BAIRD 2026 GLOBAL INDUSTRIAL CONFERENCE - SCHNEIDER NATIONAL INC

It's good to have everybody here. My name is Dan Moore. I'm the Senior Transportation Analyst here at Baird. Very pleased to be joined by Senior Management of Schneider National, Jim Pilter. We've also got Derek Campbell, so CEO and CFO, seen in the audience, known for many years, both personally and professionally. Thank you for being here. Well, thank you for having us. yeah yeah it's uh it's been it's been good um a lot of good information here i think uh today and yesterday and um you know a unique cycle right i mean i seem like it seems like i open up all of these to some extent saying the same thing but it's been a very unique cycle it's been a supply led cycle i remember when we were either in this room or another one a year ago and uh and wow how much things have changed in a year. It's been pretty extraordinary. I'm curious, maybe just kind of opening remarks, how are you guys thinking about the cycle? How do you feel about the market today relative to three and six months ago? Obviously, again, supply driven, rate seems to be a tremendous focus on the part of everyone, margin repair, that sort of thing. Stop right there yeah well let me just start with uh you're right it's primarily supply led yeah that's what we've experienced up to this point demand has been stable but nothing terribly exciting although what we are experiencing right now is what i would call what i wouldn't call it a typical peak season which probably uh last time i could say that was probably 2016 because either we're in a situation we'll take it yeah we're in a situation where the you know the incremental cost for some of the project type work that happens during this time of year customers just weren't willing to pay that price and then we had a couple years where they're willing to pay in excess of that rate right to be able to to extract capacity right now we're at a spot where you're getting the price that would reflect that type of demand that isn't stable year-round the incremental costs to reposition equipment, reposition drivers, and that's why I would say this one feels more like what you would normally experience in a fall season. So overall, I believe that with demand, there's still opportunities with those big markets like housing and autos that are driven largely by interest rates. That would cause this to change a little bit. But in terms of capacity, most of the capacity I think that was going to exit has exited. But what's really different here is the top of the pipeline. If you think about during 21 and 22, there was about 50,000 long-haul truck drivers that came into this industry. And most of them were coming through really quick ways to get their CDL. Two days, very low price, you can get a CDL Now, Schneider wasn't able to really tap into the market because you don't know how to drive a truck after just two days of training, especially if you're just sitting in a classroom. We just had a meeting with a number of our different schools, and they were feeling really optimistic because they said, we're actually seeing more demand now knowing that you know it's six weeks of training and it might be something more like seven thousand dollars that they're getting more demand going through those channels those are the channels that schneider can tap into to start to grow capacity but it's not going to grow at the same rate and so i mean one other way to think about the cycle by throw one more on you is typically up cycles we believe follow the down cycles that just preceded it and in the past you'd see these 18 months what did this one about same duration this one took almost four years right very deep we're one year into it yeah another way to think about yeah yeah no that's great context um it really kind of um sets us up to talk a little bit about pricing and so um given the uniqueness of the market given how difficult uh the driver market has been in general and the substandard returns that have been you know candidly industry-wide for a variety of reasons. There's been bad actors, there's been a bad freight demand environment. We're coming out of COVID, which was a period of rapid and meaningful capacity growth. The need to repair margins is very real, which is something I opened with. My sense is what rate has been realized has in large part gone to offset as much as possible inflation, address driver-related issues. That being said, as we look into 27, when I talk to CEOs, when I talk CFOs, when everybody's going through capital budgeting right now, so you know where I'm going next, but the backdrop seems to be one of unique focus on margin repair and rate as we go into 27. Can we talk a little bit about that? Yeah, I mean, just start about the scale of it and then talk about the repair. So we've been talking about industry costs have gone up about 30% since the pandemic, like most industries. But most industries were able to recover that through prices, through yields. And initially, this industry, we were able TO do that and then gave it all back. So we are just getting back to a level of parity. And then you do, you know, let's just get back to the performance where we were at before. Right. I also expect that, yes, drivers to be able to come through this industry in a proper manner, it's going to be at a higher price point. Trucks