Q2 2022 Werner Enterprises Inc Earnings Call
Sure.
Good afternoon, and welcome to the Warner Enterprises second quarter 2022 earnings Conference call.
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I would now I'd like to turn the conference over to John Steele Werner's CFO . Please go ahead.
Earlier. This afternoon, we issued our earnings release with our second quarter results. The release along with the slide presentation are available in the investors section of our website at Warner Dotcom.
Today's webcast is being recorded and will be available for replay beginning later this evening.
Before we begin please direct your attention to the disclosure statement on slide two of the presentation as well as the disclaimers 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.
Definitely the company reports results using non-GAAP measures, which we believe provides additional information for investors to help facilitate the comparison of past and present performance a reconciliation to the most directly comparable GAAP measures is included in the tables attached to the earnings release and in the appendix of the slide presentation.
Now I will turn the conference over to Derek Leathers, our chairman President and CEO .
Thank you John and good afternoon.
During second quarter I am pleased to report that for the eighth consecutive quarter, we achieved record quarterly adjusted EPS, We had strong performance from both dedicated and logistics and effectively stood our way through a moderating freight market in one way truckload. These.
These record earnings were achieved despite unusually high insurance and claims expense in the quarter that increased over $20 million year over year or 24 per share the.
The majority of the increase related to recent unexpected and unfortunate legal developments for two prior year accident instead have been settled.
Over the prior eight quarters, our insurance and claims expense averaged $25 million per quarter.
This quarter came in at $41 million or $16 million more than the prior eight quarter average.
Our trucks XD record continues to improve and year to date <unk> reportable accidents per million miles are the lowest of the last five years, except for the first year of Covid. When there were significantly fewer motor vehicles on the road.
I'd like to take this opportunity to sincerely. Thank the entire Warner team for continuing to deliver on our promises with superior safety and service to our customers.
Now, let's move to slide four during the second quarter, we added 175 trucks in our truckload transportation services segment, ending the quarter with 8400 consistent with our plans most of these additions were in dedicated.
Our fleet mix at quarter end remains 63% dedicated and 37% one way truckload.
Overall, our consumer oriented freight basis, performing well nearly three quarters of our freight revenues are in retail and food and beverage and we have a heavier weighting with customers, who ship recurring and repeatable consumer staple products.
We expect freight volumes related to shipments of consumer staples to remain strong.
Three of our top five customers are discount retailers, who thrive in economic markets when consumers place a high priority on value.
Our two other top five customers are industry, leading home improvement and beverage companies.
Let's move to slide five for a summary of our financial performance for.
Second quarter revenues increased 29% to $836 million adjusted operating income declined 2% to 77 six familiar.
And adjusted EPS increased 1% to 87 per share.
If you normalize our second quarter insurance and claims expense of $41 million of our last eight quarter average of $25 million adjusted EPS in the second quarter was negatively impacted by <unk> 19, a share.
Dedicated our largest business unit ended the quarter with 5320 trucks and achieved 6% <unk> growth year over year.
Dedicated continues to experience strong demand from the majority of its long term customers.
New dedicated business opportunities continue to remain strong as ship research for capacity solutions high service and better visibility to transportation costs and a volatile freight environment.
The driver market has shown some signs of easing, but remains very competitive in a tight labor market.
At quarter end, one way truckload had.
3080 trucks, including the addition of 475 trucks year over year, which was primarily due to the July 2021 ECM acquisition.
Within one way, we specialize in Mexico Cross border short haul regional team expedited and engineered fleets from April to June one way freight volumes moderated from strong to seasonally normal.
Warner Logistics continued to expand its three business units of truckload logistics intermodal and final mile with another strong quarter of revenue margin and operating income growth.
Continuing an ongoing trend it remains difficult to receive the new trucks and trailers that we want to be able to refresh our fleet.
We have frequent discussions with our Oems to coordinate our new truck deliveries based on the very difficult challenges. They are dealing with for semiconductor chips component parts labor and other issues.
The extremely strong pricing in the used truck market began to ease towards the end of the quarter our equipment gains in the second quarter were $7 2 million higher year over year and flat compared to first quarter now.
Now I'd like to turn the call over to John to discuss our financial results in more detail John .
Thank you Derek <unk>.
Beginning on slide seven second quarter revenues increased $186 million, we increased revenues due to 8% growth in TTS trucks in dedicated fleet expansion freight rate increases higher fuel surcharges and logistics revenue growth.
