Q2 2020 Werner Enterprises Inc Earnings Call

All participants will be in listen only mode.

Should you need assistance. Please signal a conference specialist by pressing the star cheaper Leopards hero.

After today's presentation, there will be an opportunity to ask questions.

Earlier this afternoon the company issued an earnings release for a second quarter 2020 resolved.

The posted a slide presentation to accompany today's discussion.

He's materials are available in the Investor section of the company's website at Warner Dot com by clicking on Investor.

Good news and events.

But what's caused a presentation.

Today's webcast is being recorded 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 as to disclaimers included in this earnings release related to forward looking statements.

Today's remarks contain forward looking statements, including those related to cope with 19 that may involve risks uncertainties and other factors that could cause actual results could differ materially.

Additionally, the company reports results using non-GAAP measures.

I wish it believes provide additional information for investors to help facilitate.

Uh huh.

Harrison of past and present performance.

Reconciliation for the most directly comparable GAAP measures is included in the tables attached to the earnings release, but in the appendix slide presentation.

I'd now like to turn the conference over to Mr. Dark mothers President and CEO. Please go ahead.

Thank you and good afternoon, everyone.

With me is our CFO John steel.

Second quarter 2020 is one of the most challenging periods in our nation's discrete and our company's history as well.

Well these customers suppliers and third party providers contended with the rapidly changing landscape.

Unprecedented impact associated with Cobot 19.

After the pandemic declaration in March we took immediate action to create an environment to safeguard our associates well deliberate on the needs of our customers.

Quickly implemented and communicated safety policies and practices and purchase P. P for a driver and Nondriver associates.

I'm extremely proud and grateful for a Warner team for taking the extra precautions and care to remain safe and healthy while continuing to make on time deliveries of the goods and products that keep American moving.

In addition, recent tragic events have intensified the national discussion for diversity and inclusion.

There's absolutely no place for racism or inequality in our communities or Workforces.

Our core values continue to be based on respect and inclusion in everything we do.

Our team is continuing to take steps by our words deeds and actions to further strengthen our diversity and inclusion programs.

Moving to sustainability during the second quarter, we were pleased to be named a 2020 top green provider by food logistics, and a 2020 green supply partner by inbound logistics.

The EPA previously named Warner as a Smart way Excellence Award winner and Smart way High performance Award winner.

These recognitions represent the highest award level granted by the EPA and Warner has received these awards the last three years.

Warner is proud to invest in the latest technology that allows us to work toward fuel efficient sustainability initiatives.

Warner's conserved more than 265 million gallons of fuel since 2007, and reduced our carbon footprint by more than 3 million tons.

Next following a review of our second quarter financial results I'll provide specific details about how warner's assessing proactively adapting and adjusting our business strategy to successfully navigate this dynamic environment.

For investors new to the order story on slide four we provide an overview of our key market size and fleet size metrics as well as revenues by segment industry vertical and customer.

To summarize we have a diversified fleet in revenue base better served us well over many years and economic cycles.

And the interest of time, let's move to slide five for a brief overview of our financial performance.

In the second quarter revenues decreased 9% to 569 million.

Adjusted EPS was 2% longer at 62 cents per share.

Hi, Good operating income declined 3% to 57.7 billion, while adjusted operating margin increased 70 basis points to 10.1%.

As we think about cobot 19 related impacts and trends during the quarter, we experienced a significant decline and economic activity in the first after the quarter.

It's affected the freight volumes if some of our when we truckload and logistics customers were forced to temporarily closed or significantly curtailed their businesses.

As we moved into the back after the quarter, we saw a steady recovery of when we truckload freight volumes from these customers as they reopened.

This improving free trend has continued into July.

We are encouraged by recent conversations with our customers about their expectations for free trends going forward.

Our dedicated freight volumes were strong during the second quarter as three quarters of our dedicated revenues are with customers that ship central products.

We ended the quarter with 7650 total trucks and TTS a decrease of 285 trucks grew year over year and a decline of 185 trucks sequentially.

This sequential fleet decline was anticipated in the early stages of Cobot 19.

As we aligned our fleet to adjust to reduce demand.

We had delayed implementations of dedicated fleet startups, and we plan for lower driver numbers and are driving schools and the other schools that we are aligned with due to social distancing requirements and state licensing agency closures and cut backs of services.

At this point I'll turn the call over to John to discuss our second quarter financial results in more detail John.

Thank you Derek and good afternoon.

Beginning on slide seven let me review in greater detail, our second quarter financial results and provide some additional color on the drivers of our performance.

In summary, Warner produced strong results in second quarter, particularly noting the challenging and volatile operating environment, we carefully monitored managed and adapted to a weaker freight market in April which then began to improve in mid may and June.

Hi, carefully executing our dedicated and one way truckload fleet management strategies combined with strong cost management, we improved our T.S. and company adjusted operating margins.

Revenues declined 59 million with nearly half the decrease associated with lower fuel surcharge revenues caused by lower fuel prices.

The balance of the decrease was due to adjusting to the impact of cobot 19.

Despite the challenging operating environment, our TTS revenue per truck per week increased 1.1% due to higher revenues per total mile and partially offset by lower miles per truck, we adapted to the softer freight market with 2.2% fewer trucks, the softer freight market and lower fuel prices.

Produced a 16% decline and logistics revenues.

Adjusted operating income declined 3% and T.S., we expanded operating margin by 170 basis points, while our logistics operating margin declined 120 basis points.

During the quarter, we implemented numerous cost containment programs that are ongoing which helped to mitigate the more challenging market and pricing conditions.

Oh salaries wages and benefits expense declined sequentially and year over year due to improvements in non driver payroll costs lower placement driver expense improved workers compensation costs and lower medical expense. We believe a large portion of these cost savings are sustainable going forward.

A portion of our lower medical costs as well as lower travel and entertainment costs are more temporary and are likely to increase when cobot 19 abates.

During the second quarter, we dealt with social distancing requirements that limited the number of drivers trained and our driver schools, coupled with state licensing delays for new drivers. This contributed to our corporate and other operating income decline of 3.1 million or three cents per share.

