Q3 2020 Werner Enterprises Inc Earnings Call

Good afternoon, and welcome to the Werner Enterprises third quarter 2020 earnings Conference call, all participants will be in listen only mode.

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After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your touched food, which are your question. Please press Star then two please note. This event is being recorded.

Earlier. This afternoon. The company issued earnings release for <unk> third quarter 2020 results and posted a slide presentation. These materials are available in the investors section of the company's website at <unk> Dot com.

He's webcast is being recorded and will be available for replay beginning later this evening before we begin please direct your attention to the disclosure statement on slide two of the presentation as well as the disclaimers on page six of the earnings release related to forward looking statements todays remarks contain forward looking statements, including those related you could've been 19 that may involve risks.

Certainties and other factors that could cause actual results to differ materially. Additionally, the company reports to see the results using non-GAAP measures, which it believes provide additional information for investors to help facilitate comparisons.

Comparison of past and present.

A reconciliation to the most directly.

Directly comparable GAAP measures is included in tables attached to the earnings release and the appendix Slide presentation I would now like to turn the conference over to Mr., Derek Leathers, President and CEO. Please go ahead.

Thank you and good afternoon, everyone with me today is our CFO John Steele.

The shortest and deepest recession and U.S. economic history in the second quarter was code by steep rebound as robust truckload freight demand that our customers combined with a stubbornly tight driver market pretty strong truckload freight market conditions.

I'm extremely proud and grateful for our entire Warner team responded with superior on time service during a period with continued challenging operating conditions caused by the pandemic.

Since the onset of cold with our drivers have been on the Frontlines delivery in a central products to our customers and this was a responsibility we take seriously our primary focus will always be protecting the health and personal safety eversource hits their families and communities and our customers.

Well there remains significant uncertainties I had related to cope with 19 and its effect on the economy. We are increasingly confident that demand for services would be strong for the fourth quarter and heading into 2021.

Oh into two overarching trends one driver supply constraints continue to persist into many of our key customers are generating strong sales that significantly reduce their inventories inventory restocking will occur and we believe this will continue over multiple quarters.

We are well prepared to thrive in this type of business environment as we did in 2018 when freight was strong and capacity was tight India.

In the event the economy were to soften, causing demand to slow you can look to our industry leading performance in 2019 as an indicator of how we were able to respond.

The strength of our diversified revenue portfolio or five t. strategy.

This focus on operational excellence, and our experienced management team and they border to succeed in any trucking freight cycle.

Following a review of our third quarter financial results I'll provide an update on our five t. strategy I'll discuss the unveiling of the addition of sustainability as an all encompassing component.

Five teas strategy moving forward.

I'll review, our environmental social and governance strategy and announced three E.S.P. milestone goals.

I'll then discuss how we are leveraging our core shrinks and sustainable competitive advantages.

With that I'll update our 2020 guidance metrics and then discuss our new long term TTS adjusted operating margin goal.

For investors new to the Warner 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.

In summary, Warner has a diversified fleet in revenue base that has served us well over many years and economic cycles, including 2020.

Let's move to slide five for a brief overview of our financial performance.

In the third quarter revenues decreased 5% to 590 million.

On a sequential basis revenues increased 4%.

Adjusted EPS grew 21% to 69 cents per share.

Sequentially adjusted EPS grew 12% from second quarter.

And adjusted operating income increased 19% to 64.3 million, while adjusted operating margin increased 210 basis points to 10.9%.

One way truckload freight volumes in the quarter were shrunk.

Unlike the second quarter, the third quarter started out with relatively strong freight activity and then gained further momentum in August and September.

Our dedicated freight volumes and our operational execution remained at a high level throughout third quarter.

Many of our largest dedicated discount retail customers and home improvement retail customers are producing much higher than expected same store sales growth that has resulted in lower inventory levels.

We're helping these and other central products customers begin to rebuild their inventories as their shrunk sales continue.

We ended the third quarter with 7710 total trucks and TTS, a decrease of 345 trucks year over year, and an increase of 60 trucks sequentially.

Most of the sequential increase in our TPS trucks occurred in September in our dedicated fleet.

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

Thank you Derek and good afternoon, beginning on slide seven total revenues decreased 28 million.

20 million of the decrease due to lower fuel surcharge revenues caused by lower fuel prices the.

The balance of the revenue decrease was primarily due to lower logistics revenues.

Our TTS revenue per truck per week increased 5.0%.

390 basis points from the 1.1% increase achieved in the second quarter.

Our logistics revenues decreased 3% significantly.

A significant improvement from the 16% decrease in second quarter.

Our cost management initiatives and programs continued to perform well and third quarter.

While we dealt with sequential cost increases from second quarter to third quarter due to higher fuel prices and higher liability insurance premiums. We continue to more effectively manage our controllable cost what's sustainable improvements through improved associate productivity better leveraging our procurement spend.

Doing more with less.

We are aggressively managing expenses and to date in 2020 have implemented 20 million in annualized sustainable cost savings.

Adjusted operating income increased 19%.

And TTS, we expanded our operating margin by 390 basis points, while our logistics operating margin decreased 320 basis points.

And our driver schools. The number of drivers. We can train is limited by ongoing social distancing requirements, which has been a factor in the 4% year over year decline of our trucks.

This along with a reduction in equipment leasing income contributed to the corporate and other operating income year over year decline of $1.6 million or two cents per share. However, due to improved execution on a sequential basis corporate and other operating income improved by 1.4 million.

Our adjusted earnings per share were 69 cents or 12 cents higher than the 57 cents a share we earned in third quarter 2019.

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

In the third quarter TTS revenues decreased 22 million, mostly due to lower fuel surcharges of 20 million.

Adjusted operating income was 65.2 million an increase 31% due to the expansion of our operating margin percentage.

Our adjusted operating ratio net of fuel surcharge was a strong 84.5%.

Turning to fleet metrics on slide nine.

Dedicated we grew trucking revenues net of fuel by 5% to 244 million.

Dedicated average trucks decreased slightly and revenues per truck per week increased 5.8%.

