Q4 2019 Earnings Call
section of the
Please website at Warner by clicking on investors then news and events and then webcasts and presentations today's webcast is being recorded and will be available for replay beginning at 5 this evening. Before we begin. Please direct your attention to the disclosure statement on slide two of the presentation as well as the disclaimers included in the press release related to forward-looking statements. Today's remarks contain forward-looking statements that may involve risks and uncertainties and other factors that could cause actual results to differ materially additionally the company reports results using non-gaap measures, which it believes provide additional information for investors to help facilitate the comparison of past and present performance a Reconciliation to them directly comparable gaap measures is included in the tables attached to the earnings release and in the appendix of the slide presentation, I'd now like to turn the conference over to mister Derrick Leathers presidential.
CEO, please.
Go ahead.
Thank you and good afternoon. Everyone with me is our CFO John Steele.
Turning the slide for we've included some updated background information for those who may be new to our story and I'll highlight a few key items for 2019 / 3/4 of revenues was generated in our primary segments truckload transportation services with the remainder coming from Warner Logistics looking at revenues by vertical for our top 50 customers just over half is dead in the retail category which reflects the continued strength of North American consumers and about 30% of these revenues are with discount retailers that focus more on selling necessity based Products off 20% of our revenues were in manufacturing and Industrial 17% were in food and beverage and the remaining 12% in the logistics and other category.
We have a diversified customer base with nearly sixty percent of revenues coming from outside our top 10 customers and about two-thirds spread across our top 50. We remain committed to supporting our corporate customers and their growth while mitigating outsized exposure to any single customer vertical or seasonal Revenue stream next. Let's move to slide 5 for a brief overview of our financial performance.
in the fourth quarter
Revenues decreased 4% to 622 million adjusted EPS was 11% lower at sixty seven cents per share adjusted operating income 2018 per cent to 63.4 million and our adjusted operating margin declined 120 basis points to 10.2% considering the more challenging market conditions home crowd to have delivered a total company double-digit operating margin in fourth quarter Nineteen Hundred.
For 2019 and total revenues increased by $6 billion to nearly 2.5 billion adjusted EPS increased $0.01 to $2.39 per share a joke operating income declined 1% to 225.9 million and our adjusted operating margin was nearly flat at 9.2%
2019 was a blow average rate and rate year compared to a stellar Freight and right here in 2018. We're pleased that in 2019 our exceptional execution effective cost management and balanced Revenue model enabled us to successfully weather the storm and generate strong financial results adjusted earnings per share with the second highest we've ever reported in the fourth quarter and our full custody earnings-per-share established a new record high our Diversified Revenue base and operational strengths places in an excellent position to perform. Well in different markets bought a truck load Freight Cycles.
results
For the fourth quarter reflect Freight demand that improved sequentially from the third quarter due to seasonality and volume was comparable to fourth quarter 2018.
The fourth quarter of 2019 was operationally more difficult than the fourth quarter 2018 due to a compressed holiday shipping. As a result of the later timing of Thanksgiving and the midweek timing of Christmas Eve and New Year's pricing was challenging is one way truck load and Logistics project and surge pricing and fourth quarter 2019 were significantly lower than fourth quarter 2018.
In January twenty twenty one of our trucks was involved in a serious accident. The company is still investigating the accident but it is probable that it will adversely impact first quarter earnings the company self-insurers for the first ten million of liability coverage for this policy. And has appropriate excess liability insurance coverage with insurance carriers above this amount off additional insurance and claims expense of ten million in first quarter 2020 would result in a charge of $0.10 per diluted share as a company. We constantly emphasized thing we do is worth getting hurt or hurting others. We will continue to live by those words as we strive to reduce and eliminate accidents.
Investments in a newer best-in-class Fleet we ended the year with 8,000 tow trucks within our truck load transportation services or TTS segment an increase of 180 trucks year-over-year off and down 55 sequentially most of our 2019 Fleet growth came and dedicated.
I'm extremely proud of Warner's performance and execution in 2019. Amid the challenges we faced our team in our business model are well-positioned to quickly adjust to whatever conditions present themselves 20/20. We have a flexible and adaptable Revenue portfolio and we are continuing to more effectively manage a broad base of are controllable costs. I'd like to sincerely thank all of our thoughts are professional drivers mechanics and office employees who contributed to this strong performance for all their hard work dedication commitment to Safety in Superior service at this point. I'll turn the call over to John to discuss the financial results in more detail John.
Thank you, Derek.
Good afternoon, beginning on slide seven. We provide some additional financial performance drivers for fourth-quarter starting with r t t s segment revenues for truck per week decrease 1.8% Net a fuel do to lower miles per truck and partially offset by slightly higher revenues for total mile.
A soft and lackluster one-way truckload pricing Market was more than offset by relative strength and dedicated pricing year-over-year. We increase the average number of TTS trucks by 3.3% and then deliberately tapered off our truck count during fourth-quarter nineteen by Design and our Logistics segment revenues were 12% lower our adjusted operating income declined 15% primarily due to 120 basis-point declined in our adjusted operating margin due to the more challenging Freight and pricing market conditions.
All right, Justin earnings-per-share. We're sixty seven cents or 11% lower than the record seventy-five cents a share. We learned in fourth quarter a year ago.
Turning to slide 8. Let's look at our full-year data and T TS revenues per truck per week. Net of fuel was nearly flat. We had an average of 347 more trucks which was a 4.6% increase Logistics revenues declined 5% and a softer Freight Market with increased competition are adjusted operating income for the year to claim slightly by 1% interested Consolidated operating margin decreased slightly are adjusted earnings per share increased to Penny the $2.39.
Beginning on slide 9. Let's look specifically at results for our truck load transportation services segment and the fourth quarter TTS revenues declined 2% versus the prior-year quarter the full $87 million primarily driven by a 1.8% decrease in Revenue per truck per week.
