Schneider National, Inc.

Greetings and welcome to the Schneider National Inc. Second Quarter 2022 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 Bindis, Director of IR. Please go ahead.

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. These 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 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, Steve, and hello, everyone, and thank you for joining Schneider's second quarter call this morning. In our opening comments, we'll cover our second quarter results, what we're currently seeing in the marketplace, and an update on our full year guidance. In the second quarter, the market has clearly moved past the chaotic routing guide breakdown and higher tenant rejection phase to the more normalized typical seasonality condition that has not existed the last couple of years. In our truckload intermodal network offerings, we are centrally through the annual allocation award process with our shipper base, and the results of that process indicate that our customers desire and value incumbency and dependability. In general, we have improved our market share at rates that recognize the unprecedented inflationary impacts of wages, equipment, and other operating expenses. In our second quarter results, you'll see further evidence of the transformation of our multimodal transportation and logistics portfolio to a higher concentration of revenue and earnings in our asset light segments and the heightened prominence of our dedicated contract configurations in our truckload segment. In the second quarter, 60% of our segment revenues and 53% of our earnings were derived from our two asset light segments, intermodal and logistics. At $175 million in enterprise earnings, this quarter was our second most profitable in our history, just missing the highest quarter of fourth quarter 2021. The difference was modest equipment disposals and gains this quarter, as we deferred planned disposals due to new equipment delivery delays and new business implementations and dedicated and power only. We see a more material equipment gain step up in the second half of the year, that Steve Ruffet will offer commentary on in a few minutes. We also had meaningful growth in dedicated truckload year over year. We have added 1,800 tractors in service within dedicated contract solutions. 47% of that growth was organic, and 53% was gained through our MLS acquisition. 280 of those units were added sequentially from the first quarter, and we have several new account startups on the docket for Q3 implementation and a healthy new business pipeline we are navigating through 60 of our truckload segment tractors or over 6 000 units now reside in dedicated configurations that is important because in general dedicated contracts are longer term in nature renew at a greater than 90 rate are stickier through freight cycles and our professional drivers prefer the more predictable nature of the work The diversification and configuration of our portfolio of services has been constructed with the intent of building additional resilience in our results, while bringing great multimodal value to our customer community, especially centered around the flexibility and control of container and trailer pools. So let's spend a few moments on intermodal specifically. The western part of the network is highly challenged on fluidity and reliability, and we're working closely with our partners to focus on key areas of improvement so we can move more volume that benefits the rail providers, Schneider, and importantly our customers. We are seeing customers through their allocation events selectively convert intermodal volumes to over-the-road. While this strategy has practical limits, it is more pronounced in prior periods. Through non-overlapping lanes, we are now moving 15% of our western-based volumes on the Union Pacific. The 15% number means customers are already sourcing new business to us on the UP. We are utilizing and sourcing drivers at new ramp facility locations, and we are working out the process and technology connections with the Union Pacific. In the second quarter, Intermodal enjoyed its highest revenue quarter in history on 5% order growth year over year and 16% revenue per order improvement. We have lots of runway on box turns when container dwell times at customer unloading locations return to its historical performance standards and as rail fluidity returns, particularly on the western part of the network. Additionally, new container delivery timing is ahead of new chassis deliveries by a couple of quarters. We expect to start to see more of our planned new chassis deliveries in time for peak season utilization, which also should serve as a boost to container turns. While we are justifiably focused on rail fluidity and box turns in the west, as that's an important component for a high-performance intermodal offering, I should mention that our eastern rail partner, CSX, is performing very reliably, and we continue to enjoy year-over-year order volume growth in the eastern part of the network. I will close my opening remarks on our logistics segments. Logistics had a remarkable quarter at $47 million in earnings and 9% operating margins, which is well ahead of our long-term margin target range of 4% to 6%. Our processes tools are very adept in adjusting to the live load, live unload spot market movements, and we grew order volumes throughout the quarter. Our investments in Schneider Freight power and digital capabilities continue to lower our cost to serve, enables faster business volume growth than people growth, and this is especially evident in our power-only offering. Our contract versus spot order volumes in our traditional live-load, live-onload brokerage toggles between 50% and 60%, depending upon market. Contract has moved higher in that range throughout the recent allocation season, and power-only continues to grow in prominence and serves as a high-performing and flexible complement to our network offering and truckload. A differentiating feature of our power only is that greater than 90% is contracted volumes. While we're collaborative with our truckload segment offering, it is not simply an overflow model, but one where we secure through our revenue management processes upfront lane commitments via the customer allocation decisions. As a result, we believe power only is resilient as the freight cycles moderate. Let me turn it over to Steve Bruffet for his additional commentary on the quarter and look ahead to the second half.

