Schneider National, Inc.

Greetings and welcome to Schneider Fourth Quarter's 2020 Earnings Conference Call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Steve Bendis, Director of Investor Relations for Schneider. Thank you. You may begin.

Thank you, Operator, and good morning, everyone. Joining me on the call today are Mark Roark, President and Chief Executive Officer, and Steve Bruffet, Executive Vice President and Chief Financial Officer. Earlier today, the company issued an earnings press release, which is available on the investor relations section of our website at Schneider.com. Our call will include remarks about future expectations, forecasts, plans, and prospects for Schneider, which 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 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, a reconciliation of any non-GAAP financial measures referenced during today's call can be found in our earnings release, which includes reconciliations to the most directly comparable GAAP measures. Now I'd like to turn the call over to our CEO, Mark Roark. Mark?

Thank you, Stephen. Hello, everyone, and thank you for joining the Schneider call today. I'll open with commentary on operating segment results for the fourth quarter and then offer company context for 2021 expectations. But before we get to your questions, I'm going to ask Steve Ruffett to provide some additional insight in the overall enterprise results and then affirm our full year 2021 net capex and earnings per share guidance. The most recently completed quarter, I think, has provided an ideal backdrop for us to leverage the power of our portfolio of services to not only optimize our base volume commitments, but dynamically capture an increasing share of the dislocated freight needs of our shipper community. I think that was best and especially evident in our truck brokerage revenue growth of over 60% year over year. In our truckload network configuration, certainly influenced by the pandemic, we've experienced a meaningful shift in our capacity mix that we deploy in the market daily. Two trends that we don't consider permanent or structural have occurred. The first is a year-over-year drop in the number of non-family team drivers, and teams is our highest utilization capacity type. And the second short-term trend is an increase in owner-operators securing their own operating authority, to pursue the elevated spot market directly. Teams owner-operators run predominantly in our longer length of haul national network versus our now heavier mix of solo company drivers who are operating in the shorter length of haul regional configurations, which our company drivers in general prefer due to the more predictable work and time at home schedules. Our brokerage business, though, did benefit from this mix change as we served an increasing share of the longer length of haul or inter-regional lanes, including team service with third-party carriers. A further accelerant to that success is third-party carriers gaining access to Schneider's nationwide trailer pools through power-only movements. Integrating this power rolling capability into our network truckload offering allows us to serve trailer pull shippers more broadly in both contract and spot configurations, increasing brokerages' top and bottom line performance. All in in the quarter, logistics delivered top line revenue performance of $374 million and earnings contribution in the quarter of over $21 million. Both of those are records. Revenue per truck per week in the truck load network was up a modest 1% year over year as the utilization impacts of the capacity mix change offset the nearly double-digit increase in rate per mile year over year. Sequentially, truck load network improved revenue per truck per week by 12%, with most of that improvement in price. On the driver capacity front, we continue to be encouraged by our improved company driver retention levels across our various driving platforms. And we celebrated our drivers' professionalism and resiliency managing through the pandemic with an additional COVID-inspired performance bonus program on miles and work activity in the months of November and December. And it was well-earned and well-received. Additionally, we took steps in the quarter to bolster our value proposition with our fleet through targeted wage increases. In our network business, we re-rated over 40% of the book in the fourth quarter alone, and we want to thank our shipper community for supporting company driver wage increases. Truck load margins improved 390 basis points sequentially. An important milestone for us in the fourth quarter was our freight power launch, which enables a full digital connection experience for third-party carriers. The freight power technical capability is important for us for really two primary reasons. The first is that our carrier base is underrepresented in the largest portion of the third-party carrier market, the microcarrier, and we define that as having between one and five trucks. We estimate this segment makes up nearly 85% of motor carriers. Our Quest carrier portal-driven technology is best suited to serve the midsize carrier and interacts at the desktop level with carriers, company dispatch, or customer service personnel. The addition of freight power mobility allows us to economically reach this long-tail microcarrier, the one-truck operator, and in combination with our power-only solution, gives us and them an access for a new vehicle for growth. The second important attribute of freight power is it allows us to grow our revenues and order volumes with minimal headcount growth, even in a highly constrained capacity market, by automating elements of the sell portion of the transactions. In Q1 of this year, we will launch Freight Power's digital connection for shippers, easing the quote, book, and track process elements targeting the small shipper community. And in the back half of 2021, and perhaps into 2022, we will intend to connect Freight Power's digital carrier and shipper interfaces with Mastery's Mastermind freight platform. Let's transition a bit here to intermodal. Order volumes increased 3% year-over-year, overcoming, to a degree, the network-wide congestion and rail reliability performance issues that we experienced in the quarter. The intermodal team executed well within the environment as the month of December set a monthly record for orders by growing 10% over December of last year. And in the quarter, we covered more loads with less boxes, driving a 7% improvement in box turns. The substandard rail performance did result in meaningful amount of missed market opportunities. We bore extra costs to adjust to the issues to serve our customers, namely in the third-party drayage usage rates and ramp storage expenses. In the end, our intermodal margin performance was flat sequentially with the third quarter at 9.2%. Our focus in 2021 is profitable growth and market share gains in dedicated contract configurations and truckloads growth and intermodal, and brokerage, including power-only solutions. Our capital allocation will be consistent with that organic growth strategy. We expect the supply and demand balance to remain favorable for 2021, supporting a pricing environment that expands margins across our asset-heavy and asset-light segments, recognizing we're going into an increasingly inflationary driver wage marketplace. Let me stop there and turn it over to Steve and for additional insight into our numbers, and I look forward with our guidance update.