Adjusted operating income was 60.4 Million declining 11% due primarily to the decrease in adjusted operating margin of 130 basis points to 12.4% off the challenges our fourth quarter 2019 adjusted operating ratio. Net a fuel surcharge was a strong 86.0%
for the full
TTS revenues increased 2% to 1.9 billion adjusted operating income declined 3% to 206.6 million due to fifty basis points of operating margin contraction back to a solid 10.8% for the full year despite challenging Trucking industry market conditions in 2019, and our full-year adjusted operating ratio. Net a fuel was 87.7%
During the fleet metrics on flight ten for dedicated. We grew full year 2019 Trucking revenues net a fuel by 12% to nine hundred fourteen million fourth quarter 2019 dedicated rep said a fuel increased 10% to 237 million dedicated average trucks grew 7% for the year and 5% for the quarter fourth quarter 2019 average dead 4693 exceeded year-end dedicated trucks of forty six thirty by sixty three trucks due to the typical post-holiday retail truck decline in the latter part of December dedicated revenues for truck per week increased 4% for the year and 5% for the quarter.
one way truck load
Tracking revenues net of fuel for the full year decreased 4% to 739 million fourth-quarter nineteen one way truck load Trucking revenues net a fuel decreased 8% $288 million one way truck load average trucks increase 1% for the year. And for the quarter one way truck load Revenue per truck per week declined 5% for the year and 9% for the quarter off further breaking out the components of the revenue for track per week changes one way truck load revenue for total mile declined 2.1% for the year and 5.4% for the quarter one way truck load my truck declined 3.1% for the year and 3.5% for the quarter month.
During November 2019 our Fleet experienced a temporary unplanned outage for our trucks and drivers caused by our GPS satellite Communications provider. That was subsequently rectifier December this industry wide outage affected tens of thousands of trucks in the market and negatively impacted our one-way truckload miles per truck by approximately 1% in the quarter of we estimate the incurred cost for this issue reduced our fourth quarter 2019 earnings per share by one to two cents per share.
Moving to wonder Logistics results on slide eleven and the fourth quarter Logistics revenues declined 12% to a hundred twenty million primarily driven by a 12% decline in truckload Logistics Revenue age. We had fewer transactional opportunities less attractive contract and transactional pricing and increased competition from Logistics competitors including digital Brokers off a gross margin percentage declined a hundred fifty basis points driven by significantly less project and surge opportunities while we achieved a 5% reduction in our other operating expenses month gross profits declined by 20% and resulted in a 250 basis point decline in our operating margin percentage to 2.8%
We're continuing to invest in logistics it which is clearly improving our decision-making and employee productivity.
Logistics operating income decreased 54% to 3.4 million
for the
Logistics revenues were 5% lower gross profit was 4% lower and operating income declined 20% Our Logistics operating margin declined sixty basis points to 3.3%
and now like to turn the final portion of our prepared remarks back to Derek will cover our strategy capex and free cash flow generation and twenty twenty guidance.
Derek
Thank you, John moving to slide 13. I wanted to update you on our V T strategy over the past few years. We created structural and sustainable improvements with our modern and more efficient Fleet of high-quality professional drivers and strong management execution. We expect to generate more consistent results. And that's exactly what we delivered in a challenging year. Our truck and trailer Fleet ages remains was an average of 1.9 and 4.0 years respectively despite the very competitive labor market. We continue to achieve one of the highest driver retention rates in the last twenty years.
We significantly upgrade.
An expanded our terminal Network in multiple strategic locations to improve our driver training and equipment maintenance capabilities this investment also provides our drivers with the facilities and infrastructure. They need deserve to keep America moving every day. We're upgrading and modernizing our it infrastructure and data security is part of our five T strategy while continually strengthening service to both our customers in a driver's we value the business of it and prioritize Rank and measure are technology initiatives to ensure they aligned to the operational priorities support business strategies and generate strong. Roi wage. The ultimate goal of our five T's strategy is safely delivering Superior Service to our customers on time every time last August. We were recognized by Logistics management is a quest for quality of life in both the drive and truckload and Logistics categories this independent recognition from thousands of shippers that participate in this long-standing annual award survey along with our solid Financial rep.
further validates that
Drive to strategy is working on slide 14 is a summary of cash flow from operations net capital expenditures and the resulting free cash flow over the past five years from 2015 to 2018. We were in a relatively High investment. Focusing on strategically improving our Fleet and strengthening our organization with the significant investment in our Fleet and terminal is behind us in 2019. Arnett capex normalized 2 284 million and we generated free cash flow of 143 million or a $74 million dollar increase month free cash flow generation year-over-year We are continuing to reinvest in a new Fleet for the future and are targeting net capex to be more consistently in the range of 11 to 13% of revenues over the long term. We also expect to once again generate significant free cash flow in 2020.
Looking ahead to our 2020 guidance on slide fifteen.
We do not plan to grow our truck Fleet until market conditions improve. Our Fleet count will likely bleed flat to slightly lower in the first half of 2020 from your end 2019. We expect a change in our Fleet count to be in the range of -3 per cent to positive 1% for the year games on sales of equipment are expected decline from 18 million and 2019 off to a range of six to twelve million in 2020 due to decelerate and used truck demand and pricing and fewer trailers expected to be sold.
we expect
Capital expenditures to be in the range of 260 to 300 million
when we truckload revenue for total miles for the first half of 2020 is expected to decrease in a range of five to seven percent compared to the same six-month period in 2019 similar issue one way truck load your over your rate Trend we've experienced the last two quarters. We expect our effective tax rate will be in the range of 25 to 26% We expect to maintain the average age of our truck Fleet at or near current levels. So far in the first five weeks of twenty-twenty freight volumes in our one way truck load unit have been seasonally normal and slightly lower than the same. In 2018 pricing remains challenging the rate Market remains difficult based on challenging customer contract rate negotiations. So far in the 2028 season and lower your monthly pricing you over your comparisons of rates and earnings in the first half of 2020 are more difficult. Currently. We expect industry Dynamics to improve in the second half of 2020 although yep.
difficult to predict the exact timing
Where is well-positioned with nearly sixty percent of our Fleet and dedicated a more stable and predictable business 20% of revenue from our Logistics segment and less exposure to the 1,000 gold market depending on how the year develops there could be Fleet growth opportunities in the second half of 2020 following expected truckload industry Supply contraction in the first half lower industry new truck production fewer available industry drivers as a result of the build-up of the drug and alcohol Clearinghouse accelerating Trucking Company failures and other factors are expected back strain truck supply has twenty-twenty develops. I'm confident that we're positioned for success and to effectively navigate whatever economic environment comes our way of the future. Our Fleet is refreshed off. Our team is rebuilt and our commitment to Excellence is unwavering.
