Werner Enterprises Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 6, 2024

There are 13 speakers on the call.

Operator

Good afternoon, and welcome to the Werner Enterprises 4th Quarter and Full Year 2023 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, Please note this event is being recorded. I would now like to turn the conference over to Chris Neal, SVP of Pricing and Strategic Planning. Please go ahead.

Speaker 1

Good afternoon, everyone. Earlier today, we issued our earnings release with our Q4 and full year 2023 results. The release and a supplemental presentation are available in the Investors of our website atoner.com. Today's webcast is being recorded and will be available for replay later today. Please see the disclosure statement on Slide 2 of presentation as well as the disclaimers in our earnings release related to forward looking statements.

Speaker 1

Today's remarks contain forward looking statements that may involve risks, uncertainties and other factors that could cause actual results to differ materially. The company reports results using non GAAP measures, which we believe provides additional information for investors to help facilitate the comparison of past and present performance. A reconciliation to the most directly GAAP measures is included in the tables attached to the earnings release and in the appendix of the slide presentation. On today's call with me are Derek Leathers, Chairman and CEO and Chris Wyckoff, Executive Vice President, Treasurer and CFO. Derek will provide an update on our 2023 accomplishments relative to our DRIVE strategy, highlights of our Q4 results and a market outlook.

Speaker 1

Chris will cover our financial results in more detail, including the 2023 achievement of our cost savings program and provide

Speaker 2

Thank you, Chris, and good afternoon, everyone. We appreciate all of you joining the call today. Clearly, 2023 was a prolonged and challenging operating environment. Our earnings were down and did not meet our expectations. However, we made structural improvements that will set us up for future success as normalization returns.

Speaker 2

Our dedicated business proved to be durable and resilient. Our one way trucking business rate per mile decline was more favorable than industry benchmarks and our logistics business generated full year volume and revenue growth. Despite the backdrop, our leadership team and nearly 14,000 talented Werner members stayed the course, executing on our strategy, upholding the Werner brand and reputation, making safety our top priority and providing superior service to our highly valued customers. Let's turn to Slide 5 to highlight some of our accomplishments in 2023 that created optimism for 2024 and beyond. Our drive strategy continues to help inform our decisions and lead to acceleration across our core businesses.

Speaker 2

2023, our dedicated business performed as expected, showing durability and resiliency in one of the most challenging operating environments that I've witnessed my 30 plus years in the industry. We grew dedicated revenue per truck for the 9th year out of the last decade. And despite the market backdrop, Dedicated performed within our TTS operating margin target for the year and we expect to see margin expansion when normalization returns. On our results and additional logistics growth and operational excellence within one way to mitigate rate per mile decline, we executed on structural cost changes, realizing $43,000,000 of savings. We also leaned into greater network optimization, engineering and improved productivity, which helped to offset rate pressure, cost inflation and declining resale values of equipment.

Speaker 2

Separately, operating cash flow margin remained solid and supported in the business. We lowered the average age of our fleet, reduced debt and returned capital to our shareholders through an 8% dividend increase in 2023. We made disciplined investments towards our continued pursuit and industry leadership of innovation. Our fleet remains modern, safe, reliable and fuel efficient. We also made significant advancements in our technology stack by transitioning truckload brokerage, including Reed and Intermodal Business to our new cloud based Edge TMS solution.

Speaker 2

In 2024, we are transitioning our One Way business to the Warner Edge platform. This continues to be a journey, but we remain excited about the long term value. By channeling all freight through Werner Edge, we are committed to a better customer experience and lower cost of execution through improved visibility and optimization across all of Werner. Our core values guide our decisions and behavior every day as we keep America moving. With integrity as our foundation, safety and service is ultimately what Werner stands for, built on the pillars of inclusion, community, innovation and leadership.

Speaker 2

We are proud to be recognized in 2023 as one of America's greatest workplaces for diversity, parents and families. We realized a 19 year low in our preventable accident rate due to the hard work of our drivers, mechanics and safety associates working together. As always, safety remains our top priority and is demonstrated by our team members every day, one mile at a time. Relative to ESG, notable milestones include naming a lead independent director for our Board of Directors, increasing our Blue Brigade volunteer hours to over 3,300 hours and doubling driver training hours to bring awareness to human trafficking. These and other accomplishments are described in more detail in our 3rd corporate social responsibility report released in November.

Speaker 2

Before we move on, I want to acknowledge the appointment of Nathan Meiszguier as the next President of Werner Enterprises. On January 5, the Board unanimously approved at my recommendation the promotion of Nathan. I could not be more excited about this progression in our company's history. Nathan has been our Chief Legal Officer and a transformative executive leader for nearly 2 decades at Werner. While his background is impressive, including being a Harvard Law School graduate, what stands out to me the most is Nathan's integrity, servant leadership, vision an embodiment of the Werner culture.

Speaker 2

And to be clear, I'm not going anywhere. I'm excited about our future and partnering more with Nathan going forward. Let's move on to Slide 6 and highlight our 4th quarter results. During the quarter, revenues net of fuel surcharges decreased nearly 2% versus the prior year. Adjusted EPS was $0.39 Adjusted operating margin was 4.8%.

Speaker 2

Adjusted TTS operating margin was 7.5 percent net of fuel surcharges. Dedicated remains solid and resilient delivering another quarter of strong customer retention and revenue per truck growth, a stable fleet in the second half of the year and double digit adjusted operating margins for all of 2023. As we anticipated heading into the quarter, one way truckload remained challenged by ongoing pricing pressure. We remain focused on long term pricing discipline and continued our positive utilization trend. Miles per truck increased by nearly 9% in the quarter, the 3rd consecutive quarter of improvement as we further engineer the fleet.

Speaker 2

Within logistics, 4th quarter volume was strong and revenue grew over 6% year over year, extending the 13 straight quarters of year over year growth. In short, freight conditions remained challenging in the 4th quarter with lower rates despite stable customer demand and slightly better than expected peak volume. In spite of this, Our results continue to reflect a business model that is durable, diversified and resilient. Moving to Slide 7 to highlight our current view of the market. We expect a challenging freight market continue through the first half of twenty twenty four.

