Schneider National, Inc.

Part of that is recovery from the market on a rate perspective. Part of that is using your market reach to be very cognizant of the experience that you're creating for your driver with the freight that you're making commitments to that's respectful of them, their time, their experience. We put a great deal of emphasis and effort against that, whether that's in our intermodal dray business, our over-the-road trucking business, or our dedicated configuration. We're very mindful of what the entire environment that the driver experiences based upon those decisions that we make. And so we combat that with the environment. We combat that with making sure that we're getting a commensurate return from our customer to make sure that we can share that with the driver. And I would expect all of those initiatives to be of material importance going forward. Great. Thank you.

Our next question comes from David Ross with FIFO. Please receive your question.

Good morning, gentlemen. I wanted to dig into the intermodal side of things a bit. Steve, maybe you can give us volume growth by month through the quarter and into October. You said that they turned positive. I just wanted to see how positive they're trending recently.

I guess, David, that's a layer of detail that we haven't gotten into on these calls and our investor discussions. And so we prefer to stay away from monthly trends. But it did strengthen as we went through the quarter and continues to do so as we bring on new business wins here in October. And given the seasonality, would expect that to continue into November and early part of December as well before the seasonal slowdown. So I think well-positioned and getting some network fluidity back. There still are certainly hot spots, both customer locations and certain ramps that aren't operating as efficiently as they can. But we have seen improvement, which helps with our asset utilization and container turns.

Given the ramp issues, some ramp closures, customer detention, what's the pricing ability on the intermodal side right now? I think it's lower year over year, but as the truckload market has tightened, how quickly are you able to get the prices up on intermodal to account for some of these cost increases?

Yeah, David, as we've been through the renewal period here in the third quarter, and what we anticipate and we're working on presently is it's following very close in line with what we're experiencing on the truck side. And some of that is there was more erosion, I think, in intermodal over the last couple of years based upon some competitive dynamics going on in the marketplace. So we believe we have consistent and across the board rate capture ability in our intermodal business, not only between now and the end of this year, but as we turn the calendar into 2021.

Can you just remind us of what percentage dredge is third-party versus Schneider in-house and where you want that to be?

We typically target and typically perform in the 90% range, give or take just a bit on either side of that from our own orange assets. Sometimes in the seasonality periods like we're in now, that dips a little lower in the first part of the year. It raises a bit above that 90% range, but that's generally what we're targeting.

Thank you.

Our next question comes from Jordan Alger with Goldman Sachs. Please proceed with your question.

Yeah, hi, morning. I was wondering if you could give a little more color on your thoughts on the, you know, I know on the capacity situation, you know, I know the outlook obviously is very strong from a pricing perspective, but, you know, there's been some concerns of late, of course, about Class A orders, and just sort of wondering how you think about that. You know, what kind of orders are they? How do you balance that with the driver issues? And then if you could touch briefly, you spoke a little bit to what your own plans are for your fleet, terms of fleet growth, whether it be dedicated or one-way truckload over the coming quarters?

So first question I think centered around kind of Class 8 orders and what we've experienced and you see it in our numbers here in the fourth quarter relative to net cap X is just the Finally, now we're starting to get fluidity back on the OEM front relative to deliveries, and we've been delayed throughout the year. So I think we're always trying to figure out as well what's just catch-up and what's – we're in the catch-up mode for replacement as we come into the fourth quarter because of the delays that we've experienced in the first part of the year. So we're not seeing any great evidence of – capacity coming back like the 2018 condition, as we recall, we were, as an industry, not only had a robust demand picture, but we had lots of capacity coming in at the same time, which then made that adjustment in 2019 a little bit more painful. We just don't see that anywhere in any meaningful fashion occurring in this environment like we did in 2018. used truck market getting a little bit better, but not overly robust. And certainly, the driver capacity at the top of the funnel issue, I think, is an industry-wide dampener for several more quarters. And then, as it relates to fleet focus for us, intended to get back a little bit of the attrition that we experienced through COVID and what I just described earlier today on the network side of the business, but not looking to grow beyond a little bit of catch-up from that attrition. And our focus for organic or potentially acquisitive growth centers around our specialty businesses, whether that would be in the liquid bulk space, dedicated, and certainly we would anticipate further growth in logistics and intermodal. It's our network business that we want to keep fairly consistent.

Got it. Thank you.