At this time, I'd like to turn the call over to the operator to begin our Q&A.
We will now begin the question-and-answer session to ask a question. You may press * then one on your telephone keypad. If you are using a speaker phone, please pick up your handset before pressing the key to withdraw your question, please press star then to to allow for as many callers as possible to ask questions. We ask that callers limit their questions to one question and one phone not this call will end at 5 p.m. Central Time following the company's closing remarks at this time. We will pause momentarily to assemble our roster.
And our first question comes from Todd Fowler of keybanc capital markets, please go ahead good evening. Thanks for taking my question Derek just to the comments on what you age acting for Fleet growth, you know playing around with the numbers a little bit, you know to get to kind of that flat level in the first half of the year. It seems like dedicated Fleet growth might decelerate from the mid single-digits that you've seen the fourth quarter. Can you talk a little bit about the dedicated Pipeline and maybe why you're seeing a little bit of slower growth and dedicated. I mean the first part of 2020 versus what you saw in the back half of 19 month you so first off thanks for the questions had the Assumption may be a little bit off in the sense that dedicated the pipeline looks good right now actually as we think about what we have in the pipeline and even as we think about it from a year-over-year perspective, it's fairly robust the hesitancy on fleet growth in our mind or my mind right now really has more time.
With where we're at in the mid cycle.
What's going on in the overall market and our willingness if needed to move additional trucks from one way over to dedicated to supply that demand that we believe is there and we will be adding as we go forward. I'd rather not I'd rather have the opportunity to keep our one-way product out there and available to our customers but as capacity still needs to bleed off and if there's an expectation of rain that we've don't believe is really terrible in our Network. We may be in a situation where will simply move more trucks from one way into dedicated and end up netting either flat to slightly down in the corner.
Okay, so it sounds like it's a little bit more of reluctancy to like lock into where the contract Market is right now versus anything on the pipeline side. Yeah, I think that's a fair way of thinking about it. I mean think about it. It's just sort of execution discipline. We're going to be disciplined in this midseason. We know what's happening with our cost structure. We know where we need to be from a rep perspective and if we find ourself in in situations where that's where we have to chase a rate, I'd rather move the truck to dedicate it and and to find myself doing that. Okay, I understood I mean then just a follow-up, you know, the the commentaries helpful on a you know, the the expected, you know comparisons pressure on the revenue per total mile. You did a good job this year of kind of controlling the margin and controlling costs into challenging environment took the back half. Usually look to 20 20. What what lovers do you have on the cost side? And what would your expectation be for? You know where margins can you still be? You know kind of in the high 80s with the pressure that wage?
Right now on rates and how do you think about controlling margins in the environment that we're in right now? Thanks.
To expand our cost-saving programs throughout the company the the cost-saving items that we've initiated or widespread their broad-based. We've made meaningful improvements to our cost-savings took her over the last year and the categories ranged from you know, labor efficiency both in the non-driver and driver's side the maintenance to supplies to benefits to Communications to insurance claims. I will say that when he's get into your to the cost savings. It's a little more difficult than than the low-hanging fruit that you start with in in your one but we expect to see Improvement on the cost side that the biggest variable to the margins is where does the rates I'd shake out and we expect that negotiations difficult in the first half. We expect the Freight Market and the rate Market to be challenging in the first half and then begin to improve in the second half partially due to fraud.
Relatively easier comps in the second half compared to the first half you remember last year. We had a six and half percent increase.
And one way truck load Revenue per total Mile in the first quarter and then that gradually deteriorated down to -2.7 -5.6 and -5.4 the next three quarters. So that's where we're going to work hard to continue to make improvements as we can, but it will be a challenging first half.
Our next question comes from mehrotra of Deutsche Bank, please go ahead.
Cancel cell not permit, as it relates to your guidance of rate guidance of down five to seven percent in the first half of 2020 obviously implies a bit of a step down and cons do get easier as you move into two Q. What is this? Assume just from a supply-demand perspective for the market overall?
Thanks. This is John. We're continuing.
So I mean our thoughts on supply and demand is that we think capacity is coming out of the market right now. We're seeing signs of that in a variety of ways, you know, the obvious being truck orders and now translating lower builds. Finally bankruptcies are up the drug and alcohol Clearinghouse is clearly taken in effect and clearly going to make it more difficult or more Supply constrained wage, you know, the bulk of that rate commentary in the first half is really just the lapping effect of what took place over the course of last year and it's kind of a continuation of where current rate levels are as well as Spotify closure and where the spot Market is currently at, you know, we like to be conservative in our guidance. We think that's a number that we feel comfortable with the guidance that we've given off that's not where we're seeing rate renewals take place at but it's it's bigger than that. It's what's the spot opportunity what our project opportunities looking like. What's our exposure to spot you over a year by birth?
And when you put all of that in the mix rates, you know, we think are going to be down for the you know in that -5 to -7 range.
It could be better than that if to turn happen sooner than the year and I think that's really going to be determined on what we see in the accelerated bankruptcy environment with where rates have been for his prolonged as they've been dead. I think you're going to continue to see pressure on people trying to make it through the other end of the tunnel.