Speaker 2

While data points suggest capacity should exit at an accelerated pace, the reality is that it continues to be modest leaving excess Inventory levels have normalized and destocking appears largely complete, although we are not seeing broad restocking. The go forward trend in consumer demand will be the focal point to normal replenishment. And while consumer sentiment has improved, mixed data points and themes impacting near term spending leave us remaining cautious. Spot freight rates remain low and are not expected to improve until the Q2. A more balanced supply and demand environment in half will benefit us as we lock in more contractual freight at improving rates.

Speaker 2

The dedicated environment is steady and we perform well in the space, but it is increasingly more competitive. Normal customer turnover exists, but pipeline opportunities remain healthy and we continue to achieve over 93% client retention rate. The one way operating environment continues to be challenging with low rates and some customers seeking cost improvement while they can. We expect ongoing pricing pressure during the early part of the 2024 bid season, although moderating later in the year. Within logistics, the marketplace remains margins will continue to be pressured.

Speaker 2

Although we are proud of the growth in logistics, our portfolio of customers and our deep network of qualified carriers. With that, let me turn it over to Chris to go through our Q4 results in more detail.

Speaker 3

Thank you, Derek. Let's continue on Slide 9. 4th quarter total revenue was 822,000,000 down 5% versus prior year. Net of fuel surcharges, total revenue was down by 2%. Adjusted operating income was $39,200,000 and adjusted operating margin was 4.8%, a decrease of 56% and 5.60 basis points versus prior year.

Speaker 3

Adjusted EPS of $0.39 was down $0.60 year over year, with over 90% of the variance driven by lower equipment gains in the macro freight environment weighing down rate per mile in one way and margin pressure in logistics. Turning to Slide 10. Truckload Transportation Services total revenue for the 4th quarter was $580,000,000 down 9%. Revenues net of fuel surcharges fell 6% to $495,000,000 TTS adjusted operating income was $37,200,000 and adjusted operating margin was 7.5%, a year over year decrease of 55% or 8 30 basis points, driven by compressed pricing in one way and lower equipment gains. During the quarter, consolidated gains on sale of equipment totaled $3,100,000 a decline of $22,800,000 or 88 percent versus prior year.

Speaker 3

While we sold 11% pure tractors and over 60% more trailers Compared to prior year period, average price and gains were significantly lower. Net of fuel surcharges and equipment gains, TTS adjusted operating expenses declined modestly, but were more than offset by TTS trucking revenue rate per mile decline during the quarter of 5% and the smaller fleet size. One way rate per total mile during the quarter decreased 8.6% year over year combined with a smaller fleet, but benefiting from nearly 9% improvement in miles per truck. This marks the 3rd consecutive quarter of production improvement. One way rate per total mile was flat from Q3 to Q4.

Speaker 3

We saw improvements in the quarter in various TTS expense categories offset with year over year inflation in other categories. For example, insurance and claims were down 24% versus the prior year and full year was down 7%. Operating supplies and maintenance expense continued a favorable trend and was down versus prior year. Driver pay continues to moderate and was down slightly year over year With now 2 consecutive quarters of a year over year decrease, excluding fringe benefits, benefit expense in the quarter was up over $9,000,000 versus prior year, driven from favorable workers' comp reserve adjustments in the Q4 of 2022. In summary, given the unique and challenging operating environment, TTS operating margin for the year was below our long range target of 12% to 17%, largely driven by One Way.

Speaker 3

Dedicated remains steady and durable, generating double digit operating margins. We are encouraged to see sequential improvement in core Dedicated operating income, excluding fuel and equipment gains for each of the last three quarters in 2023. We remain confident in returning to our target TTS operating margin towards the end of the year. Now turning to Slide 11 to review our fleet metrics. TTS average truck count was 8,100 and during the quarter were down just over 6% versus prior year.

Speaker 3

We ended the quarter with the TTS fleet down 1% sequentially and down 7% year over year. Our TTS segment revenue per truck per week, net of fuel, grew during the quarter by 0.2% and has grown year over year 19 of the last 24 quarters. These results further emphasize the resiliency of this business and our position in the marketplace. Within TTS for the 4th quarter, Dedicated revenue was $309,000,000 down 2%. Dedicated represented 64% of segment revenue net of fuel compared to 62% at the end of 2022.

Speaker 3

Dedicated average truck count decreased 3% to 5,239 trucks. At quarter end, dedicated represented 66% of the TTS fleet. Dedicated revenue per truck per week increased 0.9% year over year during the quarter and 1.5% for the year, achieving growth for 7 straight years and 9 out of the last 10 years, growing steady across all economic conditions. In our one way business for the 4th quarter, trucking revenue was $178,000,000 a decrease of 12% versus prior year. Average truck count was 11% to 2,929 trucks.

Speaker 3

Revenue per truck per week was down less than 1% year over year. Turning now to our logistics segment on Slide 12. In the 4th quarter, logistics segment revenue was up more than $13,000,000 or 6%, representing 28% of total 4th quarter Werner revenues. Truckload logistics continued to lead with double digit year over year revenue and volume growth in the quarter. Shipments declined sequentially as we work to improve revenue quality.

Speaker 3

Our power only solution represented a growing portion of the truck logistics volume during the quarter. Intermodal revenues, which make up approximately 12% of segment revenue, declined year over year due to a decrease in both shipments and revenue per Intermodal volumes have been up sequentially for 3 consecutive quarters. Final Mile continued to show strong growth, reporting a 6% year over year revenue increase the quarter despite a softer market for discretionary spending on big and bulky products. 4th quarter logistics adjusted operating income was 3,000,000 And adjusted operating margin was 1.3%, down 2 50 basis points year over year and down 10 basis points sequentially driven by rate and gross margin compression. We remain encouraged about the mid and long term benefits of our logistics business.

Speaker 3

Given a strong customer portfolio and growing contract business, particularly in food and beverage, our growing power only solution, progress towards advancing our technology strategy and long term opportunity for growing Final Mile and Intermodal. We expect brokerage margins will remain challenged in the near term, while expanding operating margin later in the year from cost savings and integration. On Slide 13, we provide an update on our cost savings program. In 2023, we achieved $43,000,000 of in year savings as an offset to rate and inflationary pressures and low equipment gains. Majority of the 2023 savings were structural and sustainable.

