Schneider National, Inc.

Greetings and welcome to the Schneider National Incorporated third quarter 2021 earnings call.

At this time, all participants are in a listen-only mode. A brief 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. It is now my pleasure to introduce your host, Steve Bendis, Director of Investor Relations.

Thank you, Steve. 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 CFO, Steve Bruffet.

Thank you, Steve. And thanks to each of you who have joined us on the call this morning. We appreciate your time in this busy earnings season. I'll open with commentary on our third quarter results. And first, I want to compliment our entire team for their performance, especially our professional drivers, field operations, and customer service associates. Operating conditions have lifted the tide for many players in the transportation space, but You have to crisply execute commercially and operationally every day to deliver results above and beyond what the tide brings. And our team's done a nice job across the board of doing exactly that as we've successfully navigated the 2021 freight environment. In addition, our multimodal portfolio and platform operating at scale enables us to compete effectively and to fulfill a growing portion of our customers' needs and profitably grow our business. Our third quarter EPS of 62 cents was the strongest in our history, exceeding the prior record of 60 cents, which was established last quarter. Contained within our third quarter results was a pre-tax net loss of $3.1 million on our equity investments. We took advantage of the robust used equipment market in the third quarter as we onboarded new equipment and utilized our efficient maintenance and retail channels to profitably dispose of older equipment. Enterprise revenues, excluding fuel surcharge, of $1.3 billion were 25% above last year. Each reportable segment of our portfolio delivered record quarterly earnings and contributed meaningfully to the doubling of our year-over-year adjusted operating income. Truckload earnings were up 87%, intermodal was up 99%, and logistics was up 143%. Our asset-wide offerings of intermodal and logistics comprised 44% of segment earnings, and that's up from 41% a year ago. I'll now provide some context for our updated EPS guidance. As noted in this morning's earnings release, we have raised our full year 2021 adjusted EPS guidance to a range from 213 to 217 a share. Given that our year-to-date number is $1.53, this range inherently guides to a fourth quarter EPS of 60 to 70%. which is in the vicinity of our third quarter EPS of 62 cents. We do anticipate selling less equipment in the fourth quarter than we did in the third quarter and therefore expect lower equipment gains. At the same time, we expect all other elements of our operations to continue at or above the trajectory of the third quarter. On a full year basis, we expect revenue excluding fuel surcharge to exceed $5 billion and for operating income to top $500 million. Our tax rate guidance remains unchanged at about 25% for the full year, and our CapEx guidance is lowered to about $300 million, and the adjustment is due to higher proceeds on equipment sales and some delayed equipment deliveries that are expected to spill over into early 2022. And so with that, I'll turn the call over to Mark.

