Werner Enterprises Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2023

There are 12 speakers on the call.

Operator

Good afternoon, and welcome to the Werner Enterprises Third Quarter 2023 Earnings Conference Call. All participants will be in listen only mode. In listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded.

Operator

I'll and will now turn the call over to Chris Neal, Senior Vice President of Pricing and Strategic Planning.

Speaker 1

Good afternoon, everyone. Earlier today, in line with our Q3 results. The release and a supplemental presentation are available in the Investors section of our website at warner.com. In listen only mode. Today's webcast is being recorded and will be available for replay later today.

Speaker 1

Please see the disclosure statement on Slide 2 of the presentation in line with the disclaimers in our earnings release related to forward looking statements. Today's remarks contain forward looking statements that may involve risks, uncertainties in line with the financial statements and other factors that could cause actual results to differ materially. The company reports results using non GAAP measures, which we believe provides in line with the financial results. Additional information for investors to help facilitate the comparison of past and present performance. A reconciliation to the most directly comparable GAAP measures is included in the tables attached to the earnings release and in the appendix of the slide presentation.

Speaker 1

On today's call with me are Derek Leathers, Chairman, President and CEO and Chris Wykoff, Executive Vice President, Treasurer and CFO. Now I'll turn the call over to Derek.

Speaker 2

In line with the call.

Speaker 3

Thank you, Chris, and good afternoon, everyone. 2023 has presented us with a challenging operating environment. The 3rd quarter was no different and our the range of $1,000,000,000 in the quarter. Despite the difficult quarter, I'd like to start by thanking our 14,000 plus talented Werner team members in line with the operator for all that you do each day to uphold the Werner brand and reputation by staying true to our core values, making safety our top priority in and provided superior service to our highly valued customers. During the Q3, we were recognized for several awards that demonstrate in line with our associates.

Speaker 3

Newsweek named Warner as 1 of America's Greatest Workplaces for 2023, in addition to being named 1 of in the market for the future. These achievements highlight our focus on building a strong culture for all our team members. We in line with the company that enables and encourages our associates to thrive in their careers. We were also pleased to be recognized for our environmental stewardship in by earning the SmartWay High Performer Award for the 7th consecutive year. This recognition is based on companies who lead the transportation industry in producing more efficient and sustainable supply chain solutions.

Speaker 3

In addition to our focus on our associates and the environment, safety remains our top priority. In the Q3, we are proud to celebrate Tim Dean, our 2nd professional driver to achieve 5,000,000 accident free miles, a very significant in over his 35 years driving for Werner. Tim represents what we desire for all our professional drivers, an unwavering commitment to safety and service 1 mile at in line with the time. And lastly, we were recognized for our superior quality and service in the industry, including the 2023 Quest in place for quality award. These awards demonstrate our ongoing commitment to excellence and the execution of our DRiV strategy.

Speaker 3

As illustrated on Slide 5, we remain laser interested on being a brand known for safety, reliability, service and durable results. Our financial strength, scale, capabilities and diversified portfolio in line with our ongoing commitment to innovative technology and sustainability will continue to drive long term value and further position Werner as a top in North America Carrier and Logistics Company of Choice. Let's move on to Slide 6 and highlight our 3rd quarter results. In line with the results. During the quarter, revenues decreased 1% year over year to $818,000,000 Net of fuel surcharges, our 3rd quarter revenue grew 3% versus the prior year.

Speaker 3

In line with the financial results. Adjusted EPS was $0.42 Adjusted operating income was $42,000,000 or an operating margin of 5.1%. Adjusted TTS operating margin was 8.5%. Our primary focus in this complex operating environment is controlling what we in line with the strong customer retention, a stable fleet and competitive margins. As we anticipated heading into the quarter, One Way Truckload remained challenged by elevated spot exposure and ongoing pricing pressure.

Speaker 3

We remain focused on utilization of one way assets and optimizing the fleet, while maintaining long term pricing Despite a shorter average length of haul, we realized 3.3% year over year growth in average total miles per truck per week, the 2nd consecutive quarter of improvement. Within logistics, Q3 volume and revenue continue to perform well, delivering double digit revenue growth and strong volume growth. We continue to execute our cost savings program and have seen sequential and year over year progress in certain expense categories. In addition, in line with sight to the non recurring year to date spend that is supporting our long term technology strategy and we remain optimistic about the benefit to earnings once complete. That said, in line with the the Q2, I would describe this as the most difficult period in my career from a market perspective.

Speaker 3

Despite these challenges, our results continue to reflect a business model that is durable, diversified and in a lower for longer and tough operating environment. Our elevated rigor on cost saving initiatives, focused on innovation and reinvestment in the business positions us well to benefit as freight conditions improve. Let's move on to Slide 7. Last quarter, I provided a more in-depth update on our Werner Edge and Cloud First, Cloud Now multiyear technology strategy. This strategy combines a blend of best in class third party market solutions with proprietary technology, talent and innovation to generate sustainable and operational benefits.

Speaker 3

It in tandem with our tech driven feature and data rich solutions and digital freight marketplaces such as the launch of Warner Bridge earlier this year. Our technology and innovation journey is progressing with 100% of our logistics segment, absent our Winter Final Mile business expected to be fully transitioned to our Edge TMS platform by informed by end of this year. As we look ahead to 2024, we are preparing for the transition of our TTS business. In line with the call. This marks a major step in our strategic roadmap.

Speaker 3

Executing our vision requires considerable investment in time, energy and capital. Line with our expectations for 2023. By channeling all freight to Werner Edge, we foresee numerous advantages, a better customer experience, in lower cost of execution and improved optimization from better visibility. This results in a more mode agnostic approach and greater revenue and earnings potential in line with the results of the financial results in more detail, let's move to Slide 8 to highlight our current a review of the marketplace. The freight market has remained challenging in Q3 and into October.