Speaker 3

Cost savings will be key to expanding margin and earnings in 2024, given a freight market that will continue to be challenging in the near term, combined with further year over year decline in equipment gains. We are laser on the 2024 program totaling over $40,000,000 in incremental in year savings. Less than 15% of the 2024 program is carryover from 2023 to get to a full year run rate on initiatives that we actioned during the year. Over 85% of the 24 program are new initiatives that are again largely structural and Let's look at our cash flow on Slide 14. We ended the year with $62,000,000 in cash and cash equivalents.

Speaker 3

Operating cash flow remained strong at $118,000,000 for the quarter or 14% of total revenue. Full year operating cash flow was also 14% of revenue and a company record at $474,000,000 a year over year increase of $26,000,000 or 6 percent and 80 basis points of margin improvement, driven largely by DSO reduction during the year. Net CapEx in the 4th quarter was 34,500,000 and totaled $409,000,000 for the year, up 29%. Free cash flow was $84,000,000 for the 4th quarter $66,000,000 for the year or 2% of total revenues, down 50% versus prior year and reflecting an elevated level of net CapEx. Our total liquidity at quarter end was strong at $526,000,000 including cash and availability on our revolver.

Speaker 3

As shown on Slide 15, Our net CapEx for 2023 of $409,000,000 was below our most recent guidance range. Certain deliveries expected in the 4th quarter were moved to Q1 24 and is now reflected in this year's guidance. 2023 was an elevated CapEx year, reflecting lower year over year gains and a greater pace of reinvestment in the business. Our 2024 CapEx guidance is a range of $260,000,000 to $310,000,000 This is within historical ranges in dollar terms, Although expected to be lower as a percent of revenue as growth in our Asset Light business continues to outpace truckload growth. Moving to Slide 16.

Speaker 3

We ended the quarter with $649,000,000 in debt, down $45,000,000 or 6% compared to a year earlier. Our debt structure is primarily long term and provides ample credit capacity for growth with 86% not maturing until the end of 2027. As of year end, 57 of our debt is effectively fixed. We remain pleased with our low leverage, healthy balance sheet and long term access fund growth and investments to expand earnings. On Slide 17, let's recap our capital allocation priorities.

Speaker 3

We will continue to prioritize strategic reinvestment in the business, remain disciplined in returning capital to shareholders and seek opportunities outside of Werner will drive long term shareholder value. Our strong balance sheet and low leverage provides us with financial flexibility to achieve our capital deployment goals. Let's turn to Slide 18 for an introduction to our 2024 guidance. Our truck fleet guidance for full year is a range of down 3% to flat year over year with the potential for growth in Dedicated in the second half. Net CapEx guidance is a range of $260,000,000 to 310,000,000 Dedicated revenue per truck per week full year guidance range is flat to positive 3%.

Speaker 3

One way truckload revenue per total mile guidance for the first half of the year is to down 3%. For the used truck market, we expect continued low demand with moderating pricing and equipment gains through the first half 2024. We reached $42,400,000 in equipment gains for 2023 and 2024 gains are expected between $10,000,000 $30,000,000 We expect net interest expense this year will be flat to $10,000,000 higher than 2023, driven by repricing of our term loan that is maturing in the 2nd quarter, interest rate swaps that are expiring and uncertainty on the timing of Fed easing, offset with debt reduction during the year. Our effective tax rate for full year 2023 was 24%. Guidance range for 2024 is 24.5% to 25.5%.

Speaker 3

The average age of our truck and trailer fleet at year end 2023 was 2.1 4.9 years compared to 2.3 5 years respectively at the end of 2022. We anticipate staying near 2 5 years through 2024. I'll now turn it back to Derek.

Speaker 2

Thank you, Chris. 2023 was a very challenging year for Werner, but we took measured steps to improve our operations, lower the average age of our fleet, improve safety, reduce costs and reduce debt. As we strategize for 2024 and met with the senior leaders across the company, we identified 3 primary pillars to generate earnings power and drive value creation this year. 1st, is driving growth in core businesses, which is comprised of returning our TTS adjusted operating income margin to within our long term range, growing dedicated fleet and total revenue on a year over year basis in the back half of the year, expanding one way utility, power only and Mexico cross border and continuing to generate double digit revenue growth in logistics while getting back to mid single digit operating percentage entering 2025. 2nd is operational excellence as a core competency, which we will deliver through maintaining resolute focus on safety, Our number one priority at Werner, advancing our technology roadmap through the transition of our one way businesses to our cloud based Edge TMS and executing on our 2024 cost savings program.

Speaker 2

Lastly, it's focusing on driving capital efficiency through process optimization. This includes streamlining business processes, maintaining strong operating cash flow and optimizing working capital, and expanding free cash flow generation and margin through disciplined CapEx and equipment fleet sales. We are 100% committed to executing on these objectives believe with high conviction that they are the right actions to generate margin and earnings improvement during the year. We've proven our ability to generate earnings power as demand accelerates. This roadmap of our commitment combined with the resiliency and dedication of all of our associates will confirm that history does indeed repeat itself.

Speaker 2

We look forward to providing you with updates on our progress against our 2024 pillars as the year progresses. With that, let us open it up for questions.

Operator

The first question today comes from Bruce Chan with Stifel. Please go ahead.

Speaker 4

Yes. Thank you, operator, and good afternoon, everyone. Maybe just want to start off by leaning into the cost savings a bit. You gave us some Good color on where those savings are filtering in from. Is there any overlap between the savings and Werner Bridge or is bridge more of an opportunity to add revenue in a market recovery on just the cost base?

Speaker 2

Yes, Bruce, thanks for the question. I'll start on the Werner Bridge part and then Chris may have color he wants to add. But, Werner Bridge is our digital platform. We're very excited about what that future looks like, but we've got a long ways to go as we continue to develop that out. More specifically, relative to the tech stack, really the transition we've already made and worked hard at throughout 2023 relative to getting both Reed, Warner Logistics our Warner Brokerage, I should say, as well as intermodal on the Edge TMS platform.