Revenue per truck per week increased five 4% adjust.
Adjusted operating income declined $1 5 million by segment of $9 1 million increase in logistics was offset by an $8 2 million decrease in TTS, which included $15 6 million of higher than normal insurance and the TTS segment here.
Here on slide eight are the results for our TTS.
TTS revenues increased 25% due to 8% more trucks, 14% higher rates and $61 million of increased fuel surcharges, partially offset by 7% lower miles per truck the miles per truck change was due to a 6% lower length of haul due to ECM and growth in dedicated and fewer team drivers.
The TTS adjusted operating ratio net of fuel was $86 six and would've been 310 basis points lower excluding the $15 6 million TTS segment impact of unusually high insurance and claims in second quarter 2022, compared to last eight quarter average now.
Now, let's move ahead to TTS fleet metrics for dedicated and one way truckload on slide nine.
Dedicated revenues net of fuel increased 14% average trucks increased 5% revenue per truck per week increased nine 1%.
One way truckload revenues net of fuel increased 13% average trucks increased 14% entirely due to the ECM acquisition, which we lap in third quarter revenue per truck per week declined nearly 1% due to a 13, 7% increase in rate per mile offset by a similar decline in miles per truck.
As the one way freight market moderated in the second quarter compared to first quarter, we improved our miles per truck by 1% sequentially from first quarter with better network fluidity driver.
Driver pay per company mile in the second quarter increased 15% year over year.
Fuel prices increased during the quarter as the price per gallon rose 18 cents from March to April 37 from April to May and 33 cents from May to June for our second quarter. The average fuel price per gallon was $2.21 higher year over year, our fuel surcharge programs mitigate the higher cost of.
Fuel for loaded miles, but fuel impacts our P&L for empty miles out of route miles and truck idle time, and idle time was higher in the summer months.
Fuel lowered our second quarter earnings by an estimated nine a share compared to second quarter a year ago.
The average age of our trucks and trailers increased year over year by three tenths and six tenths, respectively. Due primarily to the delays in receiving new trucks and trailers operating an older fleet and we would like in an inflationary market has a direct impact on supplies and maintenance costs, which were up 27%.
Year over year.
Moving to Warner Logistics on Slide 10 in second quarter total logistics revenues in the quarter grew 44% to $204 million truckload logistics revenues increased 36% driven by a 17% increase in revenue per shipment and a 16% increase in shipments our power only solution.
Continued to gain traction and achieved 68% year over year revenue growth with customers, who value the ease of working with our large national trailer pool.
Intermodal revenues grew 18% supported by a 35% increase in revenue per shipment offset by a 13% decrease in shipments.
Under final mile revenues increased $21 million due to the November final mile acquisition of <unk> and continued growth from our national final mile agent network.
Warner Logistics produced adjusted operating income improvement of $9 1 million or plus 231% to 13.1 million for the quarter due to strong revenue growth and 360 basis points of adjusted operating margin expansion.
Let's move to slide 11 to discuss our defensive positioning.
Over the past few years, we intentionally designed our revenue portfolio to consist primarily of consumer oriented customers, who have very high service requirements with an emphasis on non durable goods and essential consumable products that are purchased in good as well as bad economic conditions there.
The chart at left displays our top 50 customer revenue mix or just shy of 80% of our total revenues nearly three and four revenue dollars come from successful customers that are winning in the retail and food and beverage verticals.
Three of our top five customers are in the discount retail or dollar store verticals.
We took a look back at the retail performance of our customers by reviewing comparable same store sales trends before and after the 2009 recession. The last period of severe stress for consumers over the past 20 years.
We understand the factors impacting the economy today are very different and we're not predicting a repeat of the great recession. However, we believe this information is useful to validate customer freight trends during periods of weaker economic conditions.
We reviewed this retailer data and combined it with the mostly recession proof consumer staple spending characteristics of many of our food and beverage customers. We determined that during the period immediately preceding and following the 2008 O nine recession, 60% of our customers perform well 20% performed in line.
With the market and 20% perform below the market.
The charts on the right show the dedicated has grown to 59% of TTS revenues up from 46% in 2015.
In dedicated we provide trucks trailers and drivers for a specific customer typically for a retail distribution center or a beverage facility.
Dedicated customers typically have extremely high service and safety requirements and our dedicated contracts are typically three to five years.