Speaker 3

Dedicated demand remains steady and in line with the pipeline of opportunities that we can capitalize on. The one way operating environment continues to be challenging given lower rates in line with new contract rate implementations largely behind us, higher than normal bid churn and rapidly rising fuel prices in the quarter. Despite a very competitive marketplace, we expect solid volume in logistics, but margins will continue to be impacted due to downward pricing pressure in line with the expectations and costs related to new business implementations. As we look to peak season to close out the year, our larger retail customers continue to signal more normalized inventory levels in an improved mix of SKUs that better align with the post pandemic consumer. That said, we remain cautious about consumer behavior given mixed data points and themes impacted spending, particularly for goods versus services and recent global tensions.

Speaker 3

As a result, we expect a more muted peak season. In line with the outlook for the Q3. Looking out as capacity continues to exit the market with 57 consecutive weeks of DOT net truck deactivations, line with the operator. We are well positioned to benefit from a more balanced supply and demand freight market going forward with upward momentum to lock in more contractual freight in line with the outlook for the Q3 results in more detail.

Speaker 4

Thank you, Derek, and good afternoon. Let's continue on Slide in line with the Q3. Q3 total revenue was $818,000,000 which was down 1% versus prior year. Net of fuel surcharges, Q3 revenues grew by 3 in line with the Q2 of 2019. TTS revenues net of fuel were down low single digits despite a softer freight market, while logistics revenues grew for the 12th straight the quarter reporting double digit growth.

Speaker 4

Adjusted operating income was $42,000,000 and adjusted operating margin was 5.1%, a decrease of 47% and 4.50 basis points, respectively, versus prior year. Adjusted EPS of $0.42 was down $0.48 year over year in line with the macroeconomic environment, lower equipment gains, higher interest expense and ongoing inflationary headwinds. In the range of $43,000,000 Although there is more work to do, we are pleased with our progress to date and as of the end of the Q3, we have realized over 70% of targeted savings. The Q3 was $572,000,000 down 8%. Revenues net of fuel surcharges fell 4% to $489,000,000 Given the macro environment, in the Q3 of 2018.

Speaker 4

Q3 TTS adjusted operating income was $42,000,000 and adjusted operating margin was 8.5%, a year over year decrease of 45% or 6.40 basis points due in part to rapidly accelerating diesel fuel prices, in compression in one way and lower equipment gains against a strong prior year comp. In the 3rd quarter, in. Gains on sale of revenue equipment totaled $8,800,000 a decline of $11,300,000 or 56% versus prior year. While we sold almost 1.5 times as many tractors and over 3 times more trailers compared to prior year period, in line with the financial results. Average price and gains were significantly lower.

Speaker 4

Year to date, we have achieved $39,000,000 of equipment gains and are on track to achieve our full year guidance. In line with the Q2 of fiscal 2020.

Speaker 3

The TTS adjusted operating expenses net of fuel surcharges

Speaker 4

and equipment gains declined 0.9% compared to our TTS in the range of $1,000,000,000 which decreased 2.9%. We saw improvements in the quarter in various expense categories. Supplies in the range of $1,000,000,000 in the quarter.

Speaker 2

The increase in maintenance expense is trending well and was down 11% versus

Speaker 4

the prior year and 6% sequentially as we are in the range of the 2nd quarter, reflecting the benefits of shifting more of our repair and maintenance capabilities in house, while also benefiting from a newer, younger age fleet. In TTS Insurance and Claims were down 9% versus the prior year. We continue to focus on safety and are proud in line with the Q3 of 2019. Our strong safety record led to a low single digit premium increase in line with our expectations on our excess insurance coverage, which was effective at the beginning of August. Although the rise in cost per claim, plus record verdicts in touch with the company's expectations.

Speaker 4

In addition,

Speaker 2

the company's performance remains an

Speaker 4

industry headwind, we are encouraged by our recent trend. Driver pay and benefits continue to moderate and we are down over 1% year over year. We are committed to controlling costs and performing within our annual TTS operating margin range of 12% to 17% over the long term. Given the unique and very challenging operating environment that includes ongoing pricing pressure, primarily within One Way and lower equipment in line with our expectations. We fell below the annual range this quarter on a trailing 12 month basis.

Speaker 4

Despite near term choppiness, we remain confident in our ability to in the range of long term TTS operating margins within the stated range. Turning to Slide 12 to review our fleet metrics. In line with the TTS average truck count was 8,226 during the quarter. We're down just over 3% versus prior year. In line with the TTS fleet down 1.4% sequentially and down 4.8% year over year.

Speaker 4

Within TTS, dedicated revenue was 306 in the range of $1,000,000 down 2%. Dedicated represented 64% of segment revenue net of fuel compared to 62% prior year. In line with our TTS segment revenue per truck per week,

Speaker 2

net of fuel, has grown

Speaker 4

year over year 18 of the last 23 quarters, and while down less than 1% year over year in Q3, in line with the company's comments. This compares to industry benchmark showing significantly larger declines. The dedicated average truck count during the quarter in line with the Q2 of 2019. At quarter end, Dedicated represented 64% of the TTS fleet. In line with the results.

Speaker 2

Dedicated revenue per truck per

Speaker 4

week decreased 0.4% year over year, negatively impacted by 1 fewer business day in the quarter. Year to date, dedicated revenue in line with the company's expectations. The company's contract per week increased 1.8% year over year and is on track to increase 9 out of the last 10 years. Overall, dedicated is performing well and remains solid. Dedicated has steadily grown over the last 10 years across all economic conditions with an annual customer in a range of over 95%.

Speaker 4

Our pipeline of opportunities remains healthy, given our unique scale, reliability, strong relationships across our portfolio of large enterprise customers. As customers continue to monitor the macro environment, in we are seeing some delays in expanding existing dedicated fleets. However, as Derek mentioned, the dialogue with our customers about future opportunities remains positive. In line with the Q1 of 2019. 1 way revenue per truck per week was down 1.6% year over year line with the results of the call

Speaker 2

due to a mid single digit rate

Speaker 4

per total mile decline offset by a significant increase in miles per truck. A 1 way 3rd quarter total miles per truck per week increased 3% year over year. This marks a 2nd consecutive quarter of improvement driven by in further engineering of our fleet, improved terminal velocity and the less equipment downtime. These results were especially encouraging given the decline in average length of haul. In line with the results.