Speaker 2

That's sort of the first major milestone in a longer journey that ultimately This year focusing on getting one way largely on the platform by end of year. As we start to do that, we start to see opportunities for real savings expanded visibility, better collaboration to freight across the various sides of the organization. But those are not actually in those cost savings numbers at this point, because it's early innings. What we're talking about here are tangible programs of diligent cost cutting up and down the P and L through the building in ways that I believe do not impact our ability to respond as the market turns. That's probably the most important thing.

Speaker 2

We're late enough in the cycle that what we don't want to do is to cut for cutting sake and then end up bringing all of those costs right back on board. That's why we think they are structural, they are sustainable. It just puts us in a better position. The cost culture here has been one that we've needed to address for some time. We've worked on it aggressively over the last year.

Speaker 2

I think we are finally finding a rhythm and stride toward top to bottom ownership of better cost controls. And I think a crisis this over the last year's freight backdrop really puts us in a better position to even execute better moving forward.

Speaker 4

Okay. That's super helpful. And then maybe just to follow-up on some of your commentary around being late enough in the cycle. We've heard from a few carriers now that data and expectations are pointing toward the second half inflection, I imagine your customers are looking at similar outlooks. So just given that consideration, can you maybe share how your early conversations have been going in terms of renewals?

Speaker 4

Are we still tracking negative? Are we starting to see some firming based on expectations for that recovery?

Speaker 2

Sure. I mean, I'd have to start by just pointing out that we have less than we're still in the single digits on renewals that are closed and kind of at their end date. And so it's early, early in the bid season. Clearly, there are customers that are looking try to take one last bat bite at the apple. There's clear pressure, especially on the one way side of the network.

Speaker 2

But our stance is we've got to disciplined. If you look across especially this earnings season, it's glaringly obvious that carriers cannot make a reinvestable return at current rate levels. So they're going to be frictional. They're going to be difficult. We've already indicated that we're willing to shrink the fleet size if need be, and we've shown that through 2023.

Speaker 2

The good news is we also have a lot of stability in the dedicated portion of the portfolio that continues to do that hard to serve, difficult to kind of dislocate us from the business type of work. And that's going to stand up pretty well. We feel good with those relationships. On the one way side, we are going to keep focusing on engineering the network better to gain productivity. We are going to focus on our touchstones of Mexico cross border, the engineered lanes that we've built out and just continue to do what we do really well and lean into that.

Speaker 2

That puts us in a better position relative to price as well.

Operator

The next question comes from Jon Chappell with Evercore ISI. Please go ahead.

Speaker 5

Thank you. Good afternoon. Derek, I just want to talk about fleet for a second as we look at the guide, 0% to 3% decline in the truck count. Is this just a continued glide down of one way So you see that inflection and there's still going to be growth in the dedicated fleet? Are you actually pausing the dedicated fleet as well?

Speaker 5

We should think of both of them as being relatively static to slightly down again until you see a more favorable backdrop?

Speaker 2

Well, as we pointed out in the opening remarks, dedicated performed very well during the course of the year. So we're not looking to There is no intentionality about trying to shrink the dedicated fleet, but the reality is there too, it's a competitive landscape. And so As we retain as we remain very price disciplined on Dedicated and return focused, it's our expectation that there could be some fleet churn in Dedicated in first half of the year, we already have a very robust pipeline in Dedicated and we're pricing considerable amount of opportunities as we speak. But the net of that is that we think that will be flat to maybe slightly up by the end of the first half with back half growth built in. On the one way side, it's a different story.

Speaker 2

It's simply not reinvestable right now. We're not going to grow trucks in one until we see more of an inflection. And as a result, overall TTS fleet numbers will go down at least in the first half and that's what we've guided to.

Speaker 5

Okay. Yes, thank you. It's clear. Chris, noticeable insurance and claims down, You'd mentioned both in the Q4 and for the full year, seems somewhat contrary to what we've heard across most of the industry. Is that just a function of maybe a distorted comp to 'twenty two and we should think about some level of renewed inflation in that line item into 'twenty four?

Speaker 5

Or is there something structurally different about the way I know you're obviously running a safer overall network, but something structural that would think that insurance and claims that Werner grows at a lower level or a lesser level than the rest of the peer group in 2024?

Speaker 3

Hey, John. Yes, I mean fundamentally it does come down to safety and that's our number one priority. But to unpack that just a minute to address your question. Yes, Q4 of last year was a peak year at $44,000,000 in insurance and claims, but it's not simply just a matter of it being a comp. There have been others in the industry that have been reporting large reserve adjustments and charges And ours is elevated when you look back over the last couple of years, but really that inflection point up really occurred in the first half of really 2022, we've I think we're early on, but we've seen a recent decline.

Speaker 3

It's not just in the quarter, which is down 23%, really the second half of last year of 2023 was down 17%. So it's maybe early to say, but it's a good trend. It does coincide with our safety metrics that continue to perform very well. We have a declining accident rate. We hit a 19 year record low.

Speaker 3

So we do think that those are connected.

Operator

The next question comes from Brian Ossenbeck with JPMorgan. Please go ahead.

Speaker 6

Hey, afternoon. Thanks for taking the questions here. So Derek, maybe just wanted to get Your thoughts just going back to capacity, if we hear yourselves and other big fleets who are presumably the low cost carriers in the market backing away. Is it just inevitable that the smaller fleets and other capacity is going to exit as well? Is there something that maybe we're all missing in In terms of just how the freight is flowing, they have more contract exposure than before, they paid down equipment.

Speaker 6

Just wanted to see If you think that this is really sort of the beginning of the end of the capacity glut that's been here for some time?

Speaker 2

Brian, great question. I promised myself I wouldn't going to try to predict a turn on this call. So I'm going to try to steer clear of that. But We're at week 71 with net deactivations being negative. So more of carriers leaving the industry than coming in.