Our adjusted earnings per share were 62 cents or once that lower than the 63 cents a share we earned in the prior year period.

Beginning on slide eight let's look specifically at results for our truckload transportation services segment.

And the second quarter Tcs revenues decreased 35 million, primarily due to lower fuel surcharges of 28 million.

Adjusted operating income was 56.1 million, increasing 7% due to expansion of our operating margin.

By proactively adjusting and adapting our fleet to fit the changing freight market, we were able to produce a slightly higher TTS rate per mile and keep our fleet productive.

Binding this with a lower cost structure, we improved our operating margin.

Our adjusted operating ratio net of fuel surcharge was 86.3%.

Turning to fleet metrics on slide nine.

For dedicated we grew trucking revenues net of fueled by 5% to 239 million.

Dedicated average trucks increased 1% and revenues per truck per week increased nearly 4%.

One way truckload trucking revenues net of fuel decreased 9% to 168 million.

Average trucks decreased 7% and revenue per truck per week declined 2%.

One way truckload miles per truck decreased 0.3% and revenue per total mile declined 1.9%.

In April freight volumes, and one way truckload were lower which caused our spot miles as a percentage of total miles to increase the 16%.

As freight began to improve in one way truckload in may our spot miles percentage declined to 12% and further declined to 9% in June.

Moving to Wonder logistics results on slide 10.

And the second quarter logistics revenues declined 16% to a hadn't 10 million truckload logistics volumes were 9% lower and revenue per load declined 15%.

Intermodal revenues declined 10% well international revenues increased 20%.

Our gross margin percentage declined 40 basis points, its contractual brokerage experienced an increasing cost to capacity as a freight market began to improve in the back half the quarter.

Based on what we are seeing so far in July truckload logistics gross margins are lower due to higher capacity cost and volumes are down a high single digit percentage year over year.

Logistics operating income decreased 39% to 3.1 million well, our logistics operating margin declined 120 basis points year over year. It improved 180 basis points sequentially from first quarter due to stronger performance.

I'd now like to turn to final portion of our prepared remarks back the Derek.

Derek.

Thank you John.

Moving to slide 12, I want to update you on our five T. strategy.

Over the past few years, we created structural and sustainable improvements with our modern and more efficient fleet.

Hi, quality professional drivers and strong management execution.

Key highlights our.

Our truck and trailer fleet ages or low with an average of 2.0 and 4.1 years, respectively. We intend to keep our truck and trailer age is at or near these levels.

Well the labor market continues to change with a higher national unemployment rate in the last few months, we remain committed to our rigorous hiring processes to attract to retain the industry leading driver talent.

And our terminal network, we implemented social distancing and other safety procedures to enable our mechanics to continue to maintain our trucks and trailers.

We are utilizing enhanced technology tools to Orient and train our drivers.

And we continue to analyze and make thoughtful decisions with regards to our ongoing terminal capital expenditures.

We continue to invest in upgrading the modernizing our IP infrastructure and data security.

During the second quarter, we launched Warner edge, which demonstrates our commitment to technology development and innovation.

In June after an extensive search process Dharma hone joined Warner as our new CIO.

So far has excellent credentials with nearly two decades, and I T as well as supply chain experience, which we believe will strengthen our IP infrastructure performance and productivity going forward.

We're extremely proud of the Roque Warner drivers, who continue to safely deliver Americas freight and keep American moving during these challenging times.

Contributions of Warner drivers to our citizens in our economy have never been more important than they have been the last 20 weeks and they will continue to be going forward.

The ultimate goal of or five T. strategy is to safely deliver superior service to our customers on time every time that goals not changed and I'm proud of our team for consistently going the extra mile could differentiate Warner in the eyes of our customers.

Moving to slide 13.

We've taken significant steps to manage our business during cobot 19.

Trucking is an essential industry the delivers a central goods for consumers.

Our driver and non driver so should stick this responsibility very seriously.

I'm extremely proud of their achievements during this difficult time.

Beginning in March we thoughtfully instituted policies and procedures to reduce virus risk and enable our associates to remain safe and stay healthy.

We continue to closely monitor and disseminate CDC state local and company guideline updates to our entire team.

We continue to execute against the Warner playbook by adapting to constantly changing scenarios every Warner decision has been guided by three basic an important values be rational logical and above all be compassionate.

To effectively manage our operations, we continue to aggressively address not essential discretionary cost across the board.

We remain keenly focused on hiring and retaining the safest and most qualified drivers.

To support a safer and more efficient driver experience, we're installing new untethered telematics technology with smart workflow best in class navigation improved safety features and reduced manual entry.

And we've worked hard to implement cobot 19 protocols that enable our associates to remain safe and healthy.

So that they can continue to safely deliver our customers freight on time.

Our company Associate Cobot 19 positive incidence rate.

As a percentage of our total workforce has been tracking well below the national average.

Turning to slide 14, nearly two thirds of our revenues for our top 100 customers in the first half of 2020 consisted of basic necessity consumable products.

There are essential products are more defensive in this economy and include the discount retail home improvement retail food and beverage and consumer package goods verticals.

We have supported certain retail customers with increased freight volumes as cobot 19 has shifted some food and beverage consumption from restaurants to grocery.

And as online ordering of the central products has accelerated.

We transport numerous essential products that are continually being restocked in today's economy.

Moving to slide 15, and our financial position, we paid off $75 million of debt in second quarter. Our debt is currently below our target range at 175 million.

Our net debt to EBITDA leverage is currently very low at 0.2 times due to our desire to remain conservative during the pandemic and create flexibility as opportunities arise.

Our long term goal of 0.5 to 1.0 times net debt to EBITDA has not changed.

We have available liquidity, a 345 million at quarter end based on cash on hand, and credit facilities and excluding a $75 million credit facility that expired in July.

We have plenty of cushion with our two debt financial covenants, and we remain well positioned with a strong balance sheet and ample liquidity.

On slide 16 is a summary of cash flow from operations net capex and the resulting free cash flow over the past four years.

