Q4 2020 Werner Enterprises Inc Earnings Call
Yeah.
Good afternoon, and welcome to the Warner Enterprises fourth quarter and full year 2020 earnings conference call on.
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I would now like to turn the conference over to Derek Leathers, Vice Chairman, President and Chief Executive Officer. Please go ahead.
Thank you and good afternoon, everyone with me today is our CFO John Steele.
<unk> and 'twenty was a very challenging and disruptive year.
And I'm proud of and Warner team for their resilience tenacity and perseverance throughout the year.
And our associates quickly reacted to change and freight and work conditions and delivered record results.
The Warner team achieved record operating income and adjusted earnings per share in 2020.
Our drivers and mechanics relentlessly kept America, moving for Warner customers and consumers, despite the demand and operational protocols and necessitated by the pandemic.
Warner officers associates continue to produce superior service to our customers drivers and mechanics, despite restrictive changes to their work environment.
Our primary focus continues to be on delivering best in class service, while protecting the health and personal safety of our associates their families and our customers.
We are confident the freight demand for our services will be strong and 2021.
On the supply side structural truck driver availability constraints and OEM production challenges are expected to continue to limit industry capacity growth for at least the next several quarters on.
On the demand side, our key customers are producing strong sales that are expected to continue as the economy recovers and additional COVID-19 stimulus packages are implemented.
Finally customer inventories continue to be at historically low levels. Despite the inherent need for even more forward deployed inventory and a rapidly growing next day service ecommerce market.
We are well positioned to succeed in this business environment as we did in 2018, when freight was strong and capacity was tight and.
We're also positioned to succeed in the event the freight market begins to normalize at some point and the future.
You can look to our industry, leading earnings growth and a down market of 2019 versus 2018 as a guide for how we would expect to perform.
Warner is well positioned and committed to thrive and any trucking cycle.
The durability of our diversified dedicated one way truckload and logistics revenue portfolio has demonstrated our resiliency.
On the custom refinement and strengthening of our five T strategy for some laser focus on sustainability throughout allows us to focus on operational execution.
Our unwavering commitment and enhanced processes designed to safely and consistently deliver our customers freight on time every time position our brand for margin expansion and revenue growth in that order.
After a review of our fourth quarter and annual financial results I'll provide you with the latest developments of our five T's plus S strategy.
Finally, I'll report, our fourth quarter, 2020 guidance and introduce our 'twenty, one guidance metrics and assumptions.
On slide four here's an update and overview of our key market size and fleet size metrics as well as revenues by segment industry vertical and customer.
Over three quarters of our revenues are generated by truckload transportation services with the remainder primarily coming from more on the logistics.
Warner has a consumer centric freight rates with over 70% of revenues and retail.
Our food and beverage, Romania, and industry verticals, or 20% from manufacturing and industrial and 9% from logistics and other customers.
Nearly half our revenues came from our top 10 customers and almost 80% came from our top 50.
In short we have a long standing relationship with growing and successful companies and are committed to our strategy of aligning with winning organizations.
Revenues from our top 10 customers increased six percentage points to 49% and 2020 compared to the prior three year average of 43%.
And many of our larger and successful retail customers produced very strong sales growth and 2020 during COVID-19, which resulted in more freight shipments.
Let's move to slide five for an overview of our fourth quarter and full year financial performance.
And the fourth quarter revenues were flat at $620 million adjusted.
Adjusted EPS grew 33% to 89 per share.
Adjusted operating income increased 30% to $82 7 million.
While our TTS adjusted operating margin net of fuel increased 420 basis points to 18, 2%.
For the year revenues were 4% lower at $2 4 billion.
Adjusted EPS increased 8% to $2 59 per share.
Adjusted operating income increased 7% to $241 9 million.
For the full year 2020, despite the unprecedented challenges created by Covid, we achieved an adjusted TTS operating margin net of fuel a 14% exceeding the midpoint of the long term annual goal range of 10% to 16%.
For 2021, we expect our TTS operating margin net of fuel will improve and be in the upper end of that range.
Dedicated freight demand and revenue per truck for both strong and the fourth quarter as our largest dedicated customers and discount retail home improvement and beverage continued to produce robust sales and arc.
Our continued success and dedicated has enabled us to grow it to nearly two thirds of our TTS fleet.
Dedicated is more difficult to service produces strong financial performance and is less cyclical than one way truckload.
One way truckload peak season freight demand and fourth quarter started sooner than normal and October and remained strong into December as customers continued to manage the challenges of strong sales combined with supplier and supply chain constraints caused by Covid.
We ended the year with.
With 7000, and 830 total trucks and TTS, a decrease of 170 trucks year over year and an increase of 120 trucks sequentially from the third quarter.
At year, and 63% of our TTS truck fleet was and dedicated and 37% and one way truckload.
At this point I will turn the call over to John to discuss our fourth quarter financial results in more detail John.
Thank you Derek and good afternoon.
Moving on slide seven total revenues for fourth quarter decreased slightly with fuel surcharges and reduced by $20 million year over year due to lower fuel prices.
TTS revenues Protract per week increased five 3% due to improved revenue per total mile and slightly lower miles per truck, which was caused by the increased mix of shorter haul dedicated trucks on.
On logistics revenues increased 8%, a significant improvement and the 16% decrease and second quarter, and a 3% decrease and third quarter.
Our cost management initiatives and programs continued to perform well and fourth quarter, we effectively managed our controllable costs with sustainable improvements through improved associate productivity.
And are leveraging our procurement spend and doing more with less we aggressively managed expenses and in 2020, we delivered nearly $23 million and annualized sustainable cost savings.
And 2020, we achieved our lowest accident per million mile right and the last 28 years.
And while reduced traffic congestion due to Covid was a significant favorable factor other contributors were the improved safety performance of our professional drivers are.