Our next question comes from Allison Landry with Credit Suisse. Please proceed with your question.

Thanks. Good morning. In terms of the intermodal R market, I think you mentioned in your prepared comments earlier that you are expecting improvement in Q4. So I just wanted to just clarify, was that a sequential comment, or do you think you can possibly see a year-over-year improvement in Q4?

Yeah, my intention on that comment to Allison was a sequential improvement as we march our way back to our long-term target range of 10% to 12%. We expected to make meaningful progress in the third quarter. In our view, we did, and I think we'll make some other progress and further progress in Q4 towards those targets.

Okay. And is there any way to sort of quantify the network inefficiencies, you know, maybe just in terms of the magnitude of the margin impact? And, I mean, is it right? It doesn't sound like that's going to eat much in Q4. Maybe that's more early 21. Is that the right way to think about it?

Yeah, we most look at what could we have delivered into our business if we didn't have some of those constraints relative to third-party dray and the extra dwell time for our assets, even though our turn time year over year on a per-month basis was fairly consistent. We know we gave up opportunity, several thousand orders more we could have delivered within the quarter that we had the capability that were loaded that we just couldn't get through the system efficiently. And so that is improving. We expect that to improve, particularly a lot of focus with our customers on the dwell time. If you want additional coverage, we can't keep going into DCs that aren't unloading that end up backing us up or putting costs into our business to go find another empty outside of that. So I've been pleased with the response. You know, customers are dealing with many of the same issues we are relative the labor availability to to address the turn time that they're inside their four walls but but it is improving and we're seeing and we would expect to see further improvement here in the fourth quarter okay all right that's helpful and then just you know I know that you mentioned we're punishing the fleet and catching up a little bit there but maybe just sort of more broadly

if you could give us a sense for how you're initially thinking about CapEx in 2021, and if there's any sort of major growth projects or new technology investments that you guys are evaluating. Thank you.

Sure. This is Steve. I'll tackle that one. We haven't guided, obviously, for 2021 yet, but would indicate that we expect CapEx to be quite a bit higher than the 250 this year, which is below normal. And We're refining those numbers right now as we're in our budgeting season here. In addition to catch-up replacement capital that Mark mentioned, we probably would anticipate some growth capital for our dedicated configuration in particular. There's those elements, but there's also an age of fleet dynamic that we're contemplating. And Mark mentioned the driver experience, which is a priority to us. And so looking at that age of fleet in the context of both driver experience as well as potential new technologies down the road and positioning ourselves to be able to adapt as quickly as is reasonable could involve some capex toward that. part of our objectives as well.

Okay. All right. Thank you, guys.

Thank you, Allison.

Our next question comes from Bascom Majors with Susquehanna. Please receive the question.

Good morning, and thanks for taking my questions. I wanted to go back to Intermodal. Clearly a very pricing-sensitive business as far as profitability goes, and if you look at this year, you're probably going to end up Earnings-wise, 30% to 40% below the 2008 peak. I'm curious, you seem optimistic on pricing, and that feels appropriate given the conditions we're seeing today. Is there a path back toward profitability in the intermodal business for 2021? And what are the one or two variables that could get you there or keep you short?

Thanks. This is Steve again. You know, 2018 was a really unique year where everything that could possibly go right in the intermodal space went right. In our particular case, for example, we were onboarding several thousand new containers coming into the west coast. We could get them off the ship and immediately put them into use coming out of the California market and getting into the network efficiently and so on. There were fuel dynamics and other pricing mechanisms that were working in our favor. And it's fair where everything works that well. We even indicated during 2018 and early 2019, I recall, commenting on one of these calls that the 13% or 14% margins we were achieving at that point in time were abnormal and not our expected norm. And that's when we started talking about this 10% to 12% margin range for Intermodal as being a reasonable longer-term place that we land across business cycles. And so I think that remains consistent with our view sitting here today.

Thank you.