We continue to invest in maintaining a newfleet equipped with the newest and cutting edge collision mitigation safety technology to reduce both the frequency and severity of accidents.

We're also investing in and enhance terminal network for our drivers and ongoing modernization of variety platform and software and we are adopting new truck technologies.

We expect to generate free cash flow in excess of $150 million. This year and have already achieved that goal in the first half.

We expect free cash flow to be more neutral in the second half of the year as net capex in the first half was lower due to OEM, new truck delivery delays, resulting from temporary plant closings.

Also $34 million of the improvement in working capital in the first half was due to the temporary deferral of federal and state income tax payments for the first half which were paid in the third quarter.

Looking to slide 17, we compare our prior annual guidance second quarter actual results and current annual guidance metrics for 2020.

Our fleet declined in the first half of 2020 by 4%.

Due to an intentional decline in our one way truckload fleet in a softer freight market.

Very few dedicated fleet implementations this past quarter.

We also had lower driver school hires as enrollments declined due to the previously discussed challenges with social distancing and state licensing closures and delays.

We expect to begin growing our dedicated fleet in the third quarter based on anticipated fleet implementations.

Our full year truck growth guidance from the end of year 2019 to end of your 2020 is now in a range of negative free to negative 1%.

As we expected the used truck sales market remained challenging in the quarter due to low demand, which limited equipment gains to just shy of 1 million.

While we were seeing some recent slight improvement in the used truck market remains very difficult to predict used equipment gains for the back half a year.

We expect net capital expenditures to remain in the range of 260 to 300 million.

When we forecasted one way truckload revenue per total mile in late April for the remaining months of the first half of 2020 compared to the first half of 2019, we assume that the freight market was going to be very difficult for the entire second quarter.

Beginning in mid May the freight market began to improve and that trend continued in June.

As a result, we exceeded our forecast for this metric.

We've established one way truckload revenue per total mile guidance for the second half of 2020 compare to the same period in 2019 in the range of negative 1% to positive 2%.

This guidance reflects the recent improvement afraid and assumes a more normalized peak season in the fourth quarter. This also assumes there's no widespread round two of the stay at home order programs.

We expect our effective tax rate for the full year to be in a range of 24.5% to 25.5%.

We expect the average age of our truck and trailer fleet to remain at or near current levels.

So far in the first four weeks of July freight demand trends in our one way truckload unit have been stronger than normal representing a continuation of the improvement in freight that started in mid may.

Our annual liability insurance policies renew on August 1st.

As a result of the tightening of capacity in the commercial trucking insurance markets. We currently expect the premiums for these policies to increase by at least $7 million on an annual basis.

Noting the policies coverages and rates are not yet finalized.

We also expect to continue to be responsible for the first $10 million per claim under these new policies.

As we sit here at the end of July covert 19 case counts Endeavours have been rising the last few weeks and over half of the United States with a return to school scheduled to start beginning next month.

How we manage the virus as a society over the next few weeks and months, we'll determine if there is a strengthening or slowing of economic activity going forward.

We believe there are several factors that will constrain truckload supply in the back half of 2020, including blow replacement level class eight truck builds fewer eligible drivers of the drug and alcohol clearinghouse database continues to build.

Aging truck driver demographics, lower driving school enrollments and extremely challenging trucking insurance, Mark and the expectations for increased trucking company failures.

I believe Warner remains well positioned with a superior team then we'll continue to execute and produced strong results.

There will continue to be near term freight and cost uncertainties, and we will focus on controlling the controllables.

We will bounce our near term priorities with our long term strategies, while continually reinvesting for the future.

In June our founder first driver and my mentor Seal Warner began his retirement.

The company. So ill founded 64 years ago became one of the Giants in the trucking industry I relentlessly taking care of our customers drivers associates and suppliers.

That isn't going to change on my watch I.

I would like to sincerely. Thanks for this opportunity adverse competence and me to lead the company he built.

I'm fortunate that see I will continue to be available for his insight wisdom and knowledge.

In summary, we're very proud of our results during challenging times.

We have now demonstrated strong execution and performance during a variety of economic cycles.

And with that at this time I'd like to turn the call over to the operator to begin our Q and eight.

We will now begin my question and answer question.

You asked the question you May proceed Star then one on your touched him.

If you're using his speakerphone, please pick up your hands that before proceeding let Keith.

To withdraw your question. Please press Star then too.

To allow for his many colors as possible to ask questions, yes that callers limit their questions to one question and one follow.

This call will end at five PM CDD following the company's closing remarks.

My first question comes from Ben Hartford with Baird. Please go ahead.

Hey, good evening because.

Maybe Derek just some perspective on where the fleet sits today and where it can go I mean, this debate about where we on the pricing cycle and obviously you've got to.

Strong quarter here behind your belt.

You've talked about 11% all in TPS segment margins, it's kind of a cycle target.

Where's your mind today as it relates to the potential over the next few years.

As it pertains to where.

Maybe the top end or a full cycle average for the TTS fleet can be in terms of a margin profile.

You have been so first of all good afternoon, and thanks to the question.

I think a few things are.

Indicative of our second quarter results and how we think about going forward. One. We're finally, finding our stride on the cost side of the equation I think the Warner stories. One that is for years performed at the top end relative to yield in revenues in revenue per truck per week, but we'd need to get better and it really built a culture over the last couple of years on the cost.

That shows through and tough quarters, or I should say volatile quarters like the ones. We just went through.

And you can kind of see the results of those efforts. So so you are right as we look and think about going forward.

Expectation is will be as good as we've ever been on being paid fairly for premium work in a premium service, but at the same time, coupled out with a with a little more today's tenacity around.

Cost controls and cost management with that coupling those together my expectations is we'll continue to push forward.

You know expand a more aggressive approach relative to long term margins.

With that said.

Right now in the middle of we're out in the pandemic is not the time for me to be restating long term goals. All I can tell you is that our I think our results speak to where we're at and how we can perform and what we and the confidence that we have for the back half is apparent in some of the guidance that we've already issued.