58% of our dedicated revenues come from discount retailers or food and beverage companies.
Historically, these customers performed better than the competition and slow growth or recessionary economies when their customers have less discretionary income to spend and as consumers trade down for value to get the most for their money.
Dedicated business is more stable and predictable because of the high service requirements and relatively consistent freight volumes are dedicated revenue per truck has less variability in this metric has increased seven of the last eight years rigs.
Regardless of where the freight market goes from here the size strength and customer base of our dedicated fleet is durable and resilient and places us in a strong competitive position.
On slide 12 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 of the past five years compared to the previous five years.
Year to date net capex is $153 million.
On slide 13 is our capital allocation update our first priority for capital continues to be reinvesting in our fleet, which have become more challenging to achieve in the current build environment.
Based on our expected OEM build schedules and current data we're optimistic that we will see some improvement in new truck and trailer deliveries in the second half.
During second quarter, we increased our share buybacks and purchased $66 million of our stock or two 5% a diluted shares.
We remain committed to maintaining a strong and flexible financial position and ended the quarter with a net debt to EBITDA ratio of 0.6 times.
We remain open to considering bolt on acquisitions in North America, truckload and logistics that are both additive to our business and accretive to our earnings that.
That concludes my remarks, and now I will turn it back over to Derek.
Thank you John move.
Moving to slide 15 for several years I've shared with you details of our <unk> plus strategy to produce superior service for our customers.
Significantly upgrade our trucks trailers terminals talent in technology, we've invested nearly $2 billion in Capex and we raised the bar to attract and retain a more talented and highly performing Warner team.
Over the past several months our superior service has been validated by our customers four of our top five and seven of our top 15 customers named Warner for their carrier of the year Award.
We are humbled by this recognition, but we're not resting on our laurels our future is in focus.
We are formally introducing Warner drive to the investment community, which is the next evolution of the Warner business strategy.
As for durable it represents our strong financial position, our balanced revenue portfolio, our proactive asset management and our commitment to longer term strategy centered on high quality customers, who sell resilient products that consumers need.
Ours for results, we're committed to our relentless focus on exceptional service that drives long term value for all stakeholders, we place a premium on sustainable pricing operational execution and shareholder returns Warner is and will remain well positioned to grow earnings and free cash flow, while exceeding customer expectations.
We leverage our portfolio of one way dedicated and logistics solutions to meet customer needs as we face the challenges of an increasingly complex supply chain.
Our ability to grow and reinvest in our customers will enable us to produce more stable returns through various economic conditions.
We are committed to innovation to make it a better Warner this starts with investing in our API driven it infrastructure.
We are advancing Warner edge in all areas of our business to continually improve outcomes for our customers associates carriers and suppliers and we are maintaining a modern fleet, while exploring an integrated emerging technologies.
Warner's core values of safety and service was supported by an inclusive culture, where all individuals are respected for who they are we give our time and talent to build stronger communities. We.
We support innovations by cultivating new ideas and bringing them to action.
We empower our leadership to influence others to be their best and the foundation of our core values is to operate with the highest integrity and always be honest and accountable.
We are dedicated to being a sustainable company for our people planet and profitability, we will improve our environmental impact through the exploration of alternative fuels and equipment executing an aggressive carbon reduction plan and exploring partnerships through Warner Blue.
We support and encourage the diverse voices and perspectives of all of our associates customers and suppliers through our <unk> vision and plan.
We have a whole transparency ethics and integrity in our governance practices and we focus on community support through our Blue Brigade voluntary workforce.
You can see within the wheel, but the <unk> process remains a central components of our Warner drive strategy. These principles of reinvestment are foundational to our view on being good stewards of capital simply put we will always remain true to deploy capital across our business with an eye towards investing in the future.
Those investments will be made based on their ability to increase returns and provide stability to the portfolio as we align further with winning customers in their respective industries.
And that's the acronym implies drive signals motion progress towards a stronger future and our commitment to growth of both top and bottom line results.
On slide 16 here of the ESG developments for second quarter, we created an advancement and retention plan to increase and elevate women and diverse talent and our management pipeline, we rolled out a volunteer time off program for our associates training hours for human trafficking awareness more than doubled and we introduced two new associate resource groups for our.
Associates.
We expanded women's representation on our board with the addition of Michelle Livingstone and experienced transportation leader in the customer community and we were pleased to receive recognition for the four highly qualified women and serve on our nine person board of directors.