Speaker 4

Turning now to our growing logistics segment on Slide 13. In the 3rd quarter, logistics segment revenue was up 23 in the range of $230,000,000 and now represents 28% of total Werner revenues. Truckload brokerage revenues in the range of the largest portion of the year over year growth, increasing over 48%, driven by the REIT acquisition and strong performance from our organic business. In line with the results. This month marks the 1 year anniversary of the REIT acquisition and we are pleased with the performance as REIT is seeing volume growth compared to its pre acquisition levels.

Speaker 4

Our organic Truckload Logistics segment has also performed well. Excluding Reed, volumes in Truckload Logistics increased 9% sequentially and 8% year over year. We continue to grow our domestic and Mexico cross border power only solution in touch with our customers and alliance carriers see tremendous value in the Werner network and growing trailer pool. Power only represented a growing portion of the truckload logistics revenue during the in a range of discretionary spending on big and bulky products. And as expected, intermodal revenues, which make up approximately 11% of segment revenue, in

Speaker 5

line with the Q3 of 2019. This quarter, we

Speaker 4

expect to be in line with the Q3 of 2019.

Speaker 2

In line with the Q1 of 2019.

Speaker 4

Adjusted operating margin was 1.4%, down 160 basis points year over year, driven by rate and gross margin compression, in new business implementations and expense headwinds. While we remain excited about the mid term and long term benefits of our logistics business, we expect near term in touch with

Operator

our expectations. Let's look at

Speaker 4

our cash flow, liquidity and capital metrics on Slides 1415. In line with the call. We ended September with $43,000,000 in cash and cash equivalents. Operating cash flow remained strong at $74,000,000 for the quarter line with the operator for the Q3 or 9% of total revenue. Year to date operating cash flow is $356,000,000 14% of revenue, an increase of 75 basis points year to date year over year.

Speaker 4

In line with the call. Net CapEx in the Q3 was $120,000,000 or 15 percent of revenue and year to date was 374,000,000 in line with our expectations for 15% of revenue, reflecting lower year over year gains and a greater pace of reinvestment in the business as we continue to refresh the fleet. With the increased investment, we are seeing a lower average age of our trucks and trailers benefiting maintenance expense, while also preparing for future emission changes. Having the most modern and safest equipment benefits our professional drivers, customers and positions us well as the market strengthens. In line with the financial results.

Speaker 2

Free cash flow was

Speaker 4

a negative $46,000,000 for the Q3, largely due to our fleet investments. Year to date, free cash flow was negative $18,000,000 or negative 1% of total revenues in and reflects an elevated level of net CapEx. We continue to expect the net CapEx for second half of twenty twenty three to be lower than the first half of twenty twenty three, in line with further easing in the first half of twenty twenty four. Our total liquidity at quarter end was strong at 452,000,000 in line with our expectations, including cash and availability on our revolver. On Slide 15, we ended the quarter with in line with the Q2 of 2019.

Speaker 4

We expect to be in line with the Q2 of 2019. We expect to be in line with the Q2 of 2019. In line with our expectations. Our debt structure is primarily long term and provides ample credit capacity for growth and accretive investments with over 87% of our outstanding debt in the range of 2nd half of twenty twenty seven. During the Q3, we increased our fixed rate debt from 35% to 54%.

Speaker 4

We remain pleased with our low leverage and healthy balance sheet, including our long term and low cost access to capital and our overall capital structure. In. Moving on to Slide 16 to review our capital allocation priorities. We will continue to prioritize strategic reinvestment in the business for fueling growth in competitive advantage, including modernizing the fleet, while also investing in safety, technology and innovation. In addition, we will maintain our long standing in a position to return value to our shareholders through our quarterly dividend plus periodic evaluation of share repurchases to be balanced with availability of excess cash and impact in place to grow organically remain clear and compelling, in particular within Dedicated and our Asset Light businesses.

Speaker 4

The range of $1,000,000,000 accretive acquisitions also remain an avenue for growth, where opportunities of relevant size and synergies align with our culture and prioritize competitive advantages. In line with the financial statements. We are continuing to integrate the 4 acquisitions that we have executed today. And lastly, we are committed to preserving a strong and a flexible financial position with access to liquidity, while maintaining low and modest net leverage. Before turning it back to Derek for closing remarks, let's in the range of in line with our expectations.

Speaker 4

We are narrowing our net CapEx guidance for the year from a range of $400,000,000 to 450,000,000 in line with our expectations to $425,000,000 to $450,000,000 We anticipate that this may exceed our long term net CapEx range of 11% to 13% in the range of revenue as we've invested heavily to refresh the fleet ahead of an upcycle, increasing asset reliability, lowering operating costs and getting ahead the range of $1,000,000,000 of revenue per truck per week is expected to remain within our full year guidance of in the range of 0% to 3%. One way truckload revenue per total mile for 3rd quarter decreased 4.8% and is down 4.4% year to date in line with our guidance range. Our guidance range for the Q4 is down 9% to down 7%, due primarily to difficult in. We expect one way revenue per total mile to be flat to down low single digits sequentially from Q3 to Q4. In line with the expected continued declining demand with moderating pricing and equipment gains as we close out the year.

Speaker 4

We reached $39,000,000 in in the range of equipment gains year to date and we are tightening our expected range for the full year to between $42,000,000 $47,000,000

Speaker 2

line with our expectations.

Speaker 4

We expect net interest expense this year will be $20,000,000 to $25,000,000 higher than last year because of the continued pace of Fed tightening and more debt versus prior year. Our tax rate in 3rd quarter was 23% and is 24.3% year to date. We are maintaining the full year range of 24% to 25%. The average age of our truck and trailer fleet in Q3 was 2.05.1 years compared to 2.35 years, respectively, at the end of 2022. I will now turn it back to Derek.