Okay, maybe just a little bit of a different way because we don't have the the actual rate per mile anymore. What is this kind of assumed on an absolute basis relative to you know as we move from Q4 to q1.
What's your additionally rates are lower when you move from the strongest seasonal quarter to the weakest seasonal quarter of the year, and we usually expect that this year. We did have some project and surge opportunities not at the rate that we had hoped for and not at the rate that we saw in fourth quarter of 18. But yeah, we expect a a traditional Step Down based on the fact that you know that we're seeing this far and in the month of January is a little bit below where it was at the same time last year. Okay, so just kind of assumes normal seasonality.
Correct.
Okay, I appreciate the questions. Thanks guys.
Our next question comes from Jason Seidel of Calvin and Company, please go ahead.
Yeah. Hey guys, this is Adam on for Jason. What's it a try and take a little bit deeper on you know kind of the current environment right. Now, you mentioned a little bit about the the contract increases you're getting now and how things are still challenged. Obviously. Just want to ask if if you'd be able to kind of give us a little bit more color or maybe a number around what contract increases, you know, what contracts that you're that you're getting right now. You know what those numbers look like.
So first of all, thanks for the question Adam. We are we're early in the early in the process. So we've probably got about twenty to twenty-five percent of businesses that are either in-house or in process. Those are finishing in a variety of outcomes. Not very many of those are completely settled in finished yet wage will have over a roughly 70% of our business in the first half of nineteen first half of 20. Sorry and as we sit here today, we've seen renewals from Flat to down a few points. We're going to continue to work hard to be in that range. They'll be exceptions to that based on network fits and efficiencies of the frame. Not one of the things I think we're doing a much better job of over the last year to two years is understanding the operational cost of the individual Freight lanes and individual customers. And so that does wage.
The process so there's no one.
Size fits all answer. Um, um, but the net of it the the bid outcomes as well as the spot Market is where we come up with the guidance that we've issued.
One thing one thing I wanted to add Adam was, you know, remember one way truck loads 42% of our trucks and the commentary relates to one way truck load and not to dedicate it off.
The the rate number there the flat to down a few points was one way truck load. Yeah, that's all the commentary. We just covered relates to one way truck load. Okay, our guidance is down five 2 down 7 a.m. And the comments that Derek is made also relate to one way truck load as the guy understood understood understood. Yeah. Thank you for the caller just as a quick follow-up when you're asking about kind of the back half recovery, you know seems like everyone's kind of pricing that in you know, you mentioned some of the Catalyst earlier the insurance bankruptcies et cetera. You know, what do you kind of think about the timing as soon as we get into that right? And do you anticipate that you know, second quarter what kind of continue to be challenged I guess kind of how do you see the breakdown between the first-quarter and second-quarter, you know as we get to the to the recovery in the second half
Sure. Well, I mean
Start with this the first quarters are challenged in general. I mean normal seasonality takes hold. It's a challenging quarter even in in the best of times and this will be no different. We still earn a situation today where although I think we're closer to equilibrium than we've been in a while Europe you you've got kind of negotiation headwinds. If you will from where capacities been loose or over the last couple of quarters. Then we saw an Eighteen with that said, you know orders are way off builds are are coming off and and Below replacement levels. Now as I already mentioned bankruptcies are rising in in a meaningful way. I mean, we're not talking of you know, going up by 20% We're talking by bankruptcies up five-fold over 18 to 19 and some larger players now being affected as well. So it's not just small shops that are going out of business. It's it's larger the two big ones that I think are are you mentioned one of the two was Insurance, you know, the hardening of the insurance market and what we're continuing to see. Yep.
and insurance cost is
Really pushing a lot of people over the edge because they can't take you know fifty to seventy percent in Insurance renewal increases when it's five to six percent of cost line item and they're operating on razor-thin margins to begin with and the other ones that drug and alcohol Clearinghouse. I mean, we know with reliable data that that that drug and alcohol Clearinghouse has been receiving 250 to 275. New name is a day into that into the Clearing House. And so if you just think about that over the course of the year you're talking about a pace that would would would project out to be over 60,000 drivers off the drug and alcohol Clearinghouse this year. That's a good thing for safety. It's something we fully support and it's why we have been hair follicle testing for many years to make sure our Fleet is drug free, but it will cast some capacity constraints over the industry that will take more hold as we move forward on the outside. I think it's it's fully felt in the latter part of the second quarter on the inside job.
We could start filling it, you know late q1 early Q2, but for right now we got shop.
Choppy times ahead of us and we're going to continue to keep our head down and focus on what we can control which is our cost and our execution and the service we provide our customers.
Gotcha. Thank you for the call. I appreciate it. Thank you.
Our next question comes from Allison Landry of Credit Suisse, please go ahead.
Oh, good afternoon. Thanks. Sorry I just jumped on from another call. But my question is how do you see the progression of the upcoming bid season, you know, would you expect contract rates to perhaps start out on the week or side and then strengthen towards towards the latter part. Maybe if you could just delineate how you're thinking about that.
Yeah, thanks Allison. Clearly we view the market as one that's going to tighten as the year goes on and so at a high level that's going to change outcomes on beds as the year progresses as well at a more tactical level. The fact is we can't afford to go backwards right now. I mean the fact there may be a little bit of overcapacity out there in the market is a relevant fact, but what's happening with overall wage cost and and all of the things were discussing in terms of the industry had wins and and frankly the the under, you know, the under sized margins that the vast majority of the industry is faced with I mean to me that we've got a hold the line on rates and we're going to have very open Frank professional discussions with our customers on that. Hopefully, they're going to look to a longer-term or Rison than just a quarter because to save money or to be, you know, overly aggressive in a contract knowing that the market is turning 36, maybe 90 days out to me would be short-sighted versus a more long-term approach. We have customer.
take that view and we have others that will be more transactional and that's where some of the commentary you missed earlier in the call comes into play and that we could see more movement from
One way too dedicated because our pipeline there is is pretty strong and we have the opportunity to move more trucks to Dedicated versus taking bad outcomes out of bids if that's what if that's the only other option. Okay, that's that's really helpful. And then just in terms of some of the trends that you're seeing across your retail customer base, maybe specifically low-end vs. High-end retail wage talk about what you're you're seeing at each of those end markets relative to historical trends.