Our high standards for driver hiring and retention.
Ongoing safety training and Warner's enhanced track safety technology.
Also in 'twenty and 'twenty, we achieved the lowest work injury rate and the last 15 years.
Adjusted operating income grew 30%, primarily as a result of our strong operating execution and our TTS segment.
Our logistics segment had an 80 basis point reduction in operating margin as a result of much higher capacity costs and the second half of 2020.
Our adjusted earnings per share were <unk> 89.
Which was a 22 step improvement or 33% increase over fourth quarter a year ago.
On slide eight our full year results and 2020 revenues declined 4%, primarily due to lower fuel surcharge revenues, we increased TTS revenues per truck per week by three 7% with two 7% fewer trucks.
Our adjusted operating income grew 7% due to a 100 basis point increase and our adjusted operating margin. This margin expansion enabled us to achieve and 8% increase and adjusted EPS to $2 59 per share.
Beginning on slide nine, let's look specifically and results for our truckload transportation services segment.
And the fourth quarter, TTS revenues decreased $11 5 million or 2% due to lower fuel surcharges and partially offset by five 3% higher revenues per truck.
Adjusted operating income was $79 9 million and increase of 32% due to a 420 basis point expansion of our operating margin percentage debt appeal.
Our adjusted operating ratio net of fuel continued its favorable decline to 81, 8%.
Turning to TTS fleet metrics on slide 10.
For dedicated we grew fourth quarter trucking revenues net of fuel by 9% to $258 million.
Dedicated average trucks increased 4% and revenues per truck per week increased four 8%.
Our dedicated customer bid pipeline remains strong.
One way truckload fourth quarter trucking revenues net of fuel decreased 7% to $176 million average trucks decreased 13% due to the challenging driver market as well as trucks and drivers that moved from one way truckload to dedicated Rev.
Revenues per truck per week increased seven 2% due to the combined effect of our revenues per total mile increase of six 9% and our miles per truck increased <unk>, 3%.
Moving to Werner logistics results on slide 11, and the fourth quarter logistics revenues grew 8% to $130 million.
Truckload logistics revenues increased 2% due to a 12% volume decline and a 16% increase and revenues per load.
Intermodal revenues grew 23% due to a 21% volume increase and a 1% increase and revenue per load.
Our logistics gross margin percentage decreased 280 basis points year over year due to the much higher cost to truckload capacity for contractual brokerage.
We made good progress improving contractual rates from third quarter to fourth quarter as our gross margin percentage improved sequentially by 170 basis points and our operating margin percentage improved sequentially by 270 basis points.
And 2021, we expect further and logistics margin improvement.
Last week, we announced the sale of our global logistics freight forwarding business, which had revenues of 53.002 million 20.
And the sale is expected to close later this month and will result, and a gain of <unk> <unk> per share and first quarter 2021.
Going forward, we are focused on enhancing our north American logistics capabilities and truck brokerage freight management intermodal and final mile.
On slide 12 is a summary of our cash flow from operations net capital expenditures and the resulting free cash flow over the past five years, expanding operating margins and less variable net capex has enabled us to improve our free cash flow during the last four years rising to a record $180 million.
And 2020.
For 2021, we expect net capex to be comparable to the last two years and a range of 275 to 300 million.
This guidance range assumes we maintain our new truck and trailer fleet modestly grow our truck fleet, primarily and dedicated and we continue to invest and Warner edge by building out our technology platform with solutions that are more advanced faster and with enhanced security.
On slide 13 is our disciplined strategy for capital allocation.
First and foremost we will continue to reinvest in our fleet with new feature rich equipment with the latest sustainability features for safety and driver amenities and fuel efficiency over.
Over the last three years $899 million was invested and the five t's plus S or 64% of our total capital allocation.
Our 2021 Capex plan includes the near completion of two full service terminals and Lake City, Florida, and Lehigh Valley, Pennsylvania.
That will replace our existing lease facilities and those markets.
Warner Edge, our digital initiative continues to develop as we strengthen our information technology with systems that are better and faster less expensive and more secure.
During fourth quarter, we repurchased one 2 million shares or one seven percentage of our shares outstanding for $48 million.
Over the last three years, we repurchased four 9 million shares totaling $171 million or an average share price of just over $35 per share.
Over that same three year period, we paid dividends of $334 million.
Our capital allocation plans may include continued share repurchases and increasing our quarterly dividend to enhance total shareholder return.
At the same time, we remain committed to maintaining a strong and flexible financial position.
Our long term goal is to maintain and net debt to annual EBITDA ratio range between one half and one turn.
During this period of Covid uncertainty and 2020, we intentionally maintained a lower net debt to annual EBITDA ratio and ended the year and 0.3 times.
I'll now turn the final portion of our prepared remarks back to Derek.
Eric.
Thank you John.
Moving to slide 15, I will update you on our <unk> plus our strategy.
On the past five years, Warner implemented structural and sustainable upgrades to our TTS segment with a modern and more efficient fleet with the latest safety technology, raising our hiring and retention standards for high quality safe professional drivers and further strengthening our service product to our customers.
Our first two cheese newer trucks and trailers have young average fleet ages of two and four years respectively.
All Werner trucks are equipped with advanced collision mitigation and safety systems automated manual transmissions forward facing cameras and and Untether tablet based telematics solution for our professional drivers.
The tight driver market remains very challenging and the fourth quarter.
Since the onset of Covid last March and social distancing and other safety requirements combined with state licensing cutbacks have reduced the number of driver training school graduates nationally by an estimated 40% despite.
Despite these challenges one is industry, leading driver training school network continues to be a significant resource for highly trained new drivers.
Driver recruiting and safety and equipment maintenance will be further enhanced by the opening of our two state of the art terminals and the next few months.