Our next question comes from Chris Weatherby with Citi. Please receive the question.

yeah I picture to get a question um yeah I had a specific question on the for higher revenue per truck per week I just wanted to see if you get to talk a little bit about her the circumstances in the market in the third quarter but can you break that apart a little bit we talk a little bit about realized rate relative to productivity she's kind of curious about that number that I think down five percent maybe sort of the cadence of how that could improve as we move forward into the fourth quarter yeah Chris yeah I'm not

I'm not pleased with the performance, particularly in that metric that you just pointed to. Some of that is the unseated truck count. Ironically, we're coming off this quarter a five-year high on productivity on our solo fleet on our seated truck count in that exact quadrant, the truckload network. But the combination of being skinny on the teams, which is a high-utility industry, and a high rate per mile and the combination of the unseated units there really dampened that metric. And we had a nice upturn in price per mile, which contributes obviously to revenue per truck, really started in a meaningful way in September. And so we think we're, on the price side, are starting to see the momentum that we're after there. Probably going to have a couple of quarters of work through this team dynamic that we're looking to address. And then obviously then fill the unseated trucks that we have. We'll drive that metric. That combination of those three things we think will be a positive contribution to that metric for the next several quarters. Okay.

But still a little bit of a lag as we move forward as you're trying to work through the team situations. Yeah. Yep. Okay. Got it. That's helpful. And I know we've talked a lot about the environment, but I don't know if you've offered a specific sort of outlook for rates as we think about 2021 on the contracted side. Just going to get a sense of maybe what you think the magnitude could be. It seems like the setup relative to a fairly tight capacity market is positive, but I don't know if you care to offer a view on what you think the rate improvement might look like.

Well, all the signals that we have and the work that we're doing now, it's a constructive environment, and so that's a customer by customer, how they fit, what are their contributions to our network, to the business. But, Chris, certainly mid-single digits to low-double digits we think are within the spectrum, and we're going to continue to refine what we expect that to be here as we get through this quarter.

and we'll be in a position to give you more insight on that as we get together next time okay that's a helpful start appreciate the time thank you our next question comes from scott group with wolf research please proceed hey thanks morning guys so if i look at all the large tls this quarter i think they were all in mid to high teens margins and you guys were we're at 10. I guess, why do you think there's such a gap? Do you think there's anything structural there? What, if anything, are you guys doing to start closing that gap?

Yeah, Scott, we certainly think we have improvement opportunity, particularly in the network side of the business. And it was really, as we looked at this quarter, balancing our commitments relative to our contractual versus the amount of business that we put out into the spot market. uh we are generally much more contractual uh orientated uh but as i i think i mentioned in my opening comments we're starting and we started to move that from the mid single digits to the low double digits to take advantage of a bit more of the pricing uh the quicker pricing opportunities that exist in the marketplace. And we're going to continue to balance that long-term positioning of the business and the customer community with the opportunity to get yields relative to the spot market. So we can do better and we will do better. And it's a combination of contractual and network play as well as how we approach the spot market.

OK, and then just going back to that last question about the rev per truck, was rate per mile positive or negative in the quarter? I wasn't sure if I understood the answer.

Yeah, so in our truck load network, it was positive for the quarter, but it improved throughout the quarter. So we were slightly negative in July, and we improved throughout the quarter to get, as the September closed, we were positive for the full quarter.

Okay. So utilization's done a lot right now. Okay. Okay. And maybe just last thing, do you think you're back in the 10 to 12 intermodal margin next year?

Yeah, that would be our expectation. We haven't obviously provided guidance yet, but we think we're on the trajectory and the path as we've laid out in our last discussion.

Okay. Thank you, guys. Appreciate it. Our next question comes from Tom Wiedewitz with UBS. Please proceed with your question.

Yeah, good morning. I wanted to ask you a little bit about growth next year and how we should think about it. I think when we look at the intermodal and third quarter, it seems like even if you had more containers, you might not have had more loads because you couldn't get the containers in the gate or couldn't get them turned at the shipper warehouse. So I guess how do you look at the container fleet in UBS? 2021, are you going to grow the fleet? Is that a meaningful lever to support load growth and intermodal? And then on the truck side, you know, I mean, it sounds like you're dealing with a pretty meaningful unseated tractor issue. So, you know, would you expect the tractor fleet overall to grow in 2021? Or will you do well just to keep it kind of flat, given how tight the driving market is?

Yes. Good morning, Tom. Thanks. Let me start with where you ended there. We would expect that we would be growing our dedicated truck count. We would expect that we would deal with and get our network fleet back and some of the unseated issues that we're referencing here with both the solo fleet and the team fleet. But I would not anticipate any meaningful growth in the network side of the business. It will center around our specialty dedicated location. And I would anticipate, and we haven't fully communicated, but we do believe we have growth opportunities across the board in our intermodal business, and we will make the appropriate investments to achieve those.