Thank you, Mark. Good morning to everyone on the call, and we appreciate you joining us today. Mark mentioned earlier the strength of earnings in the second quarter, and another way to put that in perspective is to note that adjusted earnings per share were 20% better than our prior best second quarter, which was last year. Also, last year's second quarter contained an additional 14 cents of EPS from the combination of equipment and equity gains than did this year's second quarter. So the year-over-year increase in the remainder of our operating results was even more pronounced than it first appears. Revenues excluding fuel surcharge increased nearly $250 million over the second quarter of 2021, driven by 20-plus percent increases at each segment, truckload, intermodal, and logistics. Adjusted income from operations increased nearly $50 million year-over-year with contributions from each segment. Logistics was the standout contributor with a $30 million increase in earnings compared to the second quarter of 2021. During the second quarter, we closed on the acquisition of Wisconsin-based DeBoer Transportation. As previously disclosed, the primary purpose of this deal was to gain access to the equipment. We're well down the path of achieving this objective. And most of the equipment is being deployed in dedicated configurations in support of growth opportunities in our existing operations. So the benefits of the acquisition will be feathered into our truckload segment, beginning with the third quarter. And given the limited deal size and the late quarter timing, there was virtually no impact on our second quarter results. Regarding our full year guidance for adjusted diluted earnings per share, the new range of 260 to 270 refines our prior range of 255 to 270. In essence, we're modestly increasing the midpoint of the range despite lower expectations for equipment gains. Our prior guidance assumed about 40 million in equipment gains for the second half of the year, while our updated guidance includes roughly $25 million. And to be clear, this updated EPS guidance does not include any second half gains or losses from our equity investments. However, our guidance does incorporate our expectations for a moderating but stable operating environment and the return of some seasonality for the remainder of the year. Our guidance for full year net capex is unchanged at $500 million. And given that our first half net capex was $110 million, there's obviously a lot of activity planned for the second half of the year. Our OEM partners have a lot of equipment to deliver, and our team has many units to either onboard or dispose of. So there could be some spillover into next year, but our collective intentions are to execute against the $500 million plan. And so with that, we'll now open up the call 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 one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. We ask that you limit your questions to one so that others may have an opportunity to ask questions. First question. comes from Robbie Shankar with Morgan Stanley. Please go ahead.

Great morning. Thank you. Quick follow-up on the Union Pacific comment. The new business that's coming on, how does that compare versus expectations and where is it coming from? Is that share gain from other IMCs or is that conversion from trucks? Thanks.

Yeah, Robbie, I would define what's coming on via where we are presently is on non-overlapping lanes that we have with our current providers. So it's It's new origin-destination pairs that we haven't had the opportunity to pursue before. And so it's all kind of new share for us because of the kind of unique nature of those OD pairs.

Great. And just a quick follow-up to Stephen.

How much did DeBoer add to the foliar guide?

It's around the edges. Like I said, given the lack of deal size there, you know, it's – The equipment, we were after a few hundred trailers and a lesser number than that of tractors. So it's just kind of a complimentary thing, but a few cents are shared. Great. Thank you.

It comes from John Chappelle with Evercore ISI. Please go ahead.

Thank you. Good morning. I don't know if Jim's on the call. If he is, this is for him. If not, I guess, Mark, you could take it. On the intermodal side, obviously, you're going through this transition right now. You spoke about some of the rail service issues that we're all acutely aware of. But your revenue still did really well, both from a volume perspective and a revenue per load perspective. But the margin deteriorated both quarter over quarter and year over year. So I'm trying to get a sense. As we think about the disconnect there, was the operating ratio, was that due to the rail service? Was it due to, you know, just the arithmetic of fuel? Were there some, you know, transitional costs that are taking place in the western part of the network as you prepare for next year? And how do we think about that OR cadence going forward?

Great. Yeah, thank you for the question. There's a little bit of multiple questions. ways to approach that. Certainly we are executing on our current footprint and entirely focused on doing the best job with our customers as we are planning towards and executing and building capability to our futures. So we have a foot in both camps and I'm pleased not only with the execution within the constraints of the fluidity of the network and What we're also seeing is increased unloading times at our customer locations. And so just with all of that, I'm really pleased with how we're executing our current and preparing and starting, as I mentioned in my opening comments, down our new path that we'll be fully on next year. We also have inflation, certainly. There's some catch-up on rail PT costs. uh and we've also grown our driver fleet a couple hundred drivers as we prepare for the future and so those are some incremental costs that are into the business uh in the quarter from a quote-unquote startup standpoint if you will uh and then just other inflationary pressures that we're seeing as we're holding on to equipment a little bit longer on the maintenance front and uh and we don't have uh just that we've mentioned not as much gains of sale this quarter than we would typically have in a quarter just based upon the growth in the fleet there.