We're making major strides upgrading and modernizing our it infrastructure and data security and November we announced our partnership and investment with mastery logistics systems over the next four years, we will replace our existing transportation management systems with Master. He is cloud based mastermind Tms to improve functionality and visibility and one.
Integrated trucking and logistics system.
During our third quarter earnings presentation. We unveiled the addition of sustainability is a core component of our strategy in.
In November we issued a comprehensive ESG presentation.
Building on our strong foundation to drive greater sustainability at Werner.
Which is available at Warner Dot Com in that report, we announced three significant ESG milestone goals.
On slide 16, our three sustainability goals are shown with fourth quarter milestone updates for each.
I'll provide more clarity for the updates.
We will reduce our carbon emissions by 55% by 2035.
We previously announced.
<unk>.
Pilot program testing and electric powered Peterbilt truck and we will be testing and prototype hydrogen fuel cell truck with Cummins and Navistar.
Last month, we announced and equity investment and two simple and autonomous trucking technology company.
Staying on the leading edge with emerging technologies helps us remain focused on improving our drivers' lives keeping them safer, providing our drivers with best in class equipment, and helping them achieve long term careers and the trucking industry.
We were adding three additional associated resource groups by the end of 2021.
And the process of establishing a new arg for associates, who are military veterans or veteran spouses and we formed a dei council to oversee the development of Additionally, RG is going forward.
And we said we would establish a formal diversity leadership position and first quarter and January Kathy price and experienced and talented and Warner leader became our associate Vice President for diversity inclusion and learning Kathy.
Kathy has already developed a comprehensive and thorough diversity equity and inclusion and implementation plan for 2021.
This plan will encourage diversity of thought and promote corporate engagement through events geared toward education and networking.
And November.
Carmen Top Yo joined our board of directors, Carmen as President and CEO of Northern total services.
Carbons business leadership knowledge and experience as well as her extensive experience with diversity matters will provide valuable perspective and guidance for our company.
During 2021, we will publish our inaugural corporate social responsibility report to demonstrate our ongoing commitment to sustainability.
Moving to slide 17, we have a comparison of the guidance metrics, we provided last quarter against our actual results. Additionally, we are providing 2021 guidance metrics and assumptions.
During the fourth quarter, we grew our truck fleet sequentially by 120 trucks with 230 truck growth and dedicated and a 110 truck decline and one way truckload.
We ended the full year 2020, with 2% fewer TTS trucks, the Nir and 2019.
In the middle of our guidance range.
For 2021, we intend to modestly grow our truck fleet and the range of 1% to 3% and consistent with our strategy. We expect most of this growth will be and dedicated.
Pricing and the used truck and trailer sales market continued to strengthen and fourth quarter amid higher demand, which resulted in sequentially improved equipment gains of 4 million on ahead of our fourth quarter guidance range of $2 million to $3 million.
For 2021, we anticipate equipment gains and the range of $12 million to $15 million as we expect continued strength and the used markets along with the benefit of our strategy to continue to increase our sales mix of retail versus wholesale.
Net capital expenditures for fourth quarter were $79 million slightly below our anticipated guidance range, because we sold significantly more trucks and fourth quarter than originally anticipated.
2021, net capex are expected to be similar to the last two years and the range of $275 million to $300 million as we maintain our current fleet age opened two terminals and expand our Warner edge Digital initiative.
We are introducing a new guidance metric for dedicated we expect dedicated revenue per truck per week growth of 3% to 5% and 2021 consistent with our performance improvement for this metric for the last 12 quarters.
One way truckload revenues per total mile for fourth quarter increased six 9%, which exceeded our guidance range of 3% to 5% due to superior execution and a stronger than expected peak season.
For the first half of 2021 compared to the first half of 2020, we expect one way truckload revenues per total mile to increase and a range of 7% to 10% assuming high single digit to low double digit rate increases during the 2021 contract bid season.
Our effective tax rate and fourth quarter was 25, 4% in line with our guidance range and we expect our effective tax rate for 2021 to be and a range of $24 five to 25, 5%.
The average age of our truck and trailer fleet held constant and fourth quarter and we expect to keep our fleet new in 2021.
And the first five weeks of 2021 freight demand trends and our one way truckload unit continued to be stronger than normal compared to typical January and early February.
And January we implemented driver pay increases and our one way truckload fleet that exceeds $10 million annualized or plus 6%.
We are implementing driver pay increases as needed and dedicated and expect our total TTS driver pay increases will be at least $16 million to $18 million for the year.
While we will continue to aggressively manage controllable costs. We also expect debt as the vaccine is widely distributed and the economy strengthens there would likely be some cost increases, notably in the areas of healthcare travel driver recruiting and insurance premiums.
We believe there are several factors that will limit the growth and truckload supply for the foreseeable future.
These factors include fewer new drivers that are in the industry due to COVID-19 safety issues that limit driver school training and state CDL licensee.
Fewer eligible drivers is the drug and alcohol clearinghouse database continues to build.
<unk> truck driver demographics, and and extremely challenging truck liability insurance market.
Water remains well positioned with the superior team and an active talent pipeline that will continue to yield strong and sustainable results.
We continue to believe the runway for freight demand looks very good for 'twenty one.
Inventory restocking will likely continue to occur for at least the next several quarters and we also expect the economy to gradually strengthen as the national vaccine program expense.
We expect strong contract pricing opportunities and this bid season.
With that at this time I'd like to turn the call over to the operator to begin our Q&A.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
As a reminder, 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. Today's remarks contain forward looking statements, including those related to COVID-19 that may involve risks uncertainties and other factors that.
Could cause actual results to differ materially.