Thank you, Steve, and hello, everyone. Thank you for joining the Schneider call this morning. I'll offer a summary of our performance across our three primary reportable segments for the third quarter, how that aligns with our enterprise strategy, and offer our context on what to expect going forward. As Steve mentioned, each of our three reportable segments were significant contributors to our record revenue and earnings performance in the quarter, demonstrating the value of our scaled and balanced portfolio of services and our strategy to aggregate multimodal capacity options on behalf of our shipper community. I'm especially pleased with the performance of our strategic growth offerings of dedicated truck, intermodal, and brokerage. First, in the quarter, dedicated average truck count is up roughly 300 units year over year to 4240. Furthermore, we finished the quarter with 252 more dedicated trucks and 280 more dedicated drivers than we started the quarter with. Our new business startups are maturing, as is our success in seeding the dedicated business awards that we have won recently. Secondly, Intermodal battled the challenging macro environment to grow order count 1% while improving revenue per order 20% year over year. We continue to experience an increased container dwell times at customer locations and at times congestion at key Intermodal gateway locations that impact our ability to turn trailing equipment timely, impacting overall volumes. Our differentiators in container and chassis asset control, effective network and revenue management technologies, and the minimization of the impact of third-party dray costs through our company dray model overcame the volume challenges to deliver a solid 84.5% operating ratio in the quarter, representing 620 basis points of improvement year over year. Last quarter, we indicated that we expected to add between 1,500 and 3,000 containers in the second half of the year, which was dependent on overcoming supply chain delivery challenges. We added 1,600 containers in the third quarter of 2021, and we expect to add at least that many in the fourth quarter, setting up additional growth opportunities as we head into 2022. We do not talk about our Asia operations very often, but their efforts in helping us secure dedicated vessel capacity for our intermodal containers are making a real difference. Finally, our logistics business set another top and bottom line record in the quarter, as logistics revenue was only $10 million less than our truck segment revenues at $475 million. Overall volumes of net revenue per order expanded in the quarter, and operating ratio improved 150 basis points year-over-year and 80 basis points sequentially. An increasingly larger portion of our truckload network volumes is being successfully executed in the power-only configuration of our brokerage business, leveraging the value of our extensive orange trailer pool network. We expect a further catalyst for our power only offering from the conversion onto the mastery logistics mastermind platform. Power only will be the first service to make the conversion beginning here in the fourth quarter. Therefore, because of the growth and successful performance of our power only offering and serving the truck load network business, our priorities for growth and company drivers are firmly centered on dedicated and intermodal dray driving positions. We expect to carry strong momentum in these services into and likely through 2022. In closing, I would also like to thank our team, especially our professional drivers for their commitment and hard work in these disruptive supply chain conditions. Your work is essential to the everyday lives of all Americans. Thank you. And with that, I'd like to return the call back to the operator for your questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.

In the interest of time, we ask that participants limit themselves to one question and one follow-up. One moment, please, while we pull for questions. Thank you. Our first question is from Ravi Shankar with Morgan Stanley. Please proceed with your question.

Thank you. Morning, gentlemen. Morgan, Steve, how do we think about 2022 kind of going into it in terms of pricing dynamics, sleep count, wage inflation, et cetera? I mean, you set a good benchmark for us for 2021. How do we think about that slowing into 2022?

Well, Robbie, I think we have, and good morning, I think we have a lot of good momentum on the price line as demonstrated in the quarter that obviously will bring into calendar year 2022. I feel good about the dedicated growth. We had a good deal of growth of assets and drivers in the third quarter that we didn't get the full benefit of. We had the cost more so than we had the revenue based upon timing. So, again, I think we'll take that momentum forward. into the fourth quarter, into, excuse me, 2022, in addition to what we bring in in the fourth quarter. And I'm also pleased as it relates to our ability to get our boxes on ground here, more so than I probably would have thought mid part of the year, and we successfully executed, it might be a little bit ahead of the plan. So I think that gives us as the networks become more fluid in the rail portion of our business that we have good growth prospects coming into Addison in 2022. And then obviously we've matured the use of our platform as it relates to third parties to include the recent addition of our power only capability. So I put all those things together. I certainly think we have some momentum as it relates to the top line, and I would expect that we continue to extract and improve price performance to cover the inflationary aspects of the business. So I feel we're well positioned as we head into the year.

That's a great color. Any way at all you can put some numbers to that, especially around pricing and fleet count. Do you think you will have the truck availability and the driver availability to grow the fleet next year in the trucking business? And also, do you think you can get a double-digit price in the contract side?

Well, we'll probably refrain from giving all the exact detail that you may be asking in those questions, Ravi, but... You know, I do believe we have some excellent carryover work, all the work that we've done this year, and very cognizant of what it's going to take relative to the labor condition. I'm pleased that all of our truck load network business does not have to completely come from our assets based upon what we did with the power only. And so I think that combination together gives us growth opportunities within our network, so we're not backing away from that. But certainly our strategic growth drivers we continue to lean in most heavily on is dedicated, intermodal, and our logistics brokerage business. Thank you. Our next question is from Todd Fowler with KeyBank Capital Markets.

Please proceed with your questions. Hey, great. Thanks and good morning and congratulations on the quarter. Mark, I guess just starting with the operating ratio and the truckload segment, you're very, very strong here this quarter, better than kind of what your longer-term targets are. As you think about that, you know, moving into next year, what would be some of the reasons why you can't sustain the OR where the truckload business is right now, you know, over the next, you know, several quarters or longer for that matter?