are going to start becoming even more expensive. We're not going to get all of that back necessarily in, you know, an allocation cycle in 27. There's got to be a lot of different ways that we're going to able to extract price. And, you now, the other factor for shippers right now, it is not just recovering that price, but understanding post-Montgomery, there is a difference here. It's not just price and service, but what's the insurance risk that they're putting on their company as well? So I think pricing is a big part of the margin repair, as you said. But we spent most, if not all, of the down cycle making sure that we're structurally more efficient as it relates to cost. So last year, we had a $40 million cost savings target. We doubled down on that target for 2026, and we're on track to meet that. So you don't get to the results that we've seen over the last several quarters if your cost base is not more efficient. So if you think about even intermodal, in intermodals, our volumes are slightly down in the third quarter. We're just beginning to get some of the contract price, but you've seen the impact on our earnings growing 35%. Right. So it's both price and cost in addition to productivity, which we're very focused on. I'm going to jump all over the place here, but, you know, we're we're into capital budgeting right now, probably starting to wind it down in some in some instances. I think given all the inflation, some people started a little bit earlier this year. you know you're in unique position just talk just very generally about priorities for 27 not looking for guidance per se but I'm just very interested in learning what the priorities are for Schneider given given the current operating environment I guess I'll start and you can jump in so you know we've talked about discipline growth and growing where we have differentiation right and that's been you know the process that we've been going through you know throughout all cycles right so when you think about truckload we've said we're not focused on truck count specifically we're focused on growing earnings right so you know there's a constrained driver capacity uh dynamic but we're making sure that all investments that we're making in driver capacity are at the right time and that we'RE getting paid for it so that's both a network and a dedicated story so the cart is not coming before the horse the cart does not come In Intermodal, we've talked about our differentiation with our rail partners, and I'm sure one of the questions coming up will be about some of that dynamic and what we're doing with our rail alignments. And then even in brokerage, we're very specific in terms of using technology, going after premium freight. So those are the same playbook that we're going to use in 2027 in terms of being disciplined in terms of growth. We're not satisfied. we're never satisfied as it relates to just cost containment so we're going to continue to focus on cost containment because the things that we're looking at it you know they're structural in nature so we not just you know slashing costs for the sake of slashing cost we're making sure that as pricing and flex and as the market recovers we're not losing the discipline that kind of got us here and then obviously as it released to capital allocation we're also looking at you know, M&A to the extent that those opportunities arise, but we're positioning our balance sheet to be ready for those opportunities. As well as share repurchases. Yeah, share repuchases. Yeah. That's a perfect opportunity to maybe pivot and talk a little bit about Intermodal. You know, Intermodel franchise at Schneider is a very important one. You know you're a market leader among a handful of them. Um, obviously, uh, you know, the M&A environment and the rail complex, um, you know, it's going to present a lot of opportunities to some folks. Um, you had a recent announcement, uh. Had an opportunity to, uh visit with Kevin Boone earlier today and ask him this question, but, um you know it strikes me that, uh your pivot, um in terms of the network in your alignment with NS and UP really realigns the business, I would argue, to what that merger may offer long term. I see a lot of benefits, potential benefits from it. There certainly seems to be a desire to convert a lot of loads. The spread between trucking rates and rail rates is quite significant. That'll come, that'll go. But the reality is, at least we've said, we really struggle to imagine an environment where truck rates don't continue to go up. The margin repair is very much needed. The reinvestment is very Much needed and you won't get there without improved returns, which should be a tailwind intermodal. All that is to is to kind of set the foundation for why do you make the change? What do you think the opportunity is for Schneider amidst that change? And how are you thinking about Intermodal and 27 in general? Well, first, the change stands on its own, even if a merger doesn't advance. And we have a lot of data that we compare the different alternatives to. And it just put us in position and said, this is the right move for Schneiger absent a merger. The merger is the icing on the cake. And there's a lot of icing on this cake it's really deep because you know we we made the move to the cpkc we spent a lot of time with them as they were making their