One way truckload trucking revenues net of fuel decreased 7% to 173 million average trucks decreased 11% due to the challenging driver market and our ongoing focus on dedicated execution revenue per truck per week moved into positive territory and increased 4.4.

For Seth.

One way truckload miles per truck increased 1.4% and revenue per total mile Rose 2.9%.

We analyze the mileage production of our TTS fleet before and after the changes to the driver hours of service that were implemented by the FMC I say on September 29.

As we expected so far the increase in mileage productivity for our T.S. fleet is approximately 1%.

Moving to word logistics results on slide 10 in the third quarter logistics revenues decreased 3% to 117 million.

Truckload logistics revenues decreased 15% due to 15% lower volume and flat revenue per load.

Revenue per load strengthened each month as the quarter progressed.

Intermodal revenues accelerated rapidly throughout the quarter up 31% driven by a 37% increase in volume and a 5% decrease in revenue per load.

Logistics gross margin percentage decreased 440 basis points as contractual brokerage experienced an unprecedented and rapid rise in the cost of truckload capacity as the spot truckload rate market accelerated quickly throughout the quarter.

Logistics had an operating loss of 0.9 million.

During third quarter, we addressed many of our contractual brokerage accounts and we expect that logistics will be profitable in the fourth quarter.

On slide 11 is a summary of our cash flow from operations net capital expenditures and the resulting free cash flow over the past five year period.

Our net Capex guidance range for the full year 2020 has been narrowed to 275 to 300 million.

We continue to expect to generate free cash flow in excess of 150 million this year.

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

There.

Thank you John.

Moving to slide 13, I'll update you on our five T. strategy first.

I will review, the five Tees, which over the past few years created structural and sustainable improvements with our modern more efficient fleet high quality professional drivers and strong management execution.

During the quarter, we received further validation that our five key strategy is working.

In August we received two quest for quality award from logistics management in the truckload dry freight carriers and threepl categories overall.

Over 4500 shippers participated in this long standing industry evaluation Warner.

Warner achieved the second highest overall ranking of all large public dry freight carriers.

2020 marks the fourth consecutive year Warner's earned the quest for quality Award.

Our first duties are trucks and trailers are characterized by young average fleet ages of 2.0 years and 4.0 years, respectively.

Oh Warner trucks are equipped with advanced collision mitigation safety systems and automated manual transmission.

Through the first nine months are accidents per million miles declined 18% year over year.

The tight driver market further intensified in the third quarter as the improving freight market caused increased competition for a finite number of experienced drivers that meet our hiring standards at the same time, social distancing another safety procedures combined with the state licensing cutbacks due to covance and reducing the number of driver training school graduates.

The FMC Assai estimates that there were 100000 fewer truck driver Cbls issued in the first half of 2020 compared to the same period in 2019.

Our driving school network is one of the largest in the industry and is producing highly trained new drivers while following cobot safety protocols.

In our terminal network, social distancing another safety procedures are enabling Warner mechanics to safely maintain our trucks and trailers were also utilizing enhanced technology to Orient and train our drivers at our terminals.

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

We've recently completed installation of 85% of our trucks with our new in cab Untethered telematics solution.

This innovative handheld solution. It's connect provides warner drivers with smart workflow best in class navigation improve safety features and reduced manual data entry.

And finally I'm excited to announce that today, we're a billing. The addition of sustainability as a core component of our strategy.

Well Warner has long had a dedicated focus on this important imperative over the last several months our executive team has come together to discuss and mobilized around our organization wide sustainability strategy.

Going forward, we will outline our SG approach more comprehensively communicate our ongoing progress and further identify areas for improvement to deliver value for all our stakeholders.

In addition to dedicated internal resources to support this effort, we will be transparent and hold ourselves accountable on our progress towards the performance milestones we outline.

Slide 14 outlines how we're architecting our strategy around the over arching sustainability elements environmental social and governance.

While corporate adherence to SD principles is becoming increasingly important to investors and associates I'd like to emphasize that the ideals of environmental stewardship supportive of our local communities and strong corporate governance are nothing new to Warner.

We have decided however that formalized our approach and unleashing our Warner talent on this important area will lead to even greater positive outcomes than what we've delivered to date.

What is new is that we will be applying a laser like focus on MSG to develop sustainability into are recognized and durable competitive advantage.

We have tremendous opportunity if we put all our talent behind this effort and we will.

Turning to slide 15 today, we are announcing three milestone goals that support our commitment to be a leader in corporate social responsibility in our industry and beyond.

The environmental milestone we are targeting is a 55% reduction in our fleets carbon emissions by 2035.

With an average truck age of two years, we will continue to refresh our fleet with the most advanced technologies as they become commercially available.

This could include electric vehicles alternative fuels, such as hydrogen or something else entirely.

We're not committing to any one technology, but instead plan to achieve our goal by remaining at the leading edge with the most efficient eco friendly and reliable equipment available.

The social milestone we are targeting is the establishment of three additional associated resource groups by the end of 2021.

And the government's milestone we are targeting it has to have a formal diversity leadership position established by the end of first quarter 2021.

Please turn to slide 16, as a proof point that our commitment is real and very much present and how we operate.

Two weeks ago, we appointed Carmen tap you to our board of directors with her term beginning on November 10th.

Carbon as the owner President and CEO of North Intel services here in Oman, where she is also active in local community organizations.

Including the greater Omar Chamber of Commerce Board of directors.

Carmen serves as the diversity and inclusion council share as well as the Ceos for commitment to opportunity diversity in equity Council chair.

One of our government's goals is to continue to refresh and diversify our board of directors, both in terms of experience and skills and race ethnicity and gender.

Carmen with their capabilities and technology and operations as well as extensive experience addressing diversity matters will provide valuable perspective, I want to welcome Carmen to our board.

In the coming weeks, we will publish a comprehensive overview on our sustainability efforts today.

Where we are on our DSD journey, and what you can expect from Warner going forward.

Averages for other people and we plan to be a leader on this front for our associates, our customers and our shareholders.

