Is this also on the left, if that's okay? Or stage right.
Where do you want us?
Or whatever it is. Yeah.
All right. Stage left. Yeah.
Yeah. Stage left, exactly.
Okay. Stage left.
Whatever it is. These are back-to-back. Sometimes the analyst is nearly a minute late. I think I am on time this time. It is good to have everybody here. My name is Dan Moore. I am the Senior Transportation Analyst here at Baird. Very pleased to be joined by senior management of Schneider National, Jim Filter. We have also got Darrell Campbell, so CEO and CFO, Steve in the audience, I have known for many years, both personally and professionally. Thank you for being here.
Well, thank you for having us.
Thanks for having us.
Yeah. It's been good. A lot of good information here, I think, today and yesterday, and 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. Curious, maybe just kind of opening remarks, how are you guys thinking about this 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. Yeah.
Yeah. Well, let me just start with, you're right, it's primarily supply-led.
Yeah.
That's what we've experienced up to this point. Demand has been stable, but nothing terribly exciting. 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're in a situation where 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. Then we had a couple years where they were willing to pay an excess of that rate—
Right.
—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. That's why I would say this one feels more like what you would normally experience in a fall season. Overall, 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 cause us to change a little bit.
Right.
But in terms of capacity, 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. If you think about during 2022 and, well, 2021 and 2022, 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. Two days—
Right.
—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," that 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. 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. In the past, you'd see these 18 months
What did this one—
—About same duration.
Right.
This one took almost four years.
Right.
Very deep. We're one year into it.
Yeah.
Another way to think about it.
Yeah. No, that's great context. It really kind of sets us up to talk a little bit about pricing. Given the uniqueness of the market, given how difficult the driver market has been in general and the substandard returns that have been, candidly, industry-wide for a variety of reasons, been bad actors, there's been a bad freight demand environment. We're coming out of COVID, which was a period of rapid and meaningful capacity growth.
The need to repair margins is very real, which is something I kind of opened with. My sense is, what rate has been realized has, in large part, gone to offset as much as possible inflation, address driver-related issues. That being said, as we look into 2027, when I talk to CEOs, when I talk to CFOs, when everybody's going through capital budgeting right now, you know where I'm going next. The backdrop seems to be one of unique focus on margin repair and rate as we go into 2027. Can we talk a little bit about that?
Yeah, I mean, just start about the scale of it.
Yeah.
Talk about the repair. We've been talking about industry costs have gone up about 30% since the pandemic, like most industries.
Right.
Most industries were able to recover that through prices.
Right.
Through yields. Initially, this industry, we were able to do that and then gave it all back. We are just getting back to a level of parity. Then you do, let's just get back to the performance where we were at before.
Right.
Also expect that, yes, drivers to be able to come through this industry in a proper manner, it is going to be at a higher price point. Trucks are going to start becoming even more expensive. We are not going to get all of that back necessarily in an allocation cycle in 2027. There has got to be a lot of different ways that we are going to be able to extract price. The other factor for shippers right now, it is not just recovering that price, but understanding post-Montgomery, there is a difference here. It is not just price and service, but what is the insurance risk that they are putting on their company as well?
Yeah, I think pricing is a big part of the margin repair, as you said.
Right.
We spent most, if not all, of the down cycle making sure that we are structurally more efficient as it relates to cost. Last year we had a $40 million cost savings target. We doubled down on that target for 2026, and we are on track to meet that. You do not get to the results that we have seen over the last several quarters if your cost base is not more efficient.
Right.
If you think about even intermodal, in intermodal, our volumes are slightly down in the third quarter. We are just beginning to get some of the contract price, but you have seen the impact on our earnings growing 35%. Right? It is both price and cost, in addition to productivity, which we are very focused on.
I'm going to jump all over the place here. 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, just talk just very generally about priorities for 2027. 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.
I guess I'll start and you can jump in. We've talked about disciplined growth and growing where we have differentiation.
Right.
That's been the process that we've been going through throughout all cycles, right? When you think about truckload, we've said we're not focused on truck count specifically. We're focused on growing earnings.