Speaker 2

Over the last, call it 4 to 5 weeks, it's been very interesting because new activations have finally kind of really fallen off the cliff With net deactivations kind of continuing or I should say deactivations continuing their trend that we've seen for now over a year straight. So, we think momentum is gaining and we're going to see more of that going forward. When it turns exactly, I don't know. What I do know is that large well capitalized well ran fleets like Werner, we are focused and like never before on lowering our cost to execute, making sure that we're grinding through the controllable, while not spending too much time trying to speculate on the uncontrollable. I'm excited about the team's focus right now.

Speaker 2

The fact that we've identified going into the year $40,000,000 of cost initiatives And we believe we are going to have great success on getting those implemented early and often as we kick off this year is exciting. I'm real excited about the structure of the fleet going into the year, meaning that we've got the fleet age where we want it to be. The mix is Closer to where we've wanted it to be than it has been in a long time, although we'd still lean more toward dedicated given as some of these opportunities close, Logistics is continuing to grow both in volume and revenue and that's really an outlier across really the whole industry and gaining share and we're finding that rhythm of all of this technology investment that we've been making. The best on that is still probably to be fair in the out years, but we're picking up incremental gains all the time. And so I'm real excited as that plays out over the course of this year.

Speaker 6

Thanks for that. So just to follow-up on the cost savings, I know you mentioned earlier that you were confident that you're not cutting too much too late in the cycle, but also just wanted to hear a little bit more, Steve, so you can give us some details in terms of what those different buckets are, how they've changed into this year and from the previous year, there's a little bit of carryover, but really just wanted to hear what was on the horizon and understand that a little bit more? Thanks.

Speaker 3

Yes, Brian, this is Chris. So it's another $40,000,000 plus program. As we said earlier, it's less than 15 That's carryover. So by and large, it's new actions, it's new initiatives. A lot of it, as you can see from the materials that we presented, is In salaries, wages, that's both in terms of driver turnover impacts, various pay changes, changes in benefits, work comp insurance.

Speaker 3

So even within that category of salaries and wages, it's multipronged. And then there's a number of other categories that we just summarized in some of the materials, but supplies and maintenance and other categories. So Largely new initiatives, again, largely structural, sustainable, not cutting too deep, but really positioning us well to where we can In the current year, we can combat some of the inflationary headwinds, some of the headwinds that we're going to have throughout the year in lower equipment gains and obviously the market not helping us least the first half of the year. So we feel like these are the right things to do to combat those aspects, but also sustainable and puts us in a very strong position to capitalize on a better market, particularly beyond 2024.

Operator

The next question comes from Ken Hoexter with Bank of America. Please go ahead.

Speaker 7

Hey, great. Good afternoon. Derek, you noted miles per truck growth at 9% at One Way in the second quarter. Is that due to company specific moves in reshaping the network? I think you threw that out there in your prepared remarks.

Speaker 7

Or is that economic? And I guess if it's economic, how should we think about the historical trend during a turnaround? Is it led by that improved miles per truck? Is it led by rate? Maybe What are the key things we should look for as you talk about looking for that turn?

Speaker 2

Yes. Good afternoon, Ken. The production gains that we're seeing in one way is very much the result of disciplined engineering within our fleet designing As rates got as low as they've been pressed, it's really knowing what we can do and do efficiently, doing more of that and walking away from business that we feel like no longer fits our network or doesn't allow us to build the kind of efficiencies it takes to operate at these rate levels. And so, I think it's largely structural and internal to us. But clearly, The consumers held up probably a little better than most of us thought, despite rising interest rates, inflation and sort of other headwinds they've been faced with.

Speaker 2

But to answer your question, it's part of the controlling the controllable that we're trying to work on all the time. And then leaning into and this is Certainly a part of it, but we've talked several times about our Mexico cross border franchise and really trying to lean more heavily into that. It's a longer length of haul. It's more efficient freight. It's hard to do, especially on the Mexico side of the border, but it's something we're very good at.

Speaker 7

And the trend you'd look for, is that just To follow-up on that, is that the is that what goes first? Is it utilization? Is it the price? What turns first?

Speaker 2

Yes. Well, I mean, I think in this case, the utilization gains aren't necessarily a leading indicator of suddenly the market getting much better. It's just us getting better at where we allocate our trucks, Just to kind of reiterate that point, I think what I'm looking for or looking at as it relates to what goes first or what is moving is anecdotal things like yes, there were winter storms across the U. S. Yes, that played a role in what we saw with spot market and other pricing opportunities in January.

Speaker 2

It also had a very negative impact on production for sure. But the reality is, in the darkest days of this freight recession, There were hurricanes that hit with almost little to no impact on spot market pricing or project opportunities or anything else. The other thing I would look at is our comments that we talked about in the opening, but 4th quarter peak volumes like project opportunity volumes, They were up over 20% year over year. That's encouraging. Now the problem is the market rate wasn't to support those volumes being nearly as lucrative as they would have been in prior years.

Speaker 2

But in order to get back in that game and show Customers what we're capable of in our execution qualities, we moved a lot of peak freight this fall and so that was encouraging. I think it's very encouraging early conversations with customers in terms of the quality of the product that we're putting on the table, because right now when price is such a predominant topic, It's really more important than ever to be able to differentiate the quality of your service, the commitment that we're putting out there and the investment we're making into the fleet, which we clearly showed in 2023, a willingness to do with an outsized CapEx year. Now that fleet is where we want it, we are ready to launch and As this inflection kind of continues to play out, I like our positioning.

Operator

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

Speaker 8

Hey, thanks. Good afternoon. So you guys exited the year Trucking at a 7.5% margin. I think you said the goal is to get back to 12% by the end of this year. Just help us think about the cadence of that through the year.

Speaker 8

Do we take a one more step back in Q1 and then build from there and what ultimately what needs to happen to get that 4 or 5 points of margin improvement?

Speaker 2

Yes, Scott. This is Derek. I mean, clearly, Q4 to Q1 has historically over the last decade been a step back quarter just because The reality of what happens in the Q1, the combination of weather plus lower shipping volumes coming out of the holiday season, etcetera, I don't that to be any different this year, in terms of the fact that there will be those structural headwinds. But in terms of getting back to that range, it's about it's several things and I want to get too granular here, but it's a back half goal, let's be clear. It's really an end of year goal to be even more clear.

