Q3 2019 Earnings Call
Good afternoon, and welcome to the Warner Enterprises third quarter 2019 earnings Conference call.
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Earlier. This afternoon. The company issued an earnings release sports third quarter 2019 financial results and posted an accompanying presentation.
These materials are available at the company's website at Warner Dot com by clicking on Investor.
Then news and events.
And then Webcasts and presentations.
Today's webcast is being recorded and will be available for replay beginning later this evening.
Before we begin please direct your attention to the disclosure statement on slide two of the presentation as well. So disclaimers included in the press release related to forward looking statements.
Today's remarks contain forward looking statements that may involve risks uncertainties and other factors that could cause actual results to differ materially.
Additionally, the company reports results using non-GAAP measures would your beliefs provides 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 in the earnings release and at the appendix in the slide presentation.
And I would now like to turn the conference over to Mr., Derek Leathers, President and CEO Mr. Leathers. Please go ahead with your presentation.
Thank you and good afternoon, everyone.
On the call today with me is John Steele, our CFO .
Turning to slide four intercompany snapshot.
In 2018, 77% of revenue was generated in truckload transportation services or TTS with the remainder coming from Warner logistics.
PPS is made up of dedicated which comprises 57% of roughly.
And one way truckload, which was 43% of roughly.
Over half or revenue was retail, 18% as food and beverage, 18% as manufacturing and industrial with the remaining 12% logistics another.
We focused on serving discount retailers that so more necessity based products that tend to be less economically sensitive and historically performed well in slower growth or recessionary economic periods.
We have a diversified customer base with less than half of our revenue coming from our top 10 customers and 74% spread across our top 50.
Next let's move to slide five for a brief overview of our third quarter and year to date financial performance.
Overall, the trucking freight market and third quarter 2019 was meaningfully softer than the same period, a year ago with slight seasonal improvement in September that thus far has carried forward into October .
Reference a year ago in third quarter 2018, we had an extremely strong gray market and we produced a record 16% rate per total mile increase year over year in one way truckload.
The strong third quarter 2018 freight market and our outstanding execution in that market resulted in record high third quarter earnings a year ago, but.
For this years third quarter it made for a challenging comparison.
Despite the tough comp our team performed well and we produced the second highest third quarter earnings in our history.
For the quarter revenues declined 2% to 618 million.
On an adjusted basis EPS decreased 11% to 57 cents a share.
Adjusted operating income decreased 12% and our total company adjusted operating margin declined by 90 basis points to 8.8%.
The adjusted operating margin and earnings decline were due to lower results in one way truckload and logistics well dedicated improved its performance.
The softer freight market and small sequential fleet grew up in one way truckload in the corner contributed to spot miles of 13%.
Sequentially from 10% and up from 9% year over year.
But market miles in one way truckload were higher in July and August and were lower in September .
Last year, the very robust freight market produced several projects and search rate opportunities.
In the year ago period. These events added over two percentage points to our rate per loaded mile in one way truckload and contributed four cents a share to our third quarter 2018 earnings.
In third quarter 2019, a few smaller scale project in search opportunities begin to occur in the latter part of the quarter.
Currently we expect freight to seasonally strengthens sequentially in fourth quarter 2019, and we expect to peak season that is solid but not as strong as the 2018 peak season.
Warner dedicated again performed well delivering a strong operating margin that was better than third quarter 2018, and achieving continued revenue per truck growth. Despite the softer year over year freight market.
Year to date revenues increased 2% adjusted EPS increased 6% and adjusted operating income increased 5%.
We expanded our adjusted operating margin by 20 basis points through our focus on execution and cost management and a tougher freight environment.
I'd like to sincerely. Thank all our hardworking Warner associates for their continued efforts.
Reflecting our investment in a best in class fleet. We ended the third quarter with 8055 total trucks and GTS, an increase of 305 trucks year over year and up 120 trucks sequentially, just slightly above our guidance now I'll turn the call over to John to discuss our financial results in more detail John .
Thank you Derek and good afternoon.
On slide seven our additional financial performance drivers total revenues declined 2%, our TPS revenues per truck per week net of fuel declined 1.5% due primarily to tough comps and higher spot miles in one way truckload well TTS average trucks grew by nearly 4%.
Revenues in our logistics segment declined 6%.
Operating income reduction was due to 140 basis point decrease in TTS adjusted operating margin and a 120 basis point decrease and logistics operating margin.
These operating margin declines were due to comparing to a very strong freight and rate market and third quarter, 2018, which negatively impacted margins in one way truckload and logistics.
In addition, our sequential truck growth of 120 trucks in third quarter 2019 was more weighted to one way truckload than expected largely due to certain planned dedicated fleets that were temporarily delayed.
In the last few weeks, we're beginning to see these trucks shift from one like into dedicated.
Moving to adjusted EPS. The decrease was due to 14% lower adjusted net income offset by 3% fewer diluted shares outstanding.
Beginning on slide eight let's look at our third quarter results for our TTS segment in more detail.
Yes revenue declined 1% to 480 million, primarily caused by 11.2 million of lower fuel surcharge revenues due to lower fuel prices, a 1.5% decline in revenues per truck per week, which was due to lower miles per truck and partially offset by 4% fleet growth.
Adjusted operating income declined 13% to 49.7 million, primarily due to a lower operating margin percentage.
Despite the less robust freight market in third COVID-19, we achieved the solid 10.3%, Pts adjusted operating margin, including fuel our adjusted TTS operating margin net of fuel was 11.7%.
Now on slide nine, let's look at our third quarter dedicated and one way truckload metrics.