Thanks, Mark. Good morning, everyone. I'll begin with a recap of our enterprise results for the quarter and the full year. Beginning with revenue excluding fuel surcharge, our fourth quarter 2020 was up 15%, which is quite a contrast from being down 11% just two quarters prior when the pandemic had its largest negative impact. Likewise, our adjusted income from operations was up 16% compared to the fourth quarter of 2019, and that compares to being down 24% in the second quarter of 2020. The point is that the strength of the fourth quarter revenue and operating earnings made up for the weakness of the second quarter and enabled us to earn just over $300 million of adjusted income for the year. Looking at our quarterly income statement, I'll note that first to final mile operations were largely shut down by the end of the third quarter of 2019. So the impact of first to final mile is contained to the restructuring line for both the fourth quarter of 2020 and the fourth quarter of 2019. The remaining lines of the income statement for the fourth quarters of both years are an apples to apples comparison. There are obviously a lot of moving parts in the fourth quarter of 2020 compared to the prior year, but there are a couple of key variances that I want to highlight. The first is salaries, wages, and benefits, which were about 26 million higher than the fourth quarter of 2019. 18 million of the increase was due to the year over year difference in incentive compensation. And that was mostly due to there being small to no payouts for most participants in 2019. The remaining increase was largely attributable to wage and benefit enhancements in 2020, including those for drivers and those who support the strong growth in our logistics segment. The second call out is insurance and related expenses, which were down 20 million compared to last year's fourth quarter. The reduction was attributable to strong safety performance and a sustained period of lower frequency and severity of claims. So the year-over-year increase in incentive compensation and the decrease in insurance costs largely offset each other. As such, the improvement in earnings over 2019 was mostly attributable to a combination of strong market demand, commercial dexterity, and operational execution. On a full year basis, revenues excluding fuel surcharge were down 1% and adjusted income from operations was down 2%. And I'll call out the same two rows from the income statement. Salaries, wages, and benefits were down $60 million despite $32 million of increased expenses for incentive compensation. And insurance and related expenses were down $24 million for the reasons I just cited. One additional item relates to operating supplies and expenses, which includes the approximately $13 million of expense in 2020 for the adverse tax ruling that we discussed on our previous earnings call. Moving to the balance sheet, the most notable item was the special dividend flowing through cash and shareholders' equity. Our year-end cash and marketable securities balance was $443 million, as compared to $600 million at the end of 2019. So that's a decrease of $157 million, and given that the special dividend was $355 million, we otherwise generated about $200 million in free cash during 2020. Regarding our forward-looking comments, our guidance for adjusted diluted EPS is $1.45 to $1.60. And this range assumes an effective tax rate of about 25%. Our guidance for full year net cap X is approximately $425 million. And a key theme of the 2021 capital plan is our investment in tractors. In addition to our standard replacement cadence, we'll be investing to move the average fleet age even lower. Also, we'll be deploying growth capital into our dedicated and intermodal businesses and into the development of new technology capabilities. Given this level of capital investment, along with the working capital needed to support our planned revenue growth and our anticipated repayment of a debt maturity later this year, we expect only a modest build in our cash position during 2021. In closing, We are well positioned and off to a solid start to the year, and we're looking forward to crisply executing our plans over the remainder of the year and delivering shareholder value as a result. So with that, we'll open up the call for your questions.

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad.

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Our first question comes from Jack Atkins with Stevens. Please proceed with your question.

Hey, guys. Good morning, and thank you for taking my questions. So I guess, Mark, if we could maybe start on the logistics segment, the fourth quarter results were obviously very strong. To what degree were the results a function of the market? And then also maybe to what degree is it a glimpse of what's to come as we think about Schneider leveraging its broader transportation platform over the next couple of years? And I'm curious if you could maybe expand a bit further on the freight power platform that you're talking about there and What sort of value are you bringing to the small carrier, the microcarrier, that you couldn't really access before with this new platform?