Yeah, this is Steve. Todd, good morning. And I think the margin range for our truckload segment in particular is one that we are evaluating. And by that, I mean, if anything, it would be elevated from its current levels, but we haven't exactly landed on what that New range might be and will likely provide an update on that on our next call as we provide some perspective on our initial EPS guidance for 2022 and so on, if that helps provide some context. The other part of your question of what would prevent us from maintaining this type of level of performance as we go forward, I do think that we have made some step function progress as we've moved through 2021 pertaining to our margin performance within the truckload segment. And I think a substantial portion of that should remain intact as we contemplate what's ahead of us in 2022.

Yeah, no, that makes sense. And I understand kind of the response there and then the directional comments. So for my follow-up, I know it's still early, but would you care to share just kind of your thoughts on pricing expectations for trucking and for intermodal going into next year? It seems like the environment's strong. It seems like there's a lot of contracts that probably need to reset. that were priced earlier in the year that are probably still below market. So how are you thinking about pricing expectations for truckload and intermodal into 2022? Thanks.

Yeah, Todd, I think we're still building there. Certainly as you look at contract renewals in the third quarter as compared to the second quarter in both our Network, dedicated, and intermodal business, those are all continuing to go north and improving. We would expect similar results for the limited amount we have left here to do in the fourth quarter, which, again, gets back to my comments, thinking that we have a very constructive setup as we head into 2022.

Thank you. Our next question is from John Chappell with Evercore ISI. Please proceed with your question.

Thank you. Good morning. Steve or Mark, just going on the back of Todd's question there. In the second quarter call, you said that 80% of the intermodal book had been renewed and it was pricing up in the high single digits. And then you get the huge move in the third quarter revenue per load. Do we think about as kind of marking the market the intermodal book? Is that a very heavy first half timeframe?

And then is there a big step up then since the first half of this year was only kind of high single digits versus the momentum that you've seen in the third quarter and conceivably into the fourth?

Yeah, each year generally has its own nuances there. But generally speaking, the first half of the year is a more robust renewal period than the second half of the year. But as we still had some work to do because of some renewals and going back and addressing some market issues, particularly around the inflationary costs with drivers and recruiting, that we went back and had some additional discussions. And what we really would suggest to you is the low double-digit range of increases early in the year became upper teens, double-digit increases as we progress through the year, and that is still where we see what's remaining to be executed against here in the fourth quarter.

Okay. That's helpful. And then power only has obviously been a huge boon for you in the logistics space, and you mentioned, Mark, at the very end there, you're transitioning now onto converting into the Masterly logistics platform.

When you think about the opportunity there and using that technology, is there any – kind of line of sight on the long-term logistics 4% to 6% margin moving higher as you scale that platform? Yeah, absolutely. And, in fact, secondly, the second part of our business that we expect to go beyond power only onto the platform will be our brokerage business. And we would expect, obviously, with more investment that we do in the capital and the power only, that those perform at superior margins to our what is considered traditional brokerage when the carriers bring both their power and their trailer assets. So we expect to see a return for the trailer portion that we get on an incremental basis. And because I think what we're really excited about here is how we blend our solution to the customer so that we could take a larger share of wallet as it relates to bringing solutions well beyond what's necessarily just our power reach with our assets. And so this just gives us another avenue to do that. And certainly this has been a terrific market to be able to demonstrate value to the customer to build that momentum. Thank you. Our next question is from Bert Subin with Speedful. Please proceed with your question. Hey, good morning and congratulations on the quarter.