Our dedicated we once again grew trucking revenues net of fueled by 9% to 232 million.
Dedicated average trucks grew 4% are up 191 year over year dedicated revenues per truck per week increased 4.1%.
One way truckload trucking revenues net of fuel decreased 5% to 186 million.
One way truckload average tractors increased 3%.
Revenues per truck per week decreased 7.6% for the quarter due to 2.0% lower miles per truck and 5.6% lower revenues per total mile which was in line with our prior full year 2019 guidance range.
Higher spot miles and less project in search business in third quarter 2019 contributed to the revenue per total mile decline.
We continue to take additional steps to enhance our cost structure last quarter, we identified $10 million an expense savings and we have now expanded that to over $15 million this quarter.
Nearly 10 million to these savings are expected to be realized in calendar year 2019.
We grew the cumulative number of expense savings items from 70 last quarter to 130. This quarter. We expect these savings to continue to grow in the future.
In addition, our performance based compensation systems are intentionally structured to adjust payouts based on company performance relative to our business plan.
At this time, we expect these annual incentive payouts for 2019 to be several million dollars lower than 2018.
We lowered our trailer to tractor ratio and trucking by 6% year over year and improved our tractor to non driver ratio a key measure of operating efficiency to the highest level and over a decade.
There's one other item I wanted to mention in the TTS side of our business.
Earlier. This month, we received a large unfavorable jury verdict for a truck accident that occurred in 2017 in new Mexico.
Our excess liability insurance and previously established reserves covered the amount of this tragic accident.
This tragic fatality accident was the result of a brief moment of operator air by a Warner driver.
We continue to express our sincere condolences to the Army Ho family.
Moving to the Warner logistics results on slide 10.
In the third quarter logistics revenues declined 6% to 121 million, primarily due to intermodal volumes, which were significantly lower.
Truckload logistics, which consists of transactional and contractual brokerage had double digit volume increases offset by double digit price decreases a transactional spot pricing decline of nearly 20% combined with few project trade opportunities in the third quarter led to lower truckload.
Logistics pricing.
Logistics gross margin was 70 basis points lower due to our softer freight market and a more competitive brokerage market logistics operating income declined 37% and the operating margin percentage was 120 basis points lower year over year.
Other operating expenses declined 0.4 million as we are beginning to gain efficiencies from our logistics technology, which optimizes and automates freight and carrier selection.
I would now like to turn over to Derek the final portion of our prepared remarks.
Sure.
Thank you John .
Moving to slide 12.
Let me update you on our five two strategy.
During our prior earnings calls I explained the steps, we have and continued to take to position Warner as a best in class organization focused on enhancing our portfolio, attracting top talent, increasing customer service levels and delivering quality earnings to our shareholders across economic cycles.
We're creating structurally and sustainable improvements with our modern and more efficient fleet combined with high quality professional drivers and strong management execution, we expect to generate more consistent financial results.
Our truck and trailer fleets remain new with an average age of 1.8 and 4.0 years respectively.
Despite an extremely competitive driver market with a 50 year low national unemployment rate, we remain committed to quality over quantity with our professional driver force.
This is critical to delivering on our brand promise to our customers.
We're continuing to upgrade and expand our terminal network to better support our customers and drivers and lower our maintenance cost. This investment provides our drivers with facilities and infrastructure they need and deserve as we continue to raise our service expectations.
And.
As I discussed last quarter, we significantly increased our annualized t. investment as part of our five two strategy to improve service to our customers and professional drivers.
Our five teams investment combined with strong operational execution is paying off our on time service percentage is the highest in the last five years.
August Warner was one of only a few large dry van truckload carriers to be named a quest for quality Award winner over 4500 shippers participated in the 36 annual logistics management survey, where they rated carriers for on time performance value information technology customer service and equipment or not.
Operationally. In addition, we're equally proud that for the first time Warner Logistics was a quest for quality winner in the Tms category.
Turning to slide 13, we've provided a network map to help you understand the carefully designed infrastructure supporting Warner's dedicated fleet.
Our Warner dedicated fleet network is strategically positioned with our terminal locations and driving schools, helping us optimize our driver recruiting driver training and equipment maintenance over 90% of the U.S. population resides within a 150 miles of Warner dedicated fleet terminal are driving school location.
Next on slide 14, we highlight some of the key elements of Warner's dedicated business, which was established 28 years ago.
In dedicated we generally provide trucks trailers and drivers exclusively for specific customer typically for a distribution center or manufacturing plant.
Dedicated has steadily grown over the years to more than 4600 trucks and 150, plus individual fleets, making it one of the five largest dedicated fleet providers in the U.S.
Dedicated serves customers with shorter haul freight who have very high service and safety requirements.
The extremely high predictability in reliability of our dedicated Ontime service product extracts unnecessary costs from our customer supply chains.
Since a large portion of these driving jobs are typically in shorter haul operations. They are attractive for recruiting and retaining the best drivers because they are able to return home more frequently.
The upper left Pie chart shows our intentional focus in the retail sector, noting our discount retail emphasis.
Designed we focus on the brick and mortar winners and retail who are growing and producing strong financial metrics. They require and we deliver extremely high on time service as they compete in the retail marketplace that is increasingly online with their customers expecting ever shorter order to delivery windows.
Almost two thirds of Warner dedicated is retail DC to store at about two thirds of that retail business is discount.
We currently discount retail customers require specialized driver training multi stopped deliveries and driver assistance with the loading process historically, our large discount retailers performed very well during slower growth economies or recessions as consumers gravitate to their attractive pricing the merchandise.
