Q1 2021 Werner Enterprises Inc Earnings Call
Good afternoon, and welcome to the Werner Enterprises first quarter 2021 earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero and.
After todays presentation, there will be and opportunity to ask questions to ask a question. You May Press Star then one on a touchtone phone to withdraw your question. Please press Star then two.
Please note this event is being recorded.
Earlier this afternoon the company issued an earnings release for its first quarter 2020, one results and posted a slide presentation. These materials are available and are available in the investors section of the company's website at Werner Dot Com today's webcast is being recorded and will be available for replay beginning later this evening before.
And we begin please direct your attention to this to the disclosure statement on slide two of the presentation as well as the disclaimers and our earnings release related to forward looking statements. Today's remarks contain forward looking statements that may involve risks uncertainties and other factors that could cause actual results to differ materially.
Finally, the company reports for.
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 table attached to the earnings release and in the appendix of the slide presentation and I'd now like to turn the conference over.
Over to Mr. Derek Leathers, Vice Chairman President and CEO. Please go ahead. Thank you and good afternoon with me on the call today is our CFO John Steele.
I am pleased to report the Warner produced record earnings and the first quarter achieved by outstanding operational execution.
We maintain a laser focus on the health and safety of our associates.
And I sincerely appreciate the significant contributions of our entire Warner team to meet and exceed the needs of our customers today I'll start by sharing our perspective on the current market dynamics, followed by an overview of our first quarter financial results then I'll discuss the latest developments from the <unk> plus as the strategy and wrap.
Up with an update on our 2021 guidance metrics and assumptions.
We continue to expect strong truckload freight demand through this year and into 2022.
The retail inventories need replenishing as their strong sales combined with multiple supply chain challenges produced a 30 year low of retail inventory to sales ratio and January five.
And five seven trillion and cumulative COVID-19 stimulus relief payments over the last year has helped triple the amount of U S household personal savings to nearly four trillion dollars.
At the same time as the free demand pump has been prime and the supply of truckload capacity is constrained due to a tight driver market.
Werner is well positioned to thrive in this business environment.
As a result of our retail oriented free base driver preferred dedicated fleets industry, leading cross border, Mexico business and the engineered lanes and our one way segment.
These offerings are further supported by a comprehensive capacity solutions and our Werner logistics segment.
Slide four provides an update of our key market size and fleet size metrics as well as our 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 of the logistics.
By design Warner has the consumer centric for rate base with over 70% of revenues and retail and food and beverage.
Nearly half of our revenues are with our top 10 customers and almost 80% from our top 50 <unk>.
We have long standing and growing relationships with the successful companies.
Let's move to slide five for a summary of our first quarter financial performance.
For the quarter revenues increased 4% to $616 million adjusted EPS grew 72% to <unk> 68 per share.
Adjusted operating income increased 68% to $62 7 million, while our TTS adjusted operating margin net of fuel grew 570 basis points to 14, 2%.
We generated margin expansion from higher revenues per total mile strong safety performance effective cost management and improved gains on sales of trucks and trailers as.
And as we communicated last quarter, we implemented driver pay increases and January that increased driver pay per company mile by nearly 7%.
The driver pay and GTS was flat year over year due to a 6% decrease and company truck miles, resulting from a few factors, including the proactive steps we took to avoid safety risk during times of severe winter weather.
Your team drivers and a higher percentage of our total truck fleet and dedicated with an increased mix of shorter haul lower mileage trucks.
Despite the more difficult driver market and our retention efforts are paying off and we are holding the line on turnover.
In addition to attractive driver compensation Warner strives to be the truckload employer of choice by providing of modern truck and trailer fleet with the latest safety equipment and technology of <unk>.
Wide variety of driver driving positions, including daily and weekly home time opportunities and and industry, leading driver training program <unk>.
Despite the tight driver recruiting market, we are maintaining our stringent hiring standards and we remain focused on attracting and retaining the best professional drivers.
Dedicated freight demand remains strong and first quarter as our largest dedicated customers and discount retail home improvement retail and beverage continued to generate robust sales.
One way truckload freight demand was also seasonally strong.
The recovery and economy combined with several factors limiting capacity.
<unk> and a very good first quarter of freight market. We made further strides and our logistics segment and first quarter stepping up our growth and both revenues and operating income.
The improved pricing and operational efficiency led to better logistics results.
The abnormally severe winter weather events and February and March were disruptive to operations.
And as each event developed we made safety of the highest priority by working with our drivers to park their trucks until the safe to resume operations. These actions lowered our miles per truck and we experienced increased weather related maintenance driver pay and other cost. However, we were pleased that our safety first focus resulted in the 10% decline and our chargeable.
Reportable accident rate per million miles in the first quarter.
The unusually cold mid February weather, and resulting power outages also temporarily close certain driving schools and terminal locations, we estimate that severe winter weather negatively impacted our first quarter earnings by <unk> <unk> per share.
We ended the quarter with 7000, and 735 total trucks and TTS a decrease of 100 year over year and a decrease of 95 sequentially at quarter and 64% of our TTS truck fleet was and dedicated and 36% and one way truckload.
Werner fleet sales and capitalized on and improved market for our premium used trucks and trailers by achieving substantially higher average gains for truck and trailer and higher unit sales, which resulted and equipment gains of $10 5 million and the first quarter and increase of $8 million.
At this point I'll turn the call over to John to discuss our first quarter financial results in more detail.
John.
Thank you Derek and good afternoon, beginning on slide seven and total first quarter revenues increased $23 million to $616 million or plus 4%.
Our TTS revenues per truck per week increased one 3% due to a high single digit percentage improvement and revenues per total mile offset by a high single digit percentage decline and miles per truck, which was caused by the adverse winter weather, 17% fewer driver teams and an increased mix of debt.
Decayed.
COVID-19 and social distancing protocols reduce the number of our driver teams, we expect improvement and our team count going forward as the number of vaccinated Americans increases.