Now, let's move ahead to slide 17, and a review of our performance versus our 2022 guidance metrics.
During the second quarter, our TTS fleet increase.
<unk> increased 1% for the first six months.
For the year, our 2% to 5% truck growth guidance remains unchanged with our growth focused on dedicated.
Net capital expenditures year to date were $153 million, we increased our guidance range for full year net capex by $25 million to a range of $275 million to $325 million.
This is the range. We previously had at the beginning of the year.
Dedicated revenue per truck per week increased nine 1% in second quarter ahead of our full year growth expectations due to customer rate increases to offset inflationary cost pressures.
For the year, we raised our guidance and now expect this metric will grow in the 6% to 8% range.
One way truckload revenues per total mile for the second quarter increased 13, 7% slightly below the bottom end of our second quarter guidance range due to a moderating framework for.
For the third quarter, we expect our one way truckload revenues per total mile to increase in a range of 2% to 5% over the same period last year.
This percentage increase was lower than second quarter 2022, due to a moderate new freight market tougher rate comps lapping the ECM acquisition and decline in spot rates.
Our income tax rate in the second quarter was 24, 4%.
For the full year, we are reaffirming our effective tax rate of $24 5 million to 25, 5% and we expect the average age of our truck and trailer fleet at year end to be 2.2, and four eight years respectively.
One way truckload freight demand has moderated from very good levels in April to seasonally normal levels in July while dedicated freight demand remained strong and steady.
We expect to industry supply to remain relatively tight due to a competitive driver market and ongoing OEM challenges for the production of new trucks and trailers.
Also since the beginning of May the FMC USA weekly data base of carrier registrations and day Activations turned negative for the first time since Covid. We believe the decline is a combination of trucks, leaving the market and some owner operators that are returning to carriers. These company drivers.
Over the last few months concerned about the direction of the economy and the truckload freight market has increased.
Our current market view for the remainder of the year is as follows we expect the industry truckload freight demand continues to moderate more for discretionary goods and less for consumer Staples competition for freight begins to increase and these factors may impact, our one way truckload fleet more than dedicated logistics.
Visibility into the peak season market conditions is mixed and not clear at this time.
Pressure on small truckload carriers increases with declining spot rates inflationary cost increases with older equipment high fuel prices and rising interest rates.
Pricing for industry used trucks continues to ease resulting in lower gains per truck.
For Warner we anticipate we will sell slightly more trucks in third quarter than second quarter with a lower gain per truck.
Inflationary cost pressures for labor equipment, and maintenance are likely to continue.
Truckload capacity remains constrained as new truck build challenges continue in the driver market remains competitive.
We are confident in our positioning with the stability of our dedicated and one way truckload freight base and our growing logistics segment. The proven resilience of our durable business model and the superior value we provide our customers.
Before we move to the Q&A I would like to cover one more topic.
This afternoon, we announced that John has decided to retire after 33 years at Warner The last 25, serving as our CFO I am extremely grateful for John's numerous contributions over the years to make Warner better company.
John has been a true partner, enabling Warner's financial performance and effectively communicating the Warner story to the street.
On behalf of the Warner team I would like to wish John a prosperous future as he transitions to retirement, we are launching a formal search process for our next CFO I sincerely appreciate John's full supported the transition process to ensure a smooth and seamless transition John will remain with Warner as long as needed through the full transition of responsibilities to his successor.
With that I would now like to turn the call over to our operator to begin the Q&A.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys 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 daylight time, following the company's closing remarks.
Our first question is from Jack Atkins with Stephens. Please go ahead.
Okay, great good afternoon.
First John Let me just say congratulations on your on your retirement and congratulations on a hugely successful career Warner.
Thank you Jack.
So I guess for my for my first question I would love to maybe talk about dedicated for a moment if we could.
Obviously the guidance for the full year in terms of dedicated.
Per truck per week with increased could you maybe talk about the drivers behind the higher outlook for the full year in general and sort of the momentum in the second half of the year and also the pipeline in dedicated and how you see that shaping up for the rest of the year.
Sure Jack I'll take that.
Relative to the guidance is really tied closely to the pipeline.
The morality of dedicated right now is the pipeline remains very strong we have significant interest.
From customers, both organic growth within existing fleets looking to grow and our expanded new locations as well as new blood customers that are interested in the products and services that Warner provides what that allows us to do is even in these economic conditions to continue to be selective on what gets through the pipeline and what we ultimately implement.
