stifel.

J. Bruce Chan, Analyst

Maybe I want to touch on your productivity improvements and especially some of the early efforts in AI that you talked about, certainly a lot of discussion about that this earnings season. You mentioned the forty million dollar cost opportunity. How much of that is assumed for this year? How much do you have budgeted for next year? And maybe just some general thoughts around how you're thinking about the incremental opportunity from there, especially in an up cycle. I imagine it's a little bit more pronounced in logistics. Maybe you've got some routing and utilization opportunities in Dedicated. So any color there would be great.

Mark Rourke, CEO

Sure. This is Darrell. So I'll start. So the forty million is an annual target, but it includes synergies, including Cowan. So in our opening remarks, we talked about just the sequential improvement in margins for Cowan. So that's just the impact of the synergies coming through in the numbers. But a big part of that forty million is productivity-based, as you mentioned, not just people productivity, but also asset productivity. So from a people standpoint, Mark mentioned some headcount reductions that were targeted in the nondriver side. From an asset perspective, we're tightening asset ratios. So as it relates to tractor-to-driver ratios, continue to tractor ratios as well. And that's coming through also in our CapEx spend. We're reducing unbilled miles. We're looking at third-party spend. We're looking at facilities. So we're on track for that forty million. We said previously that those costs are expected to ramp throughout the year, and we're seeing that more back half weighted.

Jim Filter, Executive Vice President and Group President of Transportation and Logistics

Savings.

Darrell Campbell, CFO

Savings would ramp. but we're not done, right? So everything that we're doing here is structural in nature to lower cost to serve. We've seen that coming through. We talked about intermodal improving margin. So we're always looking for incremental ways to add to those savings targets. So a lot of that is continuing on the asset productivity front, continuing on the people productivity front and just looking at things that are sustainable in nature going forward.

Mark Rourke, CEO

Yes. Certainly, the AI, the Agentic AI, in particular, we think holds great promise. As we mentioned, our logistics business and brokerage generally becomes a great test bed for us to deploy new technologies, very, very encouraged by it. We believe it's going to be a key driver of our ability to grow our business at a much different rate than we have to grow our people to achieve that growth. And we are presently deploying across multiple work streams in our business, both on the support function, but our line of services that support either drivers or support customers or supports our third-party carriers. And ultimately, just taking the work that's less value-added that we can get in a much more efficient way as opposed to deploying people resources against it, helped us with certainly some of the numbers of the headcount performance that we've had this year, but we think it has great promise, and we're continuing to lean in. And it's a combination of what we're doing in-house and what we're collaborating with others on.

Operator, Operator

Your next question comes from the line of Jason Seidl from TD Cowen.

Jason Seidl, Analyst

I wanted to go back, Mark, to your comments as you sort of compare this future capacity issue to back to the ELD because I think that's probably the only really comparable event. But it was a much different event, right? Because people were able to find workarounds with the ELDs that are still in existence to this day. Is the capacity that we're expecting to come out, could that actually last maybe a little bit longer and give us more of an up cycle for the truckload sector? And also, are there anything that you're starting to see in conversations with insurance companies and/or clients around non-domicile drivers that could maybe accelerate this a little bit beyond the norm?

Mark Rourke, CEO

Jason, it's Mark. It's very insightful, and we're about to start discussing our insurance circuit here. I might have more to share about that the next time we meet. This is a logical extension of the ongoing headline activity regarding safety. I agree with you that this situation is not merely about adapting and changing; it actually removes capacity from the industry. This reduction affects not just the existing capacity but also inhibits backfill because it alters the dynamics of the entire pool of professional drivers. Credentials are crucial. We believe that safety is influenced by the quality of training and the infrastructure provided by carriers. Therefore, we see this as both the right course of action and something that will have a lasting impact on the overall capacity available for professional truck driving.

Jim Filter, Executive Vice President and Group President of Transportation and Logistics

Maybe one more add here, Jason, was when you go back to the ELD implementation that was implemented and carriers were onboarding these a matter of months or sometimes just weeks ahead of the requirement. And then everything was stabilized after that. This is something that's going to play out over the next two years. So just because we get to a level of equilibrium, capacity will continue to come out. There isn't a spot where it starts to regrow. And that's why it's really important that we're having our discussions with our customers. Customers are being strategic, not just about what the market is right now, but through the lifetime of the allocation event.

Operator, Operator

Your next question comes from the line of Reed Seay from Stephens.

Joe Enderlin, Analyst

Mark Rourke, CEO

Sure. We consider the demand situation to be fairly steady, though not particularly remarkable. The consumer has shown resilience, and related metrics have remained stable. However, the industrial sector has not provided much of a boost for us so far. According to the ISM and other indexes, we have been experiencing a contraction in that area for an extended period. There is potential for initiatives like the Big Beautiful Bill, recent rate cuts, and ongoing projects in the building sector of the industrial economy to act as demand catalysts in 2026. We believe the environment may be more favorable for that outcome. The main uncertainty lies in the strength of the consumer and its implications for next year. We are engaging with our customers, who express varying levels of optimism and concern depending on their specific market segment. Overall, the demand outlook remains uncertain, but it has been very stable. Even though it is below seasonal expectations, there has been a slight increase in demand from September to October. However, we still anticipate it to be less than what is usually expected leading up to the peak holiday season. Looking ahead to next year, Jim, do you have any additional insights based on our recent discussions with customers?

Jim Filter, Executive Vice President and Group President of Transportation and Logistics

Operator, Operator

And we've reached the end of our question-and-answer session, and this does conclude today's conference call. We thank you for your participation, and you may now disconnect.