Following up to Robbie's question on the 22 momentum side of things,

What gives you confidence on the demand side, or is it purely that the supply situation is so challenged that rates just should continue to rise? Yeah, it's difficult to have, obviously, a perfect view into that. But, you know, certainly I think it's on both sides of the equation, supply and demand, that gives us a degree of confidence that we have a constructive market situation. well into 2022. Equipment is going to continue to be difficult to come by relative to new equipment based upon supply chain concerns. Inventory sales ratio still has plenty of room to go. And we still have, by all measures, a very healthy consumer. And all of our channel checks relative to our customer base, for the most part, are still quite bullish as we head into next year. So we try to look at all of that and and come to our assessment to think that we have some staying power here on both the supply-constricted side as well as the demand equation. That's helpful. Just as a follow-up on the logistics side, as that business continues to take off, how much of your growth do you attribute to market share capture versus just a growing addressable market? I assume it's probably a bit of both. Yeah, I'm trying to think about how to frame that for you. Certainly, we have the benefit of all the things that are going on in the marketplace, and I think that does give benefit to multimodal platform companies like ourselves. We can, through our technologies at the front end of the funnel, capture and provide more options to the customer on the front end, which allows us then to at that original point of tender to find a way to say yes more often and look across intermodal, look across truck, look across our third-party offerings to now include power only. And so I think it's just leveraging those relationships and leveraging that initial point to capture as much volume as we can profitably.

Thank you. Our next question is from Brian Osenbeck with JP Morgan. Please proceed with your question.

Good morning. Thank you for taking the question. Mark, maybe just to follow up on that last comment you made there, I think you referred to it as blending of the orange, this multimodal platform idea. What else do you feel like you need to add or maybe potentially get bigger in when it comes to the suite of services or capabilities that your customer is asking for now or you think they will look for more in the future? And if you could add some comments on the Freight Power platform as well within logistics, that would be helpful.

Yeah, Brian, I would really tie my answer to your question, all of those pieces together. You know, traditionally we've done a very good job as a company in our asset-centric services to include intermodal on the large shipper community across a wide swath of the economy. What we've done really well on the brokerage and logistics side is getting after the longer tail, smaller shipper, And what I'm excited about with what we're seeing on Freight Power is how we can do that and find ways to grow with the smaller shipper across all of our services by making it easier for them via Freight Power to connect with us and easier for us to reach them because you can't do that all with just salespeople on the street. You know, that's where we're starting to see value. Obviously, we started first with our brokerage offering, and now we've expanded into all the rest of our offerings, both on the carrier support side and now on the shipper side. So we're in the early innings of that, but early returns, and we're more mature on the third-party carrier side of freight power and ramping up on the shipper side. And so to us, it's just an extended reach into a market segment, particularly for our assets that traditionally has been a bit more challenging for us to reach economically. And that's what this whole blending, in our view, does. It just allows us to get more of the addressable markets more effectively.

All right. Thanks for that. And then just to follow up, you get some comments on potential vaccine mandate, which I guess depends on who you ask is coming out. Before too long, the industry and the ETA have been pretty vocal about an exemption, and I think it would be pretty counterproductive if trucking didn't get an exemption, but we're not quite sure that's going to happen. So maybe you can just talk about your view on that and how you're preparing Schneider for a potential mandate with all the associated testing that they might have to go with that. Thank you.

Yeah, great question, Brian. And, um, you know, certainly, you know, start to start with, we are, uh, strongly encourage all of our associate base to get vaccinated and taken a series of steps over the last, uh, 18 months to make that as easy as possible and, and, uh, and educate to the best that we can, how that, uh, uh, makes sense and helps, uh, you know, both on the personal side, but also on the business side. But that being said, uh, We think and I'm pleased with how well the industry has responded to educate the policymakers, and we really do caution the policymakers to be thoughtful here because we already have a very fragile supply chain. in a volatile situation that we think would be very detrimental if we did not get an exemption. But, again, I think the industry has responded well. The customers that we've gotten involved have responded well to make sure that at least those voices and understanding got into the process. And we don't know, obviously, yet what the ultimate decision will be there. But it'll be problematic, particularly as we would estimate between 40% and 55% of our drivers are vaccinated, and I think that is a number that we see pretty predominantly across the spectrum. So we're putting a series of steps together to kind of put some scenarios on how we would deal with various elements of COVID. what a rule could look like, but all of it is going to be difficult to execute. It's going to be costly to execute, and I think it's going to be disruptive to execute. So we continue to lean into that and awaiting further guidance from the policymakers. Thank you. Our next question is from Jason Seidel with Calend. Please proceed with your question. Hey, thank you, operator. Steve wanted to talk about sort of use of proceeds going forward on the cash side. You know, the end of the quarter, you know, with over $500 million in cash based upon your outlook for 4Q, it looks like you're going to generate some more. You know, talk about the potential usage as you guys see in between now and the end of the year.