Speaker 3

Thank you, Chris. Again, as we have noted throughout our comments today, the freight backdrop is challenging in line with our long term expectations. That said, both strong revenue retention and progress on diversifying our portfolio deeper in both dedicated in logistics positions us well for the future. Our approach has created competitive advantages that will continue to fuel our growth, durability and in line

Speaker 2

with our expectations.

Speaker 3

We are uniquely positioned to service the most complex freight needs of large enterprise customers, including over half of the largest U. S. Retailers, in in addition to growing in other verticals with customers who are winning in their space. We have the benefit of broad solution selling to large enterprises across our highly integrated dedicated offering, in our nationwide Final Mile solution plus cross border and logistics, while also growing share with small and medium sized customers within brokerage. In.

Speaker 3

Our comprehensive footprint and terminal network across the country puts Werner within 150 mile reach of 90% of the U. S. Population. In line with the largest Mexico cross border franchise and truckload and deep experience operating in this complex market. Enhancing the experience of both our customers and associates.

Speaker 3

We continue to attract and retain top talent, including highly qualified professional drivers in place that embrace and carry out our commitment to superior safety, award winning service and in turn allows us to retain our strong portfolio of winning in line with our customers. I'm proud of our team and the exciting future for Werner. And at this point, I'll turn the call back over to our operator to begin Q and A.

Operator

In line with the question and answer session. This call will end at 5 P. M. Central Time following the company's closing remarks. At this time, we will pause momentarily to assemble our roster.

Speaker 2

In line with our expectations.

Operator

Our first question is from Christian Wetherbee with Citigroup. Please go ahead.

Speaker 5

Hey, thanks, operator. In. This is Rob on for Chris.

Operator

Derek,

Speaker 5

with the updated kind of guidance, could you give us a sense in line with the fleet allocation to the spot market just in light of where we are? Can you give us an update kind of where we are today and How you're thinking about potentially repricing as we go into next year?

Speaker 3

Yes, sure, Rob. In. Thanks for the question. Right now, on one way truckload, we are in that part of our business, we're at about 15

Speaker 2

in the range of $1,000,000,000

Speaker 3

call it roughly of our fleet in the spot market. Clearly, that's more than we'd like to see in that market. And as in recent weeks, We've seen some capabilities of kind of lowering that number. As we get deeper into peak, one of the opportunities in front of us is to get in some of those units out of the spot market and into whether it be contract freight in the range of opportunities to grow with or peak opportunities. And as we think about peak this year, what we're seeing broadly is in the range of $1,000,000,000 to $1,000,000,000 I still believe there is an opportunity for volumes to potentially even finish up year over year in the range of the year.

Speaker 3

Relative to peak, but without that same incremental pricing opportunity. Regardless of that, as you take in trucks out of peak or out of spot and into that environment, the opportunity for a significant shift in pricing on those trucks in the queue. And so that's encouraging. And as we look into next year, I think it really comes down to how the consumer holds in in a position to be in a position to

Speaker 2

be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in

Speaker 3

a position to be in a position to

Speaker 2

in the range of the year.

Speaker 3

And general trucking attrition that we do see taking place at a more rapid pace. That will really kind of set the stage for in the first half of next year looks like.

Speaker 5

Thanks, Dirk. And my follow-up is, what's the current spread for your spot in line with the expectations related to your contractual rates as we think about some of the business shifting around.

Speaker 1

In Yes. Right now, the spread net of fuel is in the, call it, $0.40 to $0.60 range, just depending on the week. But it's been at that a similar level now for a while. I mean spot rates really haven't changed much in the last couple of quarters. In They've been fairly steady.

Speaker 1

Obviously, we've seen a little degradation in one way trucking rate per total mile, but that spread has seemed to hold in in at about those levels in

Speaker 4

the last 4 or 5 months.

Speaker 6

Appreciate the time guys.

Speaker 3

In line with you.

Operator

The next question is from Tom Wadewitz with UBS. Please go ahead.

Speaker 6

In line with the operator. Thanks. This is Mike Traiano on for Tom. So you mentioned the total TTS rate per mile was down only 3% in 3Q, in the range of

Speaker 2

the market, which in

Speaker 6

this type of market points to all the good work that you've done to build the dedicated business and also build more resiliency in one way. In the low 90s is similar to some peers who are seeing more pressure on price. You've highlighted the $43,000,000 of cost savings, in the low 90s. So I'm just wondering if there are more cost efficiencies to be realized that can help you get the OR more in line with your informed on price. Thanks.

Speaker 4

Hey, Mike. This is Chris. Thanks for the question. Yes. We still feel good about the 12% to 17% target range for TTS over the long term.

Speaker 4

As you know, this has been a uniquely challenging cycle, inflation being up, rates being down, imbalance in terms of supply and demand. And so the volatility there is really within our one way business where we do have that elevated spot as Derek just mentioned and continued pricing pressure. So in the one way business, including the cross border where there's good growth and opportunity there. From a top line perspective and overall mix within TTS, in that position as well. Also remember that given the one way business, there can be a meaningful difference as we move out of spot, in move those rates into contract rates and then potentially move those into a further dedicated premium rate.

Speaker 4

So with an improved market, that can have a significant help in to the overall operating margins. And then you mentioned the cost improvements. Yes, we've made some good strides there in supplies and maintenance and in even insurance and some other categories. That program continues to progress. And by continuing to focus on cost improvements, As we're starting to see here, that certainly will help going forward to the TTS margin.

Speaker 6

In line with the question. Would you point to any particular cost bucket within that $43,000,000 where you say, look, we can probably do a little bit more, whether it's On the supplies and maintenance side or on the kind of the driver recruitment and pay side?