And that gives us the confidence as we think about revenue per truck per week looking forward. The other reality is if you recall back to like I believe it was Q3 of 'twenty, one where we talked about fleet mix makes a big difference in dedicated and so there are times, where revenue per truck per week is also dictated by what the length of haul and what the productivity.
The assumptions are within a particular fleet and some fleets are very low productive in nature and so if you happen to have a line of sight to both a strong pipeline and the modeling assumptions therein that can lead to a higher revenue per truck per week confidence and I think all of that combined gives us the confidence to do a couple of things one.
No that any growth in our truck fleet is going to be aimed at dedicated as we go into the back half of the year.
To expand the revenue per truck per week guidance previously issued.
Okay. That's very helpful. Thank you for that and then I guess, Darren maybe taking a step back I. Appreciate the comments in terms of how you expect the rest of the year to sort of shake out I guess, maybe kind of thinking about this now that we've had several months to think about the market in general since the last time.
You guys reported numbers.
Is there a way to maybe kind of get your perspective on.
The cycle from here as you see it sort of were hearing pretty consistently from carriers that underlying demand trends are still pretty healthy in absolute terms, but obviously moderating versus what we've been seeing for the last couple of years.
Do you think that we're headed to a freight recession or do you feel like we're just kind of settling out in a more normalized sort of market will just be kind of be curious to get your perspective that we've had several months to digest, what's been going on here.
Yeah, Great question.
Nobody has the perfect Crystal ball obviously.
And this cycle has certainly been different in any preceding cycle just based on the pandemic.
But if you think about where we were for two years and how hyper inflated many of the metrics were whether it would be spot market pricing overbook natures of People's networks.
And then just general volatility and what was being purchased and the quantities that are being consumed.
When you look forward or you look maybe more recently over the last few months is returning to a more normalized setting our network is still booked daily we're still coming in and what would be by any normal seasonally adjusted outlook.
In a good position and we think that probably holds up.
One of the realities as Youre looking at FMC assays net registrations, we talked about it going negative in may, but if you look at it.
For every week, but if you look at our quarterly it's been negative really each quarter. This year, but that growth has grown significantly as of late.
First week of May to til.
Current weak it's a net.
Negative of 31000, plus trucks now big chunk of that is all in one week in June where they have to renew insurance, but it's still a signal that they're not willing to do so so I think you've got moderating supply on the truck side, that's happening and happening more quickly than prior cycles, you've got some stability starting to Florida to starting to set in on the spot market.
And then you've got customers, if you're aligned with the right ones that are that are still performing well the last piece of noise. It's tough for all of us as the inventory issue there are certain over inventoried.
Situations and yet theres, others that are struggling to get the shelves stocked unfilled and that's just too tough. This time at this moment to try to generalize on how that plays out peak season visibility is a little less than maybe what we've had in prior cycles.
And high service is still being rewarded in the marketplace and so we're going to just stick with our netting and put service above all else.
Stick with our commitment to safety.
And have that be Paramount to how we think about new business, we bring on and I'm pretty excited about how that translates into that dedicated pipeline in particular and also the logistics growth in front of US Hey, Jack This is John I'd like to add one more comment on to everything that Derek said, which I agree with the one difference is.
Time around is <unk>.
Industry supply of trucks has been limited due to the OEM supply chain issues.
And a relatively low unemployment rate.
Currently at three six so.
There is forced discipline for the industry, that's going on due to the OEM issues. That's highly unusual prior strong periods for freight typically led to a spike in new truck production and an oversupply of industry capacity.
Which.
Cause the supply side of the equation to create a difficult demand supply narrative. This time around we have a low unemployment rate and we haven't had a big increase in truck builds at the same time, the employment side a lot of the over the road jobs that have been added.
<unk> had been really local delivery as opposed to long haul so I.
I really think the supply side is more constrained than it has been in the past and it's really the demand side that Derek laid out very well.
That's the issue that we got a deal with so I'm, a little more confident that that it won't be a big.
Decline in the overall environment, because the supply side is under better relative to control.
Okay, well really appreciate the detailed thoughts there. Thank you Derek Thank you John and thank you guys.
Thank you.
The next question is from Chris Wetherbee with Citigroup. Please go ahead.
Great. Thanks, Good afternoon, and congrats John it's been a pleasure working with you. Good luck on everything going forward not congrats on a great career.
