Great. And so straight in from the airport, always on time, of course. We have Schneider National with us, and CFO, Steve Bruffett, and Jim Filter, EVP, Group President of Transportation Logistics. Gentlemen, thanks so much for joining us. Kristine, welcome. And again, research disclosures, please see them. So, yeah, I think, look, I think, today's been trucking day. We had a bunch of TLs, a bunch of LTLs on stage, and I've told all of them that we are all on cycle watch. So would love to get your update on what you're seeing out there.
Kind of any signs of... I think it's sort of not in debate that we have probably bottomed. The question is kind of, are you seeing any lift off the bottom? And while there might be a little birdie or two that kind of picks up, I don't think there's much but would love to see what you're seeing.
Yeah, it's a relevant question, timely, of course, and, like, if you replay the tape on our second quarter earnings call, we kind of signaled that we felt like, sequentially, our earnings would be lower in the third quarter than in the second...
Yep.
W hich isn't necessarily normal, but it reflected the fact that we felt like all the cumulative effect of the pricing actions taken over the prior year were adding up to have their full effect on the third quarter. And said another way, we felt like third quarter was really signaling to be the bottom of this particular freight cycle, and I think that's playing out to be the case. And so, at some point, you've got to have a bottom to start having something other than that, and so it feels like we are kind of grinding along down in there.
At the same time, there are little pockets here and there that haven't been apparent for the prior year plus, in that, for example, there was some more visible back-to-school activity. There's even been some noticeable Halloween activity...
Oh, wow.
In some shipping with the retail customers, we have. I wouldn't aggregate all that to make a big, meaningful difference in what's going on overall because things are still quite muted, but there are some signs of that, some conversations about the holiday type of restocking. There is some restocking going on, and so I think everyone's pretty much in a better inventory situation than what they've been for the past year plus. So, I think all those things are starting to line up, and there's some other topics, so we can talk along that line, but that's just kind of an overview from our vantage point.
You know, since we have a portfolio that's in the full truckload space or in the dedicated space, we're in intermodal and we're in logistics, we see quite a bit across the spectrum. And so some of our own internal metrics are good leading indicators to us that you don't see out in some of the publications or broader measures.
Steve, you're our resident peak season whisperer ever since your excellent track record starting in 2018. So, what do you think we have in store for us this year, if anything?
Well, I don't know if I want that title, but...
It's a good one, trust me.
No, but it just feels to me that we've signaled we anticipate a muted peak season, and I think that would remain the case. I think there will be some signs of seasonal activity across September, October, November. And then I think that sets us up for a more constructive start to 2024. I wouldn't call it robust, but I would call it a more balanced and more in equilibrium type of setup than what's been in place entering any of the last, call it, four years. It was displaced on the shipper side for a couple of years, and now it's been displaced on the carrier the other way around. But you know what I mean.
Yeah.
Strength and weakness and it's been quite out of balance in both directions, and I think we've got a set up for 2024 that looks more balanced.
Got it. And kind of when you think of, again, the spot market here being pretty dead, if you will, and contracts kind of holding up reasonably okay, but can you run us again, what is your spot contract exposure, and kind of how do you see the movement of customers between the spot and contract markets?
Yeah. So, it depends on our business segment.
Yeah.
Our asset-based businesses, it's less than 10% that we're operating in. There's essentially no spot within the dedicated market, of course. And then within our brokerage business, it will move somewhere between 40% to 60%...
Mm-hmm.
O f how we play there. You know, we've seen it, you know, number of months were, you know, very flat. That tells you we've really hit that bottom part. We've hit that spot where carriers just can't survive below that number.
Right.
In terms of what we're feeling, and we are seeing some of the signs of capacity exiting, not necessarily on the outcome metric, the trailing metric of total number of long-haul drivers, but, you know, we have a broad portfolio. So, we have, you know, things like the number of inbound calls that, of, capacity and, and especially experienced drivers that are starting to come in.
Mm-hmm.
We have turn-ins in our lease business...
Mm-hmm.
S eeing those start to accelerate a little bit. And then within our brokerage business, the number of carriers that we're seeing that no longer exist, that haven't renewed and are no longer hauling freight. So you're seeing all three of those more leading metrics starting to change.