Great, Jack. Thanks for the question. As we look at 2020 as a backdrop, I think it serves as an accelerant of our strategic thesis that an emerging business model of aggregating freight and capacity across multiple modes is through the use of technology really, in my view, took an inflection point for us. You know, the goal is to achieve a level of scale and relevance, but we believe an asset-centric model at the foundation and certainly augmented and perhaps heavily by third parties is the most compelling and sustainable way to approach an aggregation model, and I think sustainable through business cycles is the thought there. So in other words, it's more than just the technology or platform play. Our thesis here is that a multimodal capacity approach across platforms of intermodal, irregular route, trucking, dedicated, and then extending with third-party power, in our case through an orange trailer, I think offers great value to shippers because we're giving them an optimal blend of additional reach, hitting their KPIs, but also a convenience because it's ease of access to not only trailer pools, but also to an extended reach of capacity. And so that's really what we've been building out on our strategy. In this heavily constrained second-half marketplace in 2020, we really got a chance to really exercise our network management decision science. As you mentioned, the freight power launch allows us – To get off the desktop, our brokerage group is phenomenal working with smaller, mid-sized carriers. But getting to that micro carrier, that owner-operator that might have one or two or three trucks, is more of a mobile play. And we certainly saw the reach in our power only with that group accelerate tremendously once we had the ability through freight power to do that. And so, you know, taking that ubiquitous orange trailer and container, solving for yes more often, and then being able to ultimately optimize – for our assets more effectively to drive out, to drive yield, to drive out waste is really what we're after there. So, again, really encouraged by what you saw in the fourth quarter. Certainly there's some lift in the marketplace, but a lot of our capability really came to bear there to do that really effectively.

Okay, gotcha. That makes sense. And I guess for my follow-up question, you know, as we think about the asset-based trucking operations, You know, I think if I remember correctly, the long-term sort of margin guidance there is 11% to 13%. You know, how are you guys thinking about the ability to maybe do the upper end or maybe even better than that over the longer term? I think when we look at some competitors out there that have a similar type of asset mix, you know, they're talking about more mid-teens type margins in their asset-based division. Are there some cost opportunities, some margin enhancement opportunities that you guys can target over the next couple of years to maybe improve the margin profile of that business longer term? Thank you.

Yeah, Jack, we're absolutely focused on extending margin really across all our platforms. As it relates to truck, we think the optimal level for us really starts with what's our reach there, which is, in our view, about 6,000 trucks. And with some of the difficulty with the team and the owner-operator piece that I highlighted in my opening thoughts, We dipped under that a bit, and we want to get that to about 6,000 units. And as we stated prior, we also think getting over a multi-year horizon to get our dedicated contract configuration on par with that is really what we're focused on. Other margin-enhancing activities, certainly for us, is in the productivity and sweating our assets. We think we have opportunity there, particularly, and we've had some success here in December and January, start to restore some of those team capacity levels because that's premium freight at premium utility, and we want to make sure that we're – and we do that really, really well, and we want to make sure we get our strength back to where we have historically been. And we continue to invest in decision science around this whole network solutioning around our company driver, our owner-operator, and now this whole power-only piece. And we think there's margin enhancement through all of that by making better decisions at all our moments of truth, at the initial pricing, at the acceptance, and then at the dispatch level. And we're working from a margin enhancement standpoint to do some things on the driver community to root out some of What plagues the industry, particularly new people to the industry, which is this whole income variability that early in someone's career can cause some difficulty. And so we're looking at some new approaches and models there that we think kind of enhance retention but lower overall cost of acquisition of capacity and certainly productivity. The quicker we get folks up the experience scale, the better performance that we get into the business. And so multiple fronts there and excited about what we've brought to the table to advance those things here in the part of 2020. And we'll start to, I believe, start to reap the benefits of that here in 2021.

Okay, great. Thank you.

Our next question comes from Ravi Shankar with Morgan Stanley. Please proceed with your question.

Steve or Mark, can you unpack the 2021 guidance a little bit more, kind of give us your assumptions and kind of what do you think pricing looks like on the contract side? And, again, you gave us some detail on the fleet, but kind of what does your overall fleet look like? It doesn't look like you're planning for much growth and also driver wages.

Yeah, Robbie, thanks. There's obviously quite a few assumptions that go into any full-year projection. And I would say that we have opportunity across the board within our portfolio for earnings improvement. If you look at our guide range for adjusted EPS, it's roughly 16% to 28% earnings growth. And You know, there's scenarios where we can certainly see where we could outperform that, depending on particularly how the second half of the year plays out. But we have opportunity. We think if we ranked our segments in terms of earnings and margin improvement opportunities on a year-over-year basis, I think we'd put Intermodal first, given that they were the most impacted in 2020 by the pandemic. So we see revenue and earnings and margin opportunities to be quite robust in the intermodal space for us. And I would put truckload segments second because we see continued growth opportunities and dedicated, and as well as the network enhancements that Mark just outlined there. In the truckload space, we continue to – experience robust conditions and displaced freight that Mark has referenced. So that sets itself up for a constructive pricing arena in the similar contractual ranges that we've discussed over the last couple of calls, the upper single digits to low double digit type of range depending on a customer and their profile. Talking about CapEx a bit, you mentioned, Mark mentioned that we're looking to get our network capacity up to closer to 6,000 trucks. So that's inherent in our assumptions. We're also targeting several hundred unit growth in dedicated to go with that. And there's presumed growth in our dray fleet to support intermodal growth. So it's a variety of things within there, as well as improving the age of fleet. And we're looking for a target there. More of a 24-month is our target, and we're just over 30 months on average now, so we expect to improve that by 20%. by over six months on average by the time we get through with this investment program that'll run through this year and into a part of 2022. So I don't know if that answers everything you asked, but... No, that's great.