Speaker 4

Well, yes, actually, all of those that you mentioned are part of the program, but we're excited about the recent improvement year over year that we've seen in supply in the range of the 2nd quarters. We've talked a lot about that on other calls, so several quarters to bring more of that in house as well as just having a younger, more modern fleet that in the quarter. Obviously, as a lower operating cost, for Q3 supplies and maintenance was down double digits year over year. Also insurance was down 9% in the quarter and insurance for Q3 was the 1st quarter since Q1 of 2022 that was less than 4% of revenue. Driver pay and benefits was down 2% year over year, some of that due to the fleet as well as some pay changes.

Speaker 4

So it's multipronged in terms of how we're building that bucket and going after cost improvement.

Speaker 3

And to answer directly about ongoing improvements in some of those areas, we're certainly past the middle innings in some of the initiatives in the range of the year. Relative to supplies and maintenance, but there is still room to grow. As Chris mentioned, in the range of $1,000,000 We have the ability to still bring further density into our shops. We're excited about that. It's an ongoing effort.

Speaker 3

We're clearly reaping the benefit, although it's an expensive way to get there, of the elevated CapEx as it relates to trucks out of warranty and trucks over 400,000 miles. In. To put some color on that as a just as an example, a year ago this time we would have had over 500 trucks greater than 400,000 miles in the fleet. And today as we sit here, we have less than in 50. So we're still continuing to work more aggressively on in house maintenance, the range of the quarter.

Speaker 3

The quality of that maintenance, but also the pressure fleet gives us a pretty good head start on that. As we continue to work our in the range of acquisitions into and integrate onto one platform. There's some real visibility advantages and opportunity for us to take some additional cost in the range of $1,000,000,000 Unfortunately, the reality of the acquisition timing was that it was at the same time we were building out the largest in the early stages of the business. We knew that going into it. We knew it would be more painful as a result, but we still believe that the underlying asset was worth making a decision to move forward and to fill the portfolio out to better prepare us for the future.

Speaker 6

In. Thanks. Appreciate all the thoughts.

Operator

The next question is from Jack Atkins with Stephens. Please go ahead.

Speaker 7

In line with the question. Okay, great. Thank you for the time guys. Really appreciate it. I guess, Derek, for

Speaker 3

my first one, if I

Speaker 7

could maybe pick up in on where you left off there at the end. In terms of just the cost associated with the tech investments you've been making, I'm sure that's burning the P and L this year. Is there a way to maybe help us think about the level of expense you've been incurring there? And I guess as we sort of think forward, in the range of $1,000,000 Once you begin to see the benefits from that, how are the tech investments you're making now setting Werner up for the long term?

Speaker 3

Yes, Jack. Thanks for the question. First off, it's difficult. I want to be clear about that. We've done a lot of work and we talked about even in the prepared remarks, the 30 to 40 basis points of OR impact year to date on the related to this Tech Journey.

Speaker 3

In. What makes it difficult is I don't want to imply that all of that is non recurring because there will be other types of cost in place. It may replace it in some cases, so licenses and services, systems as a service fees and other things. But perhaps the biggest cost in the first of all, and it's the one that's the most difficult to really quantify is the amount of man hours and time and effort that is put into making sure we get this right. In the range of the year.

Speaker 3

So just significant amounts of meetings and productivity that gets impacted as we lay this journey out in the range of the 2nd quarters and the

Speaker 2

2nd quarters that are working through this journey that as

Speaker 3

part of it, there's a period in time and most of that period in time has been the last couple of quarters and in the range of

Speaker 2

2.5 times. And to be frank

Speaker 3

for the next couple as well, where folks are actually working harder and working longer as they work out of old systems and into the new platform. In line with the juice worth the squeeze. I think having a cloud first, cloud now strategy, having our tech the architecture modernized, the ability to make changes and adapt to a changing marketplace more nimbly is very difficult to even put a value on. We will make us more nimble, more able to serve, but more importantly probably than all of the above is the ability for the first time in in the future as we've grown this portfolio out and expanded dedicated logistics and even within one way increase the level of engineering that we do. Having all that freight in one system with one's visibility will be leaps and bounds in line with the details of where we are operating today.

Speaker 3

We are very encouraged by that. You couple that with Warner Bridge and the digital a very strong platform within brokerage, which we are not holding out there as the core, if you will, of what we do because in truckload logistics, in we have a tremendous amount of contract work and work that involves other value added type services along the way that are coupled with in our standard brokerage product, but within Werner Bridge, that capability as it builds out and gets implemented, we're seeing receptivity in both from the customer and carrier community and a fairly quick ramp to the capabilities that that's bringing us. So, in the range of $1,000,000 Yes, it's going to be, call it, a year still out in front of us to even perhaps as long as 18 months as we go down this journey. In the range of the 2nd quarter, but the output of it is something that's very attractive and I'll point to a specific case.

Speaker 2

In the quarter.

Speaker 3

Over the last year, the most implemented, most integrated portion of this journey is our truckload logistics group. And if you look at the performance within that group in from a revenue or market share perspective, taking share growing at a time when very few if any others are, doing so yes with some in the range of additional costs associated with it because of this tech investment. But over the long term, we like the positioning of that part of the portfolio a great deal, but given its larger scale and relevance in the marketplace. So, it's going to be tough work. We're signed up for it and the in the range of the year.

Speaker 7

Okay. That makes sense, Derek. And I guess just as a follow-up, in the when we think about the dedicated market, some of your competitors have been speaking to an increasingly competitive dedicated market here over the last in a quarter or 2. Can you talk to if you're maybe seeing increased pricing pressure show up in bids over the last few months? I mean, I know it's in a challenging market broadly, but it does feel like we're seeing some competitors maybe looking to deploy additional assets into your sandbox and just curious if you could talk to that for a moment and how you're addressing that?

Speaker 3

In line with the question. Yes. So first off, I'll say there's clearly increased level of interest in dedicated both from the shipper in the range of the 2nd quarter and carrier community. I think that's not surprising given the absolute draconian pricing that exists within the spot market today. In most of what we do in dedicated can't really be replaced by spot capacity.