One of your peers was on stage earlier kind of saying that they thought that now is a tipping point for those small players to exit this sort of ride of money, fuel prices going up, et cetera. So, those statistics were really helpful to back that up. Do you think that accelerates through 4Q?
Yeah, and that's part of what, in terms of fuel, that is...
Yeah.
The quickest cash conversion you have of any expense. And so with high interest rates and that factor, expect that that's going to continue to push. And there were some small carriers that have been surviving with some amount of savings.
Yeah.
I don't know if it was as large as what some people expect, but as you deplete that... And there's still alternatives for work. The labor market is still strong, alternatives that people can find other jobs.
Got it.
Back to the cyclical nature of the ebb and flow of that capacity, if there was such a thing as a typical cycle, we would have expected to see that capacity begin to exit at least a couple of quarters ago. That obviously didn't happen, and there's probably a variety of reasons behind that, you know, people guess about, but one of which I think could be just the psychology of someone. If you had worked as an independent driver or carrier, over the past several years, you went through a period of time where making money was easy and...
Yeah.
plentiful, and you could even pull back on the number of miles you drove and still make a decent living and all that, and that's in your memory banks. And, and, and so you go through a few months where that isn't the case, and you think, "Well, I used to make X thousand a month, and, and where, where is that?" And it could take a little while for the reality of that to, to catch up with, "Hmm, maybe this is going to go on for a while. The slot machine... [crosstalk]
Yeah.
Mentality. I just... I won... [crosstalk]
Yeah.
I'm waiting for that next one... [crosstalk]
Those damn rose-tinted glasses. Maybe last question for me before I turn over to Kristine. I think it's still a little early for 2024 contract negotiations to begin. I think that really kicks off in October in earnest. But are you starting to get some feelers, kind of, can it be an up year? Will it be another down year? Will it be flattish, kind of, what are some of the early signs you're looking at for 2024 contracts?
Yeah, I don't think there's a level below where we're at right now from a contract rate.
Mm-hmm.
and our customers, I believe they understand that. And so, as you go into next year, what they're going to expect is, "I want to get to a rate that you're going to be able to honor throughout the year.
Yeah.
So, you can go and try to push that rate, that really wouldn't be durable through another contract year. So, I'd expect that there's a little bit more strategy involved in those bids, rather than trying to push down to the lowest, lowest price.
Do you think there might be a return of shorter-term contracts, and they're like: "Hey, give me a rate for six months, and then I'll, I'll reset you after that?
Well, the way we, the industry kind of works with those, if they're shorter duration during this part of the cycle, then they get treated the same thing on the other side.
Yeah.
Same thing, you asked the question about spot rates.
Yeah.
A shipper that has a contract rate, but, you know, goes out to the spot market, that's visible to everyone...
Yep
Based on how the market works, and that's just going to be reciprocated.
Got it.
Thanks, Ravi. Maybe one more macro one for me, but it feels like the destocking was obviously a pretty big contributor to the down cycle. Seems like inventories are in an okay position, but the restocking hasn't really quite kicked off yet. What are customers telling you about kind of their inventory picture? Do you feel like, you know, it's going to be an open the floodgates type of situation, they'll all come rushing in, or do you feel like it can be pretty stable? How are they framing those conversations with you?
It's a really broad range of retailer responses right now because there, there's a disconnect between retailers that are performing very well and those that are struggling.
Mm-hmm.
There's those that start very early on the destocking, have already gotten to that spot, that they have certain product categories where they need to reorder. And even what we brought up on our call, a couple of those categories where they were pushing, they felt like they were under the desired inventory levels. So, as we go through this year, it really is a mixed bag.
Yeah. I want to dig in on some of the segments, and so maybe the best place to start is you guys are probably one of the most diversified companies in our coverage. Sometimes it doesn't feel like the market gives you much credit for that. So maybe you can just kind of talk about, you know, the strategy going forward. You know, are there pockets that you'd like to continue to grow? Do you feel like the mix is in a pretty good shape? How are you thinking about that?
Yeah. It is a purposefully constructed portfolio, and we obviously participate predominantly in the full load space, be it on a 53-foot trailer or an intermodal container. And like the harmony or I guess it matches up with how customers buy freight. 49 of our top 50 customers use all segments in our portfolio, so we like that aspect of it. And we've made some conscious changes to the proportions of our portfolio over the past several years to the point where we do like our truckload network business, but we kind of like it sized like it is now, and the role that it plays in our overall portfolio and results.