transition understanding how they were going to operate their trains knowing that there's actually more miles it's a little bit of a circuitous route but they were able to do it faster more reliably than a great partner and low cost and been a great partnership 19 straight quarters of growth right when we look at this one and we lay out the map, we see the same thing at a much larger scale when you talk about transcontinental shipments. We have shippers today that don't use intermole transcontinentally because of the reliability and the speed. So that's number one. Number two is you have the center of the country that really doesn't have viable intermoal options because you're going to use two different railroads. And imagine taking a short haul, a place like Minneapolis into Chicago, north side of Chicago, and now you've got to drive it, take it off the rail, drive to Bedford Park or someplace on the south side, then we put it on a different rail to go to Atlanta or someplace else. It's not economical. And Jim, there's a lot of debate around this, as you might imagine, and so as a practitioner and somebody that lives this, to hear this, not from a rail, but from somebody that's in the market every day and can speak to it is really, I don't want to stymie your role here, so I'm anxious to learn a little bit more about the opportunities. so please yeah yeah so you know and we don't know precisely and all of the lanes that they'll be able to create and a number of these won't be specific to only intermodal you know we've done this with CSX in the past where we've had mixed trains that you would say that's not a typical intermodale lane but we've been able to look at the service levels and and build really good intermodule routes that are non-traditional length of haul we see more opportunities as we look at the center of the country. The third part that gets me excited, so those first two is just about creating a bigger pie. We like our differentiation here, knowing that on that network, we are the only one with 100% owned containers, chassis, high percent company drivers. Service. Gives service levels that we can deliver that the others operating on that new network are not able to provide. And then you have one other, you know, large intermodal company that's going to be using multiple railroads to get to the same level. We really like how this would position us, position our organization if it goes through. Yeah, no, that makes a lot of sense. So you're a believer in the Transcon opportunity, clearly. Yeah. See real value in it. Let's, let's maybe talk a minute about dedicated. I've framed it this way. I don't know if it's accurate, but post-Montgomery, it seems like maybe between the spot rate inflation, the cost inflation broadly in budgets, coupled with the counterparty risk, there seems to be an increased focus on the part of retailers and others to place more freight with high quality service dedicated providers and you guys have been in the market for a long time love to hear your perspective around dedicated the potential for yeah the cost of capital is going up and I know the dedicated market has been a very challenged one 24 and 25 but a rising tide tends to lift all ships. And so how would you frame the dedicated market today for Schneider and going forward? Long term, what we've seen is the reason for more dedicated fleets is customers have tighter and tighter supply chains that you just, you can't hit those expectations with one-way type shipments. And that's been our focus on as we're growing dedicated fleats, that we want to tap into those places where they either have high service requirements, high reliability, or specialty equipment. The ones that it's a shipper just looking for a capacity solution, those tend not to be durable. And so as we're looking at what's ahead of us here, there are shippers that are coming out of the woodwork saying looking for capacity type solution. That's not something we would necessarily want to get involved in because this isn't just about having more trucks and dedicated right but you know you do mention something else that there are more shippers that are looking at what they called as dedicated and it was more of a I leased the trucks and then I have agents that are operating those trucks that's a really risky model in a post Montgomery world. Highly cyclical. Yeah you're just you're really opening yourself up to lawsuits that they've never had to defend themselves against in the past but clearly they are the employer and so now they're looking for a solution where they change some of that indemnity insurance has been an area that's getting a lot of attention and so love to hear your perspective brokers I think have I've seen more focus than than than asset providers the duality that so many of you offer in the market of being not only an asset-based provider, but also offering a non-asset-based service option to customers to fill out. And you guys have a very broad portfolio of services. How do you think about brokerage today? How is Montgomery influencing the brokerage market more generally? And I asked C.H. Robinson this question. It seems to me there needs to be a coalition of the willing, to steal a phrase, that will sponsor legislation in D.C. so that we know what, you know, what it means to engage in negligent hiring practices. Because I think