Speaker 3

It really doesn't play a role, but it does cause carriers to gain interest in opportunities or to pursue dedicated whether or not they may have the capabilities to actually perform. So it's really incumbent upon us to make sure our performance is at the highest possible level. The business that we do is true dedicated, that the stickiness and defensiveness of that business in is inherently built in because of the complexity of the type of work we do. And I can tell you that despite being disappointed in our overall results for the quarter. I'm extremely proud of the work that we're doing in Dedicated and the underlying financial results of it as well.

Speaker 3

In. So it stood up as well as we would have expected in a market that was under this much duress. And I think the prospects in the range of

Speaker 2

2% to

Speaker 3

3% to 4% to 4% to 4% to 4% to 4% to 4% to 4% to 4% to 4%. We're going to maintain pricing discipline and you're going to see that and you have seen that in the in the fact that although it's a larger percentage of the fleet, it's not growing at the pace it once was because we're going to stick to making sure it's the right type of dedicated that's defensive in nature, that's hard to serve and it's priced appropriately. With all that in line with the outlook. Thank you. Thank you.

Speaker 3

Thank you. Thank you. Thank you.

Speaker 7

In. Okay. Thanks again for the time, Derek.

Speaker 2

Thank you.

Operator

The next question is from Eric Morgan with Barclays. Please go ahead.

Speaker 8

In. Hey, good afternoon. Thanks for taking my question. I wanted to ask on supply. Derek, you've offered some helpful perspective over the last few quarters in on just industry capacity.

Speaker 8

I know recently you've been talking about elevated cash balances, smaller carriers kind of extending the cycle. In the queue. And I think in Q and A, you said you're seeing a more rapid pace of attrition, but maybe you could just talk a bit more about what you're seeing right now and in line with you.

Speaker 2

And if there are any other

Speaker 8

factors you've kind of identified that are having an outsized impact that might have you rethinking how long this down cycle could persist?

Speaker 3

Sure. So let's start with, we've talked a lot about MedDip, the activations and that's not the end all be all, but in a listen only mode. It's certainly a relevant gauge on the dashboard. We've seen 57 weeks now in over 150,000 trucks. In the early portion of those weeks, you were seeing quite a bit of movement in the BLS data where owner operators and others may have been showing up in a position to be in a position to be in a position to be in a

Speaker 2

position to be in a

Speaker 3

position to be in a position to in the Q1 of 2019. We are very pleased

Speaker 2

with the progress we have in the Q1 of 2019. We are very pleased with the progress we have in the Q1 of 2019. We are very pleased with the progress

Speaker 3

we have in the Q1 of 2019. We are very pleased with the progress we have

Speaker 2

in the Q1 of 2019. We are very pleased

Speaker 3

with the progress we have in the Q1 of 2019. In the range of 2 100 truck, 400 truck, 500 truck carriers kind of on a weekly basis starting to hit the radar of not being able to survive this pricing environment. I think if you put all that together and you continue to and you kind of look in line with the outlook. This is coming closer to balance than people realize. I'm not here to try to predict, especially in the quarter like this, the exact date or time that, that will take place, but we're clearly more encouraged.

Speaker 3

And then lastly, because it's very relevant to the conversation, I in. I think you have to take a deeper look at inventories and what we're seeing both within our own customer base is some pretty strong statements around their comfort in line with their current inventories, but even on the broader inventory levels across the industry, you are starting to see more and more folks stepping forward and feeling as though that destocking in the line of the line. So you put all that together and that gives us a sense of encouragement. Of course, the headwind against it is overall consumer confidence and just the strength of the in the range of the quarter. So we're going to just have to see how those lines kind of play out over the next couple of months quarters.

Speaker 3

But I do believe we're certainly much closer to the end than the beginning of this cycle term.

Speaker 8

Appreciate that. And maybe just a quick follow-up on in one way. I know you did a little better than the midpoint in 3Q, 4Q in a little bit lower. Can you just give us a little bit more context on what's changing there and specifically any impact that length of haul is having in

Speaker 1

yes, in terms of in One way pricing, I mean, you look back over the year, we've been down 3.2% in Q1, down 5.2% in Q2 and now here in Q3 reporting 4 in a year to date basis, it's down 4.4%. We are relatively pleased with that given what's out there in the space, but nonetheless, it's down in an environment where there are significant inflationary cost pressures. So that's obviously in a squeeze on the margin side. As we look forward into Q4 and our guidance that's now down 9% to down 7%, in the range of $1,000,000,000 The reason for the change really is more to do with the prior year increase from Q3 to Q4 than anything that's happening really right now in line with the Q3 to Q4. So we expect our one way trucking rate to be flattish to maybe slightly down sequentially.

Speaker 1

A couple of reasons for that. You look at we've had continued implementation of lower contractual rate renewals on bids in touch on rates that were effective throughout Q3. We're done with bid season and I think most of the implementations are in the quarter. In terms of the spot exposure, we've talked about that. Spot rates in typically increasing Q4, but they've been frustratingly low and I don't

Speaker 7

know that we expect a

Speaker 1

whole lot of lift there, although in the range of 2.5 times. It could improve a little bit with some peak activity. And then the tailwind for us heading into Q4 would be some peak activity. In the range of $1,000,000,000 We are expecting some. We've already had some and that will continue, just not near the rate that it's been in the past.

Speaker 1

So really as we look in the range of 2023. We're looking at a flat to slightly down sequential number, but on a year over year basis, it looks a little worse just given the increase we had in '22 with a little more robust peak pricing. In terms of the length of haul, that is down significantly year over year. There's just a couple of things there the range of 2.5 times. With regard to mix, we had more churn this year in the bid throughout the bid season than what we typically do and that in a little bit lower length of haul.

Speaker 1

I don't know that it's impacted pricing a whole lot, maybe a little bit, But it's more to do with just the mix with the bid season. We have seen that start to increase a little bit here in the last month or so and would expect that there would be a little bit of an increase as we finish out the year, but nothing really significant to note on that in

Speaker 2

line with the line

Speaker 5

of Sean.