Now, let's turn to slide 17, and our core strengths and sustainable competitive advantage that continue to support our strong consistent performance.

Starting with strikes.

Our diversified truckload transportation portfolio dedicated one way truckload and logistics levels out trucking cyclicality and positions Warner to perform well in both strong and more challenging freight markets.

Our size and scale as a top five truckload carrier top five dedicated carrier and sizeable logistics provider gives warners stakeholder relevance and economies of scale.

Within one week truckload nearly half our revenues come from our industry, leading and high service, Mexico Cross border and team expedited business units.

The implementation of U_s_m_c on July 1st provides north American trade certainty in a period of cobot uncertainty.

We expect shippers to.

To expand the near shoring of their supply chains in Mexico in the us in the next few years.

We are well established in Mexico, and we are positioned to support our customers through this near shoring transition.

Maintaining a new and modern truck and trailer fleet enables us to stay at the forefront of safety and fuel efficiency enhancements, while limiting maintenance issues that can lead to service delays.

And driver talent is a hallmark at Warner are large and industry, leading 13 location driving school network enables us to vertically integrate the development of new drivers who are safely train the Warner way.

Our leading recruiting position with former military and women drivers is also a warner strength. These.

These core strengths produce our sustainable competitive advantages.

We focus on partnering with growing companies that are winning in their verticals. They value Warner's hi on time service levels to take cost and inefficiency out of their supply chains.

Our advanced Warner Edge technology platform enhances the experience of our stakeholders.

Our performance driven experienced leadership team encourages excellence in everything we do.

And we work hard to speak with one transparent and consistent voice to all our stakeholders.

Last Warner maintains a strong and durable financial position that is sustained by strong free cash flow and an industry leading revenue per truck per week.

Looking to slide 18 here is a comparison of prior annual guidance to third quarter actual results as well as our fourth quarter outlook.

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

Due to the cobot uncertainties in challenging driver market.

During the third quarter, we grew our truck fleet sequentially by 60 trucks with a 180 truck growth in dedicated at a 120 trucks declined in one way truckload.

Our fourth quarter outlook is for more modest fleet growth and we expect this to occur in our dedicated fleet.

For the full year, we expect our truck fleet will end up at the bottom end of our annual guidance range of down 3% to down 1%.

The used truck sales market began to improve in the third quarter mid better demand, which resulted in improved equipment gains of 3.9 million.

We are reinstating guidance for equipment gains for fourth quarter to a range of two to 3 million based on expected sequentially lower used truck sales.

We expect net capital expenditures for fourth quarter to be in the range of 88 to 113 million.

In late July when we forecasted one way truckload revenue per total mile for the second half of 2020, we did not assume the freight demand would strengthen as much as it did in August and September.

As a result, we exceeded our forecast in the third quarter.

We've established year over year, one way truckload revenue per total mile guidance for the fourth quarter in the range of 3% to 5% growth.

This guidance assumes a continued strong peak season for fourth quarter 2020.

We expect our effective tax rate for fourth quarter to be in a range of 25% to 25.5%.

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

In the first four weeks of October freight demand trends in our one way truckload unit have remained strong.

We believe there are several factors that will limit truckload supply for the foreseeable future. These factors include fewer new drivers entering the industry due to Covance safety issues that limit driver school training and state CD a licensee.

Fewer eligible drivers as the drug and alcohol clearinghouse database continues to build.

Aging truck driver demographics, and an extremely challenging truck liability insurance market.

Order remains well positioned with a superior team an active talent pipeline that will continue to yield strong and sustainable results.

We believe the runway for demand looks good for fourth quarter and headed into 2021.

Inventory restocking will likely occur over multiple quarters.

The economy continues to recover.

This should lead to much better contract pricing opportunities in the bid season in the first half of 2021.

Turning to slide 19, we've reevaluated, our long term TTS adjusted operating margin percentage goal through the freight cycle.

As a result of this review we were establishing a new long term average Cts adjusted operating margin percentage goal net of fuel of 13%.

We believe this average operating margin is achievable based on our improving financial performance and noting our growing dedicated fleet mix, our substantial essential products freight mix with winning customers. Our cost structure that is two thirds variable and one third fixed and our experienced and capable leadership team.

Based on our current assumptions and expectations for what we believe will be a strong freight market in 2021, we believe our adjusted TTS operating margin net of fuel in 2021 will meaningfully exceed this 13% long term goal with.

With that at this time I'd like to turn the call over to the operator to begin our Q and a.

And we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then two to.

To allow for as many colors as possible to ask questions. We ask that callers limit their questions to one question and one follow up.

Call will end at five P.M. central daylight time, following the Companys closing remarks.

And our first question today will come from Bascome majors with this go ahead. Please go ahead.

Yes, good afternoon.

Derek I was curious about your comments on restocking when you speak with your customers what sort of signals are they giving you on the duration of that capacity need and their willingness to perhaps pay up to make sure that capacity has secured and perhaps.

Perhaps beyond that how are you managing the business to to satisfy those customers, but not be over capacitized when inventories reached target levels and demand moderates closer to the baseline.

Yes, so good afternoon Baskin good question.

So when you think about that so the conversations today, our inventory levels, especially if you slice. It further and look at retail inventory levels are really at historic lows.

And.

Those are.

Although those data points are confirmed as we speak with our customers every day as.

As it relates to restocking, yes, there will be a need for restocking more urgently as it relates to.

We're still trying to get freight end before peak in during this peak season, but a lot of those conversations have really lend themselves around how long this restocking will likely take to get back to normalized levels.

I'll get in any customer specifically.

Many of our larger customers are thinking in terms of multiple quarters of restocking well into 2021 to get inventories back to more balanced equation as it relates to overbuilding or over producing capacity to meet what building the church for Easter Sunday, So to speak for this peak clearly.

Clearly, we're showing that discipline not to do that we're going to have to make sure and sweat the assets that we have we have to make sure and do more with less wherever we can we also have to bring the portfolio to bear and so when we're talking to customers. We're not only talking about how we can bring that portfolio to them for this peak season to augment and offer additional sources of capacity, but how our XP.