I think the one thing was driver wages. Do you address that?

Yeah, we've done some things throughout 2020 relative to the wages there. I mentioned a program to also do some things, how we construct those programs to address income variability. And we think we still are into an inflationary market, but our guidance reflects a net price positive and margin enhancing really across all of our asset-centric services. So we're very confident that the market is supporting what we need to do to stabilize the driver compensation area.

Got it. And maybe just to follow up, your digital initiatives and logistics look like they're really paying off. Obviously, you announced some important kind of partnerships a few quarters ago. But are these all in-house developments? How much are you spending on these technology initiatives relative to what you did for Quest a few years ago? And do you feel like you need to make any acquisitions in the space?

Great question, Ravi. And, yeah, we – really look at this as where do we get leverage that we can work with some real great domain expertise outside our four walls, and we've identified a number of places to do that, that we not only make investments with them to accomplish that, but also bring what we have to offer on intellectual capital to advance their efforts, and then certainly our size and scale behind it to to get it to commercial heft. So we're continuing to look and we'll take advantage of those opportunities. You know, one of the quickest ways to drive improved margins in the short term would be to dramatically cut back on our tech investments because we are now still spending at levels that I think, Steve, we would say slightly above what we were spending at during those Quest implementation. And so we're in a constant refresh, the constant... looking to stay particularly around this aggregation of freight and capacity model that we think is going to be a long-term winner in the marketplace. And so our spend reflects that. And we would expect that over the next couple of years we will be at that pace. But it will be a combination of in-house as well as looking for those leveraged partners that your question started with. Got it. Thank you. Our next question comes from John Chappelle with Evercore. Please proceed with your question.

Thank you. Good morning. First question, either Mark or Steve, is on intermodal. You stated the obvious, that the congestion and service issues kind of kept you from getting the business that your capacity was set up for. Is there any way to quantify the impact of those service issues on the fourth quarter? And thus far through January and the first couple days of February, have you seen any improvement there in the ability to kind of catch up a little bit on some of the business opportunities?

Yeah, it's a bit of an imprecise science to be able to be exact on those impacts, but certainly we could point to less orders delivered per day as a result of the delays, the congestion, the allocation issues that we had really across the network, even more so in the east than what we would typically expect. And so I don't have an exact number for you. but it's both on the revenue side and we were squeezed on the cost side, and so there is a little bit of a flywheel effect that we just didn't get a chance to take full advantage of. While things have improved modestly in the West, it's still very much an over-served network presently from a congestion standpoint, and we've seen perhaps a bit more improvement in the East, and we still grew significantly. even within the quarter, the fourth quarter, well into the double digits on the eastern part of the network, but we had issues. And those are subsiding a bit, but I think we're still going to be in less than ideal conditions here for a little while yet.

And this is not a complaint about weather, because weather's been very calm so far this winter, but this week and this upcoming week, we do anticipate a little network disruption from weather. that will further delay getting that fluidity back that we'd like to see in the network. And just back to your question about the fourth quarter and intermodal, I think we were otherwise on track to achieve a 10% margin roughly in that range for the fourth quarter, independent of that, if that's another way of answering your question.

Yeah, that's super helpful. Thank you. And just for a follow up, the too simple announcement a couple weeks ago, pretty noticeable because a lot of the major companies across the logistics chain are getting involved with this company specifically. And I know there's a lot in the startup phase. So maybe you can just talk about what attracted you to this particular investment, the commitment from Schneider, and then Mark, especially what your role will be as part of the advisory board and any advantage that that may give Schneider as part of this investment.

Yeah, well, first I just want to make this clear. We're going to need safe and professional drivers for many, many years to come. But that being said, the advancement of the technologies associated with ultimately getting to some type of level four autonomy is advancing. And we think there's a lot of safety, obviously, benefits along that path that can be deployed even earlier than when that all might be ready for mass commercial use. deployment and what we've really taken the approach here we think there's two or three folks that we've assigned resources to both technical inside the business and particularly our equipment area and from a business standpoint that that we think could ultimately be a winner at the end of whatever this path is and so too simple being one of those offer some real interesting developments on some of the things that they're working on. And so it's just making sure that we're invested, we're engaged, we're learning and preparing for what could be a series of deployments and different business models, whatever the case may be as this path unfolds itself. And we think it's important to stay out in front of that and embrace where the world's going and looking forward to engaging on that path.