We don't talk about individual customers, but I will talk about it in general terms, you know, we've aligned ourselves over the last several years with with Winters and we've worked hard to do that. So we follow our retailers very very closely to see kind of who's winning and gaining share and who's losing and and and maybe losing out to the e-commerce reality that's around us and by aligning with folks that have successful stories and successful product. It's giving us the opportunity to grow with them at the discount retail level and the Home Improvement retailers in particular. They've continued to put up strong solid results through their own execution models. They don't think our Our Winning strategies. We're going to continue to align with them and continue to grow with them and and be ready as they continue to expand their Footprints. So that end of the market looks real good some of the other ends of the mark-up frankly. We don't play in as much and it's by Design and in particular, you know, folks that are maybe caught in the squeeze of what's happening with e-commerce, and we see that squeeze occurring and and not dead.
The sufficient strategy on on their business model or their approach to the market to keep up with that. We've minimized our exposure, you know over the last several years for precisely the the the market that when
And that's what helped us weather the storm this year.
Got it. That's that's great color. Thank you guys. Thanks Allison.
Our next question comes from Ken hoxter of Bank of America, please. Go ahead. Hey Greg, good afternoon. Maybe you could just kind of keep going on on some of the pricing discussion you focus a lot on one way and and maybe just talked to us about dedicated and and your thoughts on how that rolls through on on Revenue per mile through the year. You've given a lot of specifics on the one way maybe, you know a dedicated slower to Rampage or does the pain that you're feeling now kind of come through maybe a little bit longer through 2020 than obviously in the in the one way so can first off the best news about dedicated especially the dedicated that we do is it's difficult to serve its high expectation and it's well beyond just the movement of freight. I mean it's off the design optimization implementation with a heavy focus on the utilization across the fleet to do that. You have to have a certain amount of sophistication. We think we do that and do it. Well, thank God.
Not come under the same pressure in 2019 is the one way did it certainly?
Doesn't resemble anything that's going on in spot and had this cycle carried out longer and like if we thought that we were going to be in an overcapacity situation for another year or another two years. It could have had adverse effects at some point on dedicated but having the belief currently that we are closer to equilibrium than not that you're seeing some relief in the spot market and you're seeing exits of capacity, you know kind of across the multitude of reasons. We've already given we feel pretty good about where we sit with dedicated as we talk to those customers and they look for us to grow. There's not a whole lot of folks that can do what we do for them. We're going to be fair with them and and charge them appropriately based on the services that were asked to provide but the risk for that to decline or that Thursday to worse and is largely behind us. We're pretty pretty confident and how we think about the future of our dedicated model. So I think the the expectation of one way was kind of built in in in terms of the month.
I'm at 7 but you're not turning negative. What is what you're saying in in terms of the the dedicated side? That's correct the pipeline.
Plenty robust that there isn't a reason or need to think about turning negative and dedicated right now at this point. All right, if I can get that follow up on on the outer do you mention the the Cyber? I guess it was the the Cyber attack on this supplier. And I know you said you're you're beefing up your own it. Is there anything that you've done differently now that you've gone through that John you were talking about that that experience and and the EPS impact anything to ensure backup or was it the driver's kept driving? They just went out of route. And so it was a little bit longer on on mileage. I just want to understand maybe that that impact a little bit in what you're doing. Yeah, this this month. This impact was not a Cyber attack or anything like that. It was a global GPS rollover event that took place that affected more than just our supplier to be fair and it had to do with a scheduled GPS update slash roll over that frankly just went a file and so it affected a variety of different tech devices around the world that relies wage.
On that information we were affected as well. What it meant for us is we had to revert to the old fashioned days. So we had
From one day to the next over the course of an evening revert to paper logs paper routing atlases and trip planning and that is a pretty big undertaking. So, you know, I would be remiss if I don't specifically thank all of you have folks here at Warner because the amount of work and effort they put into it the amount of extra hours and and over time and and and effort to keep that Fleet moved was nothing short of incredible. It really proved to me what they're really made of but we got through it. It took several weeks to get through it completely and to come back online and and we've kind of, already on what we think the EPS impact of the delayed dispatch delayed ability to have visibility not being able to use our optimization software because you don't have clear visibility to the fleet and it was pretty may as to what we can do differently than when it is the telecommunication link between us and our Fleet. It isn't something that you would have redundancy on it's hard to explain why but it's just kind of how that works is dead.
so when we went dark, we were all the way dark that we do have one of the things that
I'm most proud of is we built driver apps not for this reason for other reasons that allowed us to stay in constant communication with our drivers and still send and receive dispatch information. So we had already kind of built Technical Solutions are workarounds without even specifically this kind of outage in mind, but it it worked in in in in provided an Avenue for us to continue to move goods for our customers. There were impacts across the service spectrum and other places, but it was widespread not just at Warner. We just were more impacted than most cuz it was in the entirety of our Fleet whereas others had pockets of our Fleet impacted great their great job on the on the corner and a tough environment appreciate the time.
Thanks. Again. Our next question comes from Scott group of wolf research, please go ahead.