Okay, that's great and I guess, just a follow on.

To that I know, we're in the midst depend a pandemic you talked a little bit about some of the supply constraints, but.

Yeah. The July strength stands out as clearly being unusual.

There are some anecdotes about some tightness of the west coast as it stands kind of here today and the rail networks, becoming a little bit.

Hi, it already I know, it's very difficult to forecast over the next.

Few months, where we're going to go but could you speak a little bit about what's going on in July and maybe what that sets up as the best case scenario I should say what baseline scenario might be as you finished the third quarter look into peak as it stands today.

Yes, I mean, so July thus far is really been an ongoing continuation of the improvement we saw in the back half of the second quarter. We've seen continuing continued strengthening its certainly stronger than a year ago.

It's now stronger our at certain times in the week. Then then multiple years of prior data up data.

I would say what I'm more focused on right now is the encouraging conversations we're having with our customers. If you think about our portfolio mix, we talk all the time about it being.

You know focused on on discount retail focused on own improvement and also focused on those that when within that space. Those folks are doing well they are performing well during the pandemic because I think they'll do well.

You know regardless of how that the next couple of works and the road play out.

Again, we did preface all of our guidance with the reality that we're assuming no widespread secondary round of shelter in placed orders, which doesn't mean that we can't survive or persevere through hotspot issues or selective geographies that may go through that the west a strong right now really the entire countries pretty strong right now it's most.

Pronounced in the west and across the South and really all the way over to the southeast.

The dialogue is indicative of one that we've got.

Kind of everyone's attention. If you will as we start talking about peak in talking about pricing and talking about wanting to make sure to be there to serve our customers. I think you started in asking about where the fleet could go and I thought you might ask about mix that that is really got to be determined by our customers were going to listen to them understand their needs and on the mix.

Front, we're going to be nimble I think we've shown our <unk> ability to be nimble over the last several quarters in different economic environments will stay nimble going forward.

We've got a strong dedicated pipeline, but we've got a lot of opportunity in one way right now and so we will we will balance those dialogues with our customers will give them options and pricing to reflect those options and hopefully close out on something that works for both of us.

But but certainly our expectation is that our results need to and continue to show progress as we go forward.

Our next question comes from Brandon Oglenski with Barclays. Please go ahead.

Hey, good afternoon, everyone and John Kerry Thanks for taking my question.

There you have more public float out there and by no means business. This was about Mr. Seal Warner Obviously is left a very long lasting legacy.

The company, but you know objective Lee.

Yes are we can look at us and say your fleet spin around 7500 now for two decades, plus margins have been cyclical but range bound maybe a conservative approach previously yet what do you see changing going forward now that you know that's becoming maybe more of a.

Surprise run for maybe more of that or is that the wrong way to put it.

Yes, so here's I'd put it and I don't know if you will answer exactly what's your what's you're asking Brendan but look we're going to stay true to the routes on the things that really matters, so integrity service drivers customers.

In best in class and being committed above to that above all else those are things that.

Our indicative of sales DNA, but they're also part of mine, that's not going to change.

We're going to we're going to we're going to place those drivers where they belong which is really at the top of the or chart and make sure. We given the respect that they deserve but with that said, we clearly have expectations and see the LCL himself as those expectations at this company not only continues to prosper and exist, but actually thrive.

And and grow and look and look forward to the next 65.

Years are my dialogues with haven't been clear on that subject. He's he's talked about that with me with him that yes, there is a transition underway and the culture.

You can count on going forward.

But it's the world is changing the environments that we operate are changing and it's going to require us to change with it.

That includes.

You know a willingness to take educated risks when that's the right answer and to go where our customers need us and to grow where our customers may need us, but that's all going to be done with financials and mine that is going to be done I think you've all got to know me enough to know I'm going to be Bottomline focused and I have to have a reinvestable you know kind of return to.

Two to two to justify that and that growth.

But we'll have our eyes opened and.

Looking and be opportunistic as we go forward.

But again I don't want to keep going back to the touchtone of the pandemic, but right now what I can assure you. We are laser focused on kind of a short term and trying to navigate the remainder of this as we get through it.

And keep putting up the numbers, we've been putting up in improving the bottom as we go forward.

Well and I really appreciate there as far as Derek and I know, it's difficult right now the middle pandemic, but you got has been performing relatively well create even during the pandemic I guess you could look out a little bit further.

What do you want investors to watch, especially maybe new shareholders have gotten involved here.

Under your watch now at Warner what we'll get a REIT metric to measure the next few years.

Well I mean, if it so I mean I'd give you one but I'll give you some thoughts.

So few things you mentioned being range bound for a couple of decades, and I'm not going to dispute that but I will tell you we've been living in the top into that range as of late so.

We're going to continue to push that top into the range in terms of results.

Higher that's my expectation that's his team's expectation thats, what weve signed up for.

We are going to be aggressive as it relates to growing as appropriate and that doesn't just mean truck growth or may not mean truck growth at all but looking for revenue opportunities, we're going to expand our logistics portfolio.

We're going to expand and book and understand that growth is kind of the fuel and an organization needs, but all of which is going to be put against a backdrop. That's clearly entrenched in bottom line performance.

So you're going to wake up and worry at night that were just grow in for growth sake, I can assure you, but I do have an eye towards the reality that took.

Create opportunities not just for our investors, but our associates our drivers our leadership team growth as part of that equation. So we're rolling into that and.

I'm looking to lead the organization toward one place and that's to be the best in class truckload carrier and logistics company that there is.

That's what we're going to set the bar and every quarter. That's not the case I can assure you we talk about it we do it at a segment level at division level and.

I don't want to compare ourselves to just anyone I want to compare ourselves whoever's best and eventually taken place.

Our next question comes from Todd Fowler with Keybanc capital markets. Please go ahead.

Great. Thanks, Good evening, Hi, Derek Hi, John Hey, Todd.

Hey, Derek I'm doing well think Sean.

On the revenue per total mile guidance for the second half the down one to up to.