Anything on timing or the capital investment, or is it pretty still open at this point?

Yeah, I think it's still open. I think we'll be in some level of testing as we are with electric. Again, we started a little bit of that in 2020, and we think we'll have more electric test points in 2021. I don't think we'll have anything of any material testing and autonomy in 2021, but in the out years – I think we'll start to see some applications that we can at least understand what the potential is.

Great. Thank you, Mark. Thanks, Steve.

Our next question comes from Todd Fowler with KeyBank Capital Markets.

Please proceed with your question. Great. Thanks, and good morning. On the guidance maybe for Steve, you know, I know historically the first quarter has been the lowest, you know, percentage of overall earnings, and it builds throughout the year. Can you give us any thoughts on kind of the quarterly progression this year? My guess is that the back cap's a little bit more challenging to forecast, but maybe a little bit of help in how you've seen the year unfold with some of the timing of contract renewals and cost inflation and those sorts of things.

Yeah, if you rewound the clock a year prior to the pandemic, I think we would have said that our composition of earnings would probably be a little more heavily weighted toward the second half of the year than our historic norms would suggest. And I guess as we sit here today, it would be a little bit the opposite of that going into this year as we see strength coming into the year and a constructive setup from both price and volume across our portfolio. Like we've indicated, it's very difficult to know what the second half of this year looks like, but I think there's an equally good chance that we follow our normal distribution seasonally, and that would be a good setup for the higher end of our range and perhaps above it.

Yeah, okay. That makes a lot of sense, Steve. And then just to follow up, you know, on your approach to the intermodal market into 21, you know, it seems like one of your main competitors is very focused on price this year. It certainly seems like that that's, you know, a focus for you as well. But do you look at 21 as an opportunity with an intermodal to potentially take some share? And maybe if you could let us know what your expectation for container fleet growth is for 21 in your CapEx budget, that would be helpful. Thanks.

Yeah, we are focused on both top and bottom line expansion. We believe, I think we're on target to add a couple of thousand containers to the fleet to support that. And, you know, I think certainly notwithstanding some of the disruptions that we've had here in the back half of the year, We still have a very compelling value proposition for the shipper. The increase focused around the ESG elements that are more and more active in our conversations with customers, intermodal is a terrific response to that. And across really multiple lengths of hull, and we're having great success in the east, which is in direct competition with more so than in the West with truck, and we're still finding great opportunities to bring value to customers. And so I think we've got some runway ahead of us on growth, and as Steve mentioned, I think we have a good margin story that we're after from a restoration standpoint year over year coming through a very difficult second and early part of third quarter of 2020.

Yeah, no doubt, Mark. That makes a lot of sense. Okay, thanks for the time this morning. I'll turn it over.

Thank you. Our next question comes from Jason Seidel with Talon & Company. Please proceed with your question. Yeah, thank you. Good morning, gentlemen. I wanted to dive a little bit deeper on the intermodal outlook. Steve, how should we think about margin improvement on a quarterly basis as we roll forward? I'm going under the assumption that you guys are getting pretty good rate increases as we move throughout the year, particularly in the second half, and then knocking on wood, assuming rail performance improves.

Yeah, I think as we progress through the year, I think we will see strengthening in margin and intermodal as well as truckload as we gain critical mass with the rate renewals and bid cycles and so on and regain the fluidity that we're seeking in the networks and at the ramps. So, you know, first quarter itself is probably – lowest margin of the full year, and then we'll build off of that as we go. I see a strong second half setting up for Intermodal.

And in terms of your overall driver market, how has COVID impacted the number of available drivers on any given day? What percentage of your guys are out due to COVID restrictions, whether they unfortunately have it or are just quarantining because they've been to a location? Yeah, we have followed that national trend of kind of the ebbs and flow of the outbreak. And fortunately for us, most of our impact there has been more in the contact tracing end versus the affliction of the virus end. But it's still, when you see something spike geographically, we generally are experiencing that very similar to COVID. to our population. So at any given time, we probably have a few hundred folks that are in some level of contact tracing and we err obviously on the absolute side of safety and make sure that we're supporting our associates so that they're not making that tradeoff between doing the right thing versus having income to make that decision. it's a little bit disruptive not only what you're pushing on the working side, but some of the cost side of that element as well to make sure that we're doing the right thing. But we are seeing an improving picture there, just like it looks like for the most part the country is starting to see an improving picture and certainly looking forward to this vaccine rollout being and gaining traction. That's good color. Gentlemen, I appreciate the time as always. Our next question comes from Chris Weatherby with Citigroup. Please proceed with your question.

Hey, thanks. Good morning, guys.

Chris. Maybe if I could talk a little bit about the fleet. Can you give a little bit more color to sort of the fourth quarter dynamics in terms of the step down, particularly for four higher?