Additionally, the company reports results using non-GAAP measures, which it believes provide additional information for investors to help facilitate the comparison of past and present performance a reconciliation to the most directly comparable GAAP measures is included in the tables attached to the earnings release and in the appendix of the slide presentation.
Our first question comes from Todd Fowler with Keybanc capital. Please go ahead.
Hey evening guys. This is back on for Todd.
Just wanted to dive a little bit deeper into the the one way guidance here for the first half I guess, what does it incorporate in terms of seasonality for the first half of the year and then if you could just kind of touch on your on what does it assume for for maybe project freight and.
And maybe the second quarter.
So this is Derek thanks for the question.
On the seasonality I'm not sure I understand exactly what you're asking so I'll just speak to how seasonality has developed thus far.
And right now with January and February as we mentioned in our prepared remarks.
Seasonally stronger than normal all the channel checks that we're having with customers and as we have dialogues about the progress of freight and current inventory levels would suggest that that will continue.
We would expect based on those conversations current inventory levels and the overwriting capacity constraints that are more structural and systemic and they are.
Fleeting and their nature that second quarter should be set up for project opportunities. Obviously, that's a long time from now and we'll get better clarity as the quarter develops.
But in a normal year.
Second quarter, especially at the end of the second quarter does set itself up set itself up well for.
And for project freight and we wouldn't be expecting at this point that to be the same this year.
Okay. Thanks helpful, Yeah, and I understand with with.
Your prepared remarks, I'm, indicating some greater seasonality there was more looking for.
And the second quarter, I guess, but I guess just in terms of fleet growth.
And I understand its focus more towards dedicated but.
What is what are your thoughts on just kind of one way fleet as we move through 'twenty, one does that I guess being flat from current levels and and more so focused on dedicated or is it kind of a continued shifts.
From the one way and to into dedicated.
Sure. So I think the way to think about it would be right now the dedicated pipeline is very very strong and so just known.
<unk>, cedar and implementation or soon to be forthcoming.
Means that and this driver market when it's difficult to obtain.
And bring on board new drivers.
And we just know that what's the and affect is that we're going to see more growth and dedicated as a percentage of the total but we do expect that total fleet growth has some opportunity to move north from where it is today.
We price all of those dedicated opportunities based on the premise that we have to be margin enhancing and we're looking for sustainable and structural alignment with winning customers.
That is the case with these opportunities that we're looking at now the both those and implementation and we're soon to be and.
Implementation. So it's not so much at this point, we're looking to limit one way truck growth, it's more a matter of the tight driver market, a robust pipeline and dedicated and strong margin opportunities to be able to.
<unk>.
Sustain ourselves through the cycle, which is what we've been committing to the investor community for some time.
Yeah.
I appreciate the detail thanks, guys.
Thank you Zack.
The next question is from Scott Group with Wolfe Research. Please go ahead.
Hey, Thanks afternoon, guys. So I wanted to ask Derek about margins last quarter, you talked about margins getting as good a 16%.
Any reason why we shouldnt be assuming 16% this year and.
Given that you just did I think 18% and the fourth quarter is there upside potential to that 16% in your mind.
We're always going to kind of work to.
And to exceed expectations wherever we can Scott. It's a great question. Our guidance is our guidance, which is we think we're going to be on the high end of the range I mean, I think that's something we're comfortable with at this point, we think the setup is.
As good or better right now than it was the last time, we spoke and so we feel better about the overall market dynamics and capacity constraints that are out there and where we're at and the bid cycle and how those conversations are going.
So the potential is there, yes, but I'd rather not stray from the structure of the guidance that we've previously given but what I will tell you and I think the fourth quarter with the 81 eight.
And that you referenced demonstrates that if the market is there we're going to make sure and try to maximize margins for our shareholders. While also taking care of our customers.
Okay and then just second question the guidance implies a little bit of a deceleration and dedicated revenue per truck.
Any thoughts there and then just any color on the power only business, where we're hearing more and more about that from carriers and just curious about that thank you guys.
Yes, the dedicated revenue per track, we were I think four 8%.
This most recent quarter.
It it does fluctuate some from quarter to quarter, but and then in the environment, where we had some pretty solid increases in rates in 2020, we think debt of 3% to 5% range is reasonable for 2021 based on the current market conditions and I'll let.
Derek answered and the power only question.
Yes on the <unk>.
Only questions Scott I would say that.
It is a topic and this building is something we're working on as well, we do quite a bit more of it and perhaps we've communicated we're going to continue to grow it from here.
Something that we think has a lot of upside for and asset backed player like Warner when you think about brokerage and being able to combine the best of assets and non assets.
And we're only as a great place to do that.
We have oh.
A glide path right now towards.
Towards significant growth in that area and in particular.
We have a strong power only operation and.
And our cross border mix and so when you think about our business to and from Mexico, where we're a large player. We've got the large facility on the southern border. We've just built a new and even larger cross dock, we're doing a lot more power only to and from the border and we will continue to grow that going forward.
Thank you guys.
Thank you.
And next question is from Amit Malhotra with Deutsche Bank. Please go ahead.
Thanks, Operator, Hi, Derek John Congrats on the great results.
I guess first question the $81 eight or in the quarter was.
Kind of.
It was eye watering and in terms of how strong it was and obviously over 60% of your fleets dedicated.
And 7% yield growth is strong but it's.
There's obviously something else there that's allowing you to report that those types of margins can you just talk about the freight selection opportunity and the quarter and was that what really allowed you to kind of.
Achieve those types of.
Really really great margins and the quarter.
Yes, great question.
I guess the first thing I'd say is yes. The 81 eight something we're really proud of and we're also proud of how clean it is.
It's a solid 81 eight across the board with.
With.
Really a lot of blocking and tackling involved so throughout up and down the P&L. It's execution at the level that we've talked about getting to for a long time, it's a lot of focus on work by the team and so I'm proud of what they did it also points to why only one metric which could be.