Thank you Jack our thank you Chris sorry.
No problem.
Linda I wanted to kind of pick up on where you left off in sort of the supply dynamic within the within the industry I think thats kind of an interesting point. So Derek you talked a little bit about capacity coming out I wanted to get a sense of maybe if you could look at the dedicated market a little bit more specifically and kind of give us some thoughts around what you think capacity looks like within <unk>.
Thank you spent a lot of time focused on one way truckload, but I wanted to get a sense there.
Seems like Theres, a lot of resiliency in that business, it's really sort of generate price I'm kind of curious what you're thinking about capacity availability is dedicated.
Yes.
<unk> is truly unique we talk about it all the time, but I still don't think it's fully understood.
It's a market within a market and so if you want to have 99% on time, you want to have driver standards and expectations that are significantly.
More rigid than those of one way the one way market.
There is a handful maybe maybe two handfuls of competitors out there that really perform in that space and so the capacity there is determined by.
Just a few players even within that we've all kind of over time for whatever reason migrated to.
Certain verticals and certain industries and certain strengths within our own fleets and our own networks. So arguably they're not all even competitors within art within dedicated.
We just simply put look at our pipeline look at the interest level look at the winning customers. We're working with that are growing and still predict further growth regardless of economic cycle and feel real good about where we're sitting from a demand perspective, I know you asked me about capacity, but our ability.
To grow into that the OEM constraints actually are one of the things Thats made dedicated a bit tougher over the last several quarters. Because you can't just sign an account up and start up in a month because you might have to phase it in over time, because you've got to wait on the equipment, especially for the specialty equipment before you can be able to put it in place.
No.
The bottom line takeaway like what matters to an investor in my view is that pipeline is strong those customers are excited the carrier of the year Awards continue to roll in and we have the financial wherewithal to be able to invest in that fleet and it's sticky long term business, we renew those fleets time and time again north of 95.
<unk>.
Start off with three to five year type contracts settings.
We almost inevitably grow organically within that fleet once we get there at either other locations or more trucks within the same location. So that there is a sense of long term excitement here at Warner about how that portfolio is performing.
Okay I appreciate that color that's very helpful and then.
I guess I just wanted to make sure I understood maybe your thoughts on seasonality. This is a very unique year as you guys highlighted with demand questions in capacity ABB titers that coming off of peak cycles. Previously so as we think about the TTS business for the rest of the year from a from a margin perspective.
Is it possible that we see less seasonality in quarter to quarter margin progression any thoughts on sort of how that might play out in the back half of the year would be helpful.
Yes, I mean, I think the back half the tough part in the back half.
I think we've proven our willingness to be transparent and forthright on these calls but peak season is clearly not as visible this year as it has been in prior years it'll happen I mean Christmas is still come in and they are still going to be projects that are still going to be peak work to be done.
The clarity by which we know at this point what that project volume looks like isn't what it has been over the last several years.
So I am.
I'm hesitant to give you too much of a perfect outlook because we're still working on it now we're in conversations we're having dialogues with customers there.
They are still trying to sort through.
What kind of inventory levels. They are at what do they think is the right buys to make between here and the end of the year and what it means to us how much will be import volume versus maybe sourced differently because of COVID-19 supply chain changes that have taken root and so we're just not able to give the same level of clarity or confidence on the back half predominantly.
Dictated by project opportunities more than any other thing.
Okay. That's very helpful. Thanks for the time I appreciate it.
Thank you.
The next question is from Scott Group with Wolfe Research. Please go ahead.
Hey, Thanks, and congrats John you are the best so youll be missed.
The when I just following up on that margin question.
Should we take that do we just add back $20 million for the insurance and sort of start from there and then do our math or is there any sort of ongoing impact from this insurance and maybe what that just any thoughts on gains in the back half.
Yes, I think the better way to think about it probably is the eight quarter average that we talked about.
We would.
Q2 of last year was a little lower than the eight quarter average so the GAAP was $20 million year over year, but at $16 million.
Impaired to the eight quarter average and I think thats, probably a better safer way to think about it.
We also recently renewed our.
Our liability insurance is that'll be in effect August one.
Impact of that is about a $2 million uptick annually, which is lower than what it has been over the last several years, that's reflective of a lot of things both the market, but also some of our ongoing improvements in safety and implementation of further technologies. So that's where I would start Scott probably.