It solves some of the hardest problems our customers have, and it's a basis for which to have broader conversations with customers, and it interacts with our dedicated business and helps support that as well. But we're at a point where dedicated trucks represent 63 or 64% of our total truck count, and that's been purposeful, and we're comfortable continuing to grow our dedicated presence and have a good pipeline there.
Our intermodal space, we feel like is probably our biggest upside opportunity from where we sit today. We've gone through a lot of changes with our rail partners and how we're set up to perform in that space over the past couple of years and have yet to have a market condition to really exercise that capability.
So, look forward to that upside opportunity, both with our internal efficiency and over-the-road conversion that we feel is a real growth driver for us. So, we see intermodal as a growth vehicle, and we love the footprint and reach that we have in our brokerage business in logistics and think that that will continue to grow and provide value in the marketplace. So, you know, we're comfortable at a point with the adjustments that we've made. We can kind of grow across the space now.
It's also what our customers are looking for. You know, some of their toughest problems, their expectations for on-time delivery from their customers continues to advance. Best way to address that is with dedicated, so we've seen a proliferation of dedicated, and we're solving that problem. Customers are talking to us not only about capacity but really talking more about sustainability.
Best way to solve that problem is with intermodal, and then, you know, solving the capacity issue with the proliferation of small carriers and technology, being able to use power only so that to the customer it's seamless, that we can aggregate all that capacity and they don't have a rainbow fleet. So, solving some of our customers' biggest problems but also aligns to our structural improvement.
Great. Maybe to stay on the biggest part of the business, and then we'll make our way to the other segments as well. But you alluded to this with dedicated. On the pipeline, I feel like dedicated has been a big beneficiary of, you know, e-commerce, the higher service levels, the kind of shorter length of haul. Do you feel like there's still a lot of runways with that type of customer growth? Maybe you can just talk a little bit about the pipeline that you're seeing, you know, what customers are asking for you there.
Yeah, we shared on our call that we expect to add 200 units of growth in the second half of the year. We still have a very strong pipeline. Customers continue to come to us with solving that problem of, "Take a look at my network. Where can you use dedicated to get me to a different service level?" So, we haven't seen that slow down at all.
Great.
I want to also talk about intermodal. I think there's a lot of interesting things happening there at the moment. Before digging in, maybe onto some of Schneider's specific announcements, I want to take a step back and just ask. You know, I think the conversion from truck to rail has proven difficult over the last couple of years.
You know, obviously double-edged sword for you guys because you like the truck volumes, but obviously you want the intermodal to grow. So maybe you can talk a little bit about the industry's level ability to kind of convert and grow, but then also, you know, the idiosyncratic opportunities that you can kind of use, whether that materializes or not.
Yeah. We've seen a mix, but a conversion back over to truck, and a number of factors have been driving this. One of them is really just the lack of West Coast imports is one of the factors, so we don't have as much freight traveling over those long lengths of haul that favors intermodal. There's been service issues that we're carrying on, and we're top of mind for customers, as well as just the rates that generally, intermodal has trailed truck rates by about a quarter, and during that process, we saw some conversion there.
But we are at a spot where the service has improved, especially on the CSX, the CPKC, and we're performing at the levels of truck-type reliability on it, and especially in those portions, and optimistic about what's going on in the UP with their new leadership team. Opportunities to improve there, and as those prices have started to reset, feel really good about our opportunity to convert. And I think it's not just Schneider. That is an industry. I'd expect to see over-the-road conversions.
Great. You mentioned UP, CPKC. You recently had an announcement about a partnership with CPKC. They've touted your comments about their service quite a bit, actually.
Mm-hmm.
So you'll forgive me for asking, but, you know, with UP's kind of comparative service and CPKC's, I mean, maybe you can just talk a little bit about the opportunity that you guys are seeing, you know, with nearshoring, why you felt having kind of both of those partnerships were important, and if you're seeing any early signs from customers one way or the other, if there's a preference that's building.
Yeah, our on-time performance is virtually 100% on that lane, and the transit is actually beating our truck transit to get from Mexico up to the Midwest. So, I... That really is the gold standard, and we've used all of them.