Rate per total mile or any other one metric production or any other one is not always the secret sauce right. So we look at it more holistically than that we think about it.
And on how the parts fit together and we've had a vision for a long time around here and I've had a vision around.
If we have the right equipment, the right customer mix, the right quality drivers and the right folks internally that are dedicated excellence, we can get there and it doesn't have to be just through raising rate or with only focusing on production maybe at the expense of service, we've got to be able to execute across all of those facets simultaneously.
And I think Thats why if you look at the quarter. It's not just the 81 eight that I'm proud about it's the fact that the 81 eight is driven across multiple multiple different product offerings, it's with dedicated representing 63% of the truck count and still being able to achieve a result, it looks like that it shows the cycle proof nature of the business that it's not <unk>.
Back in a strong market and yet is uniquely prepared for any potential cycle turn that may be coming.
And we think that cycle is not yet here. We think we're still have a lot of runway. When you think about the systemic capacity constraints that exist, but when that day comes and this portfolio and better built and it's ever been to be able to execute strongly and so we're excited about it as we look forward.
Yes, and Thats helpful. Just just to be maybe Devil's advocate a little bit maybe the fourth quarter also represented.
Just a perfect storm and good things.
Haven't really done and to drive big driver pay increases and I think that's coming this year already has come and maybe it started this year and then demand sort of inflect. It so as we think about all.
All of the moving parts into 'twenty and 'twenty, one and you've got maybe $15 million to $20 million of headwind on driver pay.
Probably some headwind on claims expense as congestion rises he's got tailwind on gains of sales and then I guess, maybe the X factor or is it just the freight selection opportunities just the demand environment stays as strong as it is but.
A 13% and long term target there.
Do you think that no one's expecting 81, eight again, but for the entire year 2021, what do you kind of split the difference between the long term target and 80 180, 181, eight and that kind of gets you to what you guys think you can do this year and just given some of the puts and takes on the cost structure.
Yes, So I think it's obviously, it's early and the year Theres a lot of unknowns, we're still dealing in a world where COVID-19 does exist and.
Vaccine rollout is somewhat problematic, but.
The strides we've made on injury rate accident rate, yes. Some of that is aided by congestion and we called that out and our remarks, but a lot of that is systemic.
The deep dive revamping that we've done through our driver training programs from the very first day, we start recruiting through the day to day or assign their first truck it and see the.
And the utilization of technology and simulators and other.
Driver focused training initiatives that have been launched that are paying dividends and ways that we thought they would and now we've got results to show that it's true.
<unk> freight market is still a tailwind the freight market looks to stay that way for several quarters as people look to restock inventories on the driver pay side.
I wouldn't expect to hear some huge announcement from Warner because a we were paying.
Competitive wages going into this cycle and as the market continued to tighten we continue to focus on bettering the lifestyle and life that are drivers had given them the right equipment and paying on the right wage our turnover results have continued to improve.
And I think it shows where morale is and the fleet and so yes, there's headwinds, but those will be offset by the needed and necessary right.
Negotiations that will be having throughout this bid season, and so I like the setup the opportunity for us to continue to make.
As I mentioned earlier sort of up and down the P&L.
And improvements, while making sure that we are paid based on the service levels, we're offering at market.
Competitive rates and then treating our drivers through more than just pay to a lifestyle that they want to stay and they want it and they want to be a part of.
And that's where we're sitting today as we look forward certainly there is always upside to the guidance that we may give.
But the first call out of the gate and January is usually not one I'm going to start changing that guidance. So so our goal will be to continue to achieve at the top level. We've given metrics that I think are and guidance. It's aggressive it's stuff that we plan on fulfilling and.
And that'll be our go forward strategy to continue to focus on quality above all else throughout the.
And the range of everything from service to driver quality to alignment with winners to the quality of our equipment and now even the expansion of our terminal network to include best in class terminals and a couple of places where we had gaps previously.
Okay, Okay and that helps thank you Derek Thank you John appreciate it thank you.
The next question is from Jack Atkins with Stephens. Please go ahead.
Okay, great. Thanks, so much for the time guys really appreciate it I guess, maybe taking a step back and thinking about more of a longer term strategic partnerships and investments that you announced this quarter.
Derek can you can you talk for a moment about both the partnership with mastery and you gave a little bit of color on that on your prepared comments, but.
Uh huh.
How should we think about the timeline before that starts to really bear fruit for Warner from a profitability perspective and and.
And what exactly are you looking to sort of get out of that partnership over the next couple of years.
Yeah sure Jack Thanks for thanks for calling.
The the partnership with mastery is and our view.
The.
The best way for us to accelerate our sort of cloud first cloud now strategy, it's a way for us.
And to accelerate.
And the integration of what is today is still more than I would like to see.
Separate systems across logistics, and our and our asset base and ability to lean into and leverage some industry expertise.
And as proven.
A knowledge base and this area that is strong and.
And frankly, we like.
The fact that it is a startup or new entrant anyway with deep industry roots, but a new entrant because its unencumbered by legacy systems and legacy obstacles and things that would otherwise be present.
And the meantime, we are still investing and still have a robust.
And it.
Group here at Werner.
Going to continue to build and develop what we believe to be secret sauce things that for instance lead us.
Industry, leading revenue per truck per week, and our Werner and the Warner One way network.
For the fourth quarter across the entire industry. So we're going to continue to optimize and build.
Some of the the.
On the backend functionality, if you will or I should say the execution functionalities, but then by some of the core Tms and.
Cloud based Tms that allows us to integrate more rapidly allows us to be more have more mode and the neutrality overtime and really frankly be able to bear.