Sure. Jason, good morning. It's a pretty consistent messaging from us as far as useless cash goes. I think we are continuing to be interested in the inorganic opportunities that we might see in a dedicated or specialty configuration and continue to evaluate opportunities there. At the same time, primary focus is on organic growth in our strategic areas of dedicated and intermodal as well as the technology investments to grow our digital platform and capabilities, as Mark has mentioned. I think it's really important for us to continue to look for those opportunities to create seamless customer experiences and remove and automate things as much as possible as we move forward. I think that's an important part of what we're trying to accomplish here. is standardization and automation capabilities. So we continue to invest in those things. So that would be our primary use is to, one, grow our strategic areas organically, two, continue to improve the age of fleet in our truckload segment, and three, look for inorganic growth opportunities that fit with our strategy and our portfolio.

Okay, I appreciate that. My follow-up, you guys talked a little bit about, you know, really trying to get at hiring on the dedicated and grade side in terms of drivers.

You know, can you compare and contrast sort of the different challenges in both markets? I mean, I'm sure they're both challenged like everyone else's in the truckload side. However, is one far more difficult than the other right now?

Well, certainly as you look across our portfolio, the network businesses are the most challenged because of a little less certainty as it relates to the work and the time at home component. And that's why we've been had and continue to have more success in sourcing and seeding and retaining in our dedicated configurations and and intermodal. And one of the things that is probably not as evident in the public metrics is in those two configurations in particular, we have started to get back to some more of the efficiency measures around tractor sharing, particularly in our intermodal business where we did successfully grow drivers in the third quarter, and we successfully took some units out because we got back to some of our more standard practices as it relates to how we can run efficiently multi-shifts with the same power unit. Not fully back to pre-COVID, but starting in certain parts of the network to do that. But clearly, intermodal and dedicated are the most attractive options for drivers, and that's what, fortunately, we have that as a key part of our strategy. Quick follow-up, what percent of your own dray do you cover now, and what's the sort of long-term goal? Yeah, we have consistently been between 90% and 93% of our own dray. There will be certain times of the year based upon demands that that could go a little bit north of that or a little bit south of that, but that's how we're performing and performing consistently today.

Thank you. Our next question comes from Vascom Majors with Susquehanna. Please proceed with your question.

Yeah, thanks for taking my questions. As you speak with your customers and work with them on their planning into next year, is anything changing in the nature of how truckload and your modal services are being procured? I'm curious if things like firmer volume commitments with penalties for both sides are being thrown out there, or if you're just – seeing shorter-term arrangements to get through some of this volatility or anything strange where multi-year capacity commitments, just really anything that may have changed from the normal kind of cadence would be interesting. Thank you.

Yeah, terrific question. What we've continued to advocate for, which we believe is in the best interest of all parties, is to have less of this annual procurement event that puts – everything out up to bid and changing carrier to carrier and the disruption for both parties that that causes. And we're seeing more and more, particularly around their core carrier thought process, to do things just like that, to have those discussions in advance, to plan for the forward periods and perhaps not have everything be in that kind of traditional annual process that to make sure that incumbency can bring value and benefit to both sides of the equation. And so I think on trend, that is continuing, and I would expect that to be more of the trend as people see the benefit of that, particularly in these type of environments.

You know, from the outside looking in and trying to track and underspan and model your business, I mean, is that meaningful enough to have any changes to the normal cadence of a pricing hitting mid-year? Just trying to think about if that's meaningful from a financial standpoint at this point.