Okay, so you would plan to grow the containers to support the growth in 21?

We would be comfortable growing both the container and the dray fleet to support growth in intermodal, yes.

Okay, great. And then, you know, you did the special dividend. You still have a good amount of cash available, you know, maybe some ability to add leverage as well. How much are you focused on growing inorganically? Is that still a meaningful component? Are you still spending time on that? Or is that something that's just not a high priority for you?

I'll take that one, Steve, here. Nothing's changed about our prioritization. I would say as we've gone through 2020, it probably did take a bit of a backseat as we were dealing with all the rapidly changing environment and so on, but now that we are where we are, nothing's really changed about our longer-term strategic objectives, and so we remain interested and looking for opportunities. At the same time, we don't want to do something that doesn't make complete sense for us just because we have the capacity to do so. So it's finding the right opportunity is most important to us more so than speed.

Do you think it's likely you'll do a deal in 21?

It's always hard to handicap whether a transaction is going to happen or not. It's an objective. We would like to, but we're not going to force it just to do it.

Right. Okay. Thanks for the time. I appreciate it.

Our next question comes from Sanjay Ramsalini with Bank of America. Please proceed with your question.

Thanks for taking my question. Just Perhaps looking at the focus of dedicated, I mean, obviously competitors have begun to shift their fleet towards growth and dedicated. You guys have obviously noted the strategic objective of keeping your mix of one way relatively high. So maybe just some color on what the ideal split there is and then perhaps just going into your ideal bit of contract versus spot would be helpful.

So the first part of that was ideal mix between dedicated configuration and one-way. Ideally, and this will be over a several-year horizon, but getting to a 50-50 mix there would be, I think, a reasonable objective for us as an enterprise. I think there's synergies and value by having a very strong one-way network as well. having a meaningful sized dedicated configuration and so that 50-50 would be ideal. And I think it also recognizes the value that the driver community gets from those type of positions and those type of experiences. And then I think the second question might have been on the network on spot versus contract. Did I catch that one correctly?

Yeah, yeah, that's right. Yeah.

Yeah, traditionally, we've been more of a contract shop, playing in the mid-single digits and spot, mostly just to deal with out-of-balance issues in the network and repositioning. Our technology and tools and value that we can derive from that would suggest that we should be a bit higher than that, so targeting perhaps the low double-digit range of It is something that I think makes sense, and obviously it depends on the market and what your opportunities are, but we certainly have the capability to toggle that, and right now we're targeting low double digits.

Perfect. That's great. And just following up on that, I think obviously in the release you guys noted that the September network saw price yielding kind of a mid-single-digit improvement year-over-year. So maybe more in the short term in 4Q, kind of what are you kind of expecting on price? Obviously, you know, note your comments before on where you see the contracts going in 21, but just more so in 4Q and what you've seen so far in October.

The first part of that question, are we talking about network pricing in the near term and what we're seeing? Yes.

Yes.

That's the question that we just didn't hear clearly. You know, it's a continuation. Obviously, like we've indicated several times on the call, we're predominantly a contractual business, 90% or so, and substantially all of those rate renewals have occurred already. So the opportunity in the market is around the edges with premium and spot opportunities. you know, some proactive conversations with a subset of our customer base. And so the typical seasonality type of play, as we are in the fourth quarter now, and especially over the next six weeks or so. And so we will be doing those typical types of things. At the same time, a lot of work is underway to begin planning to be well prepared as we enter 2021 and are actually in a rate renewal cycle.

Great. Thanks.

Our next question comes from Brian Ozenbeck with JP Morgan. Please receive the question.

Hey, good morning. Thanks for taking the questions. Hi, Brian. Well, it's maybe just following up on that last one, just in general, as you enter the RFP season again here. I know you're leaning a little bit more towards the spot market, as you indicated a few times here. Anything that could materially reprice in the fourth quarter? Are you seeing more freight being pulled forward than on many bids and more so than usual, maybe in August of 2018? And then, Mark, do you think that we're going to see any meaningful change on just how contracts are thought of and balanced between shippers and carriers just on the heels of all the volatility that we've seen, which doesn't look like it's going to subside for a little while here?