Dictation moving forward is that we have better discipline around purchasing across the portfolio and with more diversity of their spend.

Or their wallet share with Warner all of those conversations are going well I think we all understand the predicament that we're in and that it's going to be a tough peak, but we'll get through it together.

Bascome. This is John to back that up the data for our four largest brick and mortar retail customers based on their year to date revenues there almost a third of our total year to date revenues due to the growth they've had their same store sales in the most recent quarter were up 15% their inventory per store during that same.

Grade was down 8%, that's a massive gap and they expect their same store sales remained strong they're continuing to have challenges with their suppliers are getting merchandise. So we're pretty calm and confident that that inventory restocking will take multiple quarters to be resolved.

Thank you both.

And our next question will come from Jordan I'll agree with Goldman Sachs. Please go ahead.

Hi afternoon question for you on your.

Total.

Miles per tractor per week, which I think was up.

I think it's 1.4% in the quarter.

Just sort of curious I would have thought maybe that would be a little higher given the demand surge is that a function of just the driver availability issue and how do you think about that going forward.

Well I think there's a few moving parts in that and John may weigh in as well, but.

First off during cobot team capacities tougher to come by the normal Almond I'd, probably lead with that as my answer I mean, it's real hard during kobin to get folks who want to team and our team count is under duress. As a result of that we are doing a lot of creative things to build teams, but health and safety has to come first.

And so that really impacts your ability to get more miles on the existing asset. The second thing is if you look at our utilization rates overall compared to most publicly traded company competitors. We do it very high you were at the higher end of that spectrum as it relates to productivity.

So simply put it's incremental gains are tougher to come by but we're going to continue to work to get them.

Overall, we're pretty proud of the work that in the third quarter with the what we were able to do on productivity. We did get a little help as we mentioned, but not as much as some of the publicly reported data points around.

The hours of service changes, we think some of those we simply don't take advantage of don't believe they are appropriate to do so adverse weather conditions is a slippery slope you know some of the air mile radius work is that something that we're not going to engage in.

We displayed the liability that comes with some of those decisions far outweighs the reward.

So overall, we feel we've got eyes toward increasing and doing more.

Or incremental gains on the productivity front, but the biggest thing that will change the game for us is as comfort comes.

Comes back into the concept of two drivers in one truck.

Hey, Jordan and last quarter, we were down 0.3% miles per truck. So we moved up 170 basis points this quarter to get to 1.4 and that hours of service change was very late in the quarter when that happened.

Got it thanks, and then just just one quick follow up as you think ahead next year, obviously the spot rates are very good presumably the contract markets going to heat up in the first part of slide 21.

Any initial thoughts on.

How that may shake out in terms of contract pricing.

Yes, there's been a lot of public commentary from others about where they see contract rates go in I mean, directionally, we're aligned with with comments that have already been made.

We know that yield.

The current capacity situation lends itself to a really strong set up going into 21.

We will both in dedicated to ended one way be working with our customers to take rate as appropriate. We also know there are certain headwinds that are out there there will be a headwind relative to insurance premiums that weve talked about in our last quarter and those will continue as we go forward and those need to be recouped drive.

Driver wages or something that is a market reality, although our turnover is down in our driver morale is up and I'm actually really proud of the position. We're in today, we're not nave to the reality, it's a competitive marketplace. So we're going to have to take rate for that as well what I will tell you is that we've done a lot of analysis on various rate scenarios and various cost.

Scenarios and in the end of all of those one thing Thats is true as we see the opportunity for margin expansion.

While taking into account the headwinds from an insurance and.

Risk costs driver wages.

And other items so.

Where it ultimately lands I'll just tell you we're committed to get what's appropriate and what what the market will bear because we needed to make the reinvestments back in the fleet that are going to be required in the coming years.

Great. Thanks, so much.

And our next question will come from Ravi Shanker with Morgan Stanley. Please go ahead.

Gentlemen.

So back in 2018, you guys did really well that project business, especially in the back half of the yard.

What are you seeing right now in terms of the pipeline for project business in Fourq you add into 21.

And how much of a boost could that be to the you are.

Yes, so the project pipeline strong I mean, most of that work in those negotiations are are predominantly settled now it's just a matter of whether there will be any surprise.

Surprise to the upside is more likely than than.

Opposite.

We feel good about what we've been able to put in place. This year, it's not surprising with capacity being as tight as it is that you're able to go out and walk up projects.

Premium rate as appropriate.

To be able to provide that level of service a couple of things that'll that'll.

Play out as the quarter develops one is what I mentioned earlier teams make up a big part of any projects solution and we're working diligently on some programs to build more teams as we go into the final innings of peak or the middle innings, I should say of peak, how we're making progress there that bodes well for some margin opportunity.

Because those are even more in demand then solos at this point.

And as it relates to 21, I think the real uptick in 21 first off we're going to have a stronger set up than we've seen even than we than 18. This set up is better it's been longer in duration that it's been more consistent than the 17 set up going into 18.

And secondly, what.

What I'm really excited about as we see in most years, even medium to strong years second quarter opportunities for project freight that always kind of have happen year in and year out and it's been a couple of years since that second quarter project opportunity has been as robust I would suspect based on the crystal ball today and everything we see looking forward. So.

Second quarter next year is shaping up to be another one of those opportunities for quite a bit of project activity in that quarter as well.

Great and just a follow up I'm very encouraging to see the SG targets that you guys said.

Especially the E part, but.

2035 is a long way off.

So is this just a marker in the ground and do you guys feel like you are going to be doing the heavy lifting towards the end of the decade into early next decade or are there steps you're taking in the next two or three years, maybe even right now.

To kind of make incremental traction towards these targets.

Yeah, Great question, Robbie I mean, so the answer is both.

The reality is we're always focused on this and it was pretty interesting eye opening exercise for us to realize how far along we really are in some of our commitment. So think about first major fleet in America to go to automated manual transmissions and have 100% implementation think about our commitment to aero packages across our entire fleet and what that.