Speaker 2

And it takes our ability to continue to move further down this engineered path inside of One Way to continue a further shift into that more stable, durable, dedicated business that has proven itself to be resilient in both good and bad markets and from a margin perspective and then executing on all of these identified cost savings that we've laid out. And then the wildcards are things like the used equipment market. How does that play out over the course of the year? And that's going to be difficult. But we're our base case, I think, is conservative and one that we believe is achievable.

Speaker 2

If we can be at the higher end of that range, then obviously it accelerates our ability to get there. There's a lot of work ahead of us, But again, I'll hit the theme one more time, but it's about controlling the controllable. It's been way too long with everybody waiting for something external to change And it's about the moment is upon us now that we've got to change internally and we're laser focused on doing exactly that.

Speaker 8

And then my next question, we've all seen all these all your 4th quarters. They've been tough for everybody. And your point about we're at a place where it's not reinvestable, one thing I'm just struggling with like still seeing pretty elevated truck orders, truck builds, like I'm struggling with why that's happening. Do you have a Thought on that and where we go from here?

Speaker 2

Yes. I mean, my predominant thought on that, Scott, would be, I think A lot of folks, it's a matter of when you make your move. I mean, if you think about a racing analogy, it's when do you pit versus your competitors. And we clearly pitted in 2023. We spent a lot of money and had a lot of orders and a lot of builds to get our fleet where we wanted it.

Speaker 2

There are several others that haven't made that pit yet and they're doing so I believe as 2024 plays out. It's a big thing that we like about our positioning currently Doing all of that fleet rotation is time consuming. It costs money, it costs miles, it costs driver downtime. And so I like our position. But I think that's what a lot of those orders are.

Speaker 2

Very few carriers in America are happy with their fleet makeup right now coming out of the COVID years. I think you're seeing pent up demand. I also think it will be interesting to see how that order board plays out relative to builds, because orders are one thing, but builds are something entirely different. I just think as the year plays out, that number may come into more clarity for everyone.

Operator

The next question comes from Allison Poliniak with Wells Fargo. Please go ahead.

Speaker 9

Hey, guys. James Monaghan on for Allison. Just wanted to half improvement that you have in there, is there any sort of specific event that you see? Or is it just sort of better balance improving across the first half year in that improving the market outlook in the second?

Speaker 2

Yes, I think it's really built on the ongoing attrition that we're seeing across the industry. And then I saw stat just Last week, we're up to 56,000 registered carriers that have went out of business completely. That's a big number, 700,000 less CDL drivers that are like sort of in circulation from where we were when this whole ramp started. There's just a lot more momentum behind where we're at from an equilibrium perspective. I mentioned the storms recently being an indicator that, yes, it was widespread.

Speaker 2

Yes, it was a severe storm. I'm not trying to minimize that, but kind of the immediate impact on what it did to the network shows that we're closer to balance than been in a while. So it's I don't think there's one catalyst and I certainly we're not banking on it being the GDP driven rebound. Our base case assumption is very neutral kind of GDP growth this year, but rather a supply side story as it continues to exit. And obviously keeping very close eyes on replenishment of inventories, because it's one thing to get to just a one for one replenishment level, But I don't think we've seen supply chains really since COVID that have simultaneously been dealing with issues in the Suez Canal, issues in the Panama Canal, the ongoing and sort of ever present questions around West Coast ports and productivity issues there.

Speaker 2

And I think it's really Causing some pause in the retailers of America to decide whether they want to be just in case or just in time or maybe somewhere in the middle. And if they go to the middle even, there's going to need to be outsized replenishment as the year plays out And we believe that plays into this as well.

Speaker 9

Got it. And just real quickly, you highlighted improvement in revenue per tractor per week in dedicated highlighted the fact that margins are in the double digits there. But look, how Were you able to get price increases that sort of kept up with the cost inflation that you're seeing there and sort of have you been able to sort of get margin expansion there Over time, your cost savings or anything else across this prior year?

Speaker 2

Yes. Look, I mean, look, we've been Consistent with our explanations around dedicated, it is clearly held up and shown resiliency through this downturn. But that doesn't mean there wasn't margin compression even at dedicated, but at a much lower level. We're able to get the support from our customers better there, stand by us more there because of the quality and the complexity of the work we do. But even there, there's inflationary pressures.

Speaker 2

That's why this cost becomes so critically important. We've got to offset some of the underlying inflationary pressures by taking costs out elsewhere. The bulk of obviously the damage to the long term TTS margin range was driven by one way and we've seen enough results already this quarter that for everyone to realize just how pressured that part of the portfolio is here and everywhere else.

Operator

The next question comes from Ravi Shanker with Morgan Stanley. Please go ahead.

Speaker 10

Thanks, gentlemen. Maybe just a follow-up on that. I think the tone of this call kind of on the message is a little bit different than what you heard from some of your peers Who've been saying that there's absolutely no further room to give on pricing given the cost inflation and we have to take pricing up, yet your pricing outlook is I think somewhat more bearish than we were expecting and maybe some of your peers have been telegraphing. Is this A, kind of reflective of a starting point on costs for you guys that may be lower and so you have more opportunity to cut? Or B, kind of is this a strategy potentially try and take share maybe kind of if you have more room to be flexible on rates, kind of just Try to square that difference in messaging maybe.

Speaker 2

Well, I'll start with the obvious, Ravi, which is I concur with everybody who's made the statement, there is no more room to give. But that doesn't mean that we don't have prior year comps to deal with and things that we've already digested or ingested into the network over the course of 2023 that's going to come to roost in the first half of twenty twenty four. So some of it has to do with prior year comps. Some of it has to do with making sort of intelligent decisions on places that we still want to have a foothold and we still want to kind of live to fight another day. And some of it is just trying to predict when in fact does this inflection take place.