Okay. Should we think about, you know, some of those cost challenges remaining and that's incorporated then in the guidance expectations for intermodal OR?

Yeah, I think we have solid performance and our margins are solid, but, yeah, we've baked what we expect to both commercially with coming through the allocation season and what we expect our cost position to be for the remainder of the year.

Great. Thank you so much.

Next question, Jack Atkins with Steve, and Steve, go ahead.

Okay, great. Thank you. Good morning, Mark and Steve. Yeah, so I guess, you know, Mark, I'd love to get your perspective on, you know, sort of the macro and market backdrop. We've kind of heard conflicting comments here through earnings season from different transportation providers. So, if you could maybe give us your kind of perspective on what your customers are telling you about the trajectory of their business, and how are you thinking about peak season this year around the fourth quarter?

Thanks, Jack. Yeah, I would say we have probably less visibility into what peak season would look like this year than we had perhaps the last two years from a planning standpoint with our customers. I will tell you we think the volumes are pretty steady. I think there's a lot of discussion around inventory levels, uh many of our retailers tell us they still have several hundred basis points of stock out performance worse than what they had pre uh pandemic which would suggest that the important inventory they do have maybe some of the wrong inventory uh based upon the disruptions that everyone's been dealing with so i still think there's plenty of and we're seeing in our operation particularly in the retail space on the vendor side and on the dc the store side some pretty what we would consider now more normal seasonality. We lacked seasonality the last couple of years because everything was on full throttle. You really couldn't tell the difference. And now we're just starting to see what we would see more typically, whether it's the 4th of July season, the back to school season, and how things ebb and flow between vendor inbound and DC to store. And so a bit more of a normal condition, Jack, is how I would describe it. But I would still say very solid demand and maybe a little different this year we're much farther along on the allocation season coming through the second quarter than is typical and so we have very little left in the intermodal and truckload network pie to really understand what the second half looks like so we think we're well positioned and and that's reflective in our in our guidance

Okay, great. And maybe just a brief follow-up. You said that 15% of your Western rail volumes are on your new partner, Union Pacific. Where do you expect that exit rate to be at the end of the year?

Well, we do have some plans, probably not at this point going to disclose those, but we are focused on the non-overlapping lanes so that we can get our processes down, that we can show progress to our driver community. We can start to not have such a stop start on the exchange as we get into the first of the year. And so we expect us to build from this number from here. And I'm really appreciative of our customers supporting us on that because these are new lanes that we have typically not pursued with our customer community. And I think it speaks to their excitement and their support of what we're trying to do, particularly when we combine what we consider a differentiated experience between what we'll have in the future on the West and a very high-performing Eastern partner with the CSX. And so we should expect that to continue. A little reluctant to throw a number at you right now, Jack.

Okay, I understand. Thanks again for the time.

Next question, Bert Subin with CIFL. Please go ahead.

Hey, good morning, and thank you for the time.

Good morning.

Just a question on the logistics side. What do you see as the growth trajectory of that business if we head into a slower freight year? Obviously, it's been sort of in hyper growth mode, but to start to think about the pieces of it, you would expect sort of volumes continue to benefit from digital brokerage trends and power only, as you noted earlier, is still growing pretty significantly. Do you think there's a path to that business continuing to grow double digits sort of in the medium term? And then On the margins, do you think the 4% to 6% could become closer to 6% as power only takes share there? Thank you.

All right. We'll unpack several good questions within that. You know, we do expect our logistics, in particular our brokerage element within logistics, to be one of the fastest growing parts of our portfolio. And even in what we would consider a more moderated market, they had record volume growth had their record volume in the second quarter from an order count standpoint, really across our configuration, whether it be live-live or our emerging power only. And so we would expect that to continue. And some of that certainly is because we have a mechanism that it's not simply an overflow model here at Schneider. So they have great capability both digitally and through a heavy telemarketing sales presence to kind of chart their own path. and gain their own volumes across all modes. And we'll continue to collaborate, which we do with the power only, and we do think that has significant runway based upon how easy that we can bring, how easy it is for the shipper and the consignee how we bring the carrier using our trailer pools. And you're right. I think over time we're looking at what is the appropriate margin range on our long-term targets, and we would expect that As we go through that annual process, there's likely an update to reflect those mixed changes over time.

Got it. Thank you. Just a really quick follow-up, just regards to your dedicated business. You've obviously added a lot of new contracts, and you said you have more to come in the second half. Is it fair to think that you could be doing sort of flat to positive revenue per truck per week in most freight environments next year?

2023 is the question?