You know, I think you talked a little bit about the team dynamic, but can you talk a little bit about that and then Maybe as you look out into 2021, outside of CapEx specifically, what are you doing to try to be able to sort of rebuild that? I guess there's probably some driver pay dynamics that need to kind of go into effect, but just a little help on the fleet would be great.

Yeah, from the fleet build standpoint, Chris, I take your question to be more on the network side of that, is that the two primary components is the one that I opened with, which was the owner-operator community and the team piece. we're actually, uh, had, uh, some nice success, uh, particularly the second half of the quarter. And so far in, uh, 2021 here on the company solo side of, uh, uh, having some, uh, improved numbers and netting capacity in those places. We're still not where we want to be, uh, as we've talked about on the team side. And again, that's where the utility of the is, is the most beneficial for us to be in that configuration. So, um, and we've done some things on wages already there. Uh, we've done some things on equipment, uh, tractor spec coming into 2020. So we're really making ourselves, um, as highly as attractive to that, uh, unique capacity type. Uh, and we have terrific freight. So now it's just getting the numbers where we, where we want to get them. So those were the two primary. And, uh, And again, I don't think those are permanent or structural pieces. Those are kind of idiosyncratic to the times, and we think that'll stabilize as we kind of push out through the year. Okay, that's helpful.

I guess when you think about the 21 guide, do you have, you know, 6,000 kind of coming back, getting back to 6,000 on the four higher network side, you know, in the first half of the year, and so you're able to kind of take advantage of that?

And then maybe longer term, Is 6,000 the right?

Is there the ability to kind of get back to a growth mode at some point? I know the market is cyclical from a rate perspective, but do you think you have the ability to push that number higher over time, or do you want to?

I'll kind of take the back half of that one first. I think certainly we like the network business. We think we're good at it. It makes sense for us. It's more challenging from a driver capacity standpoint. because of generally a bit more variable in its schedule, a bit more variable in its routing. And, folks, that's why intermodal is so attractive, dedicated is so attractive, because it has a bit more of that predictability that drivers in general are looking for. And so it's just our experience is chasing too hard into the network side comes with a heavy cost. By the same token, we think it provides great value to our customers. It fits well to have a good, solid, healthy network. I think it's good for our dedicated business because there's a lot of cross-sell opportunity there. So I think it's important that we're well positioned there. We're one of the largest fleets, obviously, even in the network side of the business in the country. Uh, but, uh, we're not looking at least at this juncture in our planning horizon to get much above that 6,000 number. We think that's the right spot for us and grow the rest of our fleets around, around that 6,000 number. Okay.

Any thoughts on the bounce back in 2021 to get back to 6,000 at the first half, second half of that?

I think we'll, uh, substantially be there in advance of, uh, the peak season. So maybe not exactly my first half, but, um, shortly thereafter would be the plan.

Thanks very much for the color. I appreciate it.

Our next question comes from David Ross with Stiefel. Please proceed with your question.

Yes. Good morning, gentlemen. Mark, you mentioned at the open about contemporary changes to capacity mix. I want to also talk about potential temporary changes in lane balance and freight flows. Last year saw a lot of shippers and origins boom and others went down sharply. Big picture, how are you looking at the freight flows that have moved through 2021? Have they started to shift back from where they got out of whack last year? Are they still a little bit abnormal? How do you manage through that? Our freight flows generally support our various regional configurations that we play in our network business across the country, and we're fairly well-balanced from east to west. I don't think we've seen any major shift there. Obviously, we've had commodity shifts with what's going on in consumer products and retail and food, and so we have some accelerated trends, just an overall kind of customer mix, but it really hasn't changed because our network is what our network is, and we try to certainly bend where it makes sense occasionally outside of that framework, but for the most part, we're We're keeping to our knitting there. It's where our drivers are domiciled. It's our work configurations to get them home on a regular basis. And so we wouldn't say that there's been – I don't think, Steve, I think we'd represent there hasn't been any major shifts. We've adapted to some things. That's one of the beauty of the whole power only and other things that we've done. We've done with some other folks' assets more so than disrupting our network. You mentioned the increase in third-party drayage rates. Was there also an increase in third-party drayage usage? How did the percent of outside dray compare to normal or targeted percentages? Yeah, yeah, you're right on it. Actually, a couple of things to comment there. When we talked about additional, boring additional costs, we've been successful. I think we added about 100 company dray drivers in the fourth quarter. And we had to use additional third-party expense, not only in the cost, but in the frequency to make up and catch up when things finally did arrive where they were supposed to arrive. And so to make sure that we could protect some of the customer experience through the process. So, you know, the drain fleet being a bit larger, so there's some recruiting expenses in there. Obviously, as Steve mentioned, we're going to put some additional capital into But in the short term, we didn't get the full benefit of that because we were still, because of the performance and the congestion and the rail performance, we were tapping into the third-party markets more so than we would have needed to in a more normal fluidity standpoint.