Right.
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.
The cart is not coming before the horse.
The cart is not coming before the horse. In intermodal, we have talked about our differentiation with our rail partners, and I am sure one of your questions coming up will be about some of that dynamic and what we are doing with our rail alignments. Even in brokerage, we are very specific in terms of using technology, going after premium freight. Those are the same playbook that we are going to use in 2027 in terms of being disciplined in terms of growth. We are not satisfied. We are never satisfied as it relates to just cost containment, so we are going to continue to focus on cost containment, because the things that we are looking at, they are structural in nature. We are not just slashing costs just for the sake of slashing costs.
We are making sure that as pricing inflects and as the market recovers, we are not losing the discipline that kind of got us here. As it relates to capital allocation, we are also looking at M&A, to the extent that those opportunities arise, but we are positioning our balance sheet to be ready for those opportunities.
As well as share repurchases.
Yeah, and share repurchases.
Yeah. 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, had an opportunity to visit with Kevin Boone earlier today and ask him this question. But it strikes me that your pivot in terms of the network and in your alignment with NS and UP really 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'd you make the change? What do you think the opportunity is for Schneider amidst that change? And how are you thinking about intermodal in 2027 in general?
Well, first, the change stands on its own, even if the merger doesn't advance.
Right.
We have a lot of data that we compare the different alternatives to, and it just put us in a position that this is the right move for Schneider absent a merger.
Right.
The merger is the icing on the cake.
Right.
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, so 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. Been a great partnership, 19 straight quarters of growth.
Right.
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.
Right.
We have shippers today that don't use intermodal transcontinentally because of the reliability and the speed. That's number one. Number two is you have the center of the country that really doesn't have viable intermodal options because you're going to use two different railroads. Imagine taking a short haul, a place like Minneapolis into Chicago, north side of Chicago, and now you got to drive it, take it off the rail, drive to Bedford Park or someplace on the south side, then we put it on a different rail to go to Atlanta or someplace else. It's not economical.
Jim, there's a lot of debate around this, as you might imagine. As a practitioner and somebody who lives this, to hear this not from a rail—
Yeah.
—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. So, 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 non-traditional 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.
Service.
Gives service levels—
Yeah.
—That we can deliver that the others operating on that new network are not able to provide. Then you have one other large intermodal company that is 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.
Yeah. No, that makes a lot of sense. So you are a believer in the transcon opportunity, clearly.
Yeah.
See real value in it. Let's maybe talk a minute about dedicated.
I have framed it this way. I do not know if it is 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. You guys have been in the market for a long time. Love to hear your perspective around dedicated, the potential for Yeah, the cost of capital is going up, and I know the dedicated market has been a very challenged one in 2024 and 2025, but a rising tide tends to lift all ships. So, how would you frame the dedicated market today for Schneider and going forward?
In the long term, what we've seen is the reason for more dedicated fleets is customers have tighter and tighter supply chains that you can't hit those expectations with one-way type shipments.
Right.
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. 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 and dedicated.
Right.
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 lease 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.
They are, you are really opening yourself up to lawsuits that they have never had to defend themselves against in the past.
Right.
Clearly, they are the employer, so now they are looking for a solution where they change some of that indemnity.
Insurance has been an area that is getting a lot of attention. 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 of being not only an asset-based provider, but also offering a non-asset-based service option to customers to fill out, and 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? 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 D.C. so that we know what it means to engage in negligent hiring practices. Because I think you need a more specific check the box for brokers on what is negligent hiring and what is not. We also do not really have a rating system.
FMCSA has one, but it is not what people think it is. It doesn't hold up in court at all. The point here is I think Congress has to act before these issues in brokerage are ultimately resolved. Since Democrats and Republicans agree on everything, I'm sure this is going to happen next week.
Yeah. Well, let me start broadly and then, Darrell, come in on the insurance part of it. There's been a diseconomy of scale for large trucking companies for a long time.
Right.
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—
Right.
—With actual outcomes.
Right.