Under our carbon footprint I believe its four consecutive year winter of the highest possible EPA smartway designation as it relates to our environmental sustainability I will keep doing those incremental things and keep our nose to the grindstone to be at the leading edge. The problem in the next five years, though when you think about it.

We will be back end loaded there is a lot of danger out there has to be that slippery slope between leading edge and bleeding edge. When a lot of these technologies are not fully tested and most importantly, not commercially viable yet so we'll test and we'll have prototypes and we will have all kinds of different initiatives already underway as we are currently doing today.

But but we had to put a marker at 2035 versus something sooner because there's too. Many question marks about where electric plans versus hydrogen what's the rollout and is there an appetite for the level of infrastructure investment needed nationwide for hydrogen to be a reality, if not what kind of advancement can be made made on battery.

Range and wait.

At what point does the environmental crowd really start to focus more on battery sustainability long term I.E. how's it produced where the rare earth metals coming from what's the carbon footprint of the initial construction and design and build of those vehicles. So we want to be cautious but aggressive at the same time, so our commitment I will.

Say this loudly it is.

We will be sustainability leader, how we get there is still TBD and if thats. The case in terms of what tech youre going to choose who would be fool hearted in my mind to set that goal in the earlier than 2035, because now you're forced and decisions to be made before the attack and the product in the viability is actually ready.

That makes sense I mean talking one quick one.

You started a trial dedicated service, where a customer on California running trucks only can you remind us kind of how that kicked off what have the already learnings have been like in a how's that been so far thanks.

Yes kicked off in the early learnings are valuable most were learning a lot every day.

I want to be a little careful because anytime a trucker talks about some of the obstacles to easy it's always it can be framed as somehow being a deny or have the possibility of this technology I'm all in on the reality that electric will happen I believe hydrogen will happen.

But there are real obstacles in the short term so that truck is having and that fleet is having the same type of obstacles.

That you read about right. So ranges to is still limited wheel base is still longer than we'd like weight is still heavier than is really commercially viable on over the road application but.

But with that said progress is being made and so we're supportive of that progress and we're going to be a partner in that progress with our Oems because we believe a cleaner future is out there to be had and we want to make sure and lead.

As appropriate through that transition.

Awesome. Thank you.

Thank you.

And our next question will come from David Ross with Stifel. Please go ahead.

Yes, good afternoon gentlemen.

What a focus I guess first on the dedicated segment revenue per tractor per week was up a nice 5.8%.

I wanted to.

Diving, a little bit and see how you got there was that just the dedicated trucks were running more miles per week, because the customers are that busy was that a mix issue or were there significant rate increases.

Yeah, there was a few things.

One obviously when everybody is that busy.

And we have the need to add trucks to fleets and also usually offers an opportunity for us to talk about pricing that's a piece of it.

As a piece that just simply comes along with business overall.

Of the customer even with the existing fleet base, if it doesn't change in size. It you sweat the assets a little bit more.

That has a piece but.

But honestly one of the biggest pieces is just our ongoing efforts to be best in class and backhaul. When we go out and sell the value proposition to our customers. We talk to them about revenue shared backhaul opportunities and we really want to deliver on that it's.

It becomes a bit of a tailwind and being able to deliver on that when capacities as tight as it is and freight as abundant as it is and so you're able to go out and secure more backhaul increased revenues share a piece of that back with your customer lower their overall cost while increasing year overall yield. So it's one of my favorite things about running dedicated fleets as have done well by.

Our call is something that everybody wins.

Is this something that Werner logistics is responsible for or did they play a role, but I wouldn't say, they're responsible for its alluded to they certainly play a role I mean, we'd be remiss, if we weren't to collaborate and then the building that across divisions and talking about how to best use a limited number of assets in a tight driver markets. So that's some of that backhaul certainly comes from them, but we.

Also work with other threepl and even customers directly and when freight is abundant you have more backhaul opportunities to be able to fill those empty lanes on because they're pretty prescriptive fill rates right. I mean that load has to pick up at a certain time. It has to go back to a pretty defined geographic area. It has to meet our necessary timing requirements. So that we don't disruptive.

The head all operation of that dedicated fleet, but when freight is more abundant there's more to pick from you make better matches and so I would tell you its logistics playing a role what's our dedicated team working their tails off and honestly at sea advantage over the or the output. If you will of some of the tech, we're investing and that's helping us as well.

Excellent. Thank you.

Thank you.

And our next question will come from Brian Ossenbeck with JP Morgan. Please go ahead.

Okay.

Hey, guys. Good evening, Thanks for taking the question and for the extra color on the hours of service appreciate that.

Derek on fee we've heard.

I mean just to.

Outside of times marketing type and it feels like we're back to talking about shippers of choice.

Areas of choice as well so do you think theres really anything that's going to change.

From an annual quest for proposal perspective is there something in the technology side.

It might make it less less frictionless or how do you expect.

Behaviors will change from from this cycle and did you really see any change from the last one that we just went through feels like not too long ago.

Yes, so Brian that's a great question and you know I do believe there's incremental kind of iterative changes that happened. When you go through tighter cycles. If you think about kind of step ups or step level changes between shipper and carrier collaboration there tend to happen more in type environments. They just do theres more.

And that's not indicative of shippers not caring about it may be loose environments at least not the logistics arm of that shipper. It just they have more of the year leadership in their organization things that may get cold shoulder and other times or more fully embraced by the rest of their leadership team. When they know they are in a tight market. So I think we have opportunity for gains on.

Some of the flexibility items that carriers, obviously like and prefer as it relates to working with shippers and I think you'll see some of those incremental gains those bleed through in driver satisfaction. They bleed through in overall.

Turnover results they bleed through in productivity when Theyre executed properly. So those are all things. We are excited about I always talk about in tight markets. We've got to go beyond the rate.