And do you have the percentage roughly what percent was done in-house versus third-party in the quarter?

Yeah, we would be upper 80s in the fourth quarter in-house. I tried to see 88, 89, something in that range. It was 290. Yeah. And we could be as good as the low to mid-90s if we're really humming.

Great. Thank you for the call.

Our next question comes from Tom Wadewitz with UBS. Please proceed with your question.

Yeah, good morning. I wanted to – I guess ask you a little bit about the mix on capacity. I think you've historically, you know, you've leveraged technology really well to, you know, access drivers, recruit drivers, use owner operators.

But I guess some of the reliance on owner operators causes maybe greater cyclical volatility when the market's good, they want to go do their own thing. It seems like we're, you know, we've seen that this time around as well as 2018.

Do you consider going to a higher percent of company drivers? I don't know. You had some comments about changes early on. So sorry if I missed it if you said that. But is that something where you say, you know, we just don't have the stability with as much reliance on our operators and we got to shift that? So, you know, how do you think about that element of the overall driver incapacity strategy?

Tom, you're right. We did experience in certain parts of market inflection, 18, and now as we get in the back half of 20, that you have a little bit more volatility there. But it does serve as such a great career path for our experienced associates to be their own business person. And so we think that's a great value proposition over time for those who have that interest. And so a lot of the seeding that comes uh, into those arrangements might be a three, four or five year Schneider company driver. That's looking to take the kind of the next step. And so it kind of fits in the, in a integrated fashion in some respects to our whole capacity deployment model. That being said, would we, uh, are we interested in growing the company side and to include, uh, perhaps the ratios between company and owner operator in our network business? I think that would be a fair statement. And, uh, but it doesn't dampen our enthusiasm or our interest in owner-operators because they generally play in the longer length of whole networks, and they generally are one of our top utility utilization performing capacity types. So there's a lot of advantages, and they're good business people. They understand the business, and we – So I don't want that to come across as that we're looking to discount that. But having a higher mix of company, yeah, I think that would make sense for us.

Okay. And then if I can ask a little bit on brokerage, you had pretty impressive results in brokerage, both in terms of top line, in terms of operating income. I don't know that it's gotten a lot of focus on the call. And it seems

that 2021 ought to be pretty much a sweet spot for brokerage in terms of contract rates up, maybe later in the year spot falls a little bit, source cost capacity.

So what are the assumptions you have for your brokerage business in the guidance? And is that an area where, based on fourth quarter, you could maybe see some better than expected results or maybe upside to the guidance?

I'll open maybe and let Steve kind of close on that thought. But, Tom, I'll take that as feedback because if we're not talking about this great brokerage model that we have, then that's our fault because we've been talking about, in our view, about positioning. this portfolio, both asset-centric all the way to very asset-light. And our brokerage offering is just in up markets and down markets. It's done extremely well. It's leading the way in our growth profile. And particularly now, we integrate this in-between power-only solution. I think we have nothing but more upside to come here. And it's a terrific mix of people and leadership, And the technology that we're deploying for not only an execution and an engagement in this digital space, but also for the whole decision science behind it that helps us make the right decisions on pricing and purchasing. And so I just couldn't be more thrilled with the performance of that business and its influence on our portfolio. And at some point, I think we'll start to get credit for it, because at this point, I don't think we're getting enough credit for it.

Yeah, I would agree with that. In terms of feedback, it's certainly a compliment.

But Steve, any thoughts on how that might affect the guide, just given how big the number was in fourth quarter, whether you assume that strength continues or whether you set a lower bar within your guide in terms of what brokerage does in 21?

Sure. I think, if anything, there is potentially an opportunity for upside in what's nested within our guide. We did not assume the unique dynamics of the fourth quarter of 2020 repeated themselves in the fourth quarter of 2021, for example. If that were to come to fruition, there's certainly upside just from the logistics segment itself in our guidance. We'll have to see how the year plays out, but but to Mark's comments, the complementary nature of our traditional brokerage offering as well as this power-only offering and the tools and technology we have to go with and the great team that supports it and drives those initiatives, I think it's a great asset within the portfolio.

And, Tom, my comment was not you specifically. It was the market in general. So I didn't mean for you to take it that way. Right, right. No, the results were impressive. I just thought it was worth pointing out as well. Anyway, thanks for the time. Thanks, Tom. Our next question is from Scott Group with Wolf Research. Please proceed with your question.

Hey, thanks. Morning, guys. So, Steve, I know you – intermodal is going to have the best earnings growth among the segments this year. But can you actually share what the intermodal and truckload margin assumptions are within the guidance?

We haven't gotten to that level of granularity, Scott. But, you know, I'd refer back to our longer-term margin guidance that we give for our segments, which is the You know, 11 to 13 for the truckload segment, 10 to 12 for intermodal, and 4 to 6 for logistics. And I think you can pretty safely assume that our guidance captures at least somewhere in those ranges for all the segments.