Yeah, I think it's meaningful. It might be more as we think about networks and stability and planning that we can do. So I think the events still occur, but there might be just less of the freight that finds itself in those type of events. Maybe the less Dense lanes, maybe different strategies that change because they had some changes in the network is what finds itself in those as opposed to the repetitive and the base business. So from an operating standpoint, from an efficiency standpoint, from where you want to have your drivers and your equipment, there's great benefit there. I think, for both sides to do that. I don't think it'll ever get to 100% that way because of how much change does go on within individual sourcing and networks, but I think we can get smarter collectively than traditionally has been the approach of the industry.

Thank you. Our next question is from Scott Group with Wolf Research.

Please proceed with your question. Hey, thanks. Good morning, guys. Hi. Steve, can you share with us what's in the guidance for gains in the fourth quarter? And then if I look excluding gains, truckload segment earnings were down a bit from the second quarter. It sounds like maybe there's a good amount of startup costs or inefficiencies in dedicated. Is there any way to quantify that?

Sure, I'll tackle the first part of that, and maybe Mark can weigh in on the last part. Regarding, this is equipment gains that we're talking about here, and in our fourth quarter guidance, I mentioned in the opening comments that we expected to sell less equipment, and that amount is probably less than half of the equipment that we sold in the third quarter. We'll have to see. A lot of what drives our dispositions is the receipt of new equipment coming in, and that's not always completely predictable. It's certainly been lumpy. Yeah, it's been lumpy, exactly. That's kind of what's driving some of the gain behavior that you see working through our income statement. Again, to repeat what I said earlier, we expect quite a bit less gains in the fourth quarter, but still expect to put as much operating income on the board as we did in the third. So that's an indication that we think everything else is working really well.

And, Scott, maybe just you hit on one of the major elements of kind of the cost drag in the third quarter on truck was certainly a very robust startup period within dedicated and and more back-end loaded relative to when we had the revenue that we got a chance to book much more of the cost in the earlier part of the quarter as we were preparing for that. And probably the second area that we think we've gotten to some level of maturity now is that the five apprenticeship academies that we've opened from a new driver CDL standpoint – We started that in the second quarter. We got those fully ramped up through the third quarter and are now starting to see some of the benefit of that channel to address some of the capacity gap that we're all chasing right now in the marketplace. So I think those two, from a cost standpoint, were probably the biggest contributors that we didn't get the full benefit in the quarter, but we expect to see in some of the out periods, obviously.

Okay. And then just my last question, Mark, maybe just some thoughts. What are you seeing in terms of the spread between Intermodal and trucking rates? Oil's high, inventory's tight. Intermodal's got a lot of accessorial charges right now. Where's the spread? And heading into 22, what are shippers telling you in terms of are they looking to favor one versus the other?

Yes, Scott, I would tell you today we're still seeing more conversion, that things that should go on the train are being pushed onto the road more just because of some of the difficulty and the fluidity issues and the congestion issues on the rail. I think the good news there is that we've seen much less of that here to start in October. But so frustratingly, we have much more we could do relative to intermodal based upon what we have available and how we believe we can execute across the network than we've been able to seize Certainly the increased container count will help with that, but so will just getting some of these heart attack events that we've been dealing with on a kind of a reoccurring basis. I don't know if heart attack and reoccurring is the right way to frame that, but if we can get that behind us, we can get some more confidence in the customer and convert more of what should be moving on the train. As far as price and movement, there has been some compression. I think we've moved a little bit faster in the third quarter. on some catch-up and intermodal on the contract pricing range. But there's still a good economic value for the customer between over the road and intermodal, particularly depending on where they place environmental concerns as part of that equation. Thank you. Our next question comes from Chris Weatherby with Citi.

Please proceed with your question.