Yeah, just thinking sort of, I think on the dedicated side, you know, we think about that being sort of less volatile. You've added a lot of business there and you're still adding business. And so those contracts should start to sort of extend through 23. So I guess, do you have confidence that that'll be a pretty stable to growing business in most environments?

Got your question. Thank you. Yeah, absolutely. Part of the attraction of dedicated, it is From a driver condition standpoint, more stable and consistent in the work patterns, which the drivers prefer. But also from a company standpoint, it's more resilient through whatever freight cycles may or may not occur in the future. And our portfolio now being at least 60% by the time we come out of the year, we think that is much more defensible.

Great. Thank you very much.

Next question, Vasco Majors with Susquehanna. Please go ahead.

Mark or Steve, you did an investor perception study with an outside consultant about a month ago. Assuming you've gotten some feedback from that, can you share anything you learned, whether surprising or unsurprising, and how might that inform how you manage the business and or engage with your investors? Thanks.

Hi, this is Steve. I'll tackle that one. It's actually still in process and trying to throw as wide of a net as we can to elicit solid feedback from the entire investment community, whether they're currently invested in our company or not, and the various voices that contribute to the overall mosaic of the transportation space. So it's still in flight. We've gotten a bit of preliminary feedback, and it will likely help us shape how we do our messaging going forward and so on. To date, haven't seen something shocking or profound come out of it, but I think there are some adjustments that we can perhaps make in our engagement with the investment community as we go forward. We look forward to implementing those as we head into next year, but it'll probably be another month or two before we sit down and get the formal results from that study.

Thank you.

Next question, Todd Fowler with KeyBank. Please go ahead.

Hey, great. Thanks, and good morning. I was wondering if you could speak to your expectations for the truckload fleet, both dedicated and for hire sequentially in the back half of the year. I'm just curious. It sounds like that there's some new business still being onboarded and dedicated. So what your expectation would be sequentially for the dedicated fleets and then for hire continues to drift a little bit lower sequentially. I'm just curious if this starts to stabilize at some point. Thanks.

Yes, thanks for the question, and certainly as we continue to lean in both organically and acquisitively potentially on dedicated opportunities, you should expect to see us to continue to add growth to that segment of the portfolio. As we stated many times, we're looking to stabilize and have a very healthy and prominent network business, but one that we certainly want to be responsive to the desires of our of our driver community and make sure that we put them in the best position to be successful long term. And so it has been feeding to a degree our dedicated growth. That said, we did grow sequentially first quarter, second quarter, about 100 drivers in our network fleet, which was a positive sign. And we're continuing to look for opportunities to continue that momentum. But on a growth, strategic growth driver basis in the truckload segment, we would still be focusing predominantly on the growth driver being in the dedicated and specialty service area.

Yeah. Okay. That makes sense, Mark. And then just can you comment just generally about the dedicated pipeline? Is that still pretty robust or has that changed at all, which is some of the way we've seen the overall market settle down a little bit?

No, we haven't seen really any change in the dedicated pipeline. Again, we're pursuing dedicated that isn't simply trying to capture capacity to cover you know, one-way or distress-type needs. We're pursuing a durable dedicated that adds a specific value to what the customer is trying to do strategically, and therefore the intent would be for it to be durable then through whatever freight cycle. And that's been really our focus for the last several years on that type of dedicated, not a capacity generation type of dedicated.

Right. Okay, good. Okay, thanks for the call this morning.

Next question, Ari Rosa with Credit Suisse.

Great. Hey, good morning, gents. Thanks for taking the call. So I wanted to ask about the intermodal business. As you think about positioning for 2023, and I think about what the competitive landscape is looking like in the West, obviously you have one IMC with BNSF and you have a number of number of IMCs who are going to be on UP as we think about 2023. How do you think about differentiating your offering relative to some of your peer IMCs operating on the UP and kind of how Schneider maybe is positioned to win there? And then on a related note, I'm just wondering, with the labor negotiations underway at the rails, what impact you might see that as having on the intermodal business?

All right. Well, thank you for the question. And certainly our approach on this change that we've made in the West was centered squarely on how to create the most differentiation in the marketplace. And what I would highlight here is our differentiation on the move is that we're bringing a very large asset centric approach to the Union Pacific and asset centric being our own box, our own chassis, and our predominantly company Dre model. And so with that, we're bringing a highly controlled service offering that makes us not only efficient inside the four walls of Schneider, but we're also a great partner with the railroad because of that efficiency which aligns very closely with precision scheduling railroad concepts. Secondly, then, we then get it combined uniquely with that asset-based model between the UP and the west and the CSX in the east. And we derive specific efficiencies because of those more efficient connections than our current setup. And so what we're differentiating on is efficiency. What we're differentiating on is the experience the customer gets on this controlled asset model and we also bring differentiation on a much different set of unique origin destination pairs as a result of that. So that's really the strategic intent behind the change and nothing to date would suggest that in our dialogue with the market and our customer community that that's the wrong approach.