I understand that you guys have easier comparisons are based on the second half of 19, but can you help us think a little bit about some of the assumptions that you have in there either for spot rates are what you've seen on the contract side and then there or do you think in this environment. This creates the opportunity for so many bids are to pull forward. Some pricing just based on your the tightness that you're seeing in the market right.

Now.

Yes, so first off I'll say you when you ask what's based on what's baked into the assumptions, let's start with the fact conservatism as I mean, we're going to be conservative we're going to think about these assumptions in ways that we feel comfortable we can deliver.

But the market is going to dictate how and where we ultimately end up just like it did last quarter, when we were able to exceed that range.

But we got work to do to get there.

I'm not looking to do pull forward as our primary strategy I think there's plenty of opportunity.

For us to respond to existing customer needs for additional support additional volumes.

Pop up fleets and many beds as you referenced that's where our work needs to get done the spot market is clearly moving and going to continue to move in my view and will play a role there and we'll get our fair share.

Going to stand with our customers as it relates to commitments, we've made and and volumes we need all but those commitments have been rightsized for the volumes that we've been seeing.

Over the last eight to 10 weeks and.

As those commitment levels decreased to new normals, that's the new commitment that we're going to make sure we stand behind and we'll work with them as it relates to increase needs an increased volumes above that.

But it's really going to be a mix of a lot of things. We've got a dedicated implementations that will take place metal drives some of the revenue per truck week on that side of the ledger on the rate per total mile in.

In one way, it's going to be many bid spot opportunities.

Projects in excess volumes that need to be covered and frankly some of the fallout. We're seeing from bids that are just recently been completed.

That's a fairly widespread phenomenon those all will be priced appropriately. So we can continue to reinvest as we look forward to future growth.

Okay that helps us so when you say priced appropriately and above the commitments and some of that work would be more kind of like a spot rate versus a contract rate in the second half right now.

Yes, it could be where the spot market as it could be above the spot market dependent on what that need is or what that volume is and how far we've got to pull capacity from.

You know, we're going to have real opened Frank discussions we work with great companies.

That have good leadership on their side, we're going to talk to him and be fair and appropriate about it but in order to add additional capacity, there's a cost of doing so it, especially right now and I can't overstate.

Some of the issues going on in the supply side.

With that cobot came along we have seen as an industry accelerated retirements.

From that demographic that was near retirement anyway because of the.

Their preference to bail out now that was coupled with a 100000 less cbls issued in the first six months of the year.

At the.

Licensing agencies across the country to new entrance and then that's further backed up by the fact that with social distancing.

Classes around America, producing somewhere in the neighborhood about 60% of the graduates that they did pre cobot and so that's kind of lost sleep you can't make up for there's a gap there and.

So we're going to be constrained on the driver side will be constrained I think just out of financial prudence relative to just adding trucks not just here, but across the industry and yes rates are going the right direction, but there's a lot of folks that have that of.

Had a lot of pain in their networks.

Especially in the second quarter.

That are going to be I think pretty reluctant to just throw trucks against that volume they need rate first and that's where they're going to focus and they need to focus there.

Okay that makes a lot of sand. So just a follow up John is there anything you can share with US here. The margin performance here was very good I think it's the best that I've got my model, even better than 2018, when you had higher gains in the second quarter.

Seems like Theres, some unusual seasonal patterns you what are some things you'd point out sequentially as we move into third quarter. So we should factor and from a modeling perspective, maybe on the cost side that you know maybe help in Twoq you that won't help in Threeq you are that could reverse that we should think about just from a margin perspective. Thanks.

Sure. Thanks, Todd a few things to consider we pointed out the insurance premium increase that goes into effect August 1st. That's currently estimated at a 7 million dollar increase it will have two months of that or a million two in.

Third quarter, and then a million a run rate after that assuming no changes to our coverage in rates. The next couple of days as we finalize that policy logistics margins are going to be challenged based on what we're seeing so far in July.

Cost of capacity has risen significantly and while that is good for the truck side. It creates near term challenges for the logistics side of the business.

Fuel prices.

Dropped 35 cents a gallon from March to April, but they moved up another 25 cents a gallon from.

April through here in July so we won't we had little bit of a help from lower fuel prices and second quarter and we don't expect.

That in third quarter, and then the last item, which is really after the areas how covered plays out and able to stay at home programs affect the strengthen the freight market that we're seeing right now.

Our next question comes from Amit Mehrotra with Deutsche Bank. Please go ahead.

Thanks, Operator, Hi, Derica, John Thanks for taking the question.

I was hoping Derek I, obviously I appreciate we appreciate the guidance.

In the back half in terms of revenue per total mile. One way I was wondering.

Did you can opine on what you think God 21 may look like.

We're not obviously going to hold you to Ed given how quick the markets moving but.

I'd be curious did you see see kind of where your head that with respect to 21.

Yield outlook, just based on the free how the freight volumes Balding and also comes on the conversation with your customers and office supplies as well.

Sure Matt first off thanks for the question and.

Thanks for the or.

Not holding me to it.

But even despite the fact, you're not going to hold me to it it's probably will still early for us to try to predict 21, what I can tell you is going back to the supply side.

It's tight right now I think it's going to remain tight as I look forward and think about across our network, even with our strength of our customers are still many other customers that are.

Only partially back or.

They are back and opened but at reduced volumes and yet that's enough to have the network be as tight as it is.

There's not a lot of believing we've got that in our guidance on the truck side that were suddenly going to be able to bring the Calgary.

As it relates to new trucks, given all the delays with licensing and training and and the restricted classroom size and retirement is going on in the industry and so clearly 21 is setting up to be a year for rates to continue to drive.

Forward or upward from where theyre at.

Thank you to the extent I'm being cautious about wanting to talk about a particular number it's because it's really hard to tell just how tight it might get meaning we might become more bullish as the quarter plays out I find it unlikely that we would become less so.

But it's too early to talk about a number or a range at this point.

Okay, So you're saying, 5% to 10% basically that [laughter].

Okay fine I understand that on the dedicated side.

The the tractor count to kind of.