Somewhere closer not 'twenty, but maybe it's 15 to 16.
And then I guess with that and then any thoughts.
On the gains and Oh, yes, I'm, sorry, I forgot I forgot the second part of the question Thats on the gains.
<unk> moderating they moderated through the second quarter.
Have somewhat stabilized as occurrence over the last several weeks seemed to have found a new normal it's still very elevated by historical standards, but nowhere near what it was maybe to start off the year.
We do expect that we're going to sell.
Potentially more units in the back half, but honestly, that's going to be very very dependent on what happens with new OEM production. So we've not reintroduce guidance just because.
We're not out of the woods, yet on the OEM production level and receipt of new equipment, but.
But in general terms I think there is tons of public data out there about what's happened with gains in and what we've seen is as of late it seems to be stabilizing I think if Oems find further.
If we end up in a more disrupted OEM.
Manufacturing environment in the back half you might see some uptick in.
Used gains per unit.
The contrast is also true if they suddenly get more fluidity in their networks that could put some additional pressure on trucks, but then of course, we'd sell higher volumes.
So.
We're stopping short of giving guidance I realize but I am at least try to paint the picture of what we see little higher volume lower gains for unit.
<unk>.
And the game will be determined on what happens with OEM receipt of new equipment.
Okay. Thank you guys appreciate it.
Thank you Scott.
The next question is from Ravi Shanker with Morgan Stanley . Please go ahead.
Alright, Thanks, Scott Rowe again, John I'll Echo the.
The comments and amazing working with you I'm going to Miss you at Laguna.
But we will I think in the future.
So maybe if I can maybe you can remind us and thanks for the comment on the detail on how you guys performed in the last downturn.
But.
Can you shed a little more color on how a dedicated contracts.
Correlative, though one way contracts in terms of the stickiness of the terms and the pricing thats about 10 and going up.
How do you expect that to evolve.
The market does and also have you seen any change in customer behavior around dedicated contracts in the last few months.
Sure Robbie I'll take that to start and John Please jump in anywhere you want.
The reality is dedicate as much stickier I mean, that's the simple answer it's a much stickier relationship you are an extension of that customer.
And you are in some cases in our dedicated fleets, it's almost a white label type application, where the trucks and trailers.
And the customers colors.
They are three to five year agreements.
<unk>.
The renewal rate on them is significantly higher than one way renewal rates in terms of renewing for.
Additional term.
Expectations within those fleets.
Services is significantly higher than in one way.
And.
The other side of the level of stickiness is if you look at revenue per truck per week, it's increased.
Seven out of the last eight years and dedicated.
It's just as illuminate how much less volatile it really is.
Yes, I don't have anything to add Robbie well stated Derrick.
Great and then if I follow up Derek you are all the thing.
Incredibly respected executive in the industry and kind of your thoughts on the industry carry a lot of weight. So would love your thoughts on AB five now that is the law of the land in California and potentially into other states maybe going forward at some point what kind of impact do you think this is going to have on the trucking industry and.
Great.
Yeah, I think it's going to be impactful I really do we're still sorting through so I'll start with Warner first virtually no impact. So that's the answer relative to Warner at this point, we have an extremely small owner operator footprint nationally and we have zero in California.
As we know there is some fast following stayed somewhere in the neighborhood of 12 to 15 different states are already talking about following along the lines of the AAV five type thought process.
I think it's sad for the folks to the men and women out there that have dreamed for years have been an owner operator and owner their own business and it went through a lot of trouble to do that I think it's kind of the unintended consequence of legislation, sometimes when people come out with ideas that they think are helping them actually hurt you can see that in the reactions of group cycle Ida in it.
The protest level at the ports I think it is going to be disruptive out there and we will have a net negative impact on capacity lots of folks think that those those men and women who are just going to convert to company drivers, where there aren't a lot of large company operators in and out of the ports to begin with to convert to trying to convert within that small fleet is difficult because theyre not capitalized in such a way that.
They can bring on equipment to put those drivers into.
So I think we're going to see disruption how much disruption is kind of hard to tell at this point.
We've certainly seen a net benefit from a driver hiring perspective.
Just as it relates to not just AB five but the impact of rising fuel prices rising insurance costs and lower spot rates means being an owner operator or be in a small fleet operator isn't nearly as attractive as it once was in.
So safe Haven can be found in companies like Warner.
But.
The story is yet to be fully written but I don't believe.