Got it. Thank you so much. And then any comment on the impact of labor negotiations and how that might impact your cost structure?

Well, labor is, I think, one of the constraints we're all feeling, and I believe the rails are no different there. Having enough labor capacity to be as efficient as we want, I will defer to them to respond to what they believe the risks are there.

Okay. Fair enough. Thanks for the time.

Next question, Jordan Alliger with Goldman Sachs.

Yeah, I was wondering, can you talk a little bit about, you know, in truckload thoughts around price negotiations forthcoming and timing of said negotiations? And, you know, are you getting any sense or pre or early sense that, you know, just might be a more challenging discussion point with customers? Thanks.

As I mentioned, we are largely through the allocation season with our two largest network businesses, Truckload Network and Intermodal. The customer community has responded and I think looking for, quite frankly, less chaos and dependability, and particularly as we align predominantly with trailer pool and container pool shippers, that positions us very favorably. they've also been incredibly supportive of the inflationary impacts around driver wages and equipment. And so, uh, you know, we feel coming out of that process, we feel pretty good and we feel pretty aligned strategically with our customer base and we look forward to executing on their behalf. And, and, uh, so, you know, price in our view has, it has been reflective of the inflationary costs and we would expect that to continue.

Okay. And then just, um, follow-up, and I guess this is more intermodal related, but obviously the rails have had well-noted service issues, but I'm just curious in terms of overall congestion, where else are the pinch points, would you say, aside from the rail networks? Thanks.

Well, pinch points are, we have seen, even in our truckload trailer pool, our dwell time at customers now are back to even above peak COVID times. And I think that's a condition of still we're not all through the labor constraints or seasonality of vacations and the reoccurrence of COVID that we're experiencing around the country. So I think we're still not nearly as fluid. We're not back to any level of historical standards of turning equipment at our customer locations. So that would still be a pinch point. And then for us specifically, While we're very pleased from a supply chain standpoint, we've been able to get our container volume increases into the fleet. We have yet – and we're working on the back half of this year to get caught up on our chassis to cover our chassis increases to cover those increases. And so we've got some build-in inefficiency in the short term with that, which we expect to remedy in the second half of the year. but outside the well-documented rail place, those are the maybe two other places I would point you towards.

Thanks so much.

Next question, Tom Wadowitz with UBS.

Yeah, good morning. Wanted to ask you, Mark, a bit about what you're seeing in terms of capacity and also how you might think sequentially about the brokerage business. So, you know, it's, I guess truckload's a pretty opaque market. It's kind of hard to know exactly what's happening with capacity. Do you think that there is significant capacity leaving the market, the owner-operators, small carriers? Is that happening faster than what you've seen in prior cycles? And then with respect to brokerage, the quarter was very, very impressive in terms of the brokerage results. I'm just wondering if you think that that's kind of a peak level from a gross margin and operating income perspective, or do you think that's something that you can sustain in 3Q, 4Q, just given that spot rates could fall further? So I guess kind of two things within that. Thank you.

Thomas, we do think there is certainly some tremendous stress in the small and micro carrier market, particularly those who got in at a high cost point to chase the spot market, and obviously that's gone through a bit of a, more than just a bit of a change, but a significant change. So yes, we do believe there are some substantive stresses. We can see it in the volume of calls that come into our brokerage business, which we are trying to use more of a digital channel to deal with that. We study closely the motor carrier authority replications, who is not renewing. And while that's a bit of a lag, it's a leading indicator, and that is starting to see, even though I think it's a couple months behind, you can see stark increases there in motor carrier authorities not being renewed. I would expect as that progresses and that data is refreshed, that it will even be more pronounced. And as we've gone through this pandemic stage of the market, The microcarrier has been the predominant growth vehicle for the industry, and I think that will be the first element of the industry that drops back off based upon inflationary pressures. Certainly, the business model that we have in brokerage, the second quarter was highly ideal, and so what we would say as we coming here into July, that the pricing with shippers is stabilized, carrier costs are more stabilized. So it was a highly advantageous period in the second quarter. We've always felt that our biggest earnings contribution over time with our logistics and brokerage business was market share, grow the top line, grow volume, and not be as focused on the margin performance, which is what our 4% to 6% range was based on. So we still philosophically believe that's the case, although with our power-only component, as we mentioned earlier in a prior question, we would anticipate reviewing and addressing our long-term expectations of margin within that.

If I go back to the attrition, do you subscribe to the idea that we'll have faster attrition and capacity this cycle than maybe we've seen in 2018, 2019, or prior cycles?