So were not being evasive when you ask about maybe maybe we are from your perception, but when people talk about trade recently, one of the levers as it relates to 21 the rate environment is going to be robust. We know that that's that's that's pretty clear ties in call. It to everyone out there, but what else can we do how do we further align our network how do we further build density in engineered.

Planes, how do we build better driver lifestyles wouldn't wouldn't freight is as tight as it is out there right now and then obviously rate will be part of that discussion make no mistake about it but all of that leads to a better more sustainable.

Design, when we come out of the other end because when we do and when that change occurs we want to be even further equipped and better ready to whether it and I think we are from everything from the diversified portfolio to the customer mix, we have to our commitment to taking longer term views with our customers and on the relationship overall all of that bodes well.

For when and if that cycle changes, but we certainly don't see it happening in 21.

Okay got it thank you.

Just a quick follow up on the on the dedicated to that and that backhaul.

Is that incentive.

Inside of that is easy to match when when trading is tight so is there a.

How do you manage the spot market.

Risk or overlay, but when you look at that as those contracts in.

'cause, it's still profitable and just maybe less so if rates those down.

And is that shared equally.

Equally if it slows down saying.

Seeing as it is on the way up how do you how did you manage and in kind of planned for that asset.

Mcalenney overlay on dedicated as it were.

Yes, so a couple of thoughts, but let me start with one that I'm going to try to boil down to.

You know its simplest level.

The hardest part the hardest part on filling those back on dedicated lanes is getting visibility to all of the freight that's out there. So there is other opportunities that are out there in a market thats, maybe looser, but you don't see or can't get visibility too because it's already owned or controlled by somebody else when the spot market suddenly is twice as large in population of loans or its we more.

Robust it provides instant visibility, but that visibility is only as good as your ability to digest it into a system and into a tech stack that can then optimize against it and look for overlays that fit then our ability to pounce on unsecured close it and implemented you do all of that once it sticks. If it's part of a dedicated backhaul it's hard to unseated.

Because even if the market were to loosen later that dedicated backhaul rate is pretty attractive to that shipper as long as we are meeting their service requirements and it's still filling that dedicated lane, they're going to want to hold on to that capacity in that form because even in a loose market the pricing on that lane. If they were to go place. It in the open market is going to be quite a bit higher. So these are sort of iterative step level changes.

That have pretty good stickiness, even as the cycle turns and that's again part of why we like so much your mix between dedicated in one way.

Hopefully that answered the spirit of the question.

Yes, that's great detail I appreciate that thank you.

Thank you.

And our next question will come from Ken Hoexter with Bank of America Merrill Lynch. Please go ahead.

Hey, good evening, guys, Derek and John.

Great Great update and an impressive five new outlook in terms of your margin target, but let me just pick on one thing first where's the disconnect in the market with net orders climbing you noted caution I guess the market somewhat believes that the peak at here yet you in a night continue to suggest the there's there's room to.

You know theres like than the story, so as the misunderstanding really the driver availability in the market maybe just extend your thoughts on on what really the constraint is.

And your thoughts on on the driver market and the extension of tightness in the market into next year.

Sure Ken I'll give it a shot anyway so.

So few things right. So net orders were one dash on the dashboard and so our one one gauge on the dashboard I should say first off they're not back to anywhere near 2018 levels. Secondly, there climbing from an all time low base third there directionally I get that they're directionally going up.

But you got to kind of put it against the backdrop of what are those under gauges BLS transportation data shows the year to date off 4.8% 80 days data year over year in the most recent update that I believe literally was published yesterday shows somewhere in the neighborhood of 3.9% off year over year small large company and owner operator.

Bind in terms of.

Capacity out there our own data shows our truck fleet off 4% end of period, 5% average for the quarter.

Most of our publicly traded competitors that have released have been negative year over year.

When carving out those that may have acquired somebody in kind of muddy the water a bit.

As it relates to that data point. So everywhere you look everybody's fleet is down and in aggregate, it's down at the BLS level, it's down at the retail level, it's down and yet you might have some creep into that.

Some build coming up into that but we're not mere replacement levels were starting to knock on the door and perhaps that but I think what gets confused if you look at our fleet you know I would have.

It was a really tough day for me to accept that our truck age is going to go to 2.0 versus 1.9, or 1.8, which we'd like to see it at but the Oems simply we had covered related issues that were real production was impacted and we're digging out of that now. So we're over ordering if you will are ordering up maybe a better way of saying it to make sure our fleet doesn't.

And we keep that fleet refresh for the drivers because that's the commitment. We've made I think that has to get factored in when you look at these order rates and some of the other gauges need to be kind of shined upon as well or or looked at as well.

Lastly.

I believe and I have the sphere personally the Oems are doing a great job were proud of their efforts. We're proud of the work you're doing but co has not gone and it's not fixed and it's not solved and it's about to be winter.

Winter and we've got folks working at these plants in with social distancing in place, but it takes very little of an outbreak for those plants to then re close and so I think you'll see some eagerness to get orders in sooner than you might otherwise and maybe a quantities that you might not otherwise ask for out of concern of not getting them because we went through that in 2020.

I mean, we spent the first half of the year waiting and playing catch up on our truck order and I think thats built in a little bit as well so drivers will be the overall constraint make no mistake, but that's some other things to think about as well drivers, though at the end of the day are tougher to come by 100000, most Ceos 40000 people in the driver of the drug and alcohol clearinghouse.

90% of them not even starting the process to ever come back out of it.

It's a tough it's a tough time to higher quality driver and we're going to not lower our standards just to fill trucks.

Okay, great insight I appreciate that.

So let me dig into your outlook on the follow up your margins now target that that mid 13% can you just give maybe a little bit more thoughts on that is that really just price just given what you see in the market because of the tightness of driver constraints or are there are you, saying, there's things that with the you know your programs that you're launching whether it's.

The five keys or something else on the cost side.

Yeah, what's the driver of that and how quick do you aim to get there.

Yes. So so price is certainly one of the levers and as you said in the environment. We're in today, we know were.

Coming into a bid season that will set up very well for price.