That is what we have an issue with. What happened after Montgomery, because before it was this diseconomy of scale, well, now some of that has changed because even if you are 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.
Right.
Some of this— Plaintiff's attorneys are creative. They are creative, and when I look at some of the carriers that have been used in these situations, some of those should have been addressed.
Right.
We went from 65,000 carriers to 14,000 carriers, and we did that in 2023, well before this.
Okay.
It was a result of—
Which is really important—
—Carrier security.
Yeah.
What we started doing is working with a couple third parties to go beyond the carrier and know who owns that carrier, because we understood the chameleon carrier was a real problem. You had to get to the ownership to be able to understand who is actually hauling this freight, not just the name on the side of the truck, because that can change quite frequently. That is what caused us to go down so quickly. We share, it is not just, do they have any rating? Are they satisfactory? We had to go much further than that.
Right.
There are others doing the same thing at this point.
Highway, others.
Highway is, they are a great partner for us.
Yep.
There's actually a couple others, then we implement some of our own information that we feed into it to be able to screen out. 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.
Right.
We're constantly trying to work on that. That doesn't mean that we've removed all risk from our brokerage operations, but it does create an opportunity in our truckload side. I think the insurance is a key part. We are seeing shippers starting to understand, "I not only need to make decisions based on cost and service, but what are the potential safety risk of hiring this carrier?" 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.
Yeah, I think there's a benefit to being a large asset-based, safe, compliant organization.
Absolutely.
Whereas, the dynamic is changing where the cost of a claim is going to be borne in different parts of the supply chain, right? 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. 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'd never had to deal with that or a broker who either is going to pay more, significantly more for insurance, or may not have insurance available. 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.
No, makes a lot of sense. You mentioned acquisitions.
Yep.
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?
Yep.
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.
All the above.
Right.
We start with just the ability to transact, right?
Right.
And the fact that we have spent a lot of time being disciplined on our balance sheet, right? So our leverage is up 0.1 x, right? 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, it is 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 that have 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. 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. We talked about Montgomery, we talked about AI and AV and all these disruptive forces.
Right.
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 were not either available or attractive.
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 CapEx 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 2027, and maybe we can pivot to one or two more questions and—
Yeah.
—Close up.
I'll start.
Okay.
Even during the down cycle, we've been very focused on investing in our replacement CapEx.
Yep.
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 age of fleet.
Right.
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 had scaled back, right?
Yeah.
We've also become a lot more productive during the downturn, so the need to buy as many tractors has not been there. As we look forward to 2027, we'd anticipate that we're continuing to improve our age of fleet, and as Jim said, when the right investment opportunities come, we're going to grow accordingly, whether that's intermodal or in dedicated. From an EPA standpoint. You want to touch on that?
Yeah, go back to 2010, last time there was an engine standard change, did 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.
Okay.
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 turns, that's about 30% higher volume. There's still places that we think we can eke out some more utilization out of all of our equipment.
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. Our net CapEx is impacted by more favorable proceeds.
Right. Well, maybe just to wind things down, we only have a couple of minutes left. As you think about 2027 specifically, where are the biggest opportunities for margin improvement? If there are any milestones, one or two milestones that you think are especially important evaluative measures for investors to consider, to measure Schneider by, maybe just to hit on those.
Yeah, the key priorities, Darrell mentioned removing costs over the last two years. That doesn't end just because the market's improving.
Right.
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 cost out. 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.
Yeah, and just in terms of—
And growing.
—Specific question on measurement, right?
Yes.
We have targets out there in terms of long-term margin targets, so truckload 12%-16%, intermodal 10%-14%, brokerage or logistics 3%-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. As of the end of the third quarter, we're at 8% margin in truckload, 7% in intermodal, and we're already within range for logistics, absent claims considerations. We believe that as capacity continues to exit, really from the top of the funnel, and the fact that we have structurally lower cost, the path to those long-term targets is accelerating.
Well, it seems like 2027's very much going to be a margin focus year 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 all the questions. We hope your meetings with investors go well.
All right.
Thank you.
Yeah.
Thanks, man.
Appreciate you.
Thank you.