Speaker 2

You know that we tend to be careful and thoughtful with what we say, And I believe that's a range that we're comfortable given at this point. If we can exceed that range, I can assure you we'll be doing everything we can to do so. And then the last piece, which you already mentioned inside of your question is, we were a bit of a positive outlier on price in 2023 and that might cause More pressure on us as customers try to take a second bite of the apple, but we're going to stay disciplined and focused as we go through this mid season, because Frankly, at some of the opportunities being put forth, it is not reinvestable, therefore not worth doing.

Speaker 10

Very helpful. Thanks for the clarification. Maybe as a follow-up on the logistics side of the house. We've seen some interesting announcements, obviously, a very large digital broker shut down few months ago, you've seen one of your peers examine strategic options for their digital brokerage business. The kind of big player in the space is now talking about the business potentially being more cyclical than it has been before with operating leverage.

Speaker 10

Do you think the brokerage business has kind

Speaker 4

of structurally changed with kind of what it used

Speaker 10

to be and kind of given the investments that you guys are making yourself kind of what's the outlook there kind of Both the short term and the cycle comes back, but also kind of medium to long term?

Speaker 2

Sure. Lots to unpack there. I'll give it a whirl. I mean, 1st and foremost, I think the digital brokerage push, if that's all you are and you're kind of hitching all your wagons to that horse, That's a difficult place to be, because there's still a lot of need for institutional know how, personal attention, the ability to follow-up provide customer service and an opportunity to meet your customers or even exceed what their expectations are. And it's hard to do all of the above with just a digital platform only.

Speaker 2

It's a part of our portfolio. It's not the primary focus of how we're going to attack this market. I think what's really happened is, When you think about power only and the brokerage role that power only plays, it is truly an efficiency gain for every customer that decides to purchase that product. Instead of a rainbow fleet out there that may have been getting service previously, but with a lot of labor cost absorbed by the customer to have to deal with multiple different trailers and all of the complexity that comes with that, us and others that are executing very well on power only have proven that there's a better way. And I would liken it to a lesser degree, but it's similar to why do we like dedicated so much more than one way.

Speaker 2

It's more complex. It involves It's more defensible. Well, so is the power only solutions that we're growing within our brokerage group. These are large scale network relationships with large with large scale blue chip customers that need as frictionless of support as they can possibly get in their brokerage environment And being able to offer both assets, power only, dedicated and if need be Intermodal and Final Mile is a win for them. It makes their life easier and I think that's what's putting the squeeze on folks that maybe are only playing in one end of that arena, and we're going to continue to apply that pressure every chance we get.

Operator

The next question comes from Bascome Majors with Susquehanna. Please go ahead.

Speaker 1

Thank you for taking my question. As we look into the opportunity to grow dedicated long term, can you talk a little bit about how the competition in that has changed at all through this cycle? And if you think your niche has evolved at any point as more and more people have leaned Further into that from the large carrier base and further away from one way? Thank you.

Speaker 2

Yes. Thanks, Vasquez. Appreciate the question. Yes, clearly there's been new competition and dedicated and new competitors coming to sort of look for that safe haven. But coming Pulling into the port and then knowing how to maneuver and dock inside it is 2 totally different things.

Speaker 2

And so our ability and expertise over decades work in dedicated has proven itself to not only attract new customers and new logos into the portfolio, but then retain them. Now we're going to have more competitive white noise potentially on price from time to time and dedicated with newer entrants into the market. But that's what we like to work with winning customers that are winning in their space and in their vertical because they view the supply chain as a competitive advantage, not as a cost center and they want to work with people that know what they're doing. And we believe we're very good at it and we're going to continue to lean into it. I'm excited about what that pipeline looks like right now.

Speaker 2

And yet we're realistic. We know the win rate within that will be lower at this point that we sit at today and as we get into the first half of twenty twenty four because of some of these competitive pressures. But that's simply a matter of putting more in the top end of the funnel to make sure we get what we need out of the bottom end and we will be we just got back from our annual sales meeting that I can assure you there was no lack of clarity on what we're looking for and how we're going to go about it. And our teams out there are working hard as we speak.

Speaker 1

Thanks for that, Derek.

Speaker 2

Thank you.

Operator

The next question comes from Chris Wetherbee with Citigroup. Please go ahead.

Speaker 11

Hey, thanks. Good afternoon. I guess I just wanted to Pick back up on sort of the dedicated versus, one way truckload kind of relationship, I guess. We heard from other carriers that there was maybe even some instances of breakeven or Losing money in on the truckload side. And I guess as you think about your sort of mix of business, I don't know that you've gone that far to suggest that the one way truckload exactly not making money in this environment, but kind of curious your thoughts on that relative profitability.

Speaker 11

And then what that about dedicated margins and the ability for sort of them to turn up as we go through the next year. I guess we're trying to understand what the sort of margin opportunity looks like on the dedicated side, if it's in the hundreds of basis points, meaning like several hundreds of basis points something a little bit smaller than that. So just kind of curious how you think about that and can it come back as quickly as maybe obviously truckload goes fairly quickly, but how do you think about timing of that margin expansion as we go through the year?

Speaker 3

Hey, Chris. This is Chris. Yes, a couple of points there. Certainly, Dedicated, as we've mentioned is has been steady, has been durable, continues to have double digit margins there. So that puts Can put the focus on one way.

Speaker 3

Certainly, there's been more volatility there. We're still not getting specific to disclose operating income between dedicated and one way within our TTS segment, but it certainly is more volatile than dedicated, low single digit OI percentages for the full year, and that is primarily driven by some softer demand, the market backdrop as well as the lower rate per mile, although we've been faring, we believe, better than broadly the industry there through pricing discipline and a lot of aspects and actions, but that's really the major driver along with lower equipment gains, which has been challenging and will continue to by and large throughout this year that is our view. And so those are the major drivers to TTS that's bringing down that margin. It's not necessarily in dedicated. With some of the aspects that we talked about in terms of a improved market in the second half, restocking as well as some of

Speaker 9

the structural changes, continuing

Speaker 3

the utility changes continuing the utility trend and production trend that you've seen in one way, and with those cost savings that we've been talking about, we are targeting to get back to at the end of the year, back to that TTS run rate target operating margin.