But the cost controls and the cost culture that we're building is really still in kind of the middle innings. We've still got more work to do we still have more cost to take out and we we believe we know where the bodies are buried and we're working to do that every day, it's not silver bullet stuff. It's not one line item by itself is more comprehensive than that so we can do we but we know and feel confident or we wouldn't have change.

That metric that we can do that over the cycle as it relates to the cycle range, we're saying, 13% through the cycle on average.

But we're we're stating that we will we will exceed that meaningfully. We believe in 21 are there are some tailwind or some headwinds that come into the mix. We noted you know insurance is going to be higher we know that will be driver wage pressure. So we have to factor those in and think about those as well I. We are starting to turn the corner on on depreciation.

Nation as one of the items, it's been a bit of a headwind as we were trying to move used equipment out, but new equipment coming in and you started at times to have more equipment, maybe than what you needed at that given moment based on driver availability, we're getting that cleaned up and we think there's some opportunity for some some supportive the PML in that category. So there's a lot of things that go into it.

I think you can sense, we first off we don't change guidance very often secondly, we do it's because we feel confident in where we're headed.

But the overarching message I guess would be we just have to get better across the organization and we're committed to doing that.

And Ken one thing I'd add.

Our 10 year average truckload operating margin net of fuel is 11%.

The last three years, we've improved that 12.6% and that included the risk truckload recession in 2019 and then the most recent.

I'm, sorry that was 11.7% for the last three years year to date. This year were 12.6 and then the most recent quarter were 15.5, so with our mix of dedicated in one way the cost improvements. We made were confident that 13 is achievable over the long term and we'll do significantly better than that.

2021.

Thanks, John.

Hi, John.

And our next question will come from Tom White with with you.

Okay.

Yes, good afternoon, I wanted to see yes, Derek if you could offer some thoughts on how the current.

For 2021, a current environment is compared to 2018 I mean, it seems like there are a lot of similarities but.

Are there things that you think are different good.

Good or bad.

Do you think driver pay increase in.

It will need to be similar to what was a pretty high driver inflation. In 2018, just wanted to see if you could offer some thoughts on that comparison.

Sure I'll start my head a few thoughts I'd like you to.

Think about first off the strength of the market has been longer preceding the entrance into 21 than it was 17 and 18 at least as it relates to just how tight it got and how early it was tight.

The conversations in reality around some of the headwinds to driver availability is more.

Pronounced and understood I think across the shipper community.

The economy is not yet fully open I can't really emphasize that enough.

The products economy, sugar is doing pretty well, but overall economy and economic inclusion of everyone is really not.

Kind of back at where anywhere near where it was in 17. So there's upside there as we if we can continue to make progress.

Relative to coded.

As it relates to driver wages. The starting point is much more elevated the driver wages today being at U.S. America truck driver Hayes today, a pretty decent delta versus other.

Like type of work.

Joe it's not uncommon for a second your driver in fleets across America to make in the mid sixtys or even higher if they are in dedicated they're probably doing better than that.

And so you don't have as many other alternative things pulling that that driver to put the same level of driver pressure or wage pressure, where it will be particularly acute isn't the one way part of the business, but thats also where the tightness is particularly acute and so we're going to have to make sure and get paid appropriately. So that we can staff those trucks to be able to provide that.

City.

For our customers. So I think the set up and just a lot of ways is better than what it was then but.

But both on the wage line as well as to be fair on the rate line.

The starting point is elevated from where it was going from 17 to 18, so it's going to be a case by case conversation that we're going to do the right thing.

Relative to our shareholders to make sure that you as we take on some of the headwinds I've talked about that we're we're able to compensate for those and expand margins. So we can reinvest in this fleet and be there next year for our customers.

Do you think there is a level.

Increase in pay where you get a more of a response in the market in terms of pulling more people and I don't know if theres still drivers that are kind of.

Had to Cbls, but havent re entered the industry that are kind of you know.

Then on unemployment for a while or doing other things.

Yes, it sounds like there are constraints, obviously in the training pipeline from co bid, but do you think there will be a.

Certain level of increase that you reach the you actually draw more labor and.

Well look I think it's only fair to say anytime wages go up and you make a job more attractive you're going to bring some folks may be back into the market that currently are on the sideline, but I don't believe theres a big army of folks that are on PPP payments sitting on the sideline in one of the tightest markets that's that we've ever seen.

You have those owner operator types are going to be out and on the road because there's never been a better time to be on the road and right now those company drivers have been getting recruited and pestered for some time and been hired by many fleets already.

To be able to come back and I think the the constraint on the supply side Thats very very real and systemic at this point is you can simply not produce as many new entrants into the marketplace and a socially distance world now we'll round that eventually will get around that at some point, but for the foreseeable future driver.

Driving schools across the country. When you aggregate those that are still close because their community colleges and other things where those programs simply don't exist right now.

And those that are opened but socially distance the combined effect of that is somewhere between 60, and 70% productivity compared to previous levels. So you are simply not putting that there's not as many graduates you combine that with an.

An aging driver demographic and retirements upticking, some because of cobot another health related concerns it sets up a different tightness and not one that you can just buy your way through I mean, you really have to retain the drivers you have you got to take care of the drivers you have and you got to hold onto now more than ever because there just aren't others. Indeed.

The availability to buy their what buy your way through it I think is going to be harder than ever before.

Right, Okay that makes sense. Thank you.

And our next question will come from Chris Wetherbee with Citigroup. Please go ahead.

Yeah, Hey, thanks, and good afternoon.

Yes, I wanted to pick up on the comments around the margin outlook in Pts So 13% I think is the range and then significantly higher substantially higher than that in 2021, you have a number on the slide you have 16 on the slide there I guess I wanted to get at.

If you want to give us a view for what you think you can do in 2021 that would be fantastic. If you if not maybe if you could just sort of conceptualize some of the things that would allow you to reach towards that type of flow as we think about next year. We've talked a lot about rate we've talked a lot about driver pay so I think there's some pushes and pulls there but can you talk a little bit about next.

Year, and whether a 16 and maybe the right number for Keith Yes.