Speaker 6

Appreciate all the color.

Operator

The next question is from Elliot Alper with TD Cowen. Please go ahead.

Speaker 9

In. Great. Thank you. This is Elliot on for Jason. So you discussed the margin pressure in Q4 logistics.

Speaker 9

In line with the Q3. I guess, could we see logistics lose money in Q4? I know there are a lot of moving pieces within that. If you could touch on maybe the magnitude of the truckload brokerage margins that you called out earlier as well. Thanks.

Speaker 3

Yes. So in logistics, the margin pressure concern and the reason for signaling is just as this were to start to turn or in we saw suddenly some increased activity from a peak perspective. We could see buy rate pressure in the carrier community that would perhaps outpace the ability to pass that through based on our mix. In the range of $1,000,000,000 At this point, we also have been burdened with and it's the upside or the downside of growth, I guess. But as we've grown logistics and taken share and seen some of in the volume increases that we talked about earlier on the call, it comes with a little bit of settling of each of those accounts in the range of 2,000,000,000.

Speaker 2

So that as you onboard

Speaker 3

significant amounts of new business, it takes a while to get the carrier roster kind of finalized to get the right carriers on the lanes in the right way the most efficient purchasing. And so that would be the counter to that, that as we get better at that, as we get some seasoning and some settling in the carrier base, in the opportunity to actually go the other direction. So I'm not trying to be evasive, but I think it'd be inappropriate for me to even try to tell you in I think it gets better or worse in Q4. I do think what you will see is a significant focus as we go into Q4 and into Q1 on execution, operational excellence and less on growth from a volume perspective in logistics as we get in touch with this new business digested. Chris?

Speaker 4

Yes, maybe just to add to that. Line with the volume. It's been a year since we've had the Reed acquisition. We're continuing to the market of reviewing the portfolio, making sure that we're not taking on transactional business that's underperforming, maintaining high contract volume, in and we'll continue to be reviewing the portfolio, while also balancing that with winning new business and contracts that can last with us for the future. We're also from a margin improvement standpoint, we're looking forward to having Reed fully integrated from a technology and operational impacted by the end of this year, which will enable us to realize some further synergies and cost savings going into next year.

Speaker 4

And then beyond that, there's also opportunities from a technology perspective, growing the small and medium sized business as well as in a range of 10% to 15% of the total savings within logistics. So a number of things that we're excited about, but also mindful of in the range of 2% to 3% and looking for ways that we

Speaker 5

can improve the margin there going forward. In line with

Speaker 9

the question. Thanks. And then maybe to follow-up, as you move through bid season, are there any early reads on maybe what your customers are telling you and how they're planning for 2024?

Speaker 3

It's really early to end bid season right now. I mean literally we are only starting to see the first couple in the line of the call. I think that is a it really depends on the positioning of the customer themselves. We are fortunate to work with some of the best, in touch with the company's comments, especially on the retail side, some of the best retailers out there in the retail space. Several of them are actually optimistic in the range of about the fact that they've been able to recalibrate for this new consumer behavior and they feel like the days ahead of them look a lot bit brighter than the ones that have been in the in a recent rearview mirror, so volumes being up, reopening or opening new stores and our ability to expand with them.

Speaker 3

In what that all means in price will just really determine will be dependent in some on the one way side in particular on where we're at in a supply capacity supply perspective. So it's early. We know that what we're going to be working with them on is the reality of sustainable in the same store pricing. We're going to be talking to them openly and honestly about what's happening at these pricing levels that have been out there because the data is right there in front of them and this attrition is real. We are going to talk to them about making sure that where we price we can stand behind it in and not be back in 60 days, 90 days or multiple times a year.

Speaker 3

Those conversations in some cases will go very well and with others I'm sure it will be more difficult. In line with the question. One way truckload is down, you saw in the quarter and we're prepared and actually planning to take it down further in the range of $1,000,000,000 as we continue to lean further into Dedicated. So that provides opportunity for us to be a little more picky and a little more disciplined in our

Speaker 1

in line with

Operator

you. The next question is from Scott Group with Wolfe Research. Please go ahead.

Speaker 10

Hey, thanks. Good afternoon. So maybe Chris, your comment about trucking truckload rates flat to down a bit sequentially from Q3 to Q4, Should we assume that we should apply that similar logic to truckload OR or trucking earnings Q3 to Q4 flat to down slightly?

Speaker 1

Well, Scott, there's several puts and takes as we head from the quarter. I mean, certainly, in line with the one way trucking rate is down a bit, I mean, we're talking flat to slightly down is sequentially where we're headed. Nonetheless, that would be offset with in some potential peak activity that would be better. We certainly didn't have a lot of peak activity in Q3, just a little bit of tail end of the quarter, but we Have had some peak activity in October and would expect that to continue with some of the peak awards we've got, although estimating volumes has been challenging this year, I think, for in the

Speaker 2

range of $2,000,000

Speaker 3

and our customers.

Speaker 1

And then the other thing to mention is just the continued headwind as it relates to gains. We had, I think, a $9,000,000 gain we posted in Q3, and you can tell by our annual guidance in the range of $42,000,000 to $47,000,000 for the year that, that implies a lower number in Q4. So definitely some puts and takes in line with our cost savings program, which will continue to hopefully show some benefits there. So hard to say. We're certainly going to work as hard as we can in line with the expectations of the 2020 environment and hopefully the tailwinds will outpace the headwinds.

Speaker 4

Yes. And Scott, I'll just add to that and just reinforce that we would expect to continue to see some year over year improvement in those select expense categories that we mentioned. In the range of 2nd quarter. And really where you started that question was really focused on the one way business dedicated in the quarter. While the fleet should be flat to up and revenue per truck per week generally holding steady, that will have Some offset to mitigate some of that mid single digit decline in the one way rate.