And the fruits of our overall portfolio more easily with to our customers and and provide them with a more seamless solution across multiple parts of the portfolio. So we're excited about it now as far as how long does it take these things are not easy and they certainly arent overnight, but we do expect that we will have certain aspects of the masks.
<unk> platform integrated and functioning within our building.
This year for sure.
Current plans would be some of those would be launching late second quarter and.
And starting to bear fruit at that time, but it's really going to be a back half traction that youll start to really.
See more progress on that front.
Okay that makes that makes sense.
And I guess, maybe for my follow up question.
And we think about the asset based carriers this quarter right and their logistics operations, we saw a fairly wide range of outcomes. Some folks of very aggressive top line growth and pretty healthy margins and and I guess, you guys werent able to sort of see that same level of performance and.
And definitely presents an opportunity in 2021, but I guess when you think about logistics.
And maybe what what prevented you guys from being able to really capitalize on the strong spot market that we saw.
And the fourth quarter and and how do we think about the action plan to get that on track and 2021.
Yeah, Great question.
So I'll start with the obvious you're right logistics as an opportunity in 2021.
Simply stated it didn't perform.
The way that I would like to see it performing we've got work to do there, but I will tell you that there is some very good foundational progress happening.
We made a lot of.
And we did a lot of work on legacy agreements and legacy contracts, we talked about it and the third quarter with an eye towards fourth quarter profitability, we had things we needed to clean up structurally with with more on more on the contract side on logistics than anywhere else and we've done that work.
We had to continue to staff up and to continue to add personnel for some of the volume that.
And that we have in the pipeline and that's more difficult and COVID-19 and perhaps and area that we didn't have.
As much success as we would've liked.
But we've got plans now to your real point and 21 to attack that.
And we're actively engaged right now on the on boarding business on boarding personnel to better manage that business and frankly some of the relief of the tech that we've been building out both ourselves as well as the mastery journey, we referenced earlier will bear fruit as the year progresses, so while I'm unhappy with the fourth.
Our results and how we ended the year I am very happy with the sequential improvement from Q3 to Q4, and I think Directionally that gives you a sense of where we're headed as we go into Q1 and forward I do believe debt.
There is opportunity for margin expansion there I do believe that we've got.
Volume growth going there.
The right direction, but it's going to be.
And the law.
And the headline but still more of an opportunity story for Q1 and Q2 and then.
I'm confident that and the back half you start to see that performance be reflective of the overall performance that you've seen from Warner and the last couple of quarters. Okay. Great makes sense, thanks, Derek take care.
Thank you.
The next question is from David Ross with Stifel. Please go ahead.
Mr T and the man of steel and good afternoon.
Good afternoon, Hi, Dave.
You mentioned keeping on the asset light theme that you want to grow brokerage freight management and intermodal and final mile.
And final miles and interesting one right now getting a lot of a lot of attention can you talk about warner's capabilities are there today and and what you want them to be.
Yeah sure so our capabilities today, and we have a national network, we've got a strong big and heavy presence and sort of two men and a truck we're building out and and have built out now more of the one man model.
Regionally and that is still going to need further expansion to get more of the national presence.
Volumes have continued to grow and grow steadily and that area.
Our final Mira Aerie overall that as margins have continued to perform well and tack on that side is also performing well. So I'm excited about the cost structure, there and Thats a part of the growth story within logistics and it's something that we are excited about it was part of the decision.
First from WGN and really focus on our North American footprint, which is where we think our strength is one of my goals is to make sure whenever we do we do to win and if we're going to to put time and effort against it it needs to have the return profile to justify doing so.
I think this new new.
And <unk> focus on North American logistics provides us and ability to improve those results.
The final mile footprint that we currently have provides the foundation to build upon.
And so I'm pretty bullish on it as I think about it.
Looking forward.
And you said the margins are performing well, which is interesting because one of your big competitors exited the business because the margins were poor and others that are in it are reporting good margins is there anything unique you're doing on the cost side, whether it's using Ics or company drivers or is it more of a pricing issue.
Well I think there are several things, but probably the most.
The least surprising and one to you is that we're taking a conservative approach, meaning we.
We arent building out or going full speed ahead.
Until we felt we were ready so we havent led with a lot of final mile commentary on these calls we haven't spoken about it and let our rhetoric and get out in front of our reality.
The time now is to start focusing more on on how we speak to it and communicate it.
But I think our the methodical nature of our launch is a big part I think we've got some strong leaders and execution partners and it we did steer clear of go and asset heavy into something before we understood it or do it and we are still predominantly and non asset play on that space, but.
But we also spent a ton of time and our final mile launch listening to our customers and trying to build what they want versus building out what we thought they needed and I think that does pay dividends and so it takes longer to do it that way. It takes a lot more R&D before you start having revenue and profit.
But by doing it that way, we know once we launch and once we start having those conversations it's a product that they're looking for and that was really heavy systems heavy communication visibility clay.
Claims resolution processes and other things that there is still gaps in that final mile space really across the board in terms of the customer experience and we're all working hard.
Both here and and other organizations to address it.
And I like our chances.
Excellent. Thank you.
Thank you.
The next question is from Ken <unk> with Bank of America Merrill Lynch. Please go ahead.
Hey, Derek John and good afternoon.
So congrats on a solid quarter and good luck and the Lehigh Valley and that's a great place.
But others are seeing some rising capex.
The industry is moving to lower the age it seems like of their fleet, they kind of led and age a little bit recently youre standing still on the market.
Is that a sign just the driver market and has two top kind of as you mentioned to expand the fleet or take advantage of that.
Kind of others focused on on <unk>.
Just the fleet renewal at this point with the Capex targets.
Well I think the Capex target first and foremost is driven by the fact that we already have a young fleet and we're going to keep it that way I mean, there are others that have more of a.