Yeah, Brian, a couple of thoughts. The fourth quarter generally is not a large contractual renewal period, although it is and presently is where we're focused on some key out-of-cycle increases relative to a subset of our customer community. So those things are being prosecuted and being prosecuted favorably. So we'll see some price changes. improvement more in the out-of-cycle portion of that than the kind of the in-cycle. You know, I see really just two different things going, two different streams going on in the customer community as it relates to your question around processes or approaches that can be more durable for both the carrier and the shipper as opposed to these 52-car pickup events that happen on an annual bid cycle. Yeah, the number of sophisticated shippers, more and more interested, particularly as the cycles appear to be more rapid and less in length, that puts a lot of constraints on routing guides and approaches that just doesn't seem to meet kind of the modern-day needs of both the carrier and the shipper. And so you have a lot of those discussions around what's the right setup not to be too complex that both sides can live through. cycle changes, and you get into some very constructive discussions. And the other trend that you see, which is more and more of the transportation spend pool is coming under purview of a global purchasing organization, which kind of does the opposite and puts things into the bid more frequently and puts less value against durability to be, quote, unquote, at market. And so those are two vastly different different approaches and both are seeing trends upward as opposed to the professional transportation department kind of making the selection and the pricing decisions holistically. So I think both of those offer unique challenges for both parties and we have to be prepared to operate effectively in both.

And relative to the last upcycle, 2018, did anything really change towards maybe more partnership? Or is it like you said, where there's still kind of some have moved that direction, but it's still bifurcated?

Yeah, it's a process that moves more at a glacier pace, Brian, than anything that we've seen. Radical, you can see some more short-term pricing initiatives, which we've seen this year, which maybe is a step in step in that direction. You know, ironically, so many of the other inputs that go into a manufacturing process, it's very common for the shipper to have those type of inputs on some type of index pricing, something durable over time that adjusts. But it hasn't seemed to have taken a foot yet in transportation. Something we're interested in, I think the industry would benefit from, and maybe this cycle will we'll see a breakthrough.

Got it. One quick follow-up on freight power. If you could just give us a little bit of a preview on that digital marketplace, what it gives shippers, what type of flexibility they have in there, and also on the carrier side, you know, how is it different than some of the other offerings that we've seen come to market over the last couple of years? That would be helpful. Thank you.

Great, Brian. Yes. Just a couple of thoughts. I think behind your question, it is a crowded space as it relates to those type of quote-unquote marketplaces or apps or however you want to look at it. Our primary focus and what we're doing now is on the carrier side of the equation. We have some other things that will be coming down the pike on the freight power that will be more central to the shipper side. But we're really trying to create where we can differentiation in the type of freight that we can offer versus it just being a technology differentiator, and particularly as it relates to getting select access to our third parties around Schneider trailer pool freight. And so depending upon how a carrier thinks about allocating their resources. I think we may have some mechanisms that can allow them to be a bit stickier with us, particularly as we have access to select trailer pool freight. And they can run in a network. And maybe they have 10 trucks. They put three there. They run seven in a different configuration. Those are the things that we're starting to see emerge. And that's what we think is a bit of a differentiator from a quote unquote traditional broker.

Thanks for your time.

Our next question comes from Todd Fowler with KeyBank. Please proceed.

Hey, morning, guys. This is Zach. I'm for Todd. I just want to go back to the conversation on spot versus contract. And, you know, you're targeting low double digits. But just kind of what is the timing of flexing the network up to, say that low double digits, and if spot were to turn, how do you feel in terms of just timing to maybe right-tie it back to maybe that mid-single-digit trend? Thanks.

Yeah, Todd, I think maybe what you're getting at there is not getting yourself too far out of whack in either direction, which is why we think that's at the upper end of what we feel is best over the long term for us. is that mid single digit to low double digit range, depending upon where we are in the market. And so we're very cognizant of our commitments to our shippers and what that means to reliable freight 12 months out of the year, how we get our drivers home on a regular basis, the experience that they feel, by being part of Schneider. And so that is and will remain the vast, vast majority of what we think makes the most sense in a network configuration. So that's why we don't want to get much beyond that so that we can flex it back to the more reasonable or lower level if necessary. And so that's where we are now, and we don't expect to get much beyond that.

All right, great. Thanks for your time, guys.

Thank you. There are no further questions in queue at this time. We have reached the end of the question and answer session and you may disconnect your lines at this time and thank you for your participation and have a great