And logistics continued to strengthen growing revenues by 23%.
Adjusted operating income grew 68% due to our strong performance and TTS and improving logistics results.
Adjusted earnings per share were <unk> 68, or.
Or 72% increase year over year.
Beginning on slide eight let's review results for our truckload transportation services segment.
And first quarter TTS revenues were flat due to higher revenue per mile and lower miles per truck and 1% fewer trucks adjusted.
Operating income was $58 9 million or 67% increase due to a 570 basis point expansion of our adjusted operating margin net of fuel.
Our adjusted operating ratio net of fuel continued to show strong improvement with an 85 eight.
Sure.
Turning to TTS fleet metrics on slide nine.
For dedicated we grew revenues net of fuel by 10% to $254 million.
Dedicated average trucks increased seven 5% and revenue per truck per week increased two 1% year.
Year over year strong rate growth was partially offset by lower miles per truck due to winter weather challenges, our dedicated customer bid pipeline remains strong.
One way truckload revenues net of fuel decreased 12% to of $157 million.
Average trucks decreased 12, 7% due to trucks it moved into dedicated and the challenging driver market Rep.
The revenues per truck per week increased 1.1% due to strengthening revenue per total mile which grew nine 5% and of miles per truck decrease of seven 7% due to winter weather and fewer teams.
Moving to Werner logistics on slide 10, and.
And first quarter logistics revenues grew 23% to $138 million.
Truckload logistics revenues increased 20% due to a 22% increase and revenue per load offset by a 1% decline and volume.
Loads handled by our power only solutions increased nearly 50% and the quarter.
Intermodal revenues grew 24% due to a 6% increase and revenue per load and of 23% increase and volume.
Our logistics gross margin percentage decreased 190 basis points year over year due to the higher cost of truckload capacity for contractual brokerage and intermodal shipments.
The address the increasing cost of truck capacity, we reduced our contractual truckload logistics shipments from 55% the 49% of total shipments the.
The previously announced sale of our global logistics freight forwarding business W. G. L closed at the end of February.
We remain focused on expanding and enhancing our north American logistics capabilities and truck brokerage freight management intermodal and final mile.
Debbie G. L had annual revenues of 53.002 million 20, and the sales resulted in a gain of <unk> <unk> per share and first quarter 2021.
As we move forward, we expect to see continued performance improvement from Werner logistics through revenue growth and margin expansion.
On slide 11 is a summary of the cash flow from operations net capital expenditures and our growing free cash flow over the past five years.
Expanding operating margins and less variable net capex enabled us to improve our free cash flow during the last for years.
We expect to generate meaningful free cash flow going forward.
For 2021, we expect net capex to be comparable to the last two years and a range of $275 million 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. The innovation arm of Werner by building out our technology platform of solutions that are more advanced more productive and with enhanced security.
On slide 12 is the summary of our disciplined strategy for capital allocation.
The first priority is reinvestment and our new fleet with feature rich trucks and trailers with the latest safety driver friendly and fuel efficient capabilities and.
In February we opened a state of the art terminal and Lake City, Florida, replacing of smaller lease facility and the Florida market.
In June we will open another newly built terminal and Lehigh Valley, Pennsylvania also replacing a smaller leased facility.
And we're making meaningful and sustainable progress enhancing Werner edge, our it initiatives and platform.
During the quarter, we repurchased 130000 shares and raised our quarterly dividend rate by 11%.
And we will consider strategic acquisitions that are both additive and accretive.
The increase and our quarterly dividend share repurchases and ongoing cost containment initiatives reflect our strong earnings performance and confidence and our business plans moving forward.
We are committed to maintaining a strong and flexible financial position. Our long term leverage goal is a net debt to annual EBITDA ratio of one half to one turn.
During COVID-19, we intentionally maintained of lower debt level and are currently of 0.2 times.
I'll now turn of the final portion of our prepared remarks back to Derek.
Derek.
Thank you John.
Moving to slide 14, here's our five <unk> plus the strategy.
Over the past five years, we implemented structural and sustainable upgrades to our TTS segment with the modern safer and more efficient fleet.
Raising our hiring and retention standards for high quality safe professional drivers and further strengthening our service product to our customers.
As an ongoing testament to our intense focus on service last week, we were named 2021 carrier of the year by Walmart.
We are extremely proud of the entire Warner team for earning this prestigious award.
Our first two Ts trucks and trailers and continue to have the young average fleet ages of two and for years respectively.
All of Warner trucks are equipped with advanced collision mitigation and safety systems industry, leading emissions and fuel mileage technology automated manual transmissions forward facing cameras and and Untether tablet based telematics solution.
The driver market is very competitive and dynamic we continue to enjoy a strategic advantage with our driver training School network of 14 locations that will increase to 18 by third quarter.
Our strength and terminal network is an integral part of our ability to attract and retain the best drivers and minimize fleet downtime for maintenance issues.
Our cloud first cloud now strategy is well underway and progressing the pace.
During the first quarter, we successfully converted our HR MFS and non driver of payroll systems to the cloud solution workday.
We completed the rollout of our new telematic solution edge connect to the entire truck fleet.
We migrated over 60% of our Adi transactional volume to our new cloud based provider and are completing the evi transition and second quarter.
Last quarter, we communicated our four year plan to replace our existing Tms within the integrated cloud based leader mastery logistics systems to improve functionality and visibility as we make further progress we will provide project status updates.
And last year, we added sustainability is a key element of our strategy.
Moving to slide 15 last October we formally launched our environmental social and governance efforts.
Our ESG strategy will continue to evolve through these key themes first we established a formalized ESG framework and strategy. In addition, we are identifying and relevant reportable metrics and goals to monitor measure and report on our ESG performance and progress.
For environmental and we're building on our strong foundation as the truckload industry leader by reducing our environmental impact and carbon footprint through of young innovative and modern truck and trailer fleet.