Sudden increase and their capex this year, but it's driven by wanting to renew or refresh their fleet and try to bring the age down we like our fleet age where it is it's one of the newest fleets out there and so we don't have to do that we don't have to fight that particular battlefront. So it just comes down to how.
How do we feel about fleet growth on fleet growth, if it's long term relationship.
A long term contract cycle proof defensible type freight at our margin expectations or better.
We're going to add it and were going on and we're going to go out and use the driver School network that we've built and invested in and.
And we're going to have access to high quality drivers, we're going to continue to.
Fight the fight and the experienced driver side and.
Through the combination of lifestyle equipment and compensation.
We're going to win that fight.
More often than some.
And if that provides upside through the.
And the profile of freight than that I, just talked about to exceed that TTS growth target and we'll do so.
But at that growth target.
And that.
That growth target corresponds to that Capex range, and it's consistent with that 11% to 13% of revenue target that we've talked about for several years around here.
We finally got our house.
Where we want it as it relates to age quality, both terminals infrastructure as well as fleet infrastructure and these last two terminals kind of finishes set and that table.
Wonderful.
Just coming back to the dedicated you talked about rates up 3% to 5% yet talking about rate pressure of up 6%. Maybe you were talking about that on over the road, but.
And you throw out a number for for dedicated kind of Russia.
Rate pressure as well.
Do you see that margin pressure when you step back and look at your outlook because of those debt increased driver pay.
No I do not so so we will have driver pay pressure and make no mistake about it we talked about that right now.
Targeted to be and that.
The driver pay rate of B and up 6%, we came and we finished the year very strong on driver turnover driver retention overall and and fleet morale.
And so we're going to pay our drivers appropriately.
<unk>.
The ability for rates to outpace driver increases.
And is one thing I'm very confident and right now with the market that we're in on the dedicated side, we talk about 3% to 5% driver pay is often a standalone separate line from that altogether.
Meaning either a a driver pay is already far out in front of where one way truckload payers to begin with because of the work style of the type of work it is.
And if for some reason and it was to come under pressure, we have that conversation with our customer we make that decision together and if we need to raise pay to shore up that fleet will have that will have that dialogue.
But our what our dedicated driver pay is some of the best W. Two earnings out there.
In the trucking market, because we expect high quality and 99, five or better service and it's often.
And tough driver work, but the compensation is commensurate with the work that they do.
So driver pay will be offset and I don't.
And that is not an area where margin erosion will take place and my view.
Alright. Thanks.
Thanks, Tom.
The next the next question is from Ravi Shanker with Morgan Stanley. Please go ahead.
Thanks, and you got to learn.
Can you give us a little more color on the forwarding business sale and kind of what the logic was behind that come on.
And one did you have a multi generation.
And the cycle.
And what are the kind of portfolio of businesses look like on that anything else debt that you think you can kind of monetize or would be non core this is Mike.
Sure Ravi.
Good question.
So when you think about the WGN and sell to be.
Very direct about it the fundamental premise was.
I want this to be and organization focused on being best in class and everything they do debt debt wakes up every day and Leverages our strength.
To enhance shareholder value now to do that that means if we have any businesses that are a little too far afield or a little bit outside of.
The integrated core North American footprint on purpose.
And <unk>.
And what we're trying to provide for our customers I think we had to call. It and then the question. So we did that and as we went through it. It is I want to be clear. It was it was a business that was profitable. It was a business that was actually growing some.
But I believe that the time energy effort and investment will be better spent with us focusing on our core business and north here in North America at the same time, it's obviously dependent on finding a buyer that we think highly of and a company that we think there are synergies with where we can still provide a solution to our customers.
In this new arrangement that provides them with real economic value.
And for them to be able to still get their needs met while we the reciprocal is also true provide that value to their customers, where it makes sense and so there was just a lot of synergies and this particular deal and my view for us.
Continue to focus on our core business and improving our execution while still.
Opening up potentially even new markets new opportunities via this.
On the buyer's avenues.
With their customer base and so.
We're happy with the outcome I think to the second part of your question no. It isn't like we're going through the inventory list of products or businesses looking for other things to so it really gives us an opportunity to put more focus on the rest of the portfolio versus looking to divest from other items.
Got it John and I think you mentioned.
The two facilities and you're switching from lease to own and the first quarter.
Is that going to have an impact on numbers at all.
That's part of the cost.
Debt will be dealing with.
In 2021, but I wouldn't consider it a major cost I mean.
From a personnel standpoint, the costs are comparable.
From a facility standpoint, what we're going to have now is a state of the art facility.
<unk> facility that is top shelf from a driver.
Recruiting from and equipment maintenance standpoint from a design standpoint for the.
And people who work there. So we think it ultimately will be a benefit rather than.
And a meaningful cost item it will probably have a slight cost increase but not anything significant.
And just.
Lockheed Derek.
Yes.
Our balance sheets and great shape nearly net cash.
Youre doing a great or with a lot of the cycle is still ahead of you.
You have.
Great story to tell with sustainability and digital and everything else is there.
Is there a case to be made debt you should probably be a little more aggressive with cash flow Darren on buyback and if the market's not giving you the full credit for everything you're doing right now.
Sure.
And as a case to be made for sure. The question is how far from our roots, where we stray as we think about this doubling down on <unk>.
Efforts on excellence.
We've guided to the reality that we are we.
We have an appetite.
Four.
Our net debt to EBITDA ratio, that's higher than we've traditionally been on.
And the fourth quarter you saw us.
Actively and the market and repurchasing shares.
We have talked about needing to get our house in order and show.
Both externally and internally to give everyone the confidence that this type of.
Execution is possible and we've done that and the fourth quarter and gotten our house in order and shown what's possible here at Werner.
As you do all of those things to generate increasing free cash flow, which we've done for four consecutive years and our expectation is to have free to generate free cash flow.
As we move forward as well and to continue to grow that from here.
All of the above leads to shareholder return opportunities right. So we're going to look at share repurchase we will look at dividends both regular and other.
And we're also we'll look opportunistically at M&A, that's going to have to be the right opportunity that we think is going to be accretive and it's going to be.
And something that is material enough for us to move the needle.
But all of that is on the table and I think you'll get a sense for.
And more aggressiveness as we we just celebrated our 60 <unk> anniversary and I can tell you that we think the best is yet to come and we're looking to accelerate as we drive forward.
Awesome. Thank you.
Thank you.
The next question is from Tom <unk> with UBS. Please go ahead.
Hey, guys. This is Mike Toronto on for Tom.
So I wanted to ask about the truck adds for 'twenty one.
And this one pipeline and dedicated and the tightness and the driver market and is it fair to assume that the the dedicated split of the fleet could drift up a bit from the 63% by loans.
Dear.
Yes, I think Thats fair and right now.
The dedicated pipeline is strong enough and the driver market is tight enough that although we have line of sight as to how we're going to fill and feed the pipeline that's necessary as it relates to dedicated deals that are coming through.
That are meeting, our hurdle rate and and as.
As well as those that are replacing potentially other.
Fleets that are not meeting.
Those return expectations, but to try to project something further than that would be difficult driver market is tough we are adding.
For schools to our school network.
We still believe that we have and advantaged situation as it relates to having one of the largest school networks and America producing high quality drivers.
If the market continues as we believe it will continue on the freight side, we're going to be scratching and clawing and like everybody else to do our best to bring on drivers, but I can assure you. They will only be brought on if they are of that highest quality and so with all that said.
And if I'm looking out and the future.
And Thats kind of why we guided the way we did in the prepared remarks, it would be a fair expectation to think about dedicated getting a slightly larger percentage than even where it is today. It also sets us up to be that much more resilient.
And what at whatever point the cycle does turn and my view sometime at the earliest and 'twenty two.
Got it and then for the for the truck on it in terms of the cadence for throughout the year or will they be back half first half loaded second half loaded or do you think they'd come on and kind of gradually throughout the year.
No at this point I think it's better to assume or it's safer to assume they are front half loaded and back half.
Again, it is a battle Royale out there right now for drivers and we're all working very hard on it.
One obviously is always just continue to retain better than you ever have and make sure you hold onto the ones you have and we're working every day for that.
But the goal at this point would be front half loaded.
And that would be consistent with the dedicated implementation thats already sort of known and right in front of us.
Yeah.
Okay, great. Thank you.
The next question is from Jordan <unk> with Goldman Sachs. Please go ahead.
Hi, a question. So can you talk a little bit about your thoughts on miles per truck as we go from here on productivity I think in the past you've mentioned there might've been some impact.
On dumping with team driving situations and just sort of curious.
Debt to stabilize and see some improvement over the coming quarters.
Yes so.
It's a bit tough.
Because right now I think as Covid continues as vaccine rollout continues and as you start to see more and more comfort with people being in closer proximity that should bode well for both teams as well as our leader program, where we bring in.
New drivers into the industry and they go out with a leader for a period of weeks et cetera.
And all other team like capacity formats that we have here and we have quite a few different variations downside is as the vaccine rolls out and everybody starts feeling more comfortable you're going to see an increase and congestion and youre going to start to see that seat back into transit times and the overall miles per hour. So I think it would be premature at this point for me to tell.
Which which end of the rope wins that tug of war.
And a better a better way to think about it is probably.
Utilization fairly flat.
Levers that matter right now, we're going to be rate and retention and driver hires.
And then more than most everything else and so we've got to make sure and get the rate that is commensurate with the service, we provide and we've got to make sure and retain the quality drivers we have and we've got to go out and attract new drivers to Warner.
As the employer of choice and I.
The set up again is very good on those three fronts and now it's time to go execute.
Well, thank you very much.
Thank you thanks Jordan.
I'll now turn the call over to Mr. Derek Leathers, who will provide closing comments. Please go ahead.
Yes. Thank you. So I just want to thank everybody for being with US again today, you have trusted us and been with US over this journey over the last several years.
<unk> seen are consistent executing against the focus that we've had relative to quality above all else, it's translated clearly and.
In recent quarters.
And.
To improve service.
It's translated to a stronger driver base with more tenure with higher morale and a better seated truck count than many in our industry.
Our associates have been stellar throughout the year and I want to thank them once again and all of that has led us to the results that we just talked about those are results that we expect around here and those results results that we knew.
We are attainable, but only what that laser focus and so it's a proud quarter for us.
We're still on an ongoing evolution of our portfolio.
But the goals behind it or to make us more cycle resistant than ever before we are better positioned for the ups and downs of the trucking cycles that we're all too familiar with.
We've generated four consecutive years of growing free cash flow and we expect to continue that trend as we move forward, we're going to continue to grow with winners so our alignment with winning customers with winning management teams with winning models is something that we're going to continue.
As we move forward and all of that is leading to record earnings and 2020 during the middle of a pandemic record fourth quarter earnings during the time of great uncertainty.
And both socially as well as on the health front.
It's led to some record customer retention and we're proud of how we acted.
During that fourth quarter to support our customers and the professionalism. We tried to show them I mentioned, it earlier and I'll close with this one more time and it's our 65th anniversary.
We're celebrating our founder and CEO Warner we're celebrating all that he has handed it says he gave his he is step taken a step back and turn those keys over but I will tell you the stories and over.
At the beginning of write the next chapters and in fact, I think as we look forward. We're excited about the acceleration in front of us. So thanks for spending your time with US this afternoon and.
Thanks for believing in and Warner.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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