Hey, thanks. Good morning, guys. Maybe if you could talk a little bit about what your expectations are for the fleet, both combined for hire and dedicated in the fourth quarter, and then maybe taking a step back and thinking more conceptually. Obviously, it's been a very, very challenging driver environment, and certainly that's led, I'm sure, at least in part, to the contraction in the fleet over the course of the last several years. I guess if you were to look out a few years down the road, do you think there is a point where – you'd like to pivot back into sort of market share growth within the broader over-the-road truck fleet. Maybe that's more of a dedicated comment than just a for-hire comment, but wanted to get your perspective on that bigger picture dynamic of where you think Schneider should be in terms of fleet in the broader sort of nationwide industry.

Yeah, Kristen, it took a lot there to unwind in many ways. So, We strongly believe that a healthy and vibrant network business in truck is very good for our enterprise. It gives us great optionality as we go to market to bring multiple services together, and that's always a key attraction element for our customer base. We've set all of these difficulties that we have, but we're still putting 5,000 trucks a day out there. in the network, which is still a very, very sizable, uh, comparatively in this industry. And so we still have great offering. We like to have more certainly, but we also have to be cognizant of the labor condition and the driver desires and the driver experience and some of the other configurations right now are more attractive. And, uh, fortunately they match up well with what the customer value proposition is getting out of it as well. So, um, But we're not strategically stepping back from the network side of the business, but we also don't want to just blindly chase it from an overall cost standpoint to achieve kind of that outcome. And so we're trying to use the leverage of our portfolio, which is great. One of our advantages is all the optionality that we have, and certainly from a customer standpoint, the power only advantage. capability that we developed has stepped into that vacuum in the short term here to help us serve customers and grow our third-party business by using that orange trailer. And so as your question gets to the fourth quarter, I think that is probably more what we'll see continue into the fourth quarter. I think you'll see growth in those key strategic areas of dedicated and intermodal drain, and we're going to work like heck to get stability into that network portion of the fleet. But over time, absolutely, I could see us looking to grow both of those network and dedicated side. We just want to do it when it makes more sense for us to do it.

Okay, that's really helpful, Tyler. I appreciate that perspective. And then maybe just a quick follow-up on the intermodal side. Can you just talk a little bit about container addition in the next couple quarters, and then maybe a little bit about how we should think about utilization from a rail service perspective in 4Q?

Yeah, I mentioned that I believe we'll get at least another 1,500, 1,600 containers delivered here in the fourth quarter. We may not get a chance to use them a great deal, because of kind of when they hit, but I think that puts us in a solid position next year. And we're solidifying and we'll give you more guidance as we get to the next call, but we will anticipate another year of growth of our container and chassis fleet based upon the opportunities that we see in front of us in 2021. 22 as well. You know, and right now, as you try to think about volumes in this business, we're about evenly split between just the dwell time that's impacting our volumes at the customer location and some of the gateway congestion and fluidity issues that we've had with the rail network. Don't want to obviously declare victory here, but we're seeing a little bit better improvement in the fluidity of the rail network. We have not yet seen any material movement or improvement as it relates to the customer side as they're dealing with not only increased volumes but also their own labor challenges to get those things turned rapidly. So I think that one's still going to be with us for a while, and we would expect we're going to carry some of those burdens into 2022. Thank you.

Our next question comes from Tom Waderwitz with UBS.

Please proceed with your questions.

Yeah, good morning. Maybe continuing on that topic just a little bit more. Mark, do you feel like you have visibility or are you optimistic that some of those constraints you just mentioned are likely to improve?

It seems like there's a lot of appetite for intermodal volume growth in 2022, but capacity is a constraint.