We also announced our goal to reduce our carbon emissions by 55% by 2035.
We are currently testing and electric trucks and plan to expand testing with other providers and the future.
All of its unknown, whether one clean truck technology will emerge as the leader we are actively participating and various technology developments and programs.
For social we are fostering and empowering and inclusive culture that upholds, our core values and provides equal opportunities for all we added inclusion to our core values and adopted of diversity equity and inclusion and vision statement.
So far and 2021, we established the new Associate resource group for Warner Veterans and formed a day council to oversee the development of additional args going forward.
We are and the process of launching five more associated resource groups. This year.
During the first quarter, we named Kathy pricing as of our associated Vice President of diversity inclusion and learning.
We also named Sean tail cruises to the position of associate Vice President of sustainability and sales and operations.
Finally for governance, we will continue to uphold transparency ethics, and integrity and our governance practices with an emphasis on creating a more diverse board of directors with complementary skills and aligned with our long term strategy.
And our recently filed proxy we nominated three new directors with relevant experience that will further strengthen our capability set and enhance our diversity upon their election.
And we're excited about the energy our efforts to embrace sustainability of creating at Werner and while we have accomplished a lot. There's so much more opportunity in front of us to that and and third quarter, we will publish our inaugural corporate social responsibility report.
Moving to slide 16.
We have a comparison of the 2020 one guidance metrics, we provided last quarter against our actual results. We are also providing our updated 2021 guidance metrics and assumptions.
During the first quarter, our truck fleet declined 1% with most of the decline and one way truckload due to the challenging driver market and the impact of weather on our driver training schools.
For the full year 2021, we continue to expect to modestly grow our truck fleet and the range of 1% to 3% and consistent with our strategy. We expect this growth will be and dedicated.
Pricing and the used truck and trailer sales market accelerated in the first quarter amid very strong demand.
And which resulted in sequentially improved equipment gains of $10 5 million.
For second quarter, we expect equipment gains and the range of $7 million to $10 million.
We are pivoting the quarterly guidance given trends and the used and new equipment markets that are difficult to predict.
Net capital expenditures for first quarter were $38 million. We continue to expect 2021, net capex and the range of 275 million to 300 million, which will maintain our truck and trailer fleet ages and allow for modest fleet growth.
Dedicated revenue per truck per week increased two 1% and first quarter and was impacted by lower miles per truck due to winter weather.
For the full year, we continue to expect growth of 3% to 5% for this metric.
One way truckload revenues per total mile for first quarter increased nine 5%.
And which was in the upper end of our guidance range of 7% and 10% due to a strengthening the and pricing market for.
For second quarter, we expect this metric to increase and a range of 13% to 16%.
We're also pivoting to quarterly guidance due to the strong pricing changes we have seen so far this quarter.
Our effective tax rate and the first quarter was 24, 9% in line with our guidance range and our full year guidance is unchanged.
The average age of our truck and trailer fleet held constant and our guidance remains the same for the rest of the year.
And the first four weeks of April free demand trends and our one way truckload unit of continued to be strong.
And so far we were about halfway through our annual contract bid season negotiations and one way truckload and logistics.
The contract rate increase percentages of trended higher each month this quarter and are tracking and the high single digits to low double digits percentage range.
Dedicated contract rate increases are also tracking favorably consistent with our revenue per truck per week guidance.
Warner 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 free demand looks very good for 2021 and into 'twenty two.
Inventory restocking will likely continue to occur for the next few quarters and we also expect the economy to continue to strengthen as the national vaccine program expands and government stimulus dollars are spent.
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.
Ask a question you May press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys have had any type of your question that the penetration and you would like to withdraw your question. Please press Star then two.
To allow for as many callers as possible to ask questions. We ask that callers limit their questions to one question and one follow up this call will end at five P. M. Central standard time following the company's closing remarks at this time, we will pause momentarily to assemble our roster.
Our first question will come from Chris Wetherbee with Citigroup. Please go ahead.
Hey, Thanks, and good afternoon guys.
So congrats.
And maybe when you start just on rate and I understand that the market is volatile. So I guess it makes sense to move towards quarterly guidance, and obviously, 13% to 16% and it's quite robust I guess could you maybe the free them up sort of how you might think that the and you.
Sort of is this cadence could play out as the year goes on do you feel like <unk> is actually sort of the top of the sort of rate growth dynamic and I'll stay strong, but maybe a little bit of a lower growth rate as we move forward or are there other nuances that we might expect particularly as we start to head towards the peak season, because it doesn't look like the sort of capacity is going to let up anytime soon.
Sure, Chris and I'll take that and.
Thanks for the question.
So the <unk>.
And we had was right now we've got obviously good visibility we know all type of this market as we know where we're at and the bids the current bid season and the progress we're making as you look out and the third and fourth I see nothing that changes my view on capacity nothing that changes my confidence and how tight this market would be you do have however, tougher.
Comps and rather than blending some kind of three quarters worth of data and losing sight of what's happening and the market today and being clear on what kind of.
And the success, we're having it made more sense and this and you've kind of a unique point that we're in today.
To be specific about what's happening and other contract side, where we see strength and the spot rate continuing through the end of the year.
And as I am looking forward I guess my main message would be I have a <unk>.
Strong degree of confidence that rates are going to continue to stay elevated that the spot market.
Far outpaced contract rates for the foreseeable future through the end of the year and frankly into 2022, but we felt it was better to give specific guidance about Q2, specifically when it came to rates.
Okay. Okay. That's helpful. I appreciate that color and then and.
And maybe if we could talk a little bit about the fleet and I think I asked this question most quarters, but just sort of as you think about the mix of dedicated versus the one way truckload and <unk> and obviously you are expecting to grow as the year goes on but youre down a little bit from I think where you finished the fourth quarter. So can you just give us a sense of obviously it seems like the growth is going to come on the dedicated side, but maybe when you think about the the one.