Hey, thanks afternoon guys Derek. Are we in the first half or are we seeing the same sorts of headwinds from lower project business lower spot rates than than what you saw in in the second half of nineteen. I'm just trying to bridge to that down five to seven percent and then you know if the market turns is as long as you expect, what do you think? So realistic second half rate recovery. Is it low-single mid-single? What do you think?
so
The environment has not dramatically changed from you know currently in the first quarter from what we were seeing in the latter part of nineteen to answer the first part of your question. Now, I will tell you there are fundamentally less projects and surge opportunities even in a good year in the first quarter and and most of the second quarter then there would be in the third or fourth quarter. So the so the impact if you will and the lack of an of that environment isn't as as great, we will have to continue to battle through the the fact that we're in the mid season and the turn is not completely upon us, but at least it's visible from where we're standing and I think that's generally recognized across the shipper carrier and investor community and as relates to the back half, you know rates are going to really be heavily depending on what happens with project Surge and and those type of opportunities because we built a lot of product lines around that we do it very well. We need that stuff to come off.
You know to be able to be available.
Back half and it's just too early to try to give you a prediction on what that looks like. I like where the consumer stands right now. They're standing gauged and consumer confidence looks good. We've got a trade deal and usmca that makes me feel pretty good given our presence in Mexico Phase One China certainly better news than what we were dealing with throughout all of nineteen. But we you know, but on the flipside, you've got an election down and so who knows what that does relative to page one way or the other so it's a bit early will update quarter-to-quarter, but I can assure you that Waits need to recover and when it's time for them to recover will be out there doing our our our life.
Okay, thanks. And then if I can ask one to John, so the the salaries costs were down. I think four or five percent sequentially is is that fourth-quarter a good run rate and no I get you didn't want to answer the question about full-year margin that someone else asked earlier. But at least in the first half if if rates are down similar first half as they were and back half long. Do you think the the margin impact should be similar as well?
Yes, salary wait.
Is our improvements came from the non driver in the logistics payroll side help sequentially as we may gain some productivity and efficiency improvements. We had 3.3 million fewer company miles in fourth quarter compared to third quarter partially because of the the GPS off partially because we got two holidays and fourth quarter and and one and third and we had a little bit more dedicated shorter Hall and in fourth quarter. We also had improved income and health insurance in the fourth quarter. Those are a little harder to predict as to how much that's going to be sustainable going forward. We'd like, you know changes I made to make improvements there, but you're always somewhat subject to your claims experience for those costs. So
I I would expect a salary wages to
Continue to Trend favorably based on what we know right now. But but our claims experience was was pretty good in fourth-quarter for work comp and health and life. So I wouldn't want to predict it that will keep all of that. The only thing I would add to that is that all of the things John said and then the other the other factor to keep in mind as we did have some Tailwinds and the fourth quarter from incentive comp, although this was great news in in some respects for the quarter in terms of how we performed is certainly did not meet our expectation of our internal goals were higher and instead of comp will reflect that and so they'll be some headwinds that will exist as it relates to that going into next year as we hope to Thursday our goals and exceed our expectations.
Okay. Thank you guys. Thanks Scott.
Our next question comes from Jac Atkins of Stevens, please go ahead good afternoon. So I guess just to go back to the to the, you know rate expectations in one way truck load just just for a moment not not to belabor the point, but I'm just trying to bridge to it. I think the other folks are as well, you know the down the down five to seven, you know, you've got less of a headwind your rear from from special project business in the spot Market rates appear to be roughly flattish birth rates and you know contract rates are you know, flat to down slightly, you know on an easier year of your comparison. It seems like pretty pretty steep decline in a way business in the first half. So could you just kind of maybe put a little bit more context around sort of how you're getting to the down five to seven? I think that that'd be helpful for folks.
Yeah, well, I think the first thing that might be getting overlooked is we were up over 6% 4 to 1 last year. And so if you do nothing on
Tracks and you don't renew anything just the effect that we've already been experiencing throughout the year both in spot in spot has two effects right higher spot miles exposure and a month lower spot rate. You can pound that with a normal normal seasonally slow first quarter, which is you know, it's it's it's it's like most first first quarter's right now wage, you're going to be negative right out of the gate those contracts that then renew that may end up renewing flat to slightly down still only add to that issue. Although they may be better than what you're experiencing in spot. And so we are being conservative with it with our estimate. It's probably as upside in the in the second half perhaps or the second quarter perhaps but they don't really get back to earlier question around project and spot and surge opportunities. The only time they really come to fruition and the first half of the Year even in good years. Is that the end of the summer
Order and it's just too early to be looking into a crystal ball right now and predicting what happens in June. So we're going to
Assuming plan based on what we know and what we're lapping and what we're lapping is a reality of of being in that range for one way truck load not total company in the as we start this year. So, you know, that's that's our best. That's our best for you on it right now. Okay know that that makes sense and I appreciate the extra the extra color there. So for follow-up question is relatively short-term questions, but I just think it's important for everyone to have their expectations calibrated correctly what we think about, you know, oh are Trends within the the TTS segment off, you know, John if I'm hearing everything that you guys are saying correctly, you know, you had some health care and and and other sort of workers comp Tailwinds in the fourth quarter and incentive, was was a good guy, you know, but conversely you had you know, the the disruptions from the you know from the supplier there which negatively impacted the fourth quarter. Yep.
How should we think about sequential you know or Trends? You know, typically you see, you know about a four hundred.
Basis point maybe a little bit more than a 100 basis-point degradation fourth-quarter. The first quarter, you know, is that is is that the right way to think about that this year or you know are there puts in take off?
Well, I think the biggest variable is the rate challenges that that Derek had talked about and being down five to seven in one way. I think it's still going to be pretty tough sledding at least in first quarter and more than likely in second-quarter. We're not forecasting significant project and search business and second quarter at this point. It could show up in June. But with this point, we're we're thinking it's going to be fairly difficult environment. When you combine spot rates, which we're forecasting to be down in the range of 15% first-quarter 5% wage order and contract rates that they're talked about flat to slightly negative and we're not planning on Special Projects business at this time. So Thursday factors all enter into the thought process as it relates to margins.
Okay, that's that's helpful. Thanks.