Do you think that you have visibility to the labor side with customers and warehouses or with rails or, you know, I guess drayage in general, that that would really allow you to have substantial intermodal volume growth as you look to 22. Yeah, Tom, so where I feel confident is in our dray performance, our dray opportunities to continue to put more productive driver jobs in the market to support our dray business. I feel good about our container build. I feel really good about our execution. Certain parts of our network, particularly the east where dray matters more and our execution is where we're seeing the growth and we've had good solid fluidity there from the rail side, and so we really haven't taken a backseat at all. On the eastern part of the network, it's been more of those intermediate routes and the western side through the ports that are so well documented. So I think that portion is going to be here a while, and the customer issues have not subsided. There's a lot of – obviously they've leaned into that quite heavily. They've tried to do a number of things differently, but we just haven't seen collectively – enough of a move there. So what we have is just more delay on the customer side than certainly I would have anticipated as we're this far into this cycle, but it's going to be with us, I believe. So does that imply we ought to look for growth maybe in kind of gradually ramping up? Obviously, there's seasonality in the business. I don't know if comps are a lot different, but Is that the right way to look at it, that your intermodal volume growth would kind of gradually ramp up through 22? Or are you more optimistic and kind of a step up? Yeah, I'd like to be more optimistic, you know, I think because we know how much more could convert than has converted. So it's great to be in a position that the market has more desire than, you know, the providers can provide right now. And so I think ultimately things will start to get more fluid. Things will start to work its way through. And that should bode well. And it's just a matter of when. I just don't think that's going to be a real short-term issue here in the fourth quarter, Tom. But I think certainly as 2022 progresses, I think that's a very reasonable expectation. And we're confident that that will continue to improve. Okay, just a quick second one, if I can. I wanted to see if you could provide a little more color in brokerage. We had great results in brokerage, continue to have just tons of momentum there. How much of the mix was power only, and maybe if you could give a little more perspective on how important that capability is to the growth that you're seeing in that business? Thank you. Yeah, I look at what I can try to ascertain as industry statistics on this. I don't think anybody is moving more power-only than we are. I think we're kind of leading the charge on that from an overall volume standpoint, but we're also growing our volumes across the more traditional lanes. or excuse me, the traditional channels of live-live within our brokerage offering, and that is still the dominant portion of what we do there and the dominant portion of even the growth of what we do there, Tom. But increasingly, power only is gaining share, but it's still the smallest portion of it. Thank you. Our next question is from Ken Hulkster with Bank of America.

Please proceed with your question. Hey, good morning, Mark and Steve. So just you've hit on a lot of stuff in terms of kind of what's going on with the market. So I guess just to clarify, Steve or Mark, on your thoughts on fourth quarter, just given your large outlook. So if you've got less gains, we've got similar momentum on pricing. Does that mean we're not seeing additional wage ramp up needed to sustain kind of the labor, you know, labor in this market, given the battle that's going on? I just want to understand, I know you were talking about labor wage rates before, but maybe just talk about kind of what you're seeing in terms of as on the cost side as we move into the fourth quarter.

Sure, I think we would anticipate, you know, full quarter effects of actions that have been taken across recent past in the fourth quarter. So some a bit of continued cost inflation in there. And it's not just in rate per mile. It's in work configurations and driver friendly steps that we're taking outside of the rate per mile itself. So there is some of that inherent in what we see happening in the fourth quarter. At the same time, the price momentum, we believe, should more than adequately cover that dynamic as we move through the fourth quarter. That's our statement about we, setting gains aside, we expect to make more money in the fourth quarter than in the third, particularly in truck and intermodal

Thanks, Steve. I guess what I was asking is you don't see another wave of rate increases given the tug of labor in this environment where just the demand on the drivers. It sounds like you're saying you've got that built in.

Nothing new, particularly in the fourth quarter, is planned, if that's your specific question. If we get into 2022, that's a different question. dynamic and thought process probably. But for the fourth quarter, I think it's just more about full quarter effects of things that have already been done.

And Mark, just to follow up on the brokerage side you were just referring about in terms of the grandpa, you know, is the scaling of the relationship with mastery, is that something that's going to kind of accelerate that deployment and capabilities? Or is that more gradual, just trying to understand the cadence of what we should expect out of brokerage?

Yeah, we have a very specific onboarding plan and a sequence from which we will do that, power only being the first thing that starts, and that starts the ramp, as I mentioned, in the fourth quarter. But we would expect, as we come out of next year, timing would at this juncture suggest that we'll be in the conversion of our larger segment of our entire logistics offering, namely the brokerage business, in calendar 2021.

Thank you. There are no further questions at this time.

This concludes today's conference.

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