Schneider National, Inc.

there will be a question and answer session. Please limit your question to one initial and one follow-up question. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star and one. I would now like to turn the call over to Steve Bendis, Director of Investor Relations.

Thank you, Operator, and good morning, everyone. Joining me on the call today are Mark Rourke, President and Chief Executive Officer, Darrell Campbell, Executive Vice President and Chief Financial Officer, Jim Filter, Executive Vice President and Group President of Transportation and Logistics, and Steve Bruffet, Executive Vice President. Earlier today, the company issued an earnings press release. This release and an investor presentation are 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 annual report on 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 and investor presentation. which includes reconciliations to the most directly comparable GAAP measures. Now I'd like to turn the call over to our CEO, Mark Roark.

Thank you, Steve, and good morning, everyone, and thank you for joining the Schneider call today. I'm going to start with some broader context on the market before getting to our third quarter results. We are operating in an elongated trough of the current freight cycle. As we've seen for the better part of the year, freight volumes remain muted, While inventories have normalized, shippers are facing an uncertain macro outlook. Despite pricing that in some cases are below operating costs, carrier capacity has been slow to rationalize. Last quarter, we shared that we were strongly positioned to capitalize on opportunities as they begin to materialize. While we did not see those opportunities in the third quarter, recent shutdowns of a few competing brokerage operations reflect the unsustainable nature of current pricing and the expectation of targeted near-term pricing improvements. We believe rates have fully reset during the third quarter and expect pricing to improve in the new year as the market begins to return to equilibrium. With that backdrop, let me provide context for Schneider's third quarter performance. We expected the quarter to be challenging, and it certainly was, as the forceful impacts of pricing resets were realized, especially in our network offerings of truck and intermodal. The earnings impact of this recent pricing activity was compounded by a handful of cost items. And the combined result was a sharp decline in our sequential earnings. At the same time, there is encouraging progress in elements of our portfolio and promising signals emerging in the broader market. So it's helpful to provide additional context to both sides of the equation. Regarding the cost items I just mentioned, rather than a typical quarter, which has a mix of favorable and unfavorable items, There were several areas that all fell in the unfavorable category during the third quarter. Their cumulative impact contributed to the sequential decline in quarterly earnings. First, we had unfavorable fuel dynamics during the quarter. We typically do not talk about fuel, as over the course of time, fuel has a relatively neutral effect on our earnings. However, it was a notable negative factor in the third quarter of 23 compared to the prior quarter due to the rapid run-up in fuel costs. Next, we had expenses for bad debt that were much higher than normal, as we typically have insignificant amounts of expense in this area. This quarter, a combination of customer bankruptcies and uncollectible receivables resulted in meaningful expenses. In fact, more expense in the quarter than we typically experience in a full year. Also, equipment gains were lower on a sequential basis due to the softening of the used equipment market. In aggregate, these costs represented a headwind of $18 million compared to the second quarter. These items are all in part of the sauce, yet they are outside of the core elements of our business results, such as price, volume, and productivity. So let's transition to those topics. Volumes in our truck network business have been steady but unseasonably tepid. We improved asset utilization, but that benefit was far outpaced by the reset contractual pricing which was most acute in this part of the business. That impact was compounded by low double-digit percentage of loads coming from the depressed spot market. In addition, the majority of cost items we called out in the third quarter resided within the truck network. A combination of these factors resulted in a pronounced sequential decline in margins and generated a margin profile in this portion of our business that is not sustainable. We have been proactively addressing our operating costs since the fourth quarter of 2022 and have implemented significant cost reduction initiatives that have enabled the maintenance of our variable contribution margins on a year-over-year basis. Yet a growing portion of the network book is not at compensable rates and therefore unsustainable due to the remaining inflationary cost impacts of wages and equipment replenishment. We are diligently pursuing targeted price recovery and are prepared to pivot to more compensable freight when the market supply and demand condition rationalizes further. On a brighter note, our dedicated business continues to grow and deliver expected results. We absorbed meaningful new business startup activity in the quarter and excluding a customer bankruptcy impact, we're still able to deliver stable sequential margins. The combination of organic growth and the addition of Midwest Logistics Systems and now M&M Transport has us exiting the third quarter with 6,680 tractors operating in a dedicated contract configuration. We have a line of sight to a series of new business startups in the fourth quarter of 2023 and the first quarter of 2024, giving us confidence that our momentum and dedicated will continue. We are growing our dedicated service offering as we enjoy deeper, more enduring relationships with customers, and we leverage our ability to deliver unique solutions that address how our customers deploy their supply stream strategy, deliver differentiation in serving their end markets. Also, our... drivers feel, participate in, and enjoy the experience those deeper relationships deliver at the local level. Turning to the intermodal segment, we saw modest tender volume improvement throughout the quarter as we worked to improve the balance into critical import markets such as Southern California and Mexico to lessen the financial impact of empty container repositioning. The work of improving network balance is ongoing, even as we see a more pronounced lift in tender volumes in the month of October. Revenue per order was down 4% sequentially and 16% year over year through a combination of price contraction and a mixed change with a higher percentage of shorter haul regional volumes in both the eastern and western portions of the network. Despite not having the benefit of a meaningful customer allocation season, we have already grown our order count by 20% on the CPKC service into and out of Mexico since its implementation. Overall, we continue to believe there is a large opportunity to convert over-the-road freight to intermodal across the entire North American network. Encouragingly, discussions with several of our largest customer relationships in the consumer products, retail, and automotive verticals indicate that over-the-road conversion is aligned with their 2024 transportation allocation objectives. We have at least 30% of pent-up growth opportunity in intermodal container and chassis asset productivity. Finally, in the logistics segment, brokerage volumes and contribution margins are under pressure from intense competition. While challenged, our contract logistics and brokerage business remains soundly profitable as we nimbly adapt to the current market realities while continuing to invest in our freight power for shipper and carrier platform as well as in growing our power-only capabilities. I will turn it over to Steve Ruppet for a quick wrap-up before we get to your questions. But before I do that, I want to highlight that this will be Steve's final earning season with Schneider. I want to thank and recognize his many contributions over the last five and a half years in advancing the company's multimodal and capital allocation strategy, as well as the modernization of the company's entire financial functions. I wish him and Susan all the best in retirement 2.0. I'm also pleased that Darrell Campbell has taken the Chief Financial Officer baton, and he is bringing a rich set of financial leadership experiences to our team, and we feel very fortunate to have him. Welcome, Darrell.