I do. I do just because of the cost basis that so many of these carriers came into the market at. Now, we would also say looking at our leasing business and looking at our brokerage, we haven't seen, we wouldn't set back in our experience that this juncture is massive exiting yet. The macro data that we can look from the government FMCSA appears to be maybe stronger than maybe what we're feeling presently, but I think we're just on the front end of that, Tom.

Great.

Okay. Thanks, Mark. Appreciate it.

Next question, Chris Weatherby with Citi.

Hey, thanks. Good morning, guys. This is Eli Wenske on for Chris. So maybe you can help give us a better understanding of what the potential for cost takeout looks like, maybe in the second half and more into 2023, if there is more of a downturn in the truckload cycle. Specifically, you also mentioned that we are seeing a return to seasonality, but how much closer are we really getting to that in the back half of the year?

Thanks. I don't know if I caught all of the questions.

It was more cost takeout opportunities? I'm sorry, Eli, is that what the question was?

Yeah, so if the truckload cycle starts to take more of a dip downwards, what's the opportunity for you guys to take more costs out of the network?

Yeah. Well, maybe I'll point to where our investments are from a technology standpoint to do that, and certainly digitizing and automating our business, particularly around the transaction level, has been a significant focus, and we're seeing it start to bear fruit, particularly in our logistics business, but we're bringing those same digital tools to get to the long-tail shipper and carrier in our other segments, whether it be bulk trucking, intermodal, so that we can Tad Piper- get after the long tail more efficiently and more effectively from a cost of acquisition standpoint of volume, so that will continue to be a significant focus of the organization. Tad Piper- And then you know, obviously, if the market cools which we don't put it in a place that we're anti inflationary at this point. Tad Piper- We would expect to start to see some relief in the driver recruiting phase, the maintenance and parts and costs and all the other. areas that in my 34 years I've never seen the level of inflation that we've experienced in the last 24 months. So our operating cost position in that type of environment would likely improve significantly.

I also would add to that that I think that if there were to be some sort of air pocket that would go through that could create ironically some opportunities for improved efficiency, especially in our truck network as people have a chance to, our customers maybe have a chance to catch their breath and become more fluid at their locations because that's been one of our biggest pinch points within our network on the truck side. I think those Efficiency opportunities may be a couple of quarters away in our intermodal network, given that there are more variables that go into that equation. But that efficiency play could be part of the answer as well. Asset productivity, no doubt.

That makes sense. And then just a quick follow-up on intermodal. I know you guys have more assets coming online, and you probably can't give quarter to quarter. But anyway, we should be thinking about additional containers coming online here in the back half.

We're focused primarily on growth of assets and intermodal will be on the chassis front, not so much on the container front. So we're just a couple of quarters ahead of the chassis than we are of the containers. Got it.

Excuse me, a couple of quarters behind.

Next question, Brian Ostenbeck with J.P. Morgan.

Hey, good morning. Thanks for taking the question, guys. Mark, maybe just to come back to the views on the capacity in the market, maybe one short term, one more longer term. But AB5 is obviously out there. I don't know if it's going to get enforced or not, but you have a different model. Wondering what that might impact some of your peers and how that would affect them. And if there's any other states you're watching as potentially following. And then also this morning, we saw the big settlement out in Texas. I don't know if that was... will telegraphed or expected, but what are some of the implications from that as you look forward? Does that really change the pace of insurance costs and premiums that you're already experiencing right now across the industry?

Great. Thank you. Thank you, Brian. The AB5 condition is a very, in our view, a very big deal. We found it highly disruptive when we made those changes a few years ago, anticipating this very outcome. I think there's 70,000 or so owner operators presently in the state of California. And as you mentioned, there are a few following states that we've also had to make adjustments in. And really what we found through that process, Brian, is that what surprised me is the number of folks who were willing to move out of the state of California for us to do that. So that's one component. You kind of change the geographic mix of your fleet. And we had a number of people through that process be the last straw to get out of the industry. And so in our view, if our experience is reflective, we'll start to see an attrition of capacity in those markets that go to that type of kind of rulemaking, if you will. So it will be disruptive. And if people haven't prepared for it, that's all in front of them. And as you mentioned, I think there are a lot of people that were in the wait and see mode. us and maybe a few other larger carriers that already made those adjustments. So that won't have any material impact for us. Anything that would be a positive impact because we'll be able, we've already made those adjustments and are prepared to serve those who may fall off as a result. So it's a big deal. And as you mentioned, it's not just California, it's several potentially other states as well. And as I've always said, if folks wanted to be an employee, there's lots of places for them to to achieve that, and we really are messing with very successful and purposeful folks who wanted to own their own business.