Stabilize here after a decent growth phase obviously, the the utilization the productivity of the fleet is still very strong what's the opportunity to kind of.

Get back to growth and tractor count and dedicated and do you still see.

Do you need to kind of continue that productivity rate increases.

4%.

Quarter in terms of in terms of revenue per tractor per week.

So the comps in revenue per tractor per week, obviously, you're getting tougher, but the markets also getting a little better, but it's not willing to sign up just yet that that's a run rate that we think is fully sustainable.

At this time, what I can tell you is our implementation pipe is full as it's been in a long time, because we've released went through a couple of quarters in a row of businesses that were closed and committed but just haven't yet implemented. So now we have a little bit of the rapid through the buyback on problem of trying to get a lot of stuff implemented.

As people start reopening and looking to get that done and we're going out to work our way through that as to when we can get implemented at what stage because of its been delayed for six months already we're having those dialogues in those conversations we want to we want to stand up those fleets that weve that we've won but they've been on the back burner for the better half a year.

And so we've got some work to do there.

I do think it's a safe assumption, you're going to see dedicated growth in Q3 versus Q2.

That may.

Start getting us to the higher end of the range on totaled truck count growth, but right now it's a struggle because we've got a lot of one way demand too and so when I talk about these obstacles to growing their real.

And they're not and they're not freight related it's all of the other obstacles that are going to really put a lid on capacity, including here and so we're going to have some tough tough conversations we have to have in some of that's going to be yielding off the bottom. We've got some work to do with some freight that maybe doesn't have the network.

Very well or maybe is was priced very aggressively.

You know and needs to be Relooked at.

And so because we've got to create some cap room for a fleet that's going to we're going to certainly try.

To continue to grow it as appropriate, but I think it's a tough time to grow as a trucker right now even if somebody with so inclined.

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

Hey, Thanks afternoon, guys. So I get we're not getting.

21 pricing expectations, but maybe dare to the extent that you're there are some bids happening right now I know, there's probably not a tom but to the extent there are some and any color on on that directionally or magnitude of pricing right now.

Sure Scott So I'll start with we're over 80% done with our bid season at this point and so it isn't like the bids are where the back half works going to be predominantly reside in there are some bids that are still working their way through the network right now.

Our expectation on those given the market conditions were added that it would only makes sense for and those beds.

For our pricing to reflect to inflect positive right now and those bids and we've got to work through that that will be up to our customers to decide what portion of that bid ends up landing with Warner we need to do that to continue to reinvest in our fleet to continue to take care of our drivers and so thats, where our mind as it suit rates are going to be.

Positive territory on those bids rates will be in positive territory in spot in rates will be in positive territory on project and.

Many bid type opportunities you still though are digesting goods that are better getting into the network and that you're starting to live with that might have been priced in April in April wasn't real good environment and decisions are having to be made in April that you might have to live with right now for a little while.

And so we're going to work through those and have that dialogue and try to try to do the right thing.

But that's all in the item older what's what's exactly right and I can tell you back to the statements about our character and our roots in our integrity that stuff still matters and we're not just going to run from it.

When to stay true to it.

Yeah, we got a lot of price work to do current video beds, if they were to come out today.

We will be will be pointing.

In positive territory on those I can assure you.

Okay. Thanks, and then I want to ask about driver so usually when the markets tightening like we're seeing right now the driver market tightens up and we need to get some a driver pay increases.

Are you see I'm not really sure are you seeing a tighter driver market right now.

And how big of a deal do you think this double unemployment is right now in terms of the driver market and how you think the driver market evolves from here. Thank you.

It's great question.

So the driver markets tight, especially for quality drivers right. So it's not a matter of how many drivers are out there that have cbls or how many applications, we get a week because those applications are abundant right now it's a matter of those that are higher bowl that meet the criteria that had the culture that we're looking for that we think can make a difference in our fleet.

And that that market is tight.

I do think.

You got to look at the positives during this pandemic wherever you can find one and I think one of the positives as our drivers I've seen and witnessed and lived with us treating them right.

We've worked hard through this pandemic to keep our driver safe to keep them equipped with all of the supplies they need to be able to do their job and do it safely we've aggressively tried to work.

And to on our communication and keeping them in the no and filmed videos on a regular basis and pushed amount to the trucks to continuously talk to them about where we're headed and why and what we need from them and and asked for their support and I'd say morale in the fleet is really strong and that's important because there's times on the driver markets tight and morale is.

Suffering through a cyclical low or a momentary low and you can find yourself and real trouble, that's not where we're at today.

But it doesn't mean that we don't need to be cognizant of what it's going to take to attract and retain the drivers. So.

Part of where we'll do some work over the next six months is finished my commitment on the driver wage side would be this to the extent I'm meeting to do any work on driver wages I'm going to have those conversations with our customers. It's only write that I do because the reason I'm doing that wage work is so I can then turn in all their freight and deliver and so they did the.

To go hand in glove and if you see if you were to see driver wage lines, moving you should see rate moving at that rate or or greater.

And so that's where our expectation is right now not a lot of wage pressure.

Because we're working really really hard on what matters and when they feel safe and feel like they're company cares and feels like we're fuel that we're taking the steps to put them in the right position.

They want to stay there and they've been doing that.

Our next question comes from.

Ken Hoexter with Bank of America Merrill Lynch. Please go ahead.

Hey, good job good evening.

Can you compare and contrast, some of the comments on on your higher insurance, the hard used truck market, but yet.

On that capacity that you were just talking about building class eight net orders seems to be kind of scaling up here in the market always seems to to hurt.

When when rates are turning so the question is.

Why upward.

Yes investors want to know.

We're nearing peak or if not why is it going to continue to improve I think you've got a lot of questions on the rates into 21.

So why should we not expects to be peak, if we're seeing that.

The net orders start to build up again.

Well I think the net order front, you've got to let me first of all I do want to speak with too much detail on how the Oems manage those numbers and what all goes into those numbers, but I will say that I know.

Look at our case, we've we've certainly got orders come in and in some cases, some elevated capex in the back half.