Okay. And then... On the cost side, Steve, you mentioned earlier insurance, incentive comps, and COVID bonuses. Can you just walk through what you're expecting for each of those pieces in 21, and maybe if it's more helpful this way, that other operating segment that usually operates at a loss, what we should assume for that this year? Thank you.

Yeah, I think that I've said before, In general, three to four million of loss a quarter is a reasonable expectation, recognizing that we do have some volatility within that other non-reported part of our segment reporting. I do not expect at this point the incentive compensation to be such a year-over-year topic as we go into 2021. If you rewind the clock, we had very little payout, virtually none in 2019, and then some forms of payout in 2020. So it created, for the last several years, a lot of volatility moving through that other category on our segment reporting. I would like to think that that's a more comparable number year over year as we go through this year. Regarding insurance, we've assumed some modest external third-party premium inflation in 2021 versus 2020, but expect continued good underlying safety performance from the frequency and severity part of things. So I'm not anticipating large year-over-year variances in that category either.

Okay, great. Thank you, guys.

Thanks, Scott.

Our next question is from Jordan Alliger with Goldman Sachs. Please proceed with your question.

Hi, morning. I just want to follow up on truck brokerage.

Can you maybe give some sense? I know you're not including the dynamic in the fourth quarter of 21, but How big a portion of the growth, whether it be revenue or profits, sort of ties into this truckload overflow freight? And I'm just sort of curious on that, too, because, you know, truckload's still pretty tight out there. I'm assuming that dynamic, again, I don't know how big it was of the growth, but I'm assuming that dynamic potentially could lead to continued sort of supercharged growth, at least for the next couple of quarters in 2021.

Yeah, without getting into specifics, which that, you know, we're probably not going to go to a place where we talk about where we separate the power-only results from within our logistics segment reporting. But it was obviously a profitable component and additive as the dynamics of the environment supported some premium opportunities with pricing. and good solid execution by our team within there. And I think that that's certainly continued so far this year, and we would expect maybe not quite as hot as the fourth quarter, but I think that we'd expect ongoing contributions from that service.

Yeah, I think it's important to think about strategically. We don't see this simply as an overflow model. We see it as an aggregation of capacity and demand that can play effectively in all markets. Obviously, we had to adjust and adapt and do some things to seize what was in front of us there in the second half of 2020, but it simply won't be overflow. We'll make commitments. We have the engineering and the science behind what we think makes sense to do there, so it'll play in all markets.

Okay, and just a quick follow-up.

I know the teams is probably an issue with regards to revenue per truck per week in the network business. Um, maybe give some color. I mean, I think you mentioned hopefully you'll see some stabilization. So should we look for revenue per truck per week to start gradually improving a little bit more than, you know, what we saw even in the fourth quarter?

Yes, I would, that would be absolutely our expectations. So, um, through what we talked about, not only on the rate work that we're working on, but also the productivity elements and the recovery on some of that team capacity, but productivity really across our fleet.

Great. Thanks so much.

Thank you. Our next question is from Allison Landry with Credit Suisse. Please proceed with your question.

Good morning. Thanks for speaking to my question. Just following up on the topic of power only, it sounds like it's growing pretty fast, but maybe you have sufficient trailers right now. But I guess, I mean, is there a point at which you grow the business such that you would need to invest in additional trailers? I realize this may not be something imminent, but maybe if you could just sort of speak to how you think about the trajectory of that business on a mid- to long-term basis.

Yeah, Allison, that's very much – and we'll have some growth in our trailing equipment profile this year specifically as a result of that. The good news is those are long-lasting assets that are much, much more economical than a tractor asset. And so it's an investment that, and again, it's highly leverageable across our owner-operators, our company drivers, and then select third-party solutions. So it's a very – I use the word ubiquitous. I'm not sure I know what it means, but I use the word because it can apply across – really all of our platforms. And so I think it's an excellent investment and probably one that you'd want to be a little heavier versus a little light to make sure you take advantage of what you can do there. So I think over time you will see some more trailer centricity to our equipment and revenue equipment profile.

Okay. I mean, it seems just based on what you're saying that the returns on the incremental invested capital should be relatively high. Is that a fair way to think about it?

I think so, yes. I think that's a fair way to think about it.

Okay. Just, you know, obviously you guys did a special dividend. How are you thinking about capital allocation in terms of shareholders in 2021? Is the buyback program potentially on the table or something that you guys are considering, you know, or would the preference just be to, you know, to keep returning cash via dividends? Thank you.

Sure, Allison, I'll take that. And given the size of the special dividend that we paid in November and my earlier comments that given our organic investments that we expect to make in the business to deliver shareholder value in 2021, not expecting a big build in that cash position for this year. And I think our regular dividend will serve as our shareholder distributions for the calendar year of 2021. And we'll evaluate things as we move forward from there.

Thank you, guys. Thank you.

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