Speaker 2

Yes. And I would add a couple of thoughts to that. One thing that's underappreciated about Dedicated is that throughout this downturn, although we had great fleet retention and have continued to even add new logos into the mix. The reason you haven't seen as much in truck growth is it's very common that across multiple fleets, really across the entire network, They may be down 2 trucks, 3 trucks, 5 trucks just based on customer volumes and that had mostly to do with inventory levels and the lack of replenishment. As we get to a more normalized run rate and we look forward, the upside leverage to adding 3 to 4 trucks to across 100 plus dedicated fleets can become very compelling because your fixed costs are essentially still what they are.

Speaker 2

You're not adding a lot of incremental other costs other than the variable cost of running that equipment. And so that's exciting. And so Dedicated has more upside potential than people realize as the market strengthens. And then in one way, I don't want to underestimate the fact that even with only 700 trucks and over time that number will be smaller. The percentage of those trucks that are available for hire and nimble and can be moved right now is high.

Speaker 2

Now I don't necessarily love that because it means it's not tied up with long term valued customers under the type of arrangements that we prefer, but the good news is they're available and they're free agents that can be moved around as appropriate as this market turns and they will be moved, because we're not going to continue to run a network in one way at the return levels that we're today, and we owe it to our shareholders and others to make sure that isn't the case. And so, we'll be able to respond, as you mentioned, to The one way market that more quickly turns will be nimble there.

Speaker 11

Okay. Appreciate that. And one quick follow-up just on the gain side. As you think

Speaker 12

about the first half of

Speaker 11

the year, should we be assuming essentially kind of very flattish or sort of 0 gains in the first half with maybe more material uptick towards the end?

Speaker 3

Well, as we said earlier, the range that we are guiding to is $10,000,000 to $30,000,000 for the entire year. That will be more challenging or challenged in the first half of the year versus second half of the year.

Operator

The last question today comes from Tom Wadewitz with UBS. Please go ahead.

Speaker 12

Yes, good afternoon. Wanted to see if you could offer some thoughts on just where you think the one way fleet count goes, it seems like that's been coming down a bit. And it sounds like you've got maybe more than normal trucks in the spot market in one way. Is that something you just kind of let that continue to trip down? And then I guess from a more strategic perspective, is there a reason to keep a couple of 1,000 trucks in one way or do you just kind of keep shifting those into dedicated as you get dedicated growth?

Speaker 12

It's not I don't know. I mean, it's hard to know what the theoretical framework is for what you really need in one way. So, yes, just some thoughts on kind of near term and medium term on one way fleet.

Speaker 2

Yes, Tom, this is Derek. A couple of things there. One, we do need a one way fleet for a variety of reasons that may not be as obvious as only the returns. 1, it's a great entry point to get involved and engaged with the customer and show them what Werner is all about, to get them familiar with the brand, the culture, the service levels and the commitment to safety. It also houses the Mexico cross border which has also performed well and we got to continue to focus on taking advantage of the near shoring opportunities as they present themselves and we're going to continue to be prepared to do that.

Speaker 2

We've increased utility in the One Way fleet significantly and that leads to being able to do more with less. And so we don't need the same number of trucks. And then Power only operates in many respects within the same freight environment as one way and it's really sort of a seamless movement of freight. So that also dictates. So if I zoom out to 40,000 feet, the goal is to continue to grow Dedicated.

Speaker 2

OneWay is a great kind of launching pad for drivers to come into the network, to learn Werner, to learn the culture. A great way to get to know customers and show them who we are and what we are. And at this point, where we're at in the cycle, also I don't want that fleet to be so small as to not be able to participate in the opportunities that are going to be ahead of us as we see the inflection in pricing both in spot and contract. So, it's I'm not here to give you a number. I don't think, at this point, there's anything on our roadmap that would indicate we want to grow one way, But I do want to continue to free one way assets up to be able to play whatever position comes available in the market as the market turns.

Speaker 2

I want to continue to have it be a landing pad for drivers that are coming into our culture and learning what Werner stands for. I want to continue to engineer further to try to push the envelope on production, but do so safely above all else. And I want to make sure that as Mexico cross border opportunities present themselves that we're able to respond. And we are both in the asset and non asset side through the significant investments we've made on the southern border and our cross stock operations in Laredo be able to grow and really lean into this near shoring as it matures, because we're in the very early innings of that right now, but it will continue to mature we think we're well positioned for those opportunities.

Speaker 9

So if you look

Speaker 12

at a couple of quarters, you think you're closer to 3,000 trucks or 2,500 trucks in one way?

Speaker 2

We won't be at 3,000 trucks in a couple of quarters in one way, I can assure you. Whether we're at 2,500 or not will be determined largely by the close rate and implementation dates of dedicated opportunities, because we're also not at a point right now until we get returns where they belong to grow total fleet. So That will be the farm system for those dedicated opportunities largely. And if anything, you'll see one way assets decrease in size while dedicated grows. And historically, we've talked about kind of a 60 five-thirty 5.

Speaker 2

We're well past that in our mindset now and we believe there is no we have no inhibition about dedicated growing to be 70% of the fleet in the intermediate term.

Operator

I'll now turn the call over to Mr. Derek Leathers, who will provide closing comments. Please go ahead, sir.

Speaker 2

Thank you. I just want to thank everybody for joining us today on our Q4 call. I know the quarter represented a further extension of what's been a very challenging freight environment, but we do believe capacity rightsizing is gaining momentum and inventory levels are in line and replenishment early innings have begun. We enter this year and we're focused on operational discipline and controlling the controllable. We'll continue to identify and implement cost savings without sacrificing our ability to respond as the market improves.

Speaker 2

Dedicated remains the core of this portfolio and logistics share gains allow us to be more creative than ever with how our customers' needs are going to be addressed. Power only, cross border Mexico and then further engineering of our one way lanes show promising opportunities for both top and bottom line improvements as the year plays out. And finally, we are committed to being good stewards of capital as we go forward this year and like the positioning of our fleet to kick off 2024. And with that, I just want to thank you all for joining our call today and spending your time with us.

Operator

The conference has now concluded.

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Earnings Conference Call
Werner Enterprises Q4 2023
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