This was evident in 2009 and 2010 following the great recession, when our larger discount retail customers produce superior same store sales and operating margins.
Warner dedicated as the stable middle of our revenue portfolio of one way truckload dedicated and logistics over the years dedicated has grown to over 57% of our truck fleet.
Because of the high service driver and capacity requirements and dedicated we have far less relevant competition than we see in one way truckload.
Driver home time is more frequent and dedicated as drivers work and closer proximity to their home.
This strengthens driver satisfaction and hopes lower driver turnover.
Each of our dedicated fleets has their own piano that is closely managed and monitored.
In summary, our dedicated revenue metrics and operating margins provide more relative consistency and all types of economic conditions. As a result dedicated has traditionally been a strong margin performer in good freight markets and a solid margin performer during softer freight conditions.
Next on slide 15, I'd like to discuss our 2019 updated guidance.
We are reaffirming our prior guidance for TTS truck growth gains on sales of equipment net capital expenditures and one way truckload revenue per total mile for the full year 29 team versus 2018.
Continuing our previous guidance, we do not plan to grow our truck fleet and fourth quarter 2019.
For our guidance assumptions, we expect our effective tax rate to be in the low end of the 25% to 26% range for the year.
We expect to maintain our fleet age levels at approximately 1.8 for trucks and 4.0 for trailers.
Finally, our expectation for fourth quarter 2019 interest expense is 2.2 million.
Based on current debt levels and interest rates.
This concludes our formal remarks and at this time I'd like to turn the call over to our operator to begin our today.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you're using the speakerphone, please pick up your handset before pressing the key.
To withdraw your question. Please press Star then too.
Allow for as many colors as possible to ask questions. We ask that callers limit their questions to one question and one follow up.
This call will end at five P.M. central daylight time, following the company's closing remarks.
At this time, we will pause momentarily to assemble our roster.
And on our first question will come from Chris Chris Wetherbee of Citi. Please go ahead.
Okay, great. Thanks, and good afternoon guys.
Revenue growth.
Wanted to pick up on the peak season comments that you made they seemed a bit more optimistic than maybe some of your peers have made so far during earnings season, I wanted to get a sense, maybe what you're seeing some color on the market how much maybe had to deal with some of your exposures, whether it be dedicated or maybe just retail in general.
But if you can elaborate a bit on that that would be helpful.
Sure.
So in our and our remarks, we talked about.
Throughout the third quarter being meaningfully softer than it was a year ago with slight improvements.
In September that have continued into October I would sort of double down on what previously stated statements, which is we're seeing slight improvements.
But make no mistake. It is not 2018, and so I wouldn't want you to read through something overly bullish by any of any of that commentary.
We feel good we have a peak season that shaping up that.
Is coming together nicely, we've got commitments in place and projects in place.
Give us some comfort.
This is still a market that is filled with uncertainty as or on the demand side, especially with all of the tariff Andrade backdrop and macroeconomic uncertainty, but overall.
The quarter into peak is shaping up more traditionally like you would've seen in a 17 or 16, certainly not like 18.
Okay. Okay, that's actually very helpful. So I appreciate the commentary.
Maybe just as a follow up year on pricing.
Obviously, we expect the one way truckload revenue per total mile to it sounds like decelerate toward the to drive sort of the full year towards into the range or maybe towards the lower end of the range, but could you give us a sense of maybe what your expectations are as you sort of stretch that out a little bit maybe take a little bit of a glimpse into the first half.
The next year to get a sense and maybe how you set up into bid season might look like I know you probably don't you too much guidance for 2012, just want to give us hasn't maybe how you're feeling about other rate dynamics playing out right now.
Sure I thought we might get about the first question before that came up but.
Look there's a lot of uncertainty in the marketplace right now we know the economy is sending mixed signals, we see a lot of trade and tariff uncertainty and question marks that are still out there.
Without better resolution on some of those items that would be increasingly difficult to try to predict with the first half looks like we don't give rate guidance, especially not that far out to begin with.
Our focus to be honest do you is going to be on execution, it's got to be on continuing to deliver on what weve committed to shareholders and customers alike.
Which is providing more stable returns and stable results. We think we've done that in the third quarter.
As we approach next year will attack it based on the environment at that time, but I need more.
Visibility that I have right now to be trying to prognosticate, what first first half of next year would look like.
Okay. That's fair I appreciate the time thank you.
Our next question comes from Ken Hoexter of Bank of America Merrill Lynch. Please go ahead.
Hey, great good afternoon.
Derek our John Great Great opportunity there on the cost side sounds like you're making some great strides can you maybe provide some additional details to see maybe the scale of those hundred 30 projects John you walk us through.
Yeah the scale is.
Annual run rate of 15 million, that's up from an annual run rate of 10 million that we've identified at the end of second quarter.
We expect to have for the full year 19 implemented 10 million of savings this year.
And we've got various programs throughout the company that are in place to identify.
More opportunities as we move forward the types of opportunities run through the the PNM sell.
Through the salary wages line. This the maintenance line the taxes and licenses line insurance line. There NPT line Communications line. So these initiatives.
Effect.
Multiple categories of expenses throughout the company CNL.
Oh, it sounds like there's one.
Hey, one it's just that multiple different mindy there there's no several silver bullet. This is grinding everyday across the BNL and really leave trying to leave no stone unturned.
And we're going to and we're not done we're going to continue to do so as we go forward challenging everything.
All right and just on my follow up.
We've seen some other shift away from home delivery are you seeing increased competition in the dedicated as you kind of prove the.