And on the insurance side, with the settlement out this morning with Warner, Texas, is that kind of what you expected?

I'll jump into that, I suppose, here. It's kind of difficult to know how that will ripple through. It's certainly not the first shock claim that has occurred in the space or across the country in various industries. We'll have to see how it plays out. It's predominantly a large fleet phenomenon that we're talking about here with excess towers and I think over the course of time, companies are making adjustments to the size and structure within those towers and reevaluating their self-retained risk and so on. And how that all translates into ultimate insurance costs, we'll have to see. But it's not going to help.

I guess one quick clarification just on the box turns, because that's a big focal point. It sounds like perhaps there's more containers that are in the system but not effective, are those actually getting counted in the numbers that we see, or are those not fully utilized because they're missing the chassis? So it sounds like there's opportunities to improve, but I just didn't know if you could quantify or perhaps put some context around just what that would be if you were kind of fully matched at this point in time. Thanks.

Yeah, those are fully in our numbers, and we would consider this the trough of what we would expect based upon fluidity and getting them all in. When we bring all those, obviously they're not in for the full quarter, and so you have some inefficiency to get them placed, but we do still count all those in our numbers.

Okay, thanks for the time. I appreciate it.

Next question, Elliot Alster with Cowan. Please go ahead.

Great. Thank you. So last quarter, you talked about contract renewals being highly supportive of the inflationary environment. The outlook this quarter discusses some trade moderation. I guess anything you could share on how the market has evolved over the past three months and maybe within that, you have a pretty diverse end market footprint. Can you speak to some of the pockets of weakness and any strengths within that portfolio? Yeah.

As it relates to pricing, pricing is still, even though we've been through a price escalation process both within the allocation events and prior periods and also out of periods, as we've gone through the second quarter, pricing is still on a contractual basis going up to cover any additional inflation that's in the business and so very supportive from a customer standpoint. We're committed to being a great partner for them on what they need to accomplish through that transaction as well. So very supportive condition. The market continues. And our focus has been on reshaping our portfolio to the degree where we can build resiliency in not only the customer contracting phase, which is what you see in the dedicated growth, but also being very mindful of the segments that we want to make sure that we're leaning into aggressively commercially, whether that be value retail, do-it-yourself retail, food and beverage, things that are more durable depending upon where you might be in an economic cycle. And so we think obviously being paid fairly for the value that you provide is critical, but also aligning yourself with the parts of the economy and the shipper community that's most durable through cycles has been a focus and continues to be a focus of the commercial efforts of the company.

Great, thank you.

Question, Ken Hoekstra with Bank of America.

Hey, great. Good morning. So I just want to, I guess, continue on that thought process. I want to blend your commentary on the market with what you saw at truck, right? So dedicated is But I guess I would have expected the truck market, given where rates are or rates could have been, to have maybe bigger margin upside. It looked like you decelerated 6% revenue per truck per week. Are you seeing the spot rates decline faster than you thought? Maybe is it more about the cost side of the equation you mentioned before on driver pay and how the market is changing? Maybe talk a little bit about that.

Yeah, I'm not sure I'm tracking with the question on the deacceleration. Do you want to clarify that for me, Ken?

Yeah, I just want to understand, right, because you talked about the commentary, the backdrop of a decelerating economy. But I guess even still, I would have expected, you know, from what we saw with other carriers, maybe still a bigger benefit on margin from the way rates were in the quarter. So did you see the – was it because of a bigger, faster decline in spot rates, you know, that we hear a lot about? Was it because costs were up faster? Just want to understand why the margins on truck, you know, could have been stronger relative to what we've seen in others.

Yeah, I think we were probably an outlier as it relates to the lack of gains as we've held onto our equipment for growth opportunities and power only and our dedicated portfolio. So we've sold very few units, particularly in the second quarter, which we'd expect to step up here, as we mentioned in our comments in the third and fourth and, and, And so I think that is probably the predominant difference, particularly year over year as it relates to what would have been a tailwind a year ago and we just didn't get the experience of that this quarter. And that was purposeful based upon other ability to put growth in. But certainly the spot market is as moderated. We don't play on our asset businesses all that much in the spot market. We are toggle between upper single digits to low double digits in that space, so it has less influence on us there. Obviously, that plays more specifically for us in our logistics business. And I think, you know, all that considered and what we're doing there, I think the margins were pretty solid.

Okay. And then just a follow-up. You know, you mentioned on the intermodal fleet, right, the fleet 28% loads up 5%. You mentioned about the chassis and the like kind of delaying the progress. Is there a difference so far in what you're seeing early on in Union Pacific in terms of the asset turn versus your prior Western partner?