We've used the UP, we've used FXE, we've used BNSF, we've used CN, we've used every routing available, and it's really the way that they're operating their trains is just highly repetitive performance. We're really excited about what they're doing, and the feedback we're getting from the market is very positive. With this type of performance, we're able to go to those high service sensitive type customers and have opportunities. So, this is very new.
The first train was leaving in May, so we still have a big opportunity in front of us. And as well as the UP was a large opportunity for us. That is... We haven't really been able to flex that muscle, as we were going through the transition the beginning of this year. This will be the first bid cycle that we're going through coming up, where we're not on the same rail as our largest competitors, so we see that as a large opportunity as well.
Jim, do you see any, sorry, I mixed your scene. Do you see any competitive shift in the intermodal space as a result of the changes that took place? Obviously, you and Knight kind of moved over last year, kind of... Do you see the pendulum swing, attempting to swing back in the other way, and kind of, what the competitive reaction to that's gonna be...
Yeah.
O nce volumes come back?
Yeah, and we've been competing against each other regardless of which railroad you were on, so there wasn't necessarily a change that now we're going to compete against each other. For all the competitors, the biggest opportunity is still over-the-road conversion. Yeah. The magnitude of the size of the opportunity is so much larger than share shift. So just by our math, what we would say has switched over from intermodal to over-the-road and getting back to that peak level...
Mm-hmm.
That'd be about 3.5 million shipments. So that's about seven or eight Schneiders, that, and just the size of the opportunity, that's where we really want to be focused on the over-the-road conversion.
That's right.
Yeah, no, no problem. Maybe switching gears, a little bit then to logistics. You know, can you talk a little bit about kind of the benefit of having that just for diversification sake or the services that it provides customers, versus also maybe, like, the cross-selling opportunity or, you know, the power only, maybe leveraging assets in a different way, and just, you know, how you balance thinking about those two and priorities for that segment going forward?
Yeah. It's an opportunity for our customers that reach out to us. If we're not able to solve that problem, we have other solutions that they don't have to go and hunt around and find opportunities. The other way that this comes in is that customers that are smaller are looking for someone to just take over, manage my freight, really provide my TMS, and then we're able to solve for that and be a little bit more seamless. And when we think about our truckload network, to our customers, what they're really focused on is the trailer...
Mm.
Not necessarily who's hauling the trailer. So for us to be able to have company drivers, owner-operators, power only, all able to move the box, it's a much larger set of capacity.
And maybe, maybe staying on logistics for a moment, as you think through, you know, that segment, you know, you think you guys are on the more forefront of technology within our kind of coverage universe. Obviously, that's a space that has seen a lot of disruption, you know, increasing price tools, et cetera. How do you see that kind of segment playing out over the next 10 years? Do you feel like you are making the investments that you need? Do you feel like there's stuff you want to target going forward? How are you thinking about that?
Yeah. So, there's, you know, there's a lot of brokers out there, and, you know, everybody has technology or they have apps, maybe not to the degree that we do in terms of having APIs with shippers, with customers. I think the real difference is having the assets and the capacity to back it up, so that not everything is going out and being operated on third party. There are solutions that really do require that you reach in and have a broad range of solutions. So, there's a number of customers where they need to be able to switch between modes, and it's and to include LTL for part of their freight.
So I would say over the next five to 10 years, it's one, you have to make all of these investments in technology and the decision science right now, but you know, as that proliferates, it's going to be, well, who can also be able to move the freight and have assets, and especially the box, whether it's a trailer or container.
Yeah. Staying on technology, but shifting gears a little bit, I had the honor of going to your opening of your EV terminal.
Right.
It was very exciting. Just wanted to get a little bit more on that strategy. We did have one of your peers up earlier today that was a little, maybe a little more sanguine on the opportunity. So, what are you guys seeing? How does that fit into your broader strategy, and kind of what's been the uptake since you've really launched over there?
You handle the operational part.
Okay, then I'll chime in with... Okay.
Yeah, an operational part. By the end of this year, we'll have 100 EVs in our El Monte facility out here. Big part of that, though, is what you attended, is having the charging infrastructure, because that's probably the most challenging part of this. You can go out there and buy the trucks, but the charging infrastructure required, that facility that's up here, that's drawing the power at equivalent of 5,000 homes, all in a very small area. We're fortunate to be up front and have a grant, both for the trucks as well as the charging infrastructure, that enabled, you know, the financial aspect, to come to fruition.
Then, after that, the other operational element is retraining all of your drivers, because it is different driving an EV than a diesel vehicle. For decades, we've been working with drivers to improve their MPG, and this is a different way of driving to extend the range of an EV. So, we started with a small number of trucks, we've been training drivers, and now as we're growing that out, we're in a position where all of our drivers get the opportunity.
The feedback, I'm sure you heard from our drivers, really enjoyed driving an EV. It's a different driving experience. Our drivers really talked about it was going from a standard transmission to an automatic transmission was a game changer.
It was one of the things that allowed us to start growing women drivers in our, our trucks, and we love the trajectory. Well, this is a new level that you're in a, a truck that's not loud, it's not vibrating, very smooth, and, you know, different level of torque.
Yeah, just operationally, there's learnings in there because the roughly 100 trucks will have, that doesn't represent all of our truck capacity in Southern California intermodal operations. So, you have to figure out how to best utilize those with their limited range and how to serve customer needs appropriately with those assets, those scarce assets. More broadly, now, this could change fairly quickly, but as, cause this is basically technology.
So new technology often comes in with an inefficient per unit price, and that is definitely the case now. As it stands today, there is absolutely no economic framework to support this as it exists today. It's just not feasible without sizable grants and so on, and there's no infrastructure to support it. So, without those two things changing fairly dramatic, it could be somewhat limited in scope in the near term. But there could be large forces, perhaps, that change that. But as it stands today, that's what that profile is.
What are your government relations people telling you about that? Do they expect those, that support to continue in perpetuity? Do the policymakers realize that, or are they, are you guys expecting new technologies, whether it's synthetic fuels or hydrogen, to kind of step in and fill that void? Or I mean, it seems a little, almost foolish for everybody to say, "Hey, those are our targets. Let's just keep going full speed towards them," and we all know we might not get there.
I think it depends on what arena you're talking about. We happen to be seated in an arena that has a different set of rules and a different perspective of the world that may or may not come to fruition...
Uh-huh.
I n the time frames or exactly as planned. I do think there are opportunities for the trucking and transportation space to significantly lower their carbon footprints, that doesn't have to be solely single threaded down EV line. There are viable alternatives today that would significantly impact that equation, but if it doesn't satisfy the regulatory hurdles set in front of you, then it becomes a moot discussion.
Yep.
It just depends on where you're talking about and how applicable a solution can be, and we're exploring all of them. We are testing a hydrogen truck. That's, economics are even, more difficult with the hydrogen vehicle, but... Or in the early station, then there's somebody. There's different fuel types...
Yep.
That, you know, that could make complete sense, so.
I definitely can attest to the drivers. They were pretty jazzed about it, so. Maybe we'll open it up to the floor, if there are any. Maybe just last one, just, talk about kind of, capital allocation, you know, general philosophy, but also this year it seems like equipment was, you know, a little bit tougher to get, so should we expect, you know, some ongoing kind of catch-up CapEx? What are the other capital priorities?
We actually made good progress this year compared to the couple of prior years, just given the challenges that the OEMs had in delivering equipment, both on the power and trailing side. But this year, things have largely been on-time deliveries, and so we've made some headway in that catch-up. Part of our CapEx number this year is a bit of catch-up on our age of fleet that we're shooting towards.
There may be a bit more of that in 2024 coming up, but just broadly speaking, in capital allocation, you know, we've set our pillars pretty consistently of growth in dedicated, growth in intermodal, and growth in logistics, which doesn't require a lot of capital. And that remains our focus.
We've been acquisitive in the dedicated space and some programmatic acquisitions of quality companies, kind of founder owned, and good cultural fits, great customer connections, and we'll maintain all of the goodness of those companies. So we're open for business in that space going forward. We would consider something larger if it were to fit, but we're not driven by a bigger-is-better mentality.
It would have to be something that really makes strategic sense for us and our customers and our investor base for us to do that. But feel well positioned with our balance sheet and our firepower and a focus on return on capital that I think is constructive and so feel well positioned. We've made a lot of progress over the last five or six years, and I think there's a ton of runway in front of this company, as we sit here today.
That's a great sentiment to wrap up on. Gentlemen, thanks so much for joining us, and see you next year.
Thank you, Ravi.
Thank you.