Our next question comes from Jordan allender of Goldman Sachs, please. Go ahead.
Yeah, hi. Just a quick question. Obviously most of the conversation rightly so is on truckload, but can you maybe talk a little bit about the logistics business and brokerage? And you know, is there any thought that you know, the the improved environment for truckload you start to see a trickle down to The Brokerage side of the equation later this year?
Yes, Jordan. Thanks for the question. Logistics is is got challenges both sort of market-based if you will in terms of supply and demand right now and what we've seen happen with with rep and some of the pressure and then additional as it relates to new entrants into the market that are that are you know, making that market more competitive than even the underlying supply and demand, demand would would warrant in my view we're going to continue to try to be disciplined. We we believe in that product volumes were actually up just by revenues being down and that's just a reflection of rate or rates went. We are going to stick to our knitting on on walking from business that we think is putting ourselves in a position to leave our customer in a bad spot when the market turns off. We're not we're not going to enter contracts where we're going to have to go back and rip them up and tell them here's New Deals. We're going to try to make sure and prices sustainable pricing and we hope customers will understand that and frankly, I think it'll
will be a little bit of a test to see how
How long they can lose this much in some of the digital Brokers that have entered the space and and how much staying power they have in the meantime, what we're going to focus on instead is continuing to build our Tech continue to gain efficiencies and continuing to build products that we think can compete head-to-head with any of them regardless of where they might want to price the business. We have to be able to execute and operationalize every bit as well as what they do and then back all that up with our assets. And so when we put that together that value prop I think makes sense for our customers. The response has been positive but it's going to come down to us being pretty defensive around we're we're willing to go with rate and and and I think the the stories you have to be written on how much more aggressive some of these folks get.
Thank you, very helpful.
Our next question comes from David Ross of stifel, please. Go ahead.
Yes, good afternoon. Gentlemen, good afternoon. Dave got some questions on some of the t's first the expanded the terminal Network that you talked about. How much did that grown now twenty-twenty over 2019. Do you plan for any more expansion of that this year and and is that to support mainly the one way operation the dedicated operation are both. Yeah. It's it's a multi-year plan to continue to expand terminals where we think they make sense and support our business and lower our overall cost structure. It's all in the capex numbers and we can do this multi-year plan and still happen within the ranges that we've guided to I only point that out because I don't want people to be worried or or thinking that we're you know, unnecessarily expanding. Yes, there's terminal expansion team this year. We are expanding and building the terminal in Pennsylvania. We're continuing to expand existing terminals where appropriate in almost every case they support
both actually in every
Please please support both in some cases. It might be a terminal that's 80% dedicated focused and 20% one way and the inverse is true in other terminals in the network and it really has to do with the the difference between incumbent terminals that we've had for a long long time and new terminals that were building to better support and more widespread Fleet that is more regionally concentrated than it has traditionally been.
So how many terminals did you end 2019 with and how did that compare to a year earlier?
So in nineteen, we would have added to it's difficult. I'm not trying to be evasive but we have tier one tier two and tier three Terminals. And so there are a multitude of stats around each of those. I can just tell you that at the tier one level. We've added a terminal in each of the last two years. We're adding a terminal this year, but they're also take so there's terminals that are either being downsized or removed from the network the net up the net effect is will probably be plus 3 at the end of the process net and that net number be about 13 of the large, you know, tier-one terminals a similar number of tier-two and tier-three.
Excellent. Thank you.
Our next question comes from Tom Wade with of UBS, please go ahead. Hey guys, this is Mike channel on for Tom wondering if you could provide an update on customer inventory levels are our customers looking to build inventory at this point or do we need to see some more drawdown before activity picks up. So John's the price on that. I'm going to be quick and turn it to him cuz he follows his closer than anybody. I know I just would say this I think on a very very macro level we have to continue to contemplate e-commerce when we think about inventory and we know that it takes more inventory for people to go to this omni-channel model and and and to continue to grow and have a more robust some eCommerce fulfillment strategy. They've been pulled down and recent reports but and and by historical standards, they probably still look a little elevated. I think they have to stay somewhat elevated as it relates to having a best-in-class e-commerce strategy wage.
I'll turn it over to John for more color.
A customer base in general inventory levels got a little bit better. But it it does vary from retail customer to retail customer depending on their strategies. Our customer base had a pretty solid quarter in October from a margin standpoint. They're they're in slow-motion mode. So I'm not saying they're they're expanding their sales significantly, but they are keeping a close eye on inventory. And and now that they have a little more clarity on the Tariff situation. I think that is helped them to manage their inventories more effectively. So I think we're in a good position from an inventory standpoint. Not not access phone not not significantly lean either. I think we're in a fairly balanced.
inventory situation
Okay. Yep. Thanks for that. And I guess with the recent ratification of are you guys expecting any impact or change to your Mexico business with in one way truck load longer-term?
So with a quarter ended October for our
I mean, we're still bullish on Mexico both for our own story and our Network and what we've built down there and having what we believe to be the lead the industry leading position already. You couple that with the fact we've had multiple exits over the last 12 months of carriers that are decided to exit the market which is bodes. Well for us usmca gives folks confidence now that they can go and and put back on the front burner plans for expansion. And so all of those things are positives. Um, it will the the other the other question mark I would say is Mexico's GDP for this year looks to have come in at either flat to maybe slightly negative for 2019 and the expectations for 20 is growth of you know zero to 1% So we have to keep our eyes on what happens overall with their their General economy, but in general terms, I'm bullish on our ability to continue to leverage our Mexico footprint.
Okay. Thanks. Appreciate it.
Our next question comes from Chris Weatherby of City, please go ahead.
Hey, thanks for asking me over the wire here. I wanted to maybe see their give you the elaborate on some of your comments around sort of early one Q. I know January is always difficult to get a read. I'm sure which system and kind of looks like when you think about it versus what you saw in the fourth quarter is this sort of where you'd expect to be sequentially any signs of improvement or maybe stagnation just kind of wanted to get a little bit more color around the January comics.