you need a more specific check the box for brokers on what is negligent hiring and what isn't. We also don't really have a rating system. FMCSA has one, but it's not what people think it is. And it doesn't hold up in court at all. And so the point here is I think Congress has to act before these issues and brokerage are ultimately resolved. And since Democrats and Republicans agree on everything, I'm sure this is going to happen next week. Yeah. Well, let me start broadly and then, you know, Daryl, come in on the insurance part of it. But, you Know, there's been a diseconomy of scale for large trucking companies for a long time. Right. You know, and, you know, we do believe that if you're the cause of a large accident, that there should be, you know, some responsibility to the motoring public, but it's become disproportionate with actual outcomes. That's what we have an issue with. And what happened after Montgomery, because before it was this diseconomy of scale, well, now some of that has changed because even if you're a small trucking company, you might not have the ability to pay the types of lawsuits that are going on right now, but there are brokers and there are shippers that are gonna be held accountable. And so some of this- Plaintiffs' attorneys are creative. They're creative, and when I look at some of the carriers that have been used in these situations, some of those should have been addressed. And so we went from 65,000 carriers to 14,000 carries. And we did that in 2023, well before this, and it was a result of cargo security. And what we started doing is working with a couple of third parties to go beyond the carrier and know who owns that carrier. Because we understood the chameleon carrier was a real problem, and you had to get to the ownership to be able to understand who's actually hauling this freight, not just the name on the side of the truck, because that can change quite frequently. that's what caused us to go down so quickly and we share it's not just uh you know are they you know do they have any rating are they satisfactory we had to go much further than that and there are others doing the same thing at the highway others highway is uh they're a great partner for us yep there's actually a couple others and then we implement some of our own information that we feed into it to be able to screen out and we don't share that information because as soon as we do the bad actors are going to figure that out and figure out how to counter us. And we're constantly trying to work on that. But that doesn't mean that we've removed all risk from our brokerage operations, but it does create an opportunity in our truckload side. But I think the insurance is a key part. We are seeing shippers starting to understand, I not only need to make decisions based on cost and service, But, you know, what are the potential safety risks of hiring this carrier? And it's not easy where you can just always say, oh, I'll just go and get insurance and it's going to be available. Yeah, I think there's a benefit to being a large asset-based, safe, compliant organization. Absolutely. So whereas, you Know, the dynamic is changing where, you Now, the cost of a claim is going to be born in different parts of the supply chain, right? whether that's through brokers that didn't have to deal with that before or potentially shippers, we believe that ultimately the way that insurance carriers behave and underwriters in terms of how they evaluate risk will also change. So, you know, if you're an asset-based provider that's used to carrier qualifications, monitoring, investing in safety, training, you're more advantaged than a small carrier who would never have to deal with that or a broker who either is going to pay more, significantly more for insurance or may not have insurance available. So we think that our risk profile puts us in a relatively better position. And I think the practices that we've implemented over several years and have experience doing resonates more with certain shippers. Makes a lot of sense. Yes. You mentioned acquisitions. It's in your DNA. You've certainly done several in the past. When you think about acquisitions today, what are you trying to, what sort of need are you trying to satisfy? Are you looking for increased service offerings? Are you looking to bolt on to an existing service offering? Maybe just talk about that for a minute. All of the above. So we start with just the ability to transact and the fact that we have spent a lot of time being disciplined on our balance sheet. So our leverage is at 0.1 times, and that's because there are efforts that have been made over several years to put ourselves in that position. In fact, in the third quarter, you know, with our new head of corporate finance here, we expanded our existing capacity for a debt agreement. So we have $300 million of additional liquidity. So there's one thing to have a desire to do things. We also have the ability to do thing. So I think that's the initial framing. So over the past several years, five years, we've done three very successful acquisitions. they've been in the dedicated space it doesn't mean that dedicated is the only opportunity that we look at but in this environment you know based on the needs that you that you just mentioned whether it's service offering and market geography there are opportunities