Way truckload do you think you're actually Ken and grow that or can you stabilize that debt debt.
Fleet size, and maybe debt stays flat, while you're at sort of dedicated.
Yes, I think the way to think about it would be I'll start on the one way side right, we want to stabilize that and we've seen signs of stabilization.
Very tight driver market out there I think everybody's well aware of that we were making moves as appropriate to build jobs. The drivers want and that one way group and really package and engineer freight through the first half of the bid season that we feel can both retained and drivers at a higher level as well as attract drivers into the into the mix.
<unk>.
It would be my expectation that between now and of the year that we would see some growth on the one way side, but the but the.
Predominance of the growth is still expected to be in dedicated and frankly, that's driven as much as anything by just how strong that pipeline is and.
And what that return.
The.
Profile is of dedicated through the cycle. So we will still see growth on dedicated that'll be the majority of that will get us and across the threshold of 1% to 3% fleet growth, but some of it sequentially will come and one way is the expectation as we go forward.
Our next question will come from Jack Atkins with Stephens. Please go ahead.
Good evening and thanks for taking my questions.
So I guess, if we could maybe start and then I'd love to John or Derek whoever wants to take this get your thought on customer inventories I know you guys do a lot of work around this particular subject and I think it's.
Critical topic as we sort of think through the end of the year and into next year.
I guess, how much further do you think your customers have to go and how long do you think it is kind of take them to get back to where they want to be from an inventory perspective.
It seems like Theres theirs.
We're still at very low levels on an absolute basis.
Yes.
No I sound like a broken record on this Jack debt for the last few quarters and what we see going forward, we think inventory levels will be challenged if you look at our overall economy.
The inventories are low and lots of areas retail lumber steel housing chips, new tracks. This V shaped recovery that we've got going on is is really challenging suppliers to be able to restock, especially at the very strong sales levels debt.
And large retail customers, who are part of our customer.
Customer base.
Achieving so we expect it to be a few more quarters.
And it's it's really difficult to predict.
Once kind of and we think that restocking is kind of take a while with all of the different things that happened this quarter that made restocking even more challenging with the weather the port delays the Suez Canal issue I mean, there's been just a lot of issues thrown at retailer and making it challenging to rebuild their inventory.
Levels nine of 10.
And the most recent quarter had a higher same store sales growth and they did the inventory for store growth. So.
The the challenge continues for them.
And I call out at all I would add to that Jack is the.
Best case scenario, they began to make any traction at all and probably lands and the right and the middle of peak if if they are able to make traction between now and peak and.
And what's the amount of stimulus money coming in and four trillion and savings sitting out and dry powder. We just don't see the way you call back.
And anytime this year and it is.
Probably pushed into sometime in 2022, Okay, alright that makes a lot of a lot of sense and I appreciate that insight I guess for my second question I would love to get your thoughts on your cross border business you guys have a really unique asset.
Of your cross border, Mexico U S franchise.
That's becoming more and more of a topic for folks just given all of the news from from a rail perspective and up and the <unk>.
Interest and cash you how are you guys thinking about investing and your cross border business can.
Can you just remind folks.
And what that represents today in terms of either fleet of revenue and and and where do you see that going over the next couple of years.
Yes, so I'll start with us in the quarter of our cross border business actually was under some pressure the.
And the reality is we do a lot of southbound business with.
With the truck Oems and other auto or auto related type businesses. Those have all been under duress as it relates to some of the shortages that people are well aware of.
And so you feed your northbound business, which is really where the money is made through southbound activity.
And so we're real proud of the first quarter results and the record earnings and some of the things we've talked about.
Given that that particular franchise was under what I believe to be kind of a temporary duress and so there is upside from here and we're excited about what that looks like as it relates to the merger and other thing I think it really speaks to the reality that Mexico U S trade isn't going away. There is a certain component of that that will naturally move rail intermodal will serve.
And we play a role and that and we do some of that business today ourselves, but truck is going to still play its position and so we're going to continue to invest and that business, we understand it well, we even the even with the volume pressures that we had in the quarter the.
The profitability and earnings of that segment continues to be at or above our network average and so we like the business, we're going to continue to stay with it and I think it's one place that has some unlocked the potential right now.
As we look forward over the next several quarters, if we can get some of the shortages behind us.
Our next question will come from Jon Chappell with Evercore ISI. Please go ahead.
Thank you good afternoon.
Derek just to start with logistics the comment.
The comment I have from the call in February you said less of a headline and first half 'twenty one more of a recovery story and second half. The you had a pretty big first quarter of at least as it relates to revenue and operating margin. So the logistics business get a lot better a lot sooner than you thought or was this kind of the net the natural progression that you and envisioned and there is even a bigger.
Up that you envision for the second half of the year.
Yes, great question.
A couple of things one I think it's important to recognize the work they've put into turn that thing around and get to and the right direction we've seen.
I would say a lot of smaller levers pulled there is no silver bullet and it but we've seen the some of the productivity gains we were hoping to get.
And some more focus on the cost line, if you look at productivity and that division.
It certainly played a role and as it relates to loan growth loan proceed et cetera.
We move to a more transactional model, which we expected to do the.
The market certainly is one that allowed us to do that more aggressively.
And we worked with our contractual customers would've loved to of retained all of them. If we could have but in some cases that wasn't the case and so underlying those strong first quarter results is the reality that we're lapping.
As we get through the second quarter, some larger scale businesses that we had the walk away from and then replace that.
With much smaller.
Volumes across many of the multitude of shippers, but more on the transactional space and it's paying dividends and so I'm happy that we're seeing progress we've got a lot more to go and not at all pleased with where we stand today, but I don't know that I will ever be completely satisfied but the trajectory is certainly one that's good and I think there is upside for.
And here as we look out through the remainder of the year.
That's great and then for my follow up on the dedicated side I mean clearly the.
The of lifestyle of it better than the one way.
You mentioned that the driver issue and it's kind of across the entire business. I know you are opening more schools and the second half of the year are you turning away any new potential business from the dedicated side just because you don't have the drivers the service that right now or maybe even another way of asking is are you not pursuing as much new business. As you think that you can attain with your network.
Because of the labor shortage.
Yes, so a few comments on that first off those schools are predominantly going to open and the first half of the year.
So we will have some relief coming sooner than later.
That will be helpful dedicated is more attractive and it although the driver shortage of effects of us across the business. That's clearly more acute on the one way side. So dedicated gives us shelter through cycles.
From a from an economic perspective, and also give shelter through tight driver markets and we do have benefits that come along with running that business as far as the pipeline is concerned I think the way I would think about it is we know that we can be more selective and so we're not at a point where from our lens I would call it turning away business.
<unk>, but we are certainly being very selective with the type of business that we're looking for the geographic location of that business the industry or vertical that they may represent what are the surge patterns versus existing surges and the geographic area. So the you're fitting and these pieces of a puzzle together to make dedicated be able.
To operate very well as adjusted once again, and a strong market, where others may choose to chase spot or chase one way. We can put these kind of numbers up with the with the predominance of our fleet being and dedicated by taking a more strategic view one of the things throughout this quarter. There was a major emphasis for us it's not as not just the rate.
How do you engineer more freight and your one way market, how do you engineer more dedicated fleets that fit the purpose and fit a part of the overall dedicated strategy versus just landing of fleet, because it's there to be to be taken on.
And then how do you make sure you price it and build drivers' salaries and lifestyles around it. So that you know you can fill those seats and at this point, we're able to fill those seats were able to get drivers to go into those fleets and we don't get to that final round. Because these things have six month the tails on them usually by the time you are in that month for five you've pretty much.
Figured out where youre going to get the drivers how youre going to get them and what that pace is going to look like if youre doing it right.
Our next question will come from Brandon <unk> with Barclays. Please go ahead.
Hey, good evening, everyone. Thanks for taking my question. So Derek can you just speak to.
The outlook on your long term profitability targets and maybe what you can do to reduce volatility because I think the issue of a lot of investors have with trucking equities right.
Lot of Mark the peak and trough and the cycle and whether the stocks of fairly valued or not because I think through that perspective, there could be a lot of upside here.
And so when we reissued our new TTS guidance of 13% to 16% through the cycle, we talked about the 10 I'm sorry $10.
The 16% through the cycle, we talked about.
The reality that we think we can squeeze some of that volatility out we talked about how we'd be at the upper and the lower end of the range of times.
Right now we are clearly in a market that we need to be driven by the laser focus to be at the upper end of the range of and frankly beyond it.
And that's what all of our efforts are going toward right now.
As we do that and as I talked about this engineered approach and the first quarter of heavy amount of that work is really actually focusing on how do we tighten up that bottom end of the range. How do we make sure through through analytics to think about the freight we put in at the time when we have choices to know that that freight providers.
<unk> density and lifestyle and choices for our drivers so that our costs and.
And pressures from a driver hiring and pay perspective, perhaps you and weather that storm better than others and really trying to limit the risk to that downside number.
I think it bears pointing out however that the downside number and that 10% number is the same number that the majority of the industry use drives to get to and the best of times and we are basically putting the line in the sand and saying we think that's as bad as it could get and actively working to make sure. It never comes into play.
Yeah, I appreciate that I guess and what's your broader view on the industry supply and later this year, especially and fax motions and.
We go through the population is there potentially a lot more folks wanting to get back on the road then.
I don't think so so if you think about the American truck driver.
And with her at all during the during the early.
The early stages of COVID-19 and there was no vaccine little understanding of <unk>.
Lot of fear and they've got and the Trump put the key and the ignition and drove.
And so they're not the crowd that is waiting for a vaccine to somehow then of the courage to reenter the workforce that crowd stayed out there and work what did happen. However, as COVID-19 limited through social distancing and throughput and schools and all of a variety of other <unk>.
Factors, new entrants into the market what did happen as we had and aging demographic that we're not replacing on the one to one basis now because of a year of sort of lost sleep of throughput and.
And as you look forward any any lift you might get from vaccines also goes into lift from economic activity from retail sales. It lifts up the overall consumer we're 53% retail so we benefit from that lift and the puts further pressure on demand you've got <unk>.
The structure out there ahead of us that is certainly.
Some version of which I believe will pass which will be of pool from capacity as it relates to drivers of pursuing jobs that are like.
And perhaps lifestyle wise and certain areas of viewed more preferentially the drug and alcohol clearinghouse is continuing to gain steam with very little return to work taking place within it.
And frankly, just work life balance is the reality, not just and trucking, but across the entire workforce of the United States and so one of the reasons that we think about dedicated we think about engineered we think about a lot of the things. We're doing is really taken a multiyear out view on building jobs that are.
<unk> were with an eye toward retention at all cost because ultimately that's how we provide our customers the capacity they need but I don't think the cavalry is coming from a capacity perspective, I talked about that last call. Nothing has changed my view as a matter of fact.
The fuel probably more strongly about that today. The last one I'd mention is the the known and very public reality now of what's going on from an OEM production capability perspective, and yes. The order boards are full and yes. The backlog is long, but if they don't translate into builds and builds don't get the ceded it doesn't.
Main capacity comes online and I don't think that youre going to see.
Any capacity relief come in 2021.
Our next question will come from Scott Group with Wolfe Research. Please go ahead.
Hey, Thanks afternoon guys.
Yes, and it's Scott.
Derek John how should we think about utilization and and the one way fleet going forward and now that we're through winter do we get back to positive year over year utilization.
The challenge on on one way utilization and his team count we talked about how were down 17% on teams and most of that occurs in one way and so as we get vaccinated.
Throughout the country and.
It's easier to day put teams back together again, and I think we've got a better opportunity for that and the second half and probably in second quarter.
From a.
Freight standpoint, however, I do think that that will help so I expect to see improvement as we get for.
Hi, there and part of there through the year on miles per truck I Wouldnt predict right now that will be positive, but I do think that it will be less negative and closer to flat as we get to third quarter.
And the other thing I would tell you relative to the utilization Scott and the first quarter. If you think about of our network.
Everybody's strength or geographically slightly different but we are very dense from call. It Dallas to the east Coast and then down through the Florida, and then up the lower East coast as well and we just frankly, we got hit pretty hard by the storm and that storm was more widespread longer lasting.
With more significant road closures and impacts than anything we've seen and a couple of decades. So.
So I wouldn't read I wouldn't overreact and of the utilization decline and the first quarter and hurt us and dedicated and hurt us and one way, but that storm related impact here at Werner was larger than some and perhaps maybe not as large as others guide on the walls of their networks as well but debt.
All of all of the John said is true and on the team Count we took a stance you've had a chance during things like of pandemic to really let your culture lead and.
And our culture has always been built around safety and <unk> and our drivers if they were at all of uncomfortable there was no pushback on our part of we want to retain them for the long haul and not just for a pandemic period and if they've split into the solos and wanted to go and not be comfortable and that environment. We were more than happy to support that we are seeing.
And the return as John indicated to folks going back to <unk> and we're going to encourage that as we go forward.
Okay. Thanks, and then Derek as you are about to take over as sole chairman of the board what changes if any do you think we should expect and.
In terms of balance sheet and leverage more aggressive buybacks M&A of any meaningful changes you think we should anticipate.
Yes.
I would say first is look we've been making changes for the last several years and I think they've been consistent and.
And.
And progressing.
Over quarter for now really the better part of the last of call. It for almost five years those changes and those that.
And that aggressiveness will continue we're going to continue to expect excellence from ourselves at all times I've already indicated that there is a comfort level relative to the leverage that is of perhaps higher than where it's been historically, but at the same time, if youre thinking of Warner is going to wake up and B three.
And three times EBITDA.
Probably not in terms of the debt that we'd be comfortable with we indicated and talked about the things that we think about it relative to the reality of ongoing free cash flow generation and yes, we're going to look of dividends and we're going to look at buybacks and we're going to look at M&A and so those things are on the table and the real and we are going.
Taking the analytical critical <unk> and each of those and.
And be opportunistic when the opportunity for <unk> present themselves.
But the biggest takeaway would be staying true to our roots.
Evolving our culture.
Holding on to the something that for 65 years has worked pretty darn well, but at the same time and the world around us is changing and will change with it.
Our next question will come from Kenn Hoekstra with Bank of America Merrill Lynch. Please go ahead.
Hey, Derek and John Nice job on the quarter and good afternoon.
Can you talk a little bit of.
Can you talk a little bit about the the dedicated contracts a little bit further and now maybe just delve into the percentage you can touch this year, obviously multiple multiyear contracts.
Derek you through and that's why you thought the 3% to 5% rate increases the good starting point, maybe just talk about the the cadence of of the renewals and and does that mean you have got any chance.
Or is there any chance to get any better.
Given the current rate structure and environment.
Our dedicated unit first off is performing very well and it is margin enhancing to the overall business and I want to be clear. It is not a drag in order to the performance of drag in the quarter.
And the tight market again, I know the spot market can become so and.
Intriguing to some but.
But and our business.
Through the cycle, we think we can continue to enhance margins of three to five percentage of revenue per truck per week number.
It's impacted two of both utilization and rate is.
As it relates to the contracts themselves are generally generally three to five year type contracts with one year.
Activity that takes place from a rate perspective, some are fixed or indexed I should say the majority of negotiated those negotiations are ongoing and obviously and the current driver market. We're in today.
There is more eligible and available for conversations and then there are that art and so the majority of those contracts and those customers either have had or will be having conversation. Shortly because we have to continue to enhance driver pay. We also have to continue and enhance returns. So we can continue to invest and grow with that customer.
And so so far it's been good.
I know I didn't give you a percentage, but if I was the throw one out there I mean, 75% of those at some point this year, whether it's driver pay specific of our overall rate increase.
Would be would be touched her and the majority of that has already happened as the year progresses that number likely will be higher than that simply because of the pressures out there with the.
The tap tracking and retaining quality drivers.
And thanks for that Derek and then and then maybe just a little bit more on on your thought on.
I guess two parts of wage increases as we move through the year.
The 7% increase you've put out there are you seeing maybe accelerated pressure from that and I guess I asked that because your gains on sale you noted.
And in $5 million this quarter.
Thank you said seven to 10, so that means the deceleration does that mean, we're at the peak in terms of that pressure or or I, just want maybe some insight on that.
I'll take it in reverse order I.
And I think it's of great question.
The deceleration of gains is volume related so I just want to be clear about that we are really.
Focused on trying to manage through and be in constant communication with our OEM partners and so given what we were able to secure and the first quarter as it relates to equipment and given where the market was that we sold a higher volume and the first quarter. The second quarter will probably be a little more.
Prudent about those sales numbers and a little more cautious and conservative perhaps is the way to think about it because we need to make sure. We've got income in trucks and trucks are arriving on time on schedule and so it is almost exclusively driven by volume as the only reason and thats going down and Thats driven much more by by pro.
Duction.
Disruptions or the concern potentially for production disruptions and it is any other factor so that's not a slowing.
Slowing issue.
Or any kind of peak indicator and my mind as it relates to wages, we do have a benefit I mean, 64% of our fleets and dedicated and those are much higher paying jobs and general Theyre also happen to have better lifestyles as it relates to time at home, we're managing those pressures and working with customers, where we have and need their support we're getting their support.
The offset those but.
But by and large that provides of.
The degree of insulation from this market that wouldn't be there if they were all and the one way side on the one way side, we enhanced.
And enhanced.
Wages going into the year, we've held the line on turnover that new entrant into the market is artificially constrained for in the short term with lower throughput through schools and lower new CLO issuances throughout 2020.
And we will in all likelihood.
Why more wage increases, but they will be very geographically focused even and the one way market very little of very small portion of our fleet is over the road go anywhere type trucks, the regional they're designed engineered lanes, they're local and some cases.
And so we will hand, and the payers are reflective of the type of work so as needed we'll make additional adjustments.
We do not think that's going to have any opportunity to outpace where rates are going and in fact that's.
Part of the confidence of our ability to enhance margins as we go forward first quarter as always of the worst operating quarter of the year for.
And for Us and many others and yet this first quarter was the best one we've ever posted so we've got room to run and we're going to try to execute as we go forward to the best of our abilities.
Our next question will come from Amit Malhotra with Deutsche Bank. Please go ahead.
Thanks, Operator, Hi, Derek John and Hope you guys of well.
And I guess on that on the utilization of question for one way I wanted to ask how you think comp wages and benefits costs are going to kind of trend.
And I guess, it's kind of with the utilization a little bit more and given the raises that you implemented at the beginning of the year, obviously, a very big part of the cost structure and I just want to make sure we're thinking about and the context of limited utilization.
Yes, I'll start and let John jump in but I would I would say this to start they're not going to be they're not going to track exactly with the utilization gains simply because and the first quarter. We of the double whammy of the miles not being there but are standing by our drivers. So we spent a considerable amount of money pay and drivers for not moving and the first quarter.
And would be the same pay they would've received and they've been moving but when were the ones taken the decision to shut them down or or hold them up.
<unk> made the decision to go ahead and pay.
For that downtime I think it's the right decision, it's no fault of their own that those storms hit but as we know gain those miles back those those paid at those payments are already already and the number now we will have wage pressure I talked about that we think it'll be less than some of the commentary we've heard thus far we think.
That really has a lot to do with the starting point on where turnover is and where fleet morale is we're going to pay our guys fairly though I can tell you that and.
So as we have those needs, we will address them, but I think thats kind of misunderstood thing about the quarter would be how much driver pay was actually dispersed.
For no miles being ran and the opportunity to now fill that gap with miles.
And the same pay that was already taking place anyway.
Got it Okay. That's helpful. And then I just wanted to revert back to the question I guess youre going to be obviously appointed chairman at the.
And the next months of congratulations for that.
And you guys made this acquisition of equity stake and too simple.
Which obviously I don't think it was financially motivated Rodriguez for man from the development of new product perspective.
And obviously Derek the Warner.
The profitability trajectory.
Dramatically improved under your leadership and.
And the senior management leadership and it doesn't seem like you guys are getting that much as much credit as you should for the improvement and I was just wondering if not just given your elevation to the chairman of the company whether that changes the M&A strategy, you mean Werner has been incredibly.
From an M&A perspective.
The all kind of.
Incentivize your.
Strategically wanted to pivot into a little bit more of an M&A and it gets you away from <unk>.
Talk load and diversify a little bit of away from so you don't have to deal with this peak debate the continues to see happens.
Yeah, well I don't know if you could ever find the formula to not deal with the peak debate I'd be happy to be I'd be all ears, because it doesn't seem to matter that our portfolio is arguably the most defensible portfolio and trucking and yet it doesn't underperformed during very strong robust markets and.
So it wasn't an anchor during good times, it's clearly been demonstrated to be.
A a support structure.
As markets turn.
As it relates to me as chairman and first off I. Appreciate your comments I think I'd be remiss, if I didn't point out that <unk>.
And his guidance as his leadership as part of the last several years of been interval of this but he and I. Both agree that its time for Warner to take that next step to evolve and continue to push boundaries on what is possible to have the energy and the focus and the technology.
To do it to invest and the business consistently like we have been doing and then really focus on free cash flow, which then provides opportunities for things like M&A.
Share repurchase and dividends and those are all on the table and I want to be clear. We will continue to look at all of those we've talked about all of those for some time, but but yes, there's probably a shift and our tolerance.
To be aggressive.
There is a shift and our tolerance.
To look to return value to shareholders and all forms.
And that is something that I think over time Youll see play out.
Our next question will come from Brian Austin back with J P. Morgan. Please go ahead.
Hey, good afternoon, guys. Thanks for taking the question.
Derek maybe if you can just get you to expand a little bit more on an M&A clearly you've invested a lot.
And the business through the to the <unk> you made some of those equity investments and partnerships that we've been seeing seeing and the news and some of that <unk> been getting some benefit from.
The things like mastery of what is.
What is kind of the the medium to long term.
And looking for things to develop externally and then put your chips down and the bigger way when you feel like there's a bigger need or.
Do you think that you can just get to where you want to go through partnerships partnerships alone. So how do you think I guess about the the <unk>.
And our versus acquiring and in some cases the.
And the build versus buy when it comes to the technology.
Thank you for the question.
So build versus buy I'll start there and are there.
We believe there is a lot more of that we can buy versus build as it relates to the technology focus our efforts on integrating the the connective tissue that makes those systems work well together there will always be proprietary things that we think our secret sauce to our business that create an opportunity for us to differentiate and we'll build those things, but we're certainly open minded.
To go out and the partner with folks if we think that's the right approach and we've demonstrated that as you mentioned with both mastery and two simple we think we can add value to the development of those products and make those products not only more robust, but actually better fit our needs through that process and.
And that's something that we're excited about.
As it relates to M&A.
We've looked at these deals for for.
For a long time, the appetite is probably more there than maybe it has traditionally been and frankly.
And the need.
It was probably they're more than it has been traditionally this is the driver market like one I've never seen I've been doing this now for 30 years.
And if youre going to try to do something on the asset side the the.
Idea of adding geographic capabilities, adding <unk>.
Drivers into the mix that we think fit culturally or otherwise would be attractive to us on the non asset side clearly.
There's folks out there that are winning and their space that are generally.
And maybe early in their development that we think we can add of catalyst two and both to our own business, but to the underlying <unk>.
Model and they are building and working on and if the opportunity presents itself and the price is right. That's something we're going to look at more seriously.
So yes, there is a shift of subtle as it may be.
As it relates to that but at the same time, we're not going to be a serial acquirer and we're not going to be going out to buy things just to buy it I am not looking to stay of my 30 year reputation on making some move overnight to just for the point of doing it but I think you've seen a commitment for myself and this entire leadership team to make whatever moves are necessary to continue.
And to enhance value for our shareholders and Thats one of those that's on the table.
Alright, great. Thanks for all of the context, there just a real quick follow up on the on the class eight orders it sounded like.
With the gains Im assuming youre getting the trucks that you need to at least here for the for the first quarter, but it sounded like there is still some uncertainty whether or not youre going to see some delays.
Throughout the year. So maybe you can just.
Give us an update in terms of what Youre hearing from the Oems and kind of what you expect the C and the rest of the year. When you look at the fleet that you have on order so far.
Yes. Thank you for the question I'm going to be a little careful here and let the Oems focus on speaking for themselves as.
As it relates to their specifics but in general.
This market and where we're at and the market and with our focus on service I simply don't regardless of what I'm hearing.
Don't want to put our customers of our customers credit risk through of two of lack of supply of new equipment and as a result, we're going to be very careful and conservative as it relates to with what we sell and Q2 at the same time, we're clearly projecting of large sales number. So it's not like we're going to shutdown. The the process right now we feel like we're in great shape of our Oems have been great.
Partners, they've stepped up we've worked with them and the communication has been outstanding we will continue to be laser focused on that communication and on their deliverables.
But yes I think.
It would be.
A short sighted move on our part of on my part to Chase quarterly gains.
At the expense of long term customer opportunities and so that's really the primary driver of that and as it relates to gains and I just wanted to say this while I have the opportunity.
I know tomorrow people, we'll be quick to point out that somehow gains don't count as or take some stance as to what our gains and part of cooperations, but I haven't changed my view on this and I never will and how you buy of truck the negotiated price.
And the time and effort you put into the spec ing that shrunk how you maintain it during the entire life and how you sell it is about as of quarter running the quality of trucking company has anything I can think of so I view. It is absolutely a core part of our business and critical to our success will be opportunistic about when we sell when we buy and what we buy.
But it's always going to be with an eye towards the longer term strategy not just the quarter.
Our next question will come from <unk> majors with Susquehanna. Please go ahead.
Yes, thanks for taking my questions here.
And your largest customer was recently talking pretty publicly about expanding their private fleet on the earnings call and in the breadth and I know they've done this before but can you give us a fresh look on whether or not these efforts will or won't impact your broader growth and dedicated truck count over the next call. It one to three years and.
Maybe more broadly above and beyond that I mean, we need.
To add on the dedicated pipeline and sales cycle, just putting them out of a historical context today versus versus where that's been historically.
Yes, great question.
So.
For starters, our largest customer is highly successful and runs a very good business and has continued to win through the cycle and that's got a lot to do with why we have such a strategic relationship with them.
I'm always excited if a customer wants to take on some transportation.
On their own to help offset to the needs that they're going to have as they grow and does several very valuable things that instructs them on just how difficult. This business is to do it allows them to learn and appreciate the challenges that they and frame may present, and it makes them frankly, much better customers over time so.
No I don't think its the drag on our opportunities as we look forward, we actually participate and those discussions with them on a regular basis help and even support some of the launch of that fleet and various locations and yet theres plenty of opportunity for us to continue to perform at the level, we're performing and grow our business with them. So it is.
Not something that I would be concerned about.
I think about what warner's dedicated footprint looks like and frankly, we have a huge pipeline currently of opportunities that are predominantly outside of that very customer and it's it's a broad mix and it's part of that puzzle I referenced earlier and the call where we're out right now being very selective and the <unk>.
Thoughtful about the type of business the geography, it exists and and the cyclicality of it as it relates to enter a year of cyclicality when do the surge and what do they need during that time and fitting more pieces of this puzzle together that I think is going to pay dividends as we go forward. So.
The my best answer to that.
Thank you for the thoughtful answer.
I'll now turn the call over to Mr. Derek Leathers, who will provide closing comments. Please go ahead.
Thank you, Matt I'd like to thank everyone for joining us today for our first quarter earnings call and it's an exciting time at Warner's, we continue our journey towards sustainable best in class earnings through the cycle, our consistent operational execution of our five T's plus strategy has resulted and structural and durable improvements across the business.
Consistent free cash flow generation and ongoing margin expansion of the outputs of the strategy.
But it's the passionate driver office and maintenance associates that provide the creativity and energy that makes it all possible.
Our commitment to continuous improvement and safety and on time service and sustainability is unwavering as is our focus on achieving diversity equity and inclusion throughout the organization. This.
And this commitment is backed by our balanced portfolio and it positions us well to succeed and create long term sustainable shareholder value and.
And two weeks of Warner, our founder and Chairman and first driver and my Dear friend will be retiring from our board of directors.
He has had an incredible career and built the lasting legacy over 65 years and this industry. His foresight wisdom entrepreneurial talent and drive the submitted and was a legend and the trucking industry.
Starting as one man with one truck and growing the nearly 8000 trucks and 13000 associates of something to be proud of.
But more important and that he did it the right way.
Focusing on premium service and safety, taking care of his customers drivers and associates and above all else and.
Trusting that the profit would follow.
All of <unk> CLO debt of gratitude for what he created and I'm humbled and honored and excited to help move Warner forward from here the.
The story isn't complete but it's been of great reads, so far and.
And on behalf of all of US here at Werner we firmly believe the best is yet to come.
<unk> <unk> from all of the Warner team, our board, our shareholders and our customers.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.