Speaker 10

In line with the question and answer session. And then maybe just bigger picture, I know it's just maybe this was already addressed a little bit, but all cycle, we talked about the stability of in line with the dedicated mix a lot. I think we're just all surprised by the magnitude of the margin in pressure, just given that. Can you maybe just give a little bit more color? So if overall in line with the numbers.

Speaker 10

Trucking margins are down 5, 6 points. Like how are dedicated margins doing year over year? How is One Way margins doing year over year? In the first cycle, really, we've done a lot of acquisitions. Is that helping or hurting the year over year OR performance right in any more color would be helpful, I think.

Speaker 10

Thank you.

Speaker 3

Yes, Scott, great question and I'll keep it fairly high level. But in contact with a couple of exceptions around the margin. So examples of those exceptions, we've seen fleet shrinkage in the range of approximately $1,000,000,000 across dedicated, so within contractual terms, 3 trucks, 5 trucks per fleet kind of shrinkage, and that certainly hurt our defensibility a in the marketplace a little bit because those trucks have to find a home. We've stayed disciplined to reference back to an earlier question on the call about increased competitiveness in dedicated in touch on bids this year. We've kept our discipline and as a result, some of those trucks ended up all the way back in one way when we would have preferred that they had in the range of the year.

Speaker 3

Found a home within Dedicated, but overall Dedicated returns, margins, etcetera have been sort of as expected in this type of economic backdrop performing pretty well. One way has been worse than expected. That's just the simple reality. In the range of $1,000,000 This one way market is more difficult. It's been lower for longer.

Speaker 3

Our spot exposure has been higher than anticipated. In and therefore, it has been the predominance of the drag. You couple with that, that yes, in the acquisition space. Those were predominantly one way plays, but to fill regional gaps within our network. And on the market facing portion of in those decisions.

Speaker 3

It's been very solid. Our customers have embraced it. We feel like it is absolutely filled out the network in ways that are going to be strategic and important and we stand by those decisions, but their results have been difficult from a year over year perspective in line with the question and answer session because they're operating predominantly actually exclusively in that one way space. And then lastly, in logistics, we've talked a lot about in there's times to where we believe that gaining share and gaining momentum in a space makes the most sense and doing so and executing with a in the marketplace. We have been working so aggressively on, has been paying dividends, but we have digested quite a bit of new business in logistics and there is nothing like a dedicated implementation cost.

Speaker 3

I'm not trying to make that case. It's much shorter in duration, but there is in a bit of a digestion that you do as you get the carriers and the roster settled. So those are some of the puts and takes and that's why I didn't shy in the range of

Speaker 2

$1,000,000 in the quarter. Early on

Speaker 3

in my remarks, I stated that it certainly doesn't meet our expectations internally either. But what does is I like in line with the way the portfolio is now structured. I know that we're in the later innings of this cycle. And as we come out of it, we're even further entrenched in with a stronger performing dedicated unit than before and a growing and much more relevant logistics business.

Speaker 10

In line. Thank you for

Speaker 2

the time, guys. Thank you.

Operator

And our final question today is from Ken Hoexter with Bank of America. Please go ahead.

Speaker 11

In. Hey, great. Good evening. And Derek, thank you for squeezing me in and Chris. So just, I guess, you noted you're seeing delays in expanding in existing dedicated fleets, but the dialogues are now positive.

Speaker 11

Maybe expand on your thoughts there a little bit. And then the pace that in your largest customer is now in sourcing its fleet. Has that accelerated given the downturn? Have they paused? Maybe just talk about that process and the impact on Dedicated.

Speaker 3

Sure. So within Dedicated, as they were working through their in the right stocking would be probably even a bigger component of it in my view, getting the right in the range of 2,500,000,000 of revenues for the post pandemic consumer getting the types of goods that they are more interested in buying in this inflationary environment and getting all of that right in on the in the range of the 2nd quarter. That took a while and what I'm most encouraged by is in conversations with our major customers, which I've in had many of in recent weeks, they feel as though that work is behind them. Once that work is behind them, you get back to replenishment levels, you start to see reordering and you in the market. I still think there's going to be conservatism in that reordering because everybody is waiting to see kind of how well the consumer holds up, especially in

Speaker 2

the

Speaker 3

That's what gives us confidence, specifically relative to our largest customer. I'm not going to speak to their strategy or what they will choose a range of 2 to 3, but I can tell you we're in detailed conversations. I can tell you we're up sequentially from Q2 to Q3 with them in Dedicated and that we have in conversations on the table right now for further expansion. So as their business grows, even as they grow their fleet, in the range of opportunities. There's opportunity for us to grow with them, and that's going to be an ongoing discussion that will last that will never really in the end.

Speaker 3

I'm excited about some of their expansion plans because it fits our network really well and it fits our capability set even better. In the queue. So we'll work with them and we're excited to have that partnership and it's gained considerable white noise I know in these in discussions, but inside the building, our confidence level is high relative to that relationship.

Speaker 2

Also set up. Appreciate your thoughts, sir. Thank you.

Speaker 3

In.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Derek Leathers for any closing remarks.

Speaker 3

Yes, thanks. I wanted to thank everybody for joining us today. And while the quarter represented a further extension of what was already a challenging in a great environment. We do believe that capacity rightsizing is gaining momentum and I'd like to reiterate that. I also and more importantly in line and inventory mix is getting closer to correct than it's been in many quarters.

Speaker 3

Our customers continue to make those adjustments.

Speaker 2

We're encouraged by their progress and we're encouraged by

Speaker 3

the conversations we've had with in attendance. We're encouraged by their progress and we're encouraged by the conversations we've had with them. We're going to remain disciplined on price across our organization, in line with the progress we made in the quarter while staying focused on the key components of our business, dedicated logistics and the engineered components of cross border and inside of our one way. In touch with our customers. Our tech investments are maturing as is our disciplined approach to lowering our cost to execute.

Speaker 3

In. There's certainly work ahead of us. We're committed to the work and I thank you for spending time with us today.

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Earnings Conference Call
Werner Enterprises Q3 2023
00:00 / 00:00