The sustainability of the returns in that in that segment, particularly to the discount retailers are you seeing other switch over to compete in that in that field against you.
Yes, I think theres always an ebb and flow and as people find.
Additional struggles in the one way market they tend to try to gravitate toward what others may be doing successfully we like our positioning we like that product that we put forth it's difficult to do it's hard to replicate.
And it's well entrenched and so we're going to stay with that we will see people show up at the table. The question is how long they last.
And I think what the businesses we do.
With the types of companies, we do it with their proven track records in good times in bad and the relationships. We've built in the product the surface, we deliver it's hard to unseat us it doesn't mean, there won't be people showing up in our jobs to make that decision.
Exceedingly difficult for a customer to ever want to entertain a change.
Thanks, Terry Thanks, John .
Thank you.
Our next question comes from Kevin Sterling of Seaport Global Securities. Please go ahead.
Thank you get even gentlemen.
Hi, Kevin.
Okay.
Derek you, obviously, you've been at this and John to you guys that that's a long time is not your first rodeo can you just kind of share your jump ball to what we're seeing on the supply side, we continue to hear about bankruptcies and insurance costs going up, particularly for some of the smaller carriers and some of these nuclear verdicts that unfortunate I know youve been exposed a nuclear verdict before but.
Kind of what you're seeing on the supply side of equation as it relates to the one way truckload business.
Sure I'll take a stab at it and John feel free to jump in our way in.
Okay.
Actually we had a long detailed discussion about this over the last several days here, even and determined used with my team multiple times is it's just math like we got to do the math, we're going to stay close to the math, we got to watch it.
You see 10 months consecutive of order rates, dropping and dropping below replacement levels, you see year over year changes that depending on the month were negative 50% negative 70.
You see bankruptcies in 780 halfway through the year versus I think it was 159 for the full year 2018.
So if you project that out it's not unreasonable to believe that number crest 900 before the end of year and maybe further north of that you touched on yourself the impact of insurance rates nuclear verdicts I think one thing that's maybe sometimes missed in that is you have these large verdicts in large carrier levels, but that cost structure change.
Impacts every carrier in America, because its pass through in insurance rates.
And insurance renewals as well as obviously those that have to actually absorb the blow as.
Of the actual verdict.
Put all that together you a couple of a drug and alcohol clearing house in January the finally I'll be conversion in December and I think it's extremely reasonable for anybody to look at that and say, it's coming out and it's coming out now. The question is how much needs to come out and against what economic backdrop before we get back into more tied kind of market and.
My Best guess.
At this point is still we've got a couple of quarters of.
Uphill climb into do where we've got to focus and put our heads down on costs, we've got to not take our eye off the ball and service, we have to make sure and and watch expenses, but not under invest in our fleet.
If we do all that and execute and keep delivering the kind of quality that we're doing with our customers.
We will be around when it turns and we'll be ready and prepared to ask to be paid appropriately.
And when that time comes.
But it's still a couple of quarters away, where we're going to have to come.
When the old fashioned way there is no silver bullet, it's going to be ex operational excellence and we've got to outperform our competitors.
Thank you Derek does have some some some great color perspective, one last question, there's kind of switching gears a little bit.
How do you are you concerned about IMO 2020, and the impact on on diesel fuel prices does that.
Factored into your thinking at all.
Yeah.
You concern.
No you have to be concerned when you have a shift of this magnitude coming at us and we'd have to make sure and stay cognizant of it we've looked at it throughout the year. We've we've studied it.
I don't know that anybody agrees on what that outcomes going to look like.
I think it's somewhere in the middle of where the goalpost have been set I've seen people to say they think it's a relatively non event I don't agree with that I've also seen people talk about 70 cents to one dollar type spikes in diesel I think thats a bit overstated I think somewhere in that goalpost is where it falls out what we've got to do is keep working on MPG.
Improvements at every at every turn making sure we burn less of whatever it is whatever it costs. We've got to make sure surcharges are adequate in appropriate based on the work we do for our customers.
And we've got to make sure and think about places it can creep and if we don't have around the ball like anywhere that we have all in rates are anywhere in our logistics group, where that type of activity may exist and be thinking well in advance of the change the to make sure. Our radian. Our rating engines are prepared for it. We think we are we I feel confident we're we're looking.
At the right things the right way.
And I think it's going to happen I don't think there's going to be some last minute saved it's going to save the date, we're going to see rate, we're going to see diesel go up but I don't believe its 70 cents type number that some of talked about I will focus on operationally trying to make improvements in dead head and.
Elimination of any and all empty miles in preparation of it as well and we need freight to do that obviously.
But there's other things we can do on execution wise to make that better.
Got you okay, well. Thanks, so much for your time this time saving all the color and can't are really appreciate it take care.
Thank you.
Our next question comes from Brandon Oglenski of Barclays. Please go ahead.
Hello, Brandon Hey, guys sorry.
As Amit I was talking myself.
Hey, guys. So I think you mentioned that.
We'll take a couple of quarters away here from market balance.
And I apologize because that just jumped off of another call but.
What is the driver here the weakness that we're seeing early continued weakness in the freight market is it more demand driven or more supply driven from your perspective.
From my perspective, it more as a relative term, but I think I would put a little more in the supply side than I would on the demand side.
If you look overall demand trends in terms of macro tonnage macro economic activity et cetera, it's still.
Relatively strong it's not as strong as it was a year ago, but overall tonnage is still up by most metrics. It's been softening some as of late I think supplies relieved and the issue and we kind of covered in an earlier answer what we things happening with supply.
You mentioned, a couple of quarters to get to balance what I meant to say if I didn't say it. This way is I'd say a couple of quarters is when I think you start to see tightening reenter I think we're at a relatively balanced market today.
And for the most part.
We've hit a bottom the question is how long we drag across the bottom in terms of the current supply demand balance and the tough part is and I don't think US is limited to our industry I think its industries across America is there is still this trade and tariff uncertainty out there with a little bit of an economic overhang that causes.
Summers at some point to start to become a little more.
Hesitant and their thought process and spending habits that we have to factor in so.
Well, that's why you heard me reiterate so many times that we're going to keep focusing on delivering the highest possible product weekend product quality focusing on operational excellence and absolutely trying to turnover every stone on the cost side in the meantime, because we're not going to just sit around away from the market return, we're going to continue to try to make.
A series of steps.
Regardless of how small some of the incrementally they may be just make this company a little leaner and a little more prepared.
As we wait this out.
Well I.
I appreciate that and I think you did alluded to previously had a conference yet some of your dedicated contracts might not be delivering you know maybe what you thought they would is that fair statement and then does that make you rethink the dedicated business because we've definitely seen.
Some of your competitors have a different strategy, there and definitely delivering better margins is that something you guys think about looking forward.
Yeah, we do so the quote you attributed to me I'm not sure what conference I would have been out, but that's not how I feel about that get it all the only hesitancy. We've had on dedicated this year at all has been delayed implementations that we've struggled through.
As we work to get trucks in place.
Or I should say get the green light to put trucks in place that caused in the quarter for some trucks to land in one way that were really destined to be in dedicated.
That caused disruption because you're over trucked on one side and while you will wait for final implementation.
Our confidence in our dedicated returns are as strong as they've ever been my confidence in dedicated weathering well in a tight market in an upturn is equally equally strong.
We feel very good about the dedicated model that we built we're going to continue to push the envelope and dedicated were 57% of if we dedicated today I have repeatedly stated that we would be comfortable with that number going up to 60, if it gets to 60, we'll revisit and re guide.
But it's got to be at the right return. So are part of the third quarter impact was.
Delayed implementation the other part honestly was.
Exiting or downsizing of businesses that were not meet not the profit profile that we feel the worker demands and requires.
So we're going to just stay disciplined do our job focus on the long term portfolio blend.
But only do it if the returns are there to justify our participation.
Appreciate it diminimus characterize it there.
Thank you Brandon.
Our next question comes from Ravi Shankar of Morgan Stanley . Please go ahead.
Oh, Thanks, gentlemen.
You are one of the first among your peers do identified the the emerging competitive landscape and logistics from the new digital and trends.
So your four years ago.
How would you characterize that today to what extent does that having an impact on your ability to go to market or the numbers and your logistics.
Yes, so the digital freight brokers I think are here.
And here to stay we have to recognize the reality that theres all kinds of marketing out there and when any time you talk about startups. The one thing they get right in a hurry is the how they market and how they how they sell.
The bells and whistles that they commit to the customers actually execute and operating that and delivering on that same.
Level of service that that customers become accustom to as a much more difficult hurdle I think we're still in the white noise phase and I don't mean that dismissive Lee, it's real and we have to react to it but we do a lot more talking to customers and having to work through.
Benchmark rates or target rates that are often.
In our view below reinvestable levels.
From folks that are openly admitting that they're not making a profit that we had and what we have to do obviously is to deliver a service and return of profit to our shareholders. All at same time, we're going to stay committed to that so you saw our revenues.
After several quarters in a row of growth of cooled and now actually been negative we're going to make sure that we add business that we think we can do profitably. We were also spending money on tech to make sure we're relevant in that space in that and that competition. We are seeing dividends from that tech investment, we're making we need to come.
Thank you to roll it out more system wide to reap the full benefit.
So it's a tough one answer I think some of these folks will survive some won't.
So in the meantime, they're going to continue to push.
The the spot market to the low levels that we've seen it seems to have stabilized as of late and with peak around the corner I think there'll be some relief in that area, our jobs to get our trucks out of the spot market.
Altogether, it's close to it as we can and then make sure our brokerage capability is as nimble as any of theirs.
Understood I just wanted to follow up on your comments already on peak season, where you said that this year is not going to be as good as last year. If I remember right last year speaks the there was actually pretty bad.
So are you referring to treat Q or are you referring to four cube season.
Yeah, we had a strong peak season last year by historical standards, so, perhaps you're referring to more it.
A mix of other carriers results are our peak season last year was strong.
Third quarter in particular as you mentioned, we were up 16% in the third quarter and the one way truckload side in terms of.
Revenue per mile.
The fourth quarter, we were up 11% for revenue per total mile.
That is a combination of packaged prepackaged agreements made well in advance of peak as well as spot market opportunities when people see some particular skewer product line selling aggressively and even to restock in and get into the store. We're going to you. We have similar combination of those opportunities this year.
Sure and volume is actually up.
But the problem is rate.
In the market like the one we're in today is where you won't see the same kind of.
Packaging or surcharges available in 19 versus 18.
Very helpful. Thank you.
Thank you Ravi.
Our next question comes from Brian Ossenbeck of JP Morgan. Please go ahead.
Okay.
Hey, guys that evening, thanks for taking my question.
John So quick one for you on used vehicle.
Market and the pricing looks like you're calling out that's that's been moderating a bit in.
Twoq into Threeq you here I know you had purchased about factors off cycle not too long ago. So just wanted to see if that was more of a warner comments or if that was something more broad based you're seeing in the industry and if you have any early thoughts on on next year.
No were a that's more of an industry comment and how it's impacting us in the marketplace.
As carriers are facing more challenges in the market their appetite for buying used trucks is lower than it has been.
We think from a product standpoint, where the good house and and not so good neighbor head because we've got to a newer track with lower miles has features that others that don't have an empty and collision mitigation systems, but regardless, the fact that with less demand for purchasing used trucks into.
At a market that does have a negative impact on pricing, we expect that will continue for.
For at least the near term until supply side begins to get more corrected.
Okay.
And then maybe a quick follow up on on in insurance market and I can give some color as the types of rates that you're expecting for renewals.
For this coming period, but.
Maybe from a industrywide perspective.
Derek and or whatever what are your thoughts on what needs to.
The change in terms of just just focus on on safety I'm sure. It's on the driver side as well, but how do you. How do you think the industry can kind of deal deal with this and maybe even at some of the risks and exposure.
It had been cropping up here in the in the last.
Yes.
Yes, so our renewal is in the review and we've done that and got through that and it was not.
Nearly as large of an increase of what you've heard of from many other people it was.
Low very low double digits really between 10 and 11%.
In terms of the bigger question, what do we need to be doing it I think what we're doing as we need to continue to invest in technology wherever it's available to make our trucks as safe as possible we need to continue our commitment to forward facing cameras to be able to provide visual evidence of what actually happened versus what's being alleged to have happened.
We need to continue to our focus on safety above all else in the not the internal motto of nothing we do is worth getting hurt or heard and others.
We are seeing progress across all of the above the problem is the nuclear verdict that you talked about you can make all kinds of headway across multiple categories in the risk.
Arena and it takes one day one minute one accident.
Combined with the right jury to wake up to a world where.
You are faced with a very high cost of doing business that then leaks into everybody's insurance rates over the market when any of us or attacked it's really an attack on all of us.
And we're going to have to continue to fight the good Friday Ta is also.
You made the public statement that it is a tier one issue for them to focus on tort reform and work through accretive state by state level to get some of these.
Sort of unfair realities corrected in how the laws are written.
We have to keep America moving everyday it's our job is what we do.
But there had there can't be sort of this outsize risk at a time when our safety results continued to actually improve as an industry and we continue to focus on delivering safe safer and say for year over year.
We just see outsize verdicts and I think thats a reflection of other.
Issues that are pervasive across our culture in terms of how money that one group has is suddenly transferred to other groups.
At outsized proportions to.
Try to level, the playing field or send a message versus having to be more reflective of the facts of the individual cases.
Huh.
Do you think hair follicle testing if that were to be approved would be helpful or do you see the problem on like you mentioned the top performing in just the broader.
Societal challenges both of these actions.
I mean, I think if you look at the stats and you look at the progress being made across safety and safety initiatives.
There's progress being made and yet nuclear verdicts continue to pop up in a more increasing levels. So I don't think it's indicative of the nuclear verdicts are not indicative of a sudden disregard for safety by the industry, they're more indicative of where courts in court systems and outcomes are going.
Hair follicle Weve do already we have been doing for years.
And we will continue to stay committed to that I think if we have an opportunity to do anything in our power to make sure that a driver is not under any influence within our truck we're going to do that.
And we're going to continue to focus on collision mitigation active breaking lane, keeping technology forward facing cameras and the list goes on and on.
You will still have accidents I mean, when you have millions of miles delivered.
By three P.M. everyday you. It takes a brief moment on any one of those miles to find yourself in a situation that can be troublesome.
We've we've we've done everything we can and will continue to do to eliminate every one of them, but I can never predict it will a future where there will never be an accident because I just think thats not the reality of of vehicles moving down the road.
Right Okay.
Okay. Thanks, Derek Fisher your thoughts.
Our next question comes from David Ross of Stifel. Please go ahead.
Hi, good afternoon gentlemen.
John can you talk a little bit about any fleet plans for 2020, and how you think about the Capex range for next year, Derrick mentioned not wanting to under invest in the fleet.
So is there a floor you're thinking of for Capex, and then and then an upward range of the market improves.
Likely than expected.
Yeah, with the macro uncertainty and the lack of clarity on trade and care S., we decided not to put out our 2020 Capex number until we release earnings in fourth quarter.
Fleet plans for next year are are dependent on how things trend over the next couple of three months here and we will also.
Talk about our fleet growth plans, when we do our fourth quarter call.
And Gary only thing I would add.
The only thing I would add to that is that we have opportunities based on the year, we've been through an 18 to shift assets as new opportunities come available.
And we will do so where are those returns warranted. So.
Said differently and until we address underperforming or units or areas that have become under duress.
There would be no incentive to add to the fleet.
This is shifting those assets from that portion of the fleet to a better performing unit.
That's helpful and then.
Any changes to thinking regarding the driver training school or any changes made at the training school in light of the most recent verdict.
The short answer would be the driver training schools that we operate.
Already for produce measurable better results, we know the accident rate is better by 15%. We know that turnover is better in that group of drivers in the population at large this was not an issue relative to the driver training school that simply is part of the.
Noise, that's been created in the media.
This driver was.
Person, who had an accident plain and simple he was properly trained the.
Did very well in his is program and he had an accident and beyond that I, probably won't talk about the case much more we have confidence in our schools, we will continuously look to improve them, but that would have happened with or without a verdict is because we're always going to strive to be as safe as we can be.
Excellent. Thanks.
Thank you.
Our next question comes from Scott Group of Wolfe Research. Please go ahead.
Hey, Thanks afternoon, guys. So.
Derek dedicated revenue per truck up 4%.
Curious what how you think about that is is that sustainable run rate going forward or perhaps is there a bit of a natural lag here relative to the over the road business.
Well I'm not going to try to predict or give guidance on the future identical dedicated revenue per truck. What I can tell you is that that those agreements. We have in place are stickier than they are in one way there longer term than they are in one way.
Our delivery on what we promise on our end is at or above expectations, and we're gonna stay committed to doing so.
Revenue for truck per week is something that we are going to stay hyper focused on because dedicated comes in so many varieties. That's why we shy away altogether from rate per total mile.
It really depends on the miles the productivity of the fleet in the designs that were looking at any given time.
What I can tell you is as as previously commented, we're not going to be looking to.
Push growth for growth sake, we're going to we're going to make sure and the when rates are probably fall the bid rates or the amount of bid activity has to stay active the pipeline has to stay fall. So we can earn our way into businesses that work for both us and the customer right now we feel good about how all of the above look.
And so we'll continue to take that kind of focus into 2020.
Okay that makes sense and then.
I'm just curious you made the comment earlier that we've already troughed in terms of the cycle. Just curious what metrics do you look at that that tells you that.
Yes, I think what I said as I think we've hit bottom and I don't know how long were going to stay here.
At the predominance of that statement is driven by the reality of us peak being around the corner sort of regardless of the market trends. So when we go back and look at Pryor markets.
Our prior prior peaks and valleys in prior cycles, even in bad markets from third to fourth quarter, you see demand increases simply because Christmas is coming.
I think thats, an impetus to start to set the stage as we go into 2020 for a more balanced conversation I think when you look at a number of bankruptcies and more importantly, probably the number of large bankruptcies, it's starting to become apparent that that these that these trucks are leaving them at these rate structures are not sustainable sustainability is.
More visual based on the the quantity of bankruptcies and capacity actually leaving is more visible when you talk about some of the larger ones.
Do you put all that together and I think we've still got a fight ahead of US. We're gonna have a market that is going to be tough for the fourth quarter, it's going to be tough for the first quarter, and we're not saying anything different than that.
What we believe we need to do is just out execute in a tough market and we think we're taking the steps to do so.
It'll come a lot more in clear picture over the next three to four months, Scott, but until we have that visibility that's about the best picture I can pain.
Okay. Thank you guys appreciate it.
Thank you.
Our next question comes from Tom Wadewitz of Yes. Please go ahead.
Yes, good afternoon.
Wanted to ask you a little bit about customer inventories and thank you look at that reasonably closely and just wanted to see if you have a view on that whether that's kind of a you know a [noise] a risk if there is pretty shipping activity and maybe the inventories eventful or if you think inventories are at a level, that's going to be favorable unhelpful to the improvement in freight.
Tom This is John we did see sundar larger customers increase their inventory levels.
And the most recent corridor.
But it wasn't across the board it did very from.
Company the company.
The.
Expectation is that part of it was driven by concerns they had with trade and tariffs.
Getting in the few cases getting more inventory in place.
In advance of the.
Increases that were coming.
Tried to delay the the cost of those terrorists as long as a kid.
Oh it it feels like inventory levels are.
Is it fair and reasonable levels currently based on conversations with customers and are not excessive.
But I wouldn't say their lean levels either at this point in time so.
I think a lot of it will depend on how the peak season plays out and how the consumer is a for spending this holiday season that will determine where retail inventories and up most retail customers will be reporting their numbers the end of.
Based on the number based on the end of October Westell report in their Lake in November So, we'll get an update here in about three weeks.
Right Okay.
And then a second question just on inflation in 2020, it seems like it might work in your favor that a in additional cost actions, you're taking maybe that kind of natural inflation you you phase for there to driver pay or other factors might use do you have any thoughts on how.
What inflation might look like in my that's maybe helpful next year.
Okay.
So when you think about the big factors that impact us the driver market is still tough, but clearly not as tough as it may have been a year ago. It we make it tougher in terms of expecting quality above quantity and we're going to stay committed to that we're going to make sure we hire the best drivers.
We possibly can but we don't foresee the kind of pressure on wages that we went through in 18.
So that's.
Relatively speaking, we're going to be through the comps of a lot of the driver wage pressure if the market where the suddenly change in the economy was suddenly to take off obviously that could change, but so would rate.
Along with it.
So there's a natural hedge there.
Trucks trailers always other things that are big components of the tires and fuel we talked about fuel earlier on the equipment side, it's going to be a little bit better market and then it has been to to try to work through what those purchases look like the only caution I would give you is we're gonna stay committed to the safety Tech and.
And the more tech enabled trucks that we've been buying and those do come at a cost.
And so that's a lot to do with why our focus is so heavily on the everything else category.
There is no silver bullet there is no one tailwind coming it's going to have to be fought out the old fashioned way and we're going to continue to look for ways to lower our cost going into 2000.
Okay.
Okay, great. Thanks for the time.
Thank you Tom Thank you.
Our next question comes from Jack Atkins Stephens. Please go ahead.
Good evening. Thanks for squeezing me in here just just a couple of quick questions I guess, one when we think about.
The.
The nice continued growth in terms of revenue per tractor per week within the dedicated business was up 4.1%, which was in line with the same type of growth you saw on in the second quarter.
The harder comp year over year comparison, so I guess as we sort of thinking about the components of that and I know you don't want to get too granular there, but the components of that that nice growth on a year of your basis is that is that a function of more miles per truck or is that a function of are you seeing some increased rate momentum there just kind.
To help us think about the directionality of those.
That's possible yeah without being too specific Jack I'll say, it's more rate than a myles.
Okay.
A lot of it has to do with mix dedicated mix changes as you add new fleets in and that does have an impact as well.
Okay understood understood and then and then just in terms of the tractor count sequentially between one way and and dedicated.
You know it sounds like one way is coming down but dedicated is going to be coming up so growing up sequentially can you kind of help us think through that John if it's possible to kind of put a finer point on it.
Well overall, we don't expect any fleet growth sequentially from third to fourth quarter, Okay, but.
You're right.
We ended up expecting more dedicated.
Growth in third quarter than we had I think we are at 40 trucks and our plan is to be up closer to 100 were beginning to see that come back here as we implement some new dedicated fleets. This quarter. So I think you'll we will see a little bit of a shift from one way truckload.
Aided in fourth quarter, if things play out based on where we.
Ah think they will as of today.
Okay, great. Thanks again for the time.
Thank you Jack.
Our next question comes from Ben Hartford of Baird. Please go ahead.
Hey, good evening guys.
Just wanted to focus on the double digit volume growth in.
The truckload logistics portion what are the sources of that growth. Obviously, it's been a tough third quarter from a volume standpoint, So maybe could you talk a little bit about the drivers of the sources of the volume there and as you think about 2020 without being too specific could you just provided some context about where the organization.
It's from a brokerage capacity standpoint, some of the.
Tech investments that you've made and maybe what the posturing, it's going to be as you're looking to.
2020 to use your words kind of a tough for Q1, Q where does that units.
Yes. So this year just as a broad brush kind of overview, we came into the year more bullish and brokerage in more bullish in logistics and adopted as the year played out.
We've seen double digit volume growth offset by double digit rate decrease, especially in the transactional part of our brokerage business. We made the decision that we're not going to pursue growth for growth sake, but we did stay true to the early decision to continue to invest in tech. So we see margin compression that comes across a variety of free.
Fronts, but we feel that the steps, we're taking or the right ones to prepare us to be ready enable when that market change takes place to come to shift back into more of a growth mode with double digit growth and volume.
Offset by double digit declines in rate it naturally sets itself up when you see spot rates rebound to start to see revenue growth both in volume and rate and therefore have kind of more noticeable a more meaningful upside.
The Tech investment, we're making is not dissimilar from what you hear from others, It's really trying to automate all the parts of the process that we think we can it's it's the ability to deliver to the desktop.
And.
Handheld if you well to our associates all the information relevant to be able to make the right decision and make it faster we're seeing that play out we're seeing productivity increases.
That are double digit in growing at the sea level in terms of loads covered per day and the ability for them to transact on their decisions more quickly we're going to continue to invest in that but we're not going to get to that bleeding edge level.
Because we don't believe we need to we think we can make the types of steps and incremental gains happen well without.
Needing to sacrifice margins, all together and we're going to deploy.
You kind of tech.
In in pockets and then expand nationally wants proven versus expand nationally and try to fix.
Where the areas maybe after the fact, that's been prudent thus far we're going to continue on that path I think as we look into next year, our focus on small to midsize customers that expand our visibility into other a new supply chains is going to remain intact, but we're also now starting to gain more acceptance at some of our core customer levels, which allows.
Or sets the stage for us to be able to accelerate the growth I think asset backed brokerage still matters to customers and they see viability in it and as you see supply corrections, taking place and what happens to folks that work exclusively with non asset brokers in terms of their financial stability.
Customers take note of that as well and so we will we will continue to push forward and as you indicated it's too early for me to be putting a light in the San or what I think 2020 looks like in terms of revenue growth.
On the brokerage unit.
To follow up on that is there a specific driver of the volume growth in that unit is it coming from.
What you talked about the asset backed solution is it coming from the competition is it a conversion either internally or from a private fleet.
A source of the volume.
It's a little of all of the above but we are gaining reps and gaining abilities, both pet capabilities as well as experience with our transactional brokerage unit and we certainly see a lot of upside there we've seen some small to midsize contractual logistics agreements come to fruition offsetting some businesses that we've exited.
That we have chosen to exit this year in that space as well, where we felt the margins the returns didn't justify our ongoing relationship.
We'll continue to kind of do that as we go forward and where it makes sense, but I think its transactional brokerage and getting better reps with better tech is contractual brokerage across small to midsize shippers and it's the entry point now into some of our larger relationships that makes me feel good about the future of our logistics product.
Thank you.
This concludes our question answer session.
Now I'll turn the call over to Mr., Derek Leathers who'll provide closing comments. Please go ahead.
Thank you.
Slide 17, we have an overview of.
In our view why invest with us, but I'd like to take a minute instead of just talk about.
The quarter in how we feel from a closing perspective or closing thoughts.
At the end of the day, we told you that we would go out and build a portfolio in a process and have the operational execution to perform better in good or bad markets for third quarter was certainly a tough one.
Despite that we delivered an 88.3 or net a fuel for the quarter, which I think is an indication or a window into how we operate in how we think as we look forward, we're going to stay disciplined on the cost side, we're going to continue to be consumer driven and service focused.
We're going to connect to double down on our commitment to working with winning companies and be a part of their growth as they continue to win Theres a lot of economic uncertainty, there's trade and tariff clouds around us, but we think that the commitment to our cost controls our operational focus and our commit.
But excellence above all else will help us under and continue to set us apart I appreciate you being with us on the call today. We thank you for your time and we look forward.
To your two further interest in Warner Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.