But its replacement and it's because we have to make up for the fact that we had supply disruptions and we're having to relook at our run rate and make sure that keep our fleet, new and young to back to Scott's question around.

Drivers, we've got to keep going the right equipment and so that's part of that.

You know the reality.

So as it relates to capacity going forward is going to be can you put a driver in it.

Even if you to order it and if you do can you put the kind of quality driver in it that you need now more than ever before in this tight insurance market.

Going to make sure that all of all of those things are or thought about.

And as it relates to peak or or whether there is additional earnings from here I was just kind of remind that you know did this quarter was accomplished with not only a no help on the rate side of the equation, but really headwinds as it relates to rates.

And yet we were able to deliver these kind of results will rates clearly are under market right now as an industry and they clearly need to move into right direction. So.

We've got work to do and we've got a whole entire bid cycle coming in 21 to get some of that work done so I.

I think there's room to run and we've got to continue to do better.

I think the onus on us and I'm speaking, that's we going to Warner specifically is keeping the discipline and keeping religion around the cost control side, that's really where we've got to continue to excel and we've got more work to do and we've got internal plans I was looking at today that are ahead of our initial expectations and a lot of fanfare.

Around where we're out on cost and my take is there's still more to go and there's still more defined and that's the direction on given in the team has embraced that and they're going out and they'll find it.

Perfect and then for my follow up.

Linda mentioned, a little bit about Warner edge and it seemed really exciting yesterday, another trucker talked about that digital moved to the frictionless orders.

And really seem to get enrolling and no Schneider used to talk about their systems. A lot. Maybe can you just take a minute talk about where does Warner Stan you talked about what dollar was going to kind of jump in on that as new Seattle, maybe talk about the development and what the opportunities you see.

For advancing Matt Thank you Sir.

Yes, so we saw the announcement yesterday and I applaud them for their work they're doing in the efforts undertaken.

We we find it.

I think it's good whenever other competitors start to enter that game and start to enter that that frictionless order arena.

That's exactly the kind of work we've been doing that have been doing over the last couple of years.

We looked in benchmarks a lot of our internal metrics against some of the things that have been stated over the last several days and feel really good about where we're sitting on those same benchmarks and feel really good about our.

Percent of freight that comes into our network in an automated format dispatched automated automated interaction with the driver et cetera.

Thats part of how we're getting to where we are today with some of these results. It's part of why SDMA is lower year over year, and we're making progress in that category, because we're becoming more productive.

Warner Edge is going to continue that as we go forward.

And we're going to continue to look for ways to go to more and more to a workflow environment, where where we're we're intuitively managing our business and if you think about trucking its out it's pretty.

Crazy that with satellites on the truck and satellites on the trailer and redundant feeds of both of those position locations.

That theres people out there still asking drivers to send in a arrived at shipper or departed shipper arrived to constantly type messages. So we're using more and more geo fencing and more and more automation to we should know where they're at and asked them to drive and do is little other things other than driving safely as we can do.

We're real excited about some of the work we're doing in Warner edge on break down and.

Safety in particular to to use AI to auto process and auto educate us if you will on where the real issues are because the promise of big data as people get overloaded with it you have all these alerts and all these these things coming at you and if you can't filter through it quickly and make it usable information, it's not very useful at all.

So that's where our focus is and that's where the whole Warner edge platform has been built around.

And I can tell you like you daras.

I'm not trying to overplayed, our and here, but these are breathless share and I'm excited about where he is going to take us and I I'm I'm I'm, just really excited about where our tech stack sits today, but more excited about where it's headed.

Our next question comes from Tom.

Yes. Please go ahead.

Yes, good afternoon and.

Congratulations on the strong strong results obviously against that.

The dynamic backdrop why did you get your thoughts on.

It seems like the market's been really strong in June and July.

Where do you think.

You think customer inventories are low and replenishment is going to drive things through fourth quarter, how do you think that.

This plays that just in terms of inventory than demand.

And then maybe I guess.

Another way of looking at that what do you think that's field analogous to.

Is it similar feeling too as you were in third quarter of 17, and the market was really tightening up a lot I know it no kind of historical period exactly the same but it's a couple of questions on freight demand and outlook.

Yes, so first on the on inventories I will tell you that I think thats a tougher question to answer than maybe at any point I can recall because it's so customer specific those that are winning in their space that have consumer.

Discount consumable type items have really been pushing stuff through their networks and they've got what they are in a replenishment phase because their sales are up and continuing to go further.

And were part of that replenishment. So we view the but we do have customers. Our network. There clearly are going to be on the other into that spectrum that have inventory levels that it might be heightened our job is to make sure. We're at least knowledgeable about where they are out in their cycle and make sure that we think about that as we think about the back half, but but the in net net aggregate of all of that is that I think we have.

Both the consumer that's still engaging and engaged we have people now coming out on the shelter at home orders and starting to to.

I have some pent up demand if you will in their activities and you have inventory levels that on on in the aggregate.

Needs some work relative to replenishment prior to peak.

All of that sets up well in terms of trying to compare what we're going through right now to any other cycle. It's it's so hard because we've never had a cycle that included parts of the country totally closed parts of the come through to totally open people that are now sheltering Bakken in place and others that are coming out for the first time, all with a backward background draw.

Above some of the social unrest and and other issues going on what we what we know is that we're more committed to ever and to both to those working through the pandemic and frankly those communities that are suffering through some of these social unrest to keep stuff on the shelves and.

Respond and deliver in a time of really multiple crises that are going on in our country that as an opportunity and we're poised and ready for that opportunity and we will deliver you know for our customers and so it's exciting to have these challenges because we want to play a part and overcoming them.

Okay, Great and then I guess just for the follow up on the.

You've talked a bit about capacity and a.

Good I think a clear message of constraint.

What about the driver that.

Kind of collecting unemployment benefits in the supplemental that potentially can come back to the markets.

If the supplemental a unemployment is cut back meaningfully do you think that they know kind of late and capacity that we don't see that could meaningfully come back or how do you think about that as a component of capacity view.