Sure. So we we saw the freight environment improved sequentially from Q3 to Q4 not surprising obviously with surge in other opportunities that exist but it started to give us strength on that in terms of what we're seeing in the overall non surge Network. I would say in q1 that that trend line has continued. It's still seasonally obviously lower than what we you'd see in Q4 off a compares favorably to most of the prior years. I think it's way too early to say we're out of the woods yet, but we've commented that it was it's still a lesser environment than what Q one of nineteen looked like home and the next few weeks is really where things become a lot more clear. We think assets are going to matter again and they're going to matter again very soon and will continue to try to position those assets where we would make the most sense for our core customers and our shareholders.
Okay military help. I appreciate that. And that kind of leads the second question.
Just sort of conceptually when we think about sort of coming out of 19, which is a challenging year particularly for one way truck load and and maybe there will be a recovery coming in the back half of 20 or maybe 20 21. How do you think that's sort of the real flexibility of the fleet to go back and forth a bit between dedicated and one way truck load how much capacity can you really swing back and forth in any given cycle or should we assume that service is $64 type of split. It may be where the Run rates going to be going forward.
You're so I think it's it's relatively easy to move move trucks from one way too dedicated and to do that in a fairly fluid way. Just depending on how bad outcomes are progressing and did negotiations are taking place. It's a little more difficult to move dedicated to One Way, simply because dedicated contracts the very reason they're sticky for us there also sticky for our customers, their three-year deals. Usually or sometimes longer. Our commitments are you know have been made and those trucks, you know, generally are going to remain as far as the mix we really do believe that 6040 is about where we want to be but ultimately it's people are going to compete for assets internally. I mean, the the belief I have is that when we think about what it takes from a capex perspective to to continue to operate a best-in-class fleet, those are expensive assets and there ought to be competition for their service. And so our our van division folks one way truck load Mexico dedicated. They're all going to be, you know, arguing over why they those
I said should be in their area and the returns will dictate where they end up but sixty-forty as a guideline general guide would be where I'd tell you to think about.
Our Fleet as we go forward good drivers help us be able to achieve that goal and and having high expectations of our Fleet and and Fleet discipline is really busy with high retention rates that serves us. Well if we were to have to grow and to boost up one way truck load from the outside, that's why we commented on being Market, you know, we're open to a if it's Market supports in the back half to thinking about Fleet growth, but right now we're going to stay in discipline.
Got it. Don't forget it. Thanks for the time. Appreciate it. Thank you, Chris.
Our next question comes from Brandon glinski of Barclays, please. Go ahead. This is David Zula on for Brandon. I apologize. I do not have a question on Thursday if that's okay. Perfect. So when you guys start at the five key strategy in 2015, I think the goal was to try to outperform in all rate environment and you know judging by the results of 2019. It seems to be bearing fruit could maybe pick out one of those elements of the strategy you think with most critical in the you know declining rate involved in in 2019 and maybe contrast that as investors tried to evaluate the strategy with, you know, an elephant you think will be most critical in a recovering rate environment in 2020.
Yes.
I think in the early decline of the market the clear commitment that we made starting with our chairman c l Warner and and delivered upon you know, and kind of throughout our culture to our drivers. So the talent T really carried the day, but that will carry you and allow you to change momentum and change culture in an organization. But you have to back up with with really some of the other teams and so Tech has in our investment in technology is starting to really kind of pay dividends and we've got a lot more to do there and a lot more money will be spent but but it will be home based on tangible returns and and tangible timelines. And so that is one that we think as we look forward has more opportunity the terminal and infrastructure and trucks and trailers Thursday. We are really a way to envelop the driver in the in the type of tools that he and she need to do their job. We think we have some of the best drivers in the industry, but we had to up our game on the kind of tools off.
and enabled them to really achieve what we knew they were capable of that was what nineteen was about and as we go into twenty it's continuing that
Culture and focus but backing it up with better Tech and finding the, you know, a more frictionless environment with how we interact with customers drivers mechanics and throughout our organization even internally wage and we have some Runway left ahead of us to improve some of those productivity measures and I'm excited about what that looks like is we continue to invest in Tech as we go forward.
Things are just like a quick follow-up, you know judging by the performance in margins this year. Is it time to revisit the 11% or better average through the cycle and wage not know what would spur kind of that internal conversation for you.
Well, I think you know look for updates on that maybe as the year progresses. We want to make sure we're in fact through the turn and that we understand how we've performed wage kind of through a full cycle with this new culture and new environment and new operational focused but certainly my expectations and and those of my leadership team are to continue to improve and we have to continue to find ways to to kind of create this Evolution at Warner towards a better future. I think we're on our way. I think the fourth quarter shows Thursday, I think posting year-over-year EPS earnings increase is, you know, pretty remarkable and yet we I'm excited about the number of things that we have. In fact of us to continue to to execute even better on so not looking to change that goal just yet, but I can tell you that, you know, it's on our mind.
I think so. I think that's on the quarter in the
Thank you. Thank you, David.
This concludes our question-and-answer session. I'll now turn the call over to mister Derrick Leathers who will provide closing comments, please go ahead first off. I just want to thank everybody for being on the call today and for taking the time to spend time to understand our story appreciate those that have been had the faith for some time and those that are coming to us more recently. If I was going to get you with comments. It would be really that we're going to stay committed to to what we've been doing over the last several years. We're going to put a best-in-class product out there. We're going to expect best-in-class return that and we're going to work with best-in-class customers assets will matter again and that turn is upon us as we sit here. Today. We are going to continue to keep discipline through the last month, you know few Innings or last inning perhaps of what was a tough rate environment. The first half will be challenged the second half looks more promising and in the mean time, we're going to
Find ways to execute and continue to put up results that we can.
Again, thank you for attending our call. We look forward to talking to you all more in the future.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.