We're really pleased with Union Pacific, particularly on the fluidity inside their ramps. And so we would say we have not seen any drop off. And we've got some technology connections that we're still working on to improve. make that even more efficient for our driver community. So, you know, not knowing, not doing as much with the UP up to this point, we're actually very pleased with the early returns there.

Great. Thanks, Mark. Thanks, Steve. Have a great one.

Next question, Scott Group with Wolf Research.

Hey, thanks. Good morning, guys. So, Steve, just some clarity on the guidance. It implies sort of earnings flat, maybe down slightly from 2Q the rest of the year. Any directional color on the segments in terms of, you know, what you think gets better from here, what potentially worse from here? And then, you know, just separately, Hunt on their call a couple weeks ago, you know, said as they look ahead to 23 bid season, they think intermodal price maybe will hold up something better than truckload price. I'm wondering if you agree with that or not.

Sure. The second half, I think we don't want to just beat gains to death, but compared to the prior year, we do anticipate having lesser gains in the second half of this year than we had in the second half of last year, albeit the second half of this year has stepped up from the first half of this year. But gains not being as prominent a factor in our earnings number this year is part of that flattish dynamic that you referenced there. I think the biggest question mark in our range, if you will, if we're toward the upper or the lower end ultimately really gets down to the fourth quarter and what types of project and premium opportunities present themselves compared to the prior year, which those opportunities were ample. And so I think that is the one thing that we'll have to see how it plays out. And we talked a bit about the logistics margins of 9% in the second quarter, and could there be some? Modest moderation within those margins in the second half of the year, that's possible. So I think those combination of things are the ones that come to mind in response to your question.

And Scott, maybe just commentary as opposed to maybe 2023 comments. But certainly as we got through the second quarter, renewals, our intermodal pricing improvement really led the way across the enterprise. So consistent. whether that holds all the way through 2023. We think there's room for that, but we're not making comment there just yet.

Thank you, guys.

Next question, Felix Beauchamp with Raymond James.

Hey, good morning, everybody.

Good morning.

Hey, I just have one, and it's on power only, but it's been obviously a real source of strength and logistics. You mentioned the high contractual nature of that book. And I think I heard you say that trailer turns are slower on the shipper side. I guess my question is, how are you thinking about overall trailer utilization at Schneider today? And how big of a trailer fleet size do you need to kind of sustain current power-only growth rates?

Yeah, I think one of the... Thanks for the question. Certainly, we anticipate over time being... more of a trailing equipment-centric organization as a result of using our technology and our network management capabilities around assets, in this case trailers, to aggregate freight on behalf of our customers, whether it be our assets, whether it be owner-operators, or whether it be third parties. And to do that, we'll be more trailer-centric, which is one of the reasons and the success we've had there is why we haven't sold And we've held on to our trailing equipment as a result of that. Probably a little more advanced than we would have anticipated at this juncture. And so as you think about what we'll be bringing forth in our capital allocation decisions in the forthcoming years, it'll be more trailer-centric than would be typical because of this phenomenon. And my comment around the delays is just we're just seeing more dwell time at constantly unload locations, which once that obviously returns to more historical standards, then that frees up capacity for us to grow the business without adding as many trailers.

Helpful. I appreciate it.

I will now turn the floor over to Mark for closing remarks.

I want to thank everyone for participating today and just a few final thoughts. We're continuing to execute on our strategy of growing and scaling this highly diversified multimodal transportation logistics platform. And we want to offer great value to a wide array of shippers freight needs. And increasingly, we see ourselves aggregating freight and capacity around the flexibility and control of what we've been talking about here this morning, our container and trailer assets for both Schneider and third parties. And as a result, we see our revenue earnings growth increasingly less asset and people intensive. While the market chaos of the last two years is moderating, our portfolio is well positioned as evidenced through the most recently completed allocation season, as well as the more defensive nature of our truckload mix towards dedicated. Despite the current challenges in intermodal, we do expect to move beyond these inefficiencies and remain very bullish long term on the growth prospects of intermodal and the value it provides to our shipper community both economically and environmentally. As I mentioned earlier, I am highly pleased and encouraged by the customer recognition of our competitive differentiation with our new Western Rail partner that goes into full effect next year in combination with our already high performing CSX offering. And our intermodal team has been tireless in engaging with our customers on the merit of the change and also planning the conversion with the Union Pacific. And we would expect to be flawless during that transition. Finally, the challenge of the last couple of years have greatly advanced the capability and value the market has derived from our logistics offering. And we're not taking our foot off the pedal of our technology investments to connect our various trade partners and provide resources to grow not only our brokerage capability, but this very valuable and value creating power only offering that we think adds value irrespective of market cycles. And so that is what you can expect from us. And, again, thank you for participating today.

This concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation.