Q3 2021 Werner Enterprises Inc Earnings Call
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Thank you and good afternoon, everyone with me today is our CFO John Steele.
I am pleased to report that Warner delivered record third quarter earnings our fifth consecutive record setting quarter during third quarter freight demand remains strong and the driver market remains very challenging our strategic.
<unk> investments and drive our sourcing in driver pay in a competitive labor market enabled us to grow our fleet sequentially by 75 trucks. In addition, we grew another 500 trucks with the ECM truckload acquisition that closed at the beginning of the third quarter.
We are very pleased with <unk> performance during our first four months of ownership.
<unk> service and safety record is excellent their driver turnover post acquisition remains low their financial performance was stellar and our integration is going well and tracking on schedule.
Employment in the trucking industry remains 1% below pre COVID-19 levels, while the cast truckload freight index is 16% higher.
Strong consumer demand combined with extraordinary supply chain bottlenecks are keeping retail inventory to sales ratios at historically low levels, which will boost inventory replenishment for multiple quarters going forward at the same time truckload industry capacity is significantly constrained by an ultra competitive driver market and shortfalls in new truck builds.
We expect a strong freight market through the balance of this year and well into 2022.
Despite a very difficult driver market, we were able to organically grow 75 trucks in TTS from second quarter to third our driver sourcing costs were higher than third quarter due to startup costs for our new and planned driving school locations increased training pay for drivers hire from schools driver hiring incentives and driver lodging.
In other words, we made investments in driver sourcing that precede the benefits, we expect to realize going forward.
Warner continues to be well positioned to achieve strong financial results as we benefit from our consumer oriented freight base with winning retailers driver preferred dedicated fleets industry, leading cross border Mexico business engineered lanes in our one way truckload segment, our recent ECM acquisition, and our comprehensive capacity solutions and Warner logistics.
Moving to slide four here's an updated snapshot of Warner.
Our truck fleet grew six 6% year over year to over 8200 trucks with just over 5100 and dedicated in 30 101 way truckload.
<unk> continues to have a consumer centric freight base with 75% of third quarter revenues in retail and food and beverage about half our revenues are with our top 10 customers and 78% from our top 50, Warner has a long standing and growing relationships with winning companies in their industries.
Let's move to slide five for a summary of our third quarter financial performance.
For the quarter revenues increased 19% to $703 million adjusted EPS grew 14% to <unk> 79 per share adjusted operating income increased 15% to $73 9 million, while our TTS adjusted operating margin net of fuel declined 150 basis points to 14%.
Our operating income growth was primarily due to rate per mile increases fleet growth and strong logistics results.
Our operating margin declined due to lower miles per truck and some higher than normal cost increases, which John will explain further in his comments.
Dedicated freight demand remains strong in third quarter, as our customer base and discount retail home improvement retail and food and beverage continued to generate strong sales.
Dedicated average trucks grew over 10% year over year and 2% sequentially.
To fund that truck growth, we incurred start up costs for driver pay and pay guarantees that increased expenses during the period in which our dedicated miles per truck were 8% lower.
One way truckload freight demand also remains strong in third quarter.
<unk> financial results are included in one way truckload and ECM represents 17% of the trucks in this fleet.
We achieved significantly improved results in our logistics segment in third quarter with a 35% increase in revenues and $8 5 million of operating income growth.
During third quarter, we received fewer new trucks and trailers than planned as Oems are increasingly challenged to meet current demand levels with shortages of semiconductor chips raw materials components parts and labor.
We expect this industry trend will continue well into 2022.
To enable us to organically grow our fleet and continue to meet our freight commitments with our customers, we reduced the number of trucks and trailers, we sold in the quarter.
Significantly higher used truck and trailer pricing per unit and strong execution by our fleet sales team produced $15 3 million of equipment gains in the quarter.
In third quarter, the market value of our equity investments in two simple declined while the market value of our equity investment and mastery increased the net effect of these market value changes during the quarter was $16 $1 million unrealized gain or <unk> 18, a share which increased our non operating income in third quarter.
We adjusted for these items in our third quarter non-GAAP EPS.
At this point I'll turn the call over to John to discuss our third quarter financial results in more detail John.
Thank you Derek and good afternoon, beginning on slide seven total third quarter revenues increased to $113 million to $703 million.
Our TTS revenues per truck per week increased three 2% due to a 15% year over year improvement in revenue per total mile offset by a 10% decline in miles per truck the.
A competitive driver market the acquisition of the shorter haul ECM fleet, which has lower miles per truck and other factors were the primary drivers of that 5% sequential decrease in TTS miles per truck from second quarter to third quarter.
The other significant factors that contributed to lower our miles per truck in third quarter included truck and driver downtime due to delays caused by severe truck and trailer parts shortages and more drivers available to work due to COVID-19 quarantine protocols and.
In addition, part shortages caused our weekly minimum driver pay guarantees to occur more frequently in the quarter due to increased truck downtime.
Adjusted operating income increased 15% year over year and third quarter on top of 19% adjusted operating income growth in the same quarter a year ago.
Adjusted TTS operating income increased slightly.
And logistics, our revenues continued to strengthen with 35% growth year over year logistics had a strong quarter with significant operating income improvement.
<unk> financial performance from our driver training School network and other factors increased corporate and other operating income by nearly 1 million. Despite the fact that the school network is incurring higher startup cost for adding new locations.
Adjusted earnings per share in the third quarter was <unk> 79 up 14% year over year on top of 21% adjusted earnings per share growth and third quarter a year ago.
Beginning on slide eight let's review results for our truckload transportation services segment.
In third quarter, TTS revenues increased 13% due to the higher rates increased steel surcharges more trucks, and partially offset by the decline in miles per truck.
Adjusted operating income was $65 4 million.
Although our TTS adjusted operating ratio increased 150 basis points, we produced a solid 86 operating ratio.
Turning to TTS fleet metrics on slide nine.
For dedicated we added 484 trucks year over year and dedicated revenues net of fuel increased by 11% to $271 million.
Dedicated revenues per truck per week increased slightly which was below our expectations is 9% higher rates were offset by 8% lower miles per truck.
Dedicated miles per truck were lower due to the part shortages COVID-19 impacts less driver seniority due to fleet growth and the addition of 16, new dedicated fleets in the last year with a lower miles per truck profile.
We expect to gradually improve our dedicated miles per truck and our revenue per truck per week over the next few quarters, our dedicated customer pipeline remains very strong.
One way truckload revenues net of fuel increased 10% to 190 million average trucks increased 2%.
Revenues per truck per week increased seven 8% as a result of a 21, 8% increase in rate per total mile. Our one way truckload miles per truck declined 11, 4%.
The addition of the shorter haul lower mileage ECM fleet in third quarter had an expected favorable impact to the year over year, one way truckload rate per total mile and an expected unfavorable impact on miles per truck with an overall minimal impact on revenue per truck per week.
Driver pay costs were higher in third quarter 2021, due to driver pay per mile increases incentive recruiting bonuses and minimum pay guarantees with lower than expected miles per truck.
Drivers, who had their mileage impacted due to part shortages were compensated.
Our TTS driver pay per company mile increased 20%, which we expect will begin to moderate going forward as our mileage productivity improves.
Insurance and claims expense increased $4 $4 million year over year in third quarter and $7 million sequentially from second quarter. The primary factors were less favorable claims development increases in insurance premiums for liability insurance above our claim retention levels and less favorable claims experience.
Health insurance expense increased $4 $6 million year over year, and third quarter due to increased claim frequency and severity.
Insurance expense increased $6 2 million sequentially from second quarter to third quarter, primarily due to a higher cost per claim in part due to multiple high cost medical claims including for claims paid in third quarter that reached our annual stop loss insurance level per member.
The combined effect of higher insurance and claims expense and higher health insurance expense reduced adjusted third quarter 2021 earnings per share by <unk> 10 year over year and by 15 sequentially from second quarter.
Moving to Warner logistics on slide 10, and.
In third quarter logistics revenues of $158 million grew 35%.
Excluding Warner Global logistics, which we sold in first quarter revenues grew 50%.
Truckload logistics revenues increased 63% driven by a 33% increase in revenue per shipment and a 23% increase in shipments power only in project business continued to generate strong revenue growth increasing over 175% from third quarter a year ago.
Intermodal revenues grew 19% supported by a 25% increase in revenue per shipment while shipments declined 5%.
Intermodal volumes were off due primarily to a decline in rail velocity chassis shortages and increased dwell throughout the rail in customer networks.
Logistics produced strong operating income improvement of $8 5 million and an excellent print market. We continue to expect our logistics segment to achieve strong growth through this capacity constrained period.
On slide 11 is a summary of our cash flow from operations net capital expenditures and free cash flow over the past five years expanded operating margins and less variable net capex resulted in higher free cash flow. During the last four years, we expect to continue to generate meaningful free cash flow going forward.
We lowered our net capex guidance for the full year of 2021 by $25 million.
Based on recent discussions with our Oems, we expect to receive fewer new trucks and trailers this year than originally planned.
The higher sales prices, we are achieving for used trucks and trailers are also contributing to lower net capex.
On slide 12 is a summary of our disciplined strategy for capital allocation.
Our unwavering priority for capital continues to be investing in our fleet with feature rich trucks and trailers with the latest safety driver friendly and fuel efficient capabilities in.
In July we opened a new driver and maintenance facility, which is strategically located in Lehigh Valley, Pennsylvania and replace to smaller lease facility.
In a subsequent slide Derek will discuss the progress we are making with our Warner edge technology initiatives.
We see intrinsic value in our stock based on our long term growth expectations and we purchased over 1 million shares this quarter at an average price per share of <unk> 45 52.
On July one we completed the acquisition of 80% of the equity of the elite regional truckload carriers of the ECM Transport group based in Chiswick, Pennsylvania.
ECM performed very well in third quarter and exceeded our expectations for driver retention fleet growth and profitability, we implemented several buying power cost savings synergies with ACM during the quarter and are excited about how our companies are working together.
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 <unk> 5 million to one times.
With the acquisition of ECM and our stock repurchases during third quarter, we ended the quarter with a net debt to EBITDA ratio of <unk> five.
I'll now turn the final portion of our prepared remarks back to Daragh.
Eric.
Thank you John.
During the third quarter, the average age of our new truck and trailer fleet inched up slightly as a result of the OEM build challenges.
Every Warner truck is equipped with advanced collision mitigation 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 competitive and dynamic in addition to implementing market based driver pay increases were expanding and leveraging the strategic advantage of our industry, leading driver training School network and are inherently strong culture.
So far this year, we increased our school locations from 13 to 17 and have five more planned openings to be completed by the first quarter of 'twenty two.
These new school locations were selected in cities with strong driver demographics that align with our freight network. The financial investments we are making in these news driving schools are proving successful as we have already increased the number of school graduates who have decided to join Warner.
Each of these driver graduates then develops further driver proficiency through our proprietary program with certified and experienced Warner leaders.
The investments we have made in driving sourcing and hiring are working.
From the end of the second quarter to the end of third quarter, our drivers increased by three 3% not including the addition of ECM.
On the technology front, our Warner edge team continues to work on our cloud first cloud mouth strategy by developing innovative products that are integrated via Apis with third party SaaS solutions.
We are building the tech stack that will improve process efficiencies and help drive operational excellence, our rollout of mastermind, which began with our logistics division is on track with transactional volume increasing daily at all domestic U S. Brokerage offices. This is the first of multiple phases that will continue over the next three years.
We continue to deliver on our commitment to create products and solutions that empower our drivers shippers carriers and associates.
So our drivers we've delivered enhancements to our in cab device that has resulted in 250 hours of daily time savings across our fleet.
We provided our drivers with new EPA software engine that is improved arrival time accuracy, we digitized our <unk> inspection process, which improved deficiency and contributed towards warner's commitment to sustainability.
When it comes to quick and accurate shipper bids we've implemented new software to streamline the bulk bid process and improve our response time to our customers.
We've strengthened our carrier platform by delivering tools to streamline rate negotiation and to help identify best matches for loads and this process utilizes machine learning to improve matching and increase overall transactional efficiency.
On Slide 15, you can see the results of our <unk> plus S initiatives in both truckload and logistics.
In August we were once again named a 2021 quest for quality Award winner by Logistics management in both the dry freight truckload and logistics categories.
This 38 annual shipper survey is widely regarded as the most important measure of customer satisfaction and performance excellence in transportation and logistics.
<unk> thousand 100 shippers participated in the survey.
Warner received the second highest carrier rating of all public company drive freight truckload carriers and Warner is one of only two of these carriers that received this award each of the last five years.
Next on Slide 16, we continue to make significant progress in our ESG program in July we published our inaugural corporate social responsibility report following the recognized standards from the United Nations Sustainable development goals and the sustainability accounting standards Board you can now find Warner is reporting company under the SaaS.
B framework on their website.
We launched Warner Blue our branded sustainability endeavor, we set new ESG goals and milestones with four of the nine goals targeted for completion in 2020 to these goals. We will continue to drive accountability for our ESG efforts across our company and increase engagement by our associates the four goals our COO.
Great and advancement in retention plan to increase and elevate women and diverse talent and our management team.
Increased employee engagement with the expansion of our associate volunteer program by adding a volunteer hours option that will support employee involvement with qualifying charities of their choice.
We created a stand alone ESG Board Committee that commences in 2022, and we will form a task force of senior leadership Associates and board members to further the goals of Warner Blue our branded sustainability program.
During the quarter, we added three new associate resource groups for the year, we have introduced eight new args.
Yeah.
This week Warner was awarded the 2021 Smartway Excellence award for outstanding Environmental performance for the seventh time in the last eight years.
This is the highest recognition in our industry given by the United States Environmental Protection Agency.
Next on slide 17, I would like to spend a moment discussing our durable business model.
Here's the history of our annual TTS adjusted operating margin percentage net of fuel since 2008.
The bar show the percentage of our TTS fleet that is dedicated and the line chart shows our annual TTS operating margin percentage during.
During the last five years, while we successfully implemented our <unk> strategy and as we grew our dedicated fleet, we achieved meaningful TTS operating margin improvement.
A year ago, we established a long term annual adjusted operating margin goal range from 10% to 16%.
After calibrating and carefully modeling our TTS margin performance, we are increasing our TTS annual adjusted operating margin goal to a range of 12% to 17%.
We have increased confidence in our ability to perform and less attractive markets, which allows us to raise the bottom end of the range by 200 basis points and the structural improvements we have made give us confidence in our ability to perform better and stronger freight markets, which allows us to raise the top end of the range by 100 basis points.
Our carefully constructed and optimized fleet mix is designed to generate strong adjusted operating margin performance and good freight markets as evidenced by the $15, 9% TTS margin, we achieved over the last 12 months.
At the same time, we are increasingly confident we will perform very well and tougher freight markets due to our resilient dedicated fleet and strengthened one way truckload fleets with specialization in Mexico Cross border expedited engineered fleets temp controlled and ECM.
Let's now move to slide 18, and a review of our 2021 guidance framework, how we are progressing against this guidance and updates to our outlook.
During third quarter, we increased our truck count by 575 trucks sequentially, including the 500 trucks, we acquired from ECM.
Our end of period trucks are up 5% year to date, and we expect our fleet to remain flat or decline slightly in fourth quarter as a result of normal seasonal holiday activity.
For the full year 2021, we expect our fleet to increase from 3% to 5%.
Pricing in the used truck and trailer sales market was better than expected in third quarter unanticipated lower unit sales resulted in higher than expected equipment gains of $15 3 million up slightly from $13 5 million in the second quarter.
For the fourth quarter, we expect continued strong pricing with fewer units sold in third quarter, resulting in an expected gains in the range of $10 million to $12 million.
Net capital expenditures were $163 million for the first nine months of 2021.
We now expect capex to be $25 million lower for the full year and to come in at a range of $250 million to $275 million based on fewer new truck and trailer deliveries.
Dedicated revenue per truck per week increased slightly in third quarter, the shortfall relative to our guidance was due to the factors that lowered our miles per truck.
For fourth quarter, we expect to begin to make progress restoring our dedicated revenue per truck per week growth in the 1% to 2% range.
One way truckload revenue per total mile for the third quarter increased 21, 8%.
For fourth quarter, we expect our one way truckload revenue per total mile to increased 17% to 19% above fourth quarter a year ago.
In the first four weeks of October freight demand trends in our one way truckload unit have remained strong.
We are reaffirming our effective tax rate of $24 5 million to 25, 5% and we expect the average age of our truck fleet to be two two years and the average age of trailers to be four four years at year end.
Warner remains well positioned with a superior team and an active talent pipeline that will continue to yield strong and sustainable results.
At this time I'd like to turn the call over to our operator to begin our Q&A.
Thank you.
Before we begin our question and answer session, we would like to let everyone know that earlier this afternoon.
We issued an earnings release for the third quarter of 2021 results and posted a slide presentation. These materials are available at the Companys website at Warner Dot Com.
Today's webcast is being recorded and will be available for replay beginning later this evening.
Before we begin Q&A. Please direct your attention to the disclosure statement on slide two of the presentation as well as the disclaimers in 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. Additionally, the company reports results using non.
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 slide presentation.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone if.
Youre using a speakerphone please pick up your handset before pressing the keys to allow for as many callers as possible to ask questions.
That callers limit their questions to one question and one follow up.
Also the call will end at five PM Central time, following the Companys closing remarks.
And our first question will come from Chris Wetherbee with Citi. Please go ahead.
Hey, Thanks, good afternoon guys.
Maybe I just wanted to start on the on the TTS side and maybe if we can get it better.
Maybe more of a breakdown of what was going on from a cost perspective in the corner. So it sounds like there are two dynamics that impacted the profitability there.
The lack of miles.
Protractor and then there was also some cost dynamics. So maybe if you could kind of split the two of those apart and get a sense of sort of what the impact of each one of those was maybe a better sense of what maybe kind of ongoing profitability might look like in the segment.
Sure. Chris This is Derek Thanks for the question I'll start and then John will jump in with more detail Im sure but.
So in a word miles.
The problem in the quarter.
Suffered throughout the quarter from ongoing parts issues in parts availability problems I think we were impacted greater than others that maybe are don't have the same decentralized dedicated.
Kind of footprint much of our.
Infrastructure, if you will relies on dealers and dealer networks to be able to support these dedicated footprints and given the service expectations of those fleets, we had to do quite a bit of.
Repositioning and really incur some incremental costs that if mileage productivity would start to resume to normalized levels, which it has been doing as of late.
<unk>.
We will see a lot of that pressure go away on.
On the cost line, we talked a lot about we had some significant increases in both health insurance and liability insurance.
Interestingly the bulk of those were sort of out of period.
Developments, if you will that took place in both cases.
That we needed to address in the quarter and we chose to do so.
Parts and some of the OEM disruptions that we went through impacted us across a few other items as well like driver like la.
Lodging driver layover pay.
And also toes were up in the quarter, what I would refer to as a material amount as we had to work through some of those issues and we've taken several steps to address them.
And have made considerable progress on those issues and the most important one of which is we are starting to see just improvement in the overall supply of many of those parts that were causing that.
On the driver pay side, we saw significant increases in driver pay.
A lot of that is we're guaranteed minimum pay.
It really started to come into effect and leak into the P&L.
Does those those are designed is truly kind of a fail safe not something intended to come into play on a weekend week out basis in any broad format.
Based on the structure in that we've put in place it came into play more than we had anticipated we've done a couple of things there one an eye toward productivity, which will obviously prevent that from happening, but secondarily looked and evolve some of those plans to better reflect or better protect.
And have a more shared risk as those situations may arise. So as we look forward, it's going to be about a return to normalcy from a productivity perspective, both in dedicated added one way.
As well as.
Having evolved a few of the pay packages and pay programs to better reflect market put us in a position to hire.
To attract hire and retain.
But have.
Basically that risk profile share just a little bit better than it was at times during Q3.
I don't know if that fully answers or John if you have any color you'd like to add just a couple of things Chris So.
Clearly the health insurance and the insurance and claims were higher than normal.
There was a <unk> 15 cents a share sequential impact due to those two items and a <unk> 10 per share impact on a year over year basis.
Then the other part of it is that we were able to begin getting back.
Our truck growth in in the quarter. So from second to third quarter on an average truck basis, we were up over 100 trucks most of that in dedicated.
That excludes the ECM 500 trucks that we added in the quarter. So we're one of the few carriers. It was able to invest in drivers and get some growth back this quarter. So the hiring incentives driver lodging was about <unk> <unk> per share impact on a year over year basis and then.
The minimum pay and lay overpay, we're about <unk> <unk>, a share as well on a year over year basis.
Sequentially, the hiring and incentives and lodging was about <unk> <unk> a share sequentially and.
Minimum pay an allay overpay or about a penny a share sequentially from second quarter. So hopefully that gives you some more information to clarify yes.
Yes.
Really helpful color. So I appreciate all the detail there I guess a follow up question would just be as you think about <unk> and maybe <unk> first half of next year. It sounds like there is progress being made there based on your comments, maybe about productivity being able to pick back up.
Just given some of the dynamics of the supply chain would also sound like some of the cost headwinds might still be around for the next few quarters. So if you could sort of give us a little bit of help in terms of understanding how quickly. This process clears or do we need to think about this really as being a major issue in <unk> and maybe getting better in the first half.
Yeah I'll start there so clearly some of it is confined to the quarter.
We are on top of the parts issue part shortage, we're working more closely with these dealers, we've even started to work to supply.
Them with parts that we had better availability to then they were able to on their own behalf.
Clearly become more aggressive on.
Where we will go service ourselves versus rely on others to do so those things have cleared minimum pay will come much less in the play as productivity has already started to increase and really taken it out of play so that one is.
Predominantly behind Us, it's tougher on health insurance and liability because obviously were in the quarter and it's difficult to predict but at this time those would not appear to be trending as we saw in the third quarter and we don't have reason to believe.
<unk>.
We wont have an opportunity to return to closer to normalized levels now we did take a pretty significant.
Increase in which we disclosed I believe last quarter and our health insurance premiums.
And that obviously is here to stay but a lot of it is behind us lodging.
We had several dedicated accounts that went into effect at the beginning of this quarter.
You simply can't Miss implement on those and so there was a chunk of this the cost are reflected in the third quarter, but as you look into fourth quarter, you know at least start to offset that with revenues and yield.
Driver pay line itself the actual pay line itself that's more.
Ongoing so so what I'm, referring to there as salary increases and the impact of salary changes that took place and again, that's with an eye toward the most robust dedicated pipeline we've had in a long time and our need to deliver.
On the closed business that we have.
Coming down the pipe that new business has been priced with this new reality in mind.
The cost to get it ramped up and be prepared for it was born in the quarter. So Chris I would add that the <unk>.
20% increase in driver pay per company mile that is higher than it should trend going forward, because our miles were down 10% and we expect to get the miles back. So on a per mile basis, We think that percentage increase will come down it has trended from up 7% year over year and first quarter to 11% in the second quarter.
20% in third quarter, but we think it will moderate as we start in the fourth quarter and into the next year.
Okay. That's really helpful color guys. Thanks, so much sir good job take care.
Thank you.
And the next question will be from Scott Group with Wolfe Research. Please go ahead.
Hey, Thanks afternoon, guys. So.
Derek John I know you don't typically answered this question, but just given the third quarter operating ratio and just people trying to understand how sustainable this is or not any thoughts on fourth quarter operating ratio and if it can improve in <unk>.
We're not.
Yes, so the expectation in Q4, which would be to see operating ratio improvement from Q3, we've just talked about several costs that are transitory. Although some are are more structural those transitory ones are being addressed as we speak and many have already.
We've already changed course.
<unk> made adjustments to see improvement on them.
As we think about.
The question that we also never answer but it is going to come up so I would like to talk about it now is Q3 to Q4 sequential improvement.
That'll come up at some point, so let's take that head on.
If you look at our five and 10 year history of Q3 to Q4 sequential improvement, but even five years sequential history of improvements about 20% at.
At this point with the changes.
Those portions of the costs that were transitory in nature. We believe that is a number we're comfortable with.
Making that type of improvement as we look into Q4 and if we can make further progress on some of the headwinds in particular as it relates to Myles is impacted by parts availability and some of the ramped up incentive.
Hiring that we had to do to meet contractual obligations.
But there could be some upside to that.
Okay and then.
I wanted to ask on the vaccine.
Hi, how are you.
As we're thinking about this and what's the latest you're hearing on carve out or not and what youre doing to prepare for it.
Yes, so there's a lot there but.
I'll start with we know we have a contingency of our fleet that is at this point on vaccinated.
It's tough to pin that down to an exact number because within that contingency. There is a group that chooses to not declare.
Right.
How much we may be asking are pushing.
We are certainly pro vaccine and we are setting up onside vaccination clinics and doing a variety of things to get our vaccination rate up.
But I would tell you that I think we're not dissimilar from the industry, which is probably in that 50% unvaccinated range potentially even a little higher than that.
Preparing.
And thinking about and modeling what it would look like to route.
And test those cost are very prohibitive, if that was to be the round that was taken we feel encouraged that the dialogue has been ongoing relative to carve potential carve out for transportation similar to what they did in Canada I think it makes all the sense in the world. These are remote workers that don't interact with the general.
Public and clearly don't come near the grave danger test that will this entire vaccine mandate.
Based on based on the nature of their work, but we're also going to continue to prepare for worst case scenario.
Don't see.
A world Scott to be honest, we're at a time when the supply chain is under the level of duress, it's on already.
That we could risk <unk>.
20% to 25% exited us industry wide, that's not a warner number im just saying industry wide.
And nor do I see a justification to possibly defend.
The 100 <unk>.
E count and an industry is fragmented as ours that also is daily tasks with hauling delivering and making available the very PPE vaccine and other medical supplies that are absolutely critical at this time, so where it will go from here I don't know, we do expect to hear something inside.
The next call it two to five days.
And we're going to be standing by on the ready to react as well everybody else but.
It's a concern but one that's at this point a bit out of our control until we get more detail.
Okay. That's helpful. Thank you guys.
Thanks Scott.
The next question will be from Jack Atkins with Stephens, Inc. Please go ahead.
Okay, great. Thank you for taking my questions. So I guess, Derek maybe to pivot a little bit and maybe look forward some more into next year.
Obviously with strong.
Demand trends, we've got visibility into that at least into the first half of next year, it's very difficult for carriers to add capacity both on the driver side and the equipment side I guess would you care to maybe update the market in terms of how you're thinking about the potential for contractual rate increases in 2022 on the one way truck side.
Any sort of kind of parameters you want to maybe think about that.
What I put out there for the market and then.
Within within that kind of broader framework.
Do you think.
Realistic to expect margin expansion in 2022 for Warner.
If you can kind of think about.
Sure.
So I'll start with Jack Thank you.
I'll start with us.
Made our move on driver pay early we felt it was important to be fully staffed and ready prior to peak and then to set ourselves up for the dedicated pipeline Thats ahead of us.
That is either landed or or near closed.
And so that's important as it relates to whatever happens with rate because at this point.
I feel more confident than ever that we have got a variety of packages <unk> safety nets for our drivers that position us very well to continue the trend. We've seen is as of late for both organic growth and then of course with the ECM acquisition demonstrated ability to add capacity inorganically as well.
With all of that said there are inflationary pressures across the P&L and we're going to be asking our customers to support us as we support them through this peak and beyond.
Early in the year, you have got lapping effects of some some.
Contracts that maybe you didn't get the full effect of of what needed to be done last year. When they were negotiated call. It late 'twenty with implementation dates in early 'twenty. One we're now at that stage today. So.
Those scenarios were certainly in the double digits and above type range and in some cases higher than that.
As you get into next year.
Haven't really given firm guidance, but I think the thoughts of that sort of mid single digit or no longer prevalent at all it's got to be north of that and I think it's a lot more rational to think about it in a double digit format.
As we think about rate renewals that doesn't mean, the whole network moves by that amount because clearly we have.
Certain longer term agreements and other things in place, but those longer term agreements also are generally coupled with lower turnover fleets with lower pressures on some of the lines across the P&L. So margin expansion is possible.
Got a lot to do with why we changed our long term guidance range.
Yes, it's a quarter that didn't meet every.
Everybody's expectations and most importantly, our internal ones, but at the same time, we took several strategic decisions this quarter and spent money to invest in what we believe is a longer story that runs through the cycle.
Even though this cycle, we think has longer legs with each passing month.
That's very helpful. Derek Thank you for that and I guess, maybe a bigger picture question.
This has been such an unusual freight cycle in so many ways and I think everyone expects. This to continue on for some time into the future I would just be curious to get your take on the feedback youre getting from your shipper customers are they looking for ways.
Maybe more closely partner with.
Carriers like Warner.
Who can provide high levels of service and capacity to them.
Instantly through cycle. They just feel like we we kind of go through this annual bid process in one party is trying to get something from the other.
Most every other year I'm curious Derek for your thoughts on if that can potentially change prospectively moving forward.
Just given how unusual and how strong this rate cycle has been and the pressure put on your shipper customers.
Yes.
The easy part would be yes, shippers, obviously in a market. That's tied are aggressively looking to find and establish a longer term kind of agreements longer term arrangements partnerships would reward you may want to use the onus is on us to make sure that that happens and aligns with people that we think are winners in this space that have longer term run.
Ways to their own internal models and their own internal capabilities.
Capabilities.
As we do that.
We want to make sure it's people that it looked to buy across the portfolio that have needs that fit what we bring to the table size matters in a lot of these things our ability.
To give a more guaranteed rate of return over a longer period of time to our shareholders matters to us and we're pretty open about that and so as we see the opportunity to get deeper into dedicated with shippers that also have needs.
And intermodal and logistics in one way those are places that we're going to look to.
To better align ourselves with long term and we're setting expectations as we put capacity toward their needs. This peak that are beyond the rate. So it's not just what the right opportunity may be on a particular project, but it is what happens after that once peak.
Come and gone.
In some level of normalcy returns to some of the bottlenecks in the supply chain, we want to make sure that relationship as runway left so those conversations are going great I had several of them here recently that are encouraging.
And I think.
The kind of investments just as an example, we made in Q3.
To meet our commitments once again showed that when we make those commitments they matter.
We keep our word theyre expensive at times into the short term or even painful over the long haul I think they make the most business sense.
Okay. Thank you.
The next question comes from <unk> majors from Susquehanna. Please go ahead.
Yes. Thanks for taking my question I wanted to go back in and maybe with the hindsight of hearing some of your peers talk about their quarters and results. I mean has anything stuck out to you were you surprised at some of the profitability of some of your competitors, who admittedly are maybe a little more one way levered, but but even a big day.
<unk> added 700, or so trucks sequentially and it was fairly flat and operating income doing that just just anything that stuck out to you in and.
Any thoughts on where you are on pay versus peers at this point in that fleet as we look forward. Thank you.
Yes, I'm asking a great question I mean look it would be we'd be remiss and really somewhat Darryl looking our duties. If we didn't always challenge ourselves about our model versus other peoples and how they may be performing versus us, but with that challenge.
Can assure you we don't do it just quarter on an individual quarter basis.
We've talked for years about the fact that we want to return this organization to best in class service.
Mid single digit or better revenue growth through the cycle and double digit earnings growth.
On an annual basis through the cycle and to do that you have to have a portfolio that is structured in a way that's more diversified thats more that.
Customers can buy and we can meet them where their needs are.
One that can survive the ups and downs and cyclicality of the one way market ensure there is no doubt in my mind that we could have made more money in Q3 at the expense of our long term objectives. I mean, the best example of that I can think of is it's a very easy time to sell a bunch of trucks and trailers right now and make a lot of money and gains on sale, we chose not to do that we'd rather hold that trucking.
Dollar, especially given some of the supply chain disruptions and our diversified dedicated footprint. So we pay a higher price for our long term strategy inside of one quarter, but I think it stands up over time, and we'll continue to do so with five consecutive quarters of new EPS.
Records, we have 11 over the last 15, the 12th one missed by one penny.
Two of the others were in the 2019, which was the and we were the only carrier whose EPS went up from 18 to 19, so over the cycle, which is what we've talked about we think this is a play that continues to hold its value and improve and enhance our returns and results for our shareholders. Our.
<unk> and really everybody.
<unk> with the Warner story.
Occasionally you pay the price when.
When you've got law when you've got dedicated fleets that are coming in place and the timing is such that you've got large outlays at the end of the quarter and the benefits of such coming in the following quarter you don't get to pick when they implement will you pick but you don't you don't choose based on quarterly EPS you choose based on the long term relationship with that customer.
And so we'll work through this.
Not happy you could probably tell that by the tone of my voice, but at the same time I'm very proud of the ongoing story that we have developing here and it's not yet written to its fullest extent.
Thank you for that that answer if I could just.
Focus a little bit and on the driver pay portion and I realize that dedicated is very local and situational. So it's hard to paint them all brush, but do you feel like what you did in <unk> and <unk> got you back to market or do you feel like you've invested to get ahead of market and thats going to really give you some momentum going forward. Thank you.
Great question, I think I think a couple of things one I think we are ahead of market.
Some of the new stuff we're doing.
In the short term, we might have a little slightly higher cost profile on some of those but it allows us in a tough market not just to attract and retain drivers but to attract and retain the highest quality ones that we need for the type of work, we're going to be signed up for doing.
So I think thats part of it to be Frank I think Theres also a few other packages in the quarter that were.
Innovative in nature that have been now evolved quickly to better adapt to.
Some circumstances that were really never.
Foreseeing.
Yeah.
Anybody who never told me that we would have the magnitude of trucks.
Again, because of our dealer reliance that were that were idled during the quarter.
And thus the impact on some of the guarantees in some of the safety nets.
I would have is.
Just something we didn't expect what do you do you learn from it you adapting to improve it. So we're still going to provide our drivers with guarantees and we still have opportunities for them to have strong viable safety nets, but we've got to think through.
And improve upon.
Some of our proactive planning around.
To avoid those from coming into play.
One of the things I told our team. This morning is as frustrated as I may be with where we ended up the fact that we are.
<unk>.
Angered frustrated whatever the right word you may want to use of about an 86 or.
I think as a telltale sign of where our standards are it wasn't long ago that that was something that we were striving to get to and it's something that many many carriers still aspire to some day.
And for US, it's simply unacceptable in this market condition and one that we will improve on.
Thank you Derek.
Thank you next question will come from Cobb, sorry, Tom <unk> with UBS. Please go ahead.
Hey, guys. This is Mike triangle on for Tom.
So I wanted to ask about drivers with the minimum pay kicking in for a lot of drivers in <unk> was that helpful from a retention perspective.
And then on the increase in driver schools. How are you thinking about the impact on the one way fleet and in particular your ability to potentially grow the one way fleet in 'twenty two.
Yes.
The first question first on the minimum pay it was it was definitely impactful and effective we've seen a fairly.
Better than modeled benefit if you will from a retention perspective on some of the minimum guarantees we put in place now they come into play more often and as I've said several times and we had expected or wanted.
And we've got to fix that that's our job that's not the driver not doing their part it's us needing to make sure we put the miles on those trucks and keep those trucks.
On the road and running.
But overall directionally effective with some modifications that we need to take and improve upon.
I apologize you had a second part of your question, yes, the driver schools and the new locations. We really do think they are helping we've been able to get back to sequential fleet growth this quarter, where we haven't been able to achieve that.
The last few quarters.
<unk> added 75 trucks, excluding ECM.
And we're up to 17 locations now we have five more planned in the next six months that we think will really help us train.
And develop drivers to be able to continue to have that sequential fleet growth in a market, where there is a significant competitive headwind for labor and we're I think doing a good job of fighting that headwind with our driver School program.
Thanks, guys I appreciate it.
Thanks, Mike.
The next question will be from Kenn Hoekstra from Bank of America Merrill Lynch. Please go ahead.
Great good afternoon.
John and Derek can you clarify I guess, just real quick the insurance and claims is that ongoing or was there a catch up in the quarter, but.
And my question is is the one way.
You Protract are actually declined sequentially, maybe just delve into that a little bit to understand the mix change or what's going on does that do to the massively lower miles just want understand that.
The rate per mile.
I'll take the first part the insurance and claims.
If you look at the year over year increase was I believe was about $4.4 million.
Not quite half of that was due to <unk>.
Increases in excess insurance premiums for the.
Where we have <unk>.
Coverage for catastrophic claims and Thats, a reflection of the overall market conditions for that type of insurance and the balance was due to increases in claims and claims development.
This year compared to a year ago, we got a little bit more congestion on the roadways and we did last year at this time, our safety record is still strong but.
Little bit higher claim development.
And then you will take the second part Derik, we are a one way revenue per truck per week.
Which I believe is what you had asked about its essentially flat from Q2 to Q3.
And that is driven almost exclusively by some of the mileage productivity issues that we were faced with.
During the quarter.
And a lot of that again is driven by some of the same issues we've been talking about.
And that has already improved and started to reverse that trend and it looks much better as we go into Q4.
Got to make sure and keep that productivity gain and continue to see that moving.
As we as we move forward, but at this time.
We've got a lot of work still ahead of us.
Thanks, Dan and John.
Maybe just your thoughts on the new dedicated business it sounds like.
We're running up was it a lot of new business coming on at the end of quarter. As you said I just wanted to understand that.
Costs.
I thought given your scale.
Incremental costs coming onboard wouldn't have typically impacted you. So maybe just flush that out for us a little bit.
Sure. So so you're right. It's not it's certainly not exclusively related to that new dedicated business, but the difference on the dedicated business is when you are adding drivers you want to add them. All the time. When you are adding dedicated you have to add them at a certain time and so there was some incremental advertising cost onboarding lodging.
Some training and development cost and then the other thing within dedicated is uncertain fleets.
The work we have to do from a finishing perspective, so training that you do after hiring them within the fleet is done either on the account are on a very similar account whereby you see no productivity.
Impactor enhancement by having two drivers on that truck and what you have is a significantly higher cost profile during that period.
We met all of those deadlines and met those.
Launch dates and those launches all started in Q4 and have already all started and they are now in place, but most of that hiring activity and a lot of a bounty bonus and incentive bonus and other things that were in place took place in Q3 by no means do I want to paint the picture that driver pay suddenly goes back to Q2 levels that is not the case.
But there is.
<unk> of those cost items in Q3 that were unique that will start to moderate both through higher mileage as well as lower incentives and boundaries because we've met some very critical deadlines in our implementation plans.
So Derek just can you clarify one thing on that just so we understand the pricing on your I get the new business, that's coming on board, but you all dedicated contracts.
In flavors that.
I thought the whole point of the business right is that it protects you on up and down can you maybe just talk through the timing to realign that with the cost that youre seeing.
Yes, Thats a fabulous question. So first off there is great deals of protection in the up and down as you said and most of our dedicated contracts. There are a couple of exceptions. So when you have absolutely down trucks. So the truck is down awaiting parts or down because of hurricanes in the southeast where you move them out of the region in the back.
Into the region there.
Even then you have some baseline protections, but absolutely none.
When it is a nonproductive truck relative to any ability to add margin or operated at any profit.
So there's impacts there that were unique to the quarter.
That we have seen already rebounding.
As it relates to repricing dedicated we've had good success on incumbent business throughout the year of pricing in the new pay packages that we're referring to so when we talk about driver pay on the base level, we can get that price back in in.
In the quarter some of the stuff that's not priced into that incumbent businesses, the sudden and fairly significant increase that we spend across some of those incentive bounty advertising lodging.
Other incidentals associated to it.
Great.
I'll take the time and thoughts.
Thank you Ken.
The next question will be from Jeff Kauffman from vertical research partners. Please go ahead.
Thank you very much.
Going to apologize for re asking.
Ken's question a different way.
But when I looked at non fuel revenue per vehicle per week and dedicated.
It was roughly flat with year ago levels.
<unk>.
I understand what you were just explaining with the new contracts and the new pricing and the pricing, but why haven't we made more traction over the last 12 months in that area is there a mix effect is there something else going on that might not be obvious just looking at that statistic.
What steps are you looking at specifically, Jeff is revenue per truck per week net of fuel or yes.
Okay. So that.
Sure.
Was $41 29 in third quarter this year, $41 15, and third quarter last year, but we had.
9% I think it was.
<unk>.
8%, I'm, sorry, lower miles per truck and so it was the parts shortages and drivers out with Covid and the new fleet startups that reduced our our mileage productivity.
Ads, so <unk> to be very specific here 16 of the 20 fleets. We've added in dedicated in 2021 are are by design lower mileage fleets.
So you have lower cost structures to those fleets as well and that mix has a significant impact on what happens now that does not explain away the entirety of that mileage degradation that we're talking about but it is a major component of it. So if you were to go back to the Q2 call. There was a question about revenue per truck per week and dedicated and I made the comment in Q2 something.
Along the lines of we're struggling to find what the right metric is as our fleet mix is changing.
Fairly significantly and it was both with those fleets that we have landed in mind as well as those we know new were closed and about to implement because you can have static revenue per truck per week and increase yield if in fact, the mileage associated that fleet is significantly lower by design and we are seeing more of that as of late.
Okay. So maybe to paraphrase what I think John said in the opening comments.
Revenue per mile implied is probably up in that 9% to 10% range and miles per truck down and Thats really the way to think about it yes. It was up nine on rate and down 8% on miles and in.
Net net it's slightly higher.
Great. That's my one thanks guys.
Thank you John Thank you Jeff.
The next question will come from Brian Awesome back from Jpmorgan. Please go ahead.
Hey, guys. Good evening, thanks for taking the question.
Derek just wanted to dive back into the vaccine mandate a little bit more since it sounds like something is rather eminent here to extent you can help us just think through what happens next we're assuming that there's going to be a lawsuit maybe several that come out to challenge. This as we've seen with other <unk>.
<unk> Oh sure.
So maybe you can talk about how you're preparing just to educate your your fleet.
Not even want FCA mandate, even if it is something thats challenged in court. So do you think that will still have an effect.
If it is challenged and then secondly, it's a little unclear to me at least what happens after the six months when this.
Emergency temporary standard expires.
So I don't know if <unk> seen or heard anything on that front because it seems like it could.
But you certainly counterproductive to supply chain, they're trying to fix it.
It could also perhaps have some uncertainty after six months, if and when it does get put into place. So any thoughts on all of that would be helpful.
Brian.
I will attempt to win and I hope you can understand that.
Sensitivity about any answer in relative to anything vaccine related but I'll start with the obvious we are pro vaccine and we will continue to push and recommended encourage and we're doing that actively as we speak. We will also continue to analyze all available options relative to testing and the.
Routing implications of such test and those are extremely cost prohibitive at this point and we're working through that.
It will have a significant impact on supply chain and so I question, the logic and trying to move forward with a group of remote workers that has no interaction with the general public to speak of and certainly falls far short of the grave danger.
<unk>.
<unk> threshold that the entire.
Emergency action is based on.
With all of that said at this point, we just don't know we've had calls with Osha. We've had calls with the department of Labor, we have been part of other groups calls with both as well and there are too many uncertainties to predict where this heads from here.
I am hoping cooler heads will prevail and somewhere in this mix somebody will remember that these are the very men and women that worked every day. During this entire pandemic to make sure all of them were safe and interestingly kept himself safe at far greater levels than the national average of infections and I think it speaks to the very <unk>.
<unk> work, the very nature of the remote work that they do.
So it's tough it's worrisome I understand the concern from the investment community.
And all I can tell you is that we will stay as close to the forefront be prepared to react and the last thing I'll say on this is I agree with your assessment that was buried in the question around even if it were to come out and be challenged in court.
There is some risk of driver loss, yes, and that has a lot to do with why we wanted to make sure we were fully staffed and fully.
Equipped with drivers and you saw I believe the number is three 3% increase in driver count from Q2 to Q3.
I am sorry year over year.
Exclusive of ECM and.
And thats, a little bit of a hedge as well so those things come at a cost, but I think we're in as good a situation as we can be and in very difficult times.
Understood. Thanks for all that Eric I appreciate it thank you.
The next question will come from Jon Chapell with Evercore ISI. Please go ahead.
Thanks, very much and good evening guys.
Eric just quickly on the ECM integration you've had four months of it now were there anything surprising either good or the bad in that first quarter or any of the impact on the total results potentially from ECM cost integration and then finally is there anything else kind of come across your desk, because we've integrated this business.
Track that from a bolt on or from entering another new market as you've done with ECM.
Yes, great question.
Start with.
In General terms, we're very pleased with how the integration is going after four months, we were pretty diligent throughout the due diligence process. We had a plan in place and the team identified to handle the integration and I would say its on or ahead of schedule in every major category with one.
Noticeable caveat and that is some of the equipment synergies. Obviously, we would have liked to have had much more progress at this point on some of the buying and purchasing synergies than we've realized we have realized some but not nearly what we would have liked to and that has everything to do with the very OEM supply chain challenges that everybody's well aware of.
So that would be really at this point the only downside upside stuff driver retention has been better than expected and we're very excited about where morale sits in that fleet right now customer acceptance and service levels have been great.
Their financial performance has been as expected or better windows.
<unk> of some of the cost savings, we thought we could bring to bear.
Big caveat, which by the way is one of the biggest synergies is really on the.
The purchasing and procurement side and Thats, just because it's a constrained market right now as it relates to pipeline. The pipeline is we do have pipelines. We have we are continuing to look at other opportunities that we think will be additive and accretive and I put those in that were in that order because ECM was truly additive to our portfolio.
Palio it brings to bear a set of capabilities and knowledge set.
A reputation and brand.
That we think makes us better makes our portfolio stronger we're looking and continue to look.
Through that pipeline for other such opportunities that are additive to the portfolio accretive is important as well and this is playing out to be such so we will look at both of those things as we go forward and I do think there's an opportunity out there for future ECM like or other parts of the portfolio that followed.
Similar path relative to quality.
Operation and making us.
Stronger in our respective areas of expertise, especially those where we think the market is headed and in particular in that short haul.
Marketplace that ECM does so well in.
Great to hear thank you Derrick.
Yes.
Ladies and gentlemen, this concludes our question and answer session.
Now I'll turn the call over to Mr. Derek Leathers, who will provide closing comments. Please go ahead.
Yes. Thank you everyone I just want to thank you again for joining US today, we achieved record third quarter earnings despite missing our own and many of your expectations.
But we're in this for the long game, we made multiple investments throughout the quarter that we believe we are already paying dividends as we work our way through Q4 and beyond.
Our best customers, our winters and as such their growth companies and their number one question is how we can grow with them.
Lending into that as we further position this company for the future.
We'll continue to focus on cost controls and several of the period costs that impacted this quarter.
We've already taken measures to improve as we sequentially move into Q4.
There are some necessary and non transitory cost portions of the P&L that have been under pressure.
Those will be offset through pricing and we are working on that actively as we speak.
We keep our promises.
And that is.
Going to be true in good times and bad.
And it is rewarded though over time through the bid process and we are seeing that reward as we get deeper into the year. Our dedicated model remains durable through the cycle. Just like we've stated all along growth has happened to be more expensive right now, but as long as it's in the right business with.
With the right customers with the right contract terms I think it's a sensible and smart investment.
Logistics growth has never been more important we didn't talk about it a lot today, but we're proud of the results they put up this quarter.
The high capital requirements or trucking are only going to go higher as we look forward and it's imperative for us to continue to balance our asset exposure with our non asset growth.
And in closing peak is here, we are ready for it and we're aligned with the right customers to mutually prosper and we look forward to talking to you again next quarter. So thanks for being with us today.
And thank you Sir the conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Yes.
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