Yeah, Chris we'll stop short of giving 2021 guidance on the third quarter 20 call, but I will tell you that if you look at third quarter 20.

We are already in advance of the range that we just published as a as a new long term range through the cycle. We don't expect to give ground from where we're at today and we actually feel we have clear line of sight as to how we can improve and advance some of the ground that we have currently gained.

It's going to come in the things, we've already talked about the headwinds or insurance and drivers.

Our wins, our cost controls rate relief and rate support from our customers as capacity gets tighter a better blend of dedicated in one way than we had in 18 in prior cycles.

The set up for that blend working together better and then old clear line of sight in our eyes to what we needed to do to fix logistics and we've taken measures actively engaged our customers fix some of those contract rates and were seeing and gaining productivity in some of the tech we're investing in on that side. So.

It isn't the focus of these calls often but logistics is a sizable business unit new to add a rough third quarter. We believe we've got a line of sight and a strategy in place that's going to correct that so.

So that's something that will help us not on the TTS margin side, I realize but an overall operating performance it will.

So yeah, we think will be you know above the 13% range.

Hi, Bob It's certainly my expectation that it will be above the current operating range. So that gives you some color of where you can look to and.

Anything more specific than that we'll have to wait till later in the year.

Okay I understand Thats helpful. And then I guess last helpful follow up here on the mix of trucks here at the 60 40 dedicated one way truckload are there any new thoughts about how you think about that mix into 2021, and maybe some of the constraints that we're talking about from a capacity standpoint might influence that as well any thoughts around that 64.

40 mix going forward on the tractors.

Yeah, we're really like 61, now 39 not to split hairs, but we're a little over that 60 40, even what we said we were comfortable going there and honestly I look at it like this we want to make we want to meet our customers, where they're at but that still means they've got to compete for those assets and so we have a finite amount of quality drivers that we can hire train.

Rain and retain and as we do that that is going to see a finite number of trucks and that finite number of trucks is going to be competed for based on long term returns through the cycle you have dedicated and those customers value. The product that were put on the table and they want to see that grow we're going to have that talk if one wants to do it the problem is that is.

More cyclical and you do get into cycle problems on the one way side that are less apparent on the on the dedicated side. So until we get further into bid season, I'm not yet ready to predict any major change in that but we did foreshadow a little bit about where we see growth in the fourth quarter. Because we do we have indicated that we're going to be inside of that.

Range by the end of the year in terms of our truck count we've indicated that the focus of that will be in dedicated versus one way.

And so you could actually see that percentage go up a little bit more I think the important thing for the investor communities that I want to assure you we're not putting them in dedicated at the expense of our ability to have an appropriate return. We're looking at that on a case by case trumped by truck and deal by deal level and if they go there it's because that's the right.

A decision and Thats the one that we feel holds up over time.

Okay helpful color I appreciate the time thank you.

Our last question today will come from Allison Landry with credit Suisse. Please go ahead.

Hi, Thanks for sneaking me and good afternoon I just wanted to quickly ask one question.

BD outlet per contract rate and 20 claim on that specifically thinking about dedicated birthday, one way and maybe just based on what we saw coming out of that the 2017 tight environment do you think that there's any similar factors that that may keep that gap.

More narrow as we go into 2020 line between the two segments, but when thinking about core rate. Thank you.

Sure Allison, Thank you and thanks for calling.

We've got dedicated product is coveted today as it has been at any point in its history, we feel our execution there as well.

Really hitting on all cylinders, our customers understand and want more of that product. That's why the pipeline as robust as it is and new customer entrants are coming into that space and looking for capacity as.

As well.

Given all of the above.

We are expecting that there isn't this big give away by having trucks and dedicated that you somehow can't yield up on during the tight market. We will continue to have advancements in dry and dedicated backhaul, which ultimately represents a yield opportunity will continue to add trucks to fleets that are better performing and customers are growing with winning models.

As in their vertical which gives us opportunity for yield improvement so it won't necessarily be cleanly, and obviously just through rate per mile. But there is a lot of opportunities for us to help our customer support them and maybe even lower their overall cost through and do that if you think about that backhaul opportunity as an example, while increasing our rate our.

New per truck per week, I think 18 was a shining example of dedicated doesn't leave money on the table just because we have trucks in that unit 21, we'll we'll reiterate that story as we get through the year and prove out and show what were capable of and ultimately the trucks have wheels, and if we need to move and shift that mix because of opportunities that exist are underway.

Oh, you are or a customer that is undervaluing that asset will make those tough decisions, but we'll work with our customers.

Over the next few months and have.

Quite a few dialogues motor.

Well beyond zoom, probably more than we wanted to be but it's part of the process and we're looking forward to it.

Okay. Thank you very much for the color.

Thank you.

And this will conclude our question and answer session I'd like to turn the conference back over to Mr., Derek whether to provide closing remarks.

Thank you cole.

In closing I, just as always want to thank everybody for spending time with us today I know you're very busy we appreciate you being on the call.

My closing thoughts are that we you know we've laid out a story today that hopefully resonates to make people understand the supply issue is real the driver market is constrained its not one that you can spend your way through its one that you've got to attract and retain.

The best drivers you already have and get through this peak peak is upon us volley.

Volumes are strong and project opportunities are out there, we think that sets up for a very strong 2021.

Our service excellence is ongoing it's paying dividends at showing through in the financials I've always believed if you hire the right people given the right tools, but most importantly set the right type of expectations, They will live up or exceed them and they are and we're going to continue to focus on that going forward. We're in the middle innings on the cost story, we're going to keep working on cost and driving costs out of our network any and every way.

Where we can and we think there's opportunities to do that.

And in closing closing I would just say that we are excited about doing everything I, just said with an eye towards sustainability like never before.

Really something we're excited about we're building.

A structure, we've got a report coming out in a couple of weeks that will further outline and define our iOS few initiatives and so I'd ask that you take the time to read it when it comes out we will be happy to answer questions on it as well. So thank you all for being with US and thank you for sporting Warner.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.

Yeah.

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