that came that were able to broaden our portfolio we think that playbook still works if you look at the three acquisitions that we've done they're bigger today than when we acquired them and that's not always is the case. So we have a proven playbook and a team that's proven to be able to execute. Now, as disruptive factors happen in the industry, there are certain targets that may have been attractive before, may not have been attracted before, where that dynamic may change. So we talked about Montgomery. We're talking about AI and AV and all these disruptive forces. So we're not closed off to only dedicated, because we think that a lot of capabilities that we have, and if we lean into disruption, will enable us to look at other targets that maybe before were not either available or attractive. We've got new EAPA emission standards. Everybody, I think, though, is uniquely focused on seeding trucks and improving utilization. I know we touched on capital earlier. Just curious, as we think about the path ahead, any need to refresh the fleet, either at a tractor level or at a trailer level? Please remind us just general average ages, kind of whether or not there's any work that needs to be done there in 27. And maybe we can pivot to one or two more questions and close up. I'll start. Even during the down cycle, we've been very focused on investing in our replacement capex. Yep. So, you know, the decline that you saw since the COVID highs were not on the replacement side. So we've been very, very disciplined in terms of maintaining and improving our Asia fleet. Right. What we've seen is where there's no growth or there's no growth at a commensurate return, the growth capex is where we had scale back. Right. Yeah. We've also become very, a lot more productive during the downturn. So the need to buy as many tractors has not been there. So as we look forward to 2027, we'd anticipate that we're continuing to improve our Asia fleet. And as Jim said, when the right investment opportunities come, we're going to grow accordingly, whether that's intermodal or in dedicated. From an EPA standpoint, can you touch on that? Yeah, so go back to 2010. Last time there was an engine standard change, did a pull ahead that was probably about 30% higher than the prior year. But we've seen some value going through the pandemic and other times of maintaining that consistent buying pattern. Made some very minor adjustments, but not really noticeable. I think the other part to just consider here is that container and chassis fleet. Getting back to the productivity levels we had in 2022, 2021, that's about 20% more volume on that equipment. If we get back to 2017, 2018 level type equipment turns, that is about 30% higher volume. So there are still places that we think we can eke out some more utilization out of all of our equipment. And we've been growing our investment in replacement CapEx, especially year over year. but you don't see it as much because proceeds have also improved. So our net capex is impacted by more favorable proceeds. Right. Well, maybe just to wind things down, we only have a couple of minutes left. As you think about 27 specifically, where are the biggest opportunities for margin improvement? And if there are any milestones, one or two milestones that you think are especially important evaluative measures for investors to consider to measure Schneider Buy? Maybe just to hit on those. Yeah, the key priorities. So Daryl mentioned removing costs over the last two years. That doesn't end just because the market's improving. We see great opportunities to continue to take out structural costs, including the use of AI, and I would expect autonomous vehicles at some point. Great opportunity for us to continue to take cost out. Second one is providing a high level of service to be able to get reward from customers with higher price points. We're going to take price through allocation seasons, how we accept rate, different types of opportunities that come up, and then using portions of that strategically to grow our driver fleet, not just throwing money everywhere because you don't fix a capacity issue just throwing the money at it. It's a lot about how do you work with your drivers, create a better jobs for them. We think we have a lot of opportunities that will be exciting for drivers. You do those three things, and we are improving and moving towards long-term ranges. Yeah, and just in terms of a specific question on measurement, right? So we have targets out there in terms OF long-terms, margin targets, so truckload 12% to 16%, intermodal 10% to 14%, logistics 3% to 5%. Even in an environment where we don't have full price recovery, we're on the path to contract recovery, and we don�t have a demand inflection, you can see the trajectory that we're in. So as of the end of the third quarter, we�re at 8% margin in truckloads, 7% in intermodal, and we're already within range for logistics, absent claims considerations. So we believe that as capacity continues to exit, really from the top of the funnel, and the fact that we have a structurally lower cost, the path to those long-term targets is accelerating. Well, it seems like 27 is very much going to be a margin focus year for Schneider and most of the rest of the industry. We really appreciate you guys being here today. Thank you for your attendance. Thank you.