Yes, so I think there's some of that.

I don't know that it's as much as people might believe because you had a large swaths of the industry's capacity that stay busy through the entire pandemic kept hiring kept training keep kept running well you know a orientation or welcome experiences and kept bringing people into their fleet yet other swaps that maybe.

Went to BPP route and add drivers that weren't working or were laid off for furloughed temporarily many of those folks already got higher there already back there is working for someone else.

So as those fleets try to spool up of as we've had anecdotal conversations across our broker network with fleets in our broker network very few if any are talking about having any line of sight to getting back to where they were before in the short term.

Many of those drivers went elsewhere, one thing about that American or really driver period. This would be true in Mexico. In many places is during a pandemic. They did not go to the couch. They said what can I do put me in the game I want I want to participate are are ready and available percentage was as high during the pandemic as we've seen it in many many.

Years, because drivers wanted to be out there to make a difference.

So I just don't know that I buy that Theres. This huge swath of drivers that just sat around during the pandemic taken the check and not wanting to work, but theres going to be obviously some of that I don't think it's enough to change the many things on that list, we talked about and overcome them all but clearly if theres out folks from returning to work were.

Happy to harm if they meet the criteria and that could be driving from Warner soon.

Okay.

Our next question comes from Jack Atkins Stephens. Please go ahead, Hey, guys. Good evening. Thanks for taking my question just just one for me and I'll I'll turn it over because I know or sort of running low on time here, but you know Derek you in your prepared comments you.

You referenced the balance sheet and how you guys are below your target sort of debt level, our leverage level and I was just curious maybe you could talk about.

Your your sort of outlook on on the ways to deploy that capital is it maybe you know is M&A, maybe rising in terms of the potential uses of capital in your mind now that.

Sort of <unk>.

Trying to be a little more aggressive I guess as you think about growth or is it sort of whats maybe accelerate the buyback or maybe do another dividend.

So one of them when we think about capital allocation, it's always going to be in all the above strategy.

We have a quarterly dividend that we've continued to either keep constant arrays for the entire history of our company.

I don't see that changing we're going to stand with that and overtime appropriately move it up.

Share buy backs when theres opportunity or the right the right timing will be opportunistic as appropriate.

We will look at M&A and we've looked at M&A in the past but.

We're not going to stray far afield from a the same conservative kind of methodology that we've had but but make no mistake as I said in my opening remarks, we do understand.

It's a time for us to take that step to continue to push forward and be aggressive as it relates to.

Our shareholders. Our total shareholder return is going to it as a matter more more over time to do that I can't do that if we're not growing we can't do that afford our growing with more importantly, an eye toward the bottom line and to properly pull that off everything is going to be on the table.

So it will be.

Uh huh.

I guess, that's my answer to that and if you have a follow up that's fine.

Now that I think that answered the question Oh perfectly thanks very much.

Our next question comes from Chris Wetherbee with Citi. Please go ahead.

Yes, hey, thanks for squeezing the under the wire here, maybe keep it at one for me as well just a dedicated side you obviously pricing has been a bit stronger now on the one way truckload side can you talk a bit about what the its outlook is the second half there what youre how sort of you are positioned the teams are somewhat equally.

Given the large offering that you have to take advantage of that how much more of a shot on goal. The avid you go back to the second half of this year.

Well I think of the dedicated pricing side, we were up nearly 4% revenue per tractor week.

In a second quarter year over year, well expect that pricing increase will moderate a little bit in the second half just because of a larger pricing gains that we were able to achieved last year, but definitely stay in positive territory.

We like the fact in a dedicated to our customer base is can consists of companies that are strong winners.

Particularly in the discount retail space and as they've had needs to grow.

Pills pandemic, we've been growing with them so we.

We think theres good opportunities to grow dedicated going forward.

Great. Thanks, very much appreciate it.

This concludes our question and answer session I would now like to turn the call back over to Mr., Derek whether you will provide closing comment. Please go.

Thank you I just want to thank everybody for being with US today I. Appreciate your time and your interest in Warner just a couple of closing thoughts is I think as we look at the market. We're in and the one we've been in for the last several quarters, one things clear.

The turns are quicker and more violent than what we've seen historically.

But weve shown a nimbleness to be able to adapt and responded and succeed through those changes.

Theres not a lot of certainty is out there, but there are few one is the quality and safety when today and were to stay focused on that serving our customers on time every time, but doing it safely.

Customer selection has never been more important than we're going to be working more aggressively than ever to make sure. We're aligned yet again, a further layer with with those that when and those that have models that we think we can support theres lot of questions about the rate cycle and we understand that most of the bid season is behind us, but theres plenty of opportunity as we look through the back half to work our network.

As we rebalanced and rethink about.

How to best support our core customers and with that will present opportunities for us to make sure that were properly rewarded for for the work we do for them every day.

We're going to continue to invest and spend the money appropriately and capex to drive future cost controls and future productivity. So thats not something we're going to shy from because to do that is the only way I feel we can set ourselves up to.

Continued to deliver the type of returns we have been uneven and improve upon them overtime.

In the short term, we're going to thrive. This pandemic, we're going to stay safe, we're going to keep our people in our driver safe.

On to continue to deliver and support the communities within Weve, where we work and live and all of those communities around the country, including those that are going through some pretty difficult times, both with coated in various forms of social unrest.

Going to stick stay committed.

And double our efforts on diversity and inclusion and it's something that matters a lot to me personally and and I'm going to push my team and our organization forward on that front.

And we have and our and are excited about the opportunity to really flux or muscle and logistics and the back half as capacity continues to be constrained as we continue to find ways to bring solutions to our customers.

You're going to see logistics play a larger role in that.

Lastly, as it relates to all of the conversations over the last several hours if not days around automation again, we've done a lot internal benchmarking I like where we set but yet we will continue to push further I welcome those that want to do more investment in that space and want to join.

Some of the best in class carriers out there that have been doing that work for some time, because it makes the industry better and stronger.

With that again. Thank you. We appreciate your interest in your time.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.