On a macro level, it's anything other than negative four overall capacity the overall supply chain and the ability for us to get back to kind of a more normalized.
Flow across customer supply chain so.
It was it was certainly.
Not well received in our four walls, even though we weren't impacted at all by just because I think it's bad for the industry.
Do you have any clarity on enforcement at this time.
Yeah on the clarity I have so far is that its very unclear.
I know that's not very helpful, but unfortunately.
What I've said to our own executive team here is that if you think about it kind of logically. It was intended to do and help is this particular group.
It was misguided in its application and into the design and now if you go to enforce it youre going to be unfortunate upon the very group that.
<unk>. This law was written to help which I think puts enforcement officials in a very tough position. So I suspect enforcement will be fairly loose for some period of time, but you can't pass a law and put as much emphasis on it and then just ignore it once it's on the books.
Although we do tend to do that I guess on other loss from time to time around this country.
So, we'll see but I think enforcement will ramp up over time.
Great. Thank you.
Thank you.
The next question is from Jeff Kauffman with vertical research partners. Please go ahead.
Thank you very much and John .
<unk> been a terrific almost 30 years.
Looking forward to.
Hearing about your new ventures, and whatever you do next so thank you.
I'm going to go in a different direction Derrick.
You had a slide up on ESG.
Which I thought was terrific and I Love. The addition of Michelle Livingstone.
Your board she is fantastic.
I'd love to hear a little bit about what you're learning in some of these.
New ventures, I know you just announced the project with Aurora.
You've been working a little bit with two simple and some others, but.
Looking both at the.
Autonomous driving which is still a few years away. We are in the early stages and maybe some of the new energy products that are out there.
What are your thoughts on what Warner's doing in the area of lowering carbon emissions and safety and things like that.
Sure Geoff Great question I'll start with.
Probably the most important thing which is we are passionately committed.
To do everything in our power to lower our carbon footprint as we go forward I won't Warner to lead in this space I want to make sure that it's clear that we're committed to both EES Angie as it relates to ESG and.
And we're going to take the steps necessary to do that but but along the way, but we're not going to do.
As we put the portfolio at risk or make financial decisions that are that are done for optics purposes only.
And so what that results in is a lot of testing.
Got a lot of lines in the water everything from the electric truck test. So we've talked about a few different times to assume recently completed work with hydrogen we're going to continue to have a dual fuel opportunity.
Coming later in the year as well as some additional electric trucks.
ESG was incorporated into the drive strategy is a constant reminder, to everybody internally and externally, but it's not going away and we will lean into it.
As far as the autonomous and some of the specifics learnings and strategies.
I hope you can understand that we're going to keep some of that a little close to divest for now as we continue to vet through how we think it plays out I think youre right on the autonomous side, we're still a few years away from even marginal impacts around the edges, but my view on it is today is the day an everyday as we go forward.
As when we need to be preparing for the inevitable reality that things are going to change.
And what we'll do is stay connected.
We'll keep our innovation council active.
Personally will stay active in that space.
We've got a guide this ship.
Through what will be a different look.
As we look out 10 years and further into the future.
Okay. That's my one thank you.
The next question is from Kenn Hoekstra with Bank of America. Please go ahead.
Great Good evening.
John just really appreciate all the help for 20 years really been great working with you and best of luck.
Derek just thinking about you talk about the revenue per truck per week kind of shift on the on the dedicated side maybe talk about the cost is this just balancing out.
Margins as you look forward is it is it still staying ahead of inflation and ability to expand margins, maybe just given your maybe just give us some thoughts on your thoughts on revenue versus the cost.
Sure Ken that dedicated is performing very well at.
At the same time.
In a tight driver market when that when you think about the roles I described previously as being more rigid.
More requirements.
And more driver involvement than one way that job is even tougher to Phil often one way jobs.
Pay has to keep pace with what we're asking of the driver and so we're going to have to offset that with with increased.
Yield.
Mix is a big part I mentioned it once I want to re mentioned it again.
Net.
Could you can mix that that fleet differently quarter to quarter based on what fleet, what new dedicated opportunities are in the pipeline and see some revenue per truck per week increases or or.
Slow that growth and yet still be modeling that the exact same or it's still performing at the same or improving it.
It's a little bit of all of the above we know.
Think about running the trucking company, you've got trucks tires trailers labor and fuel before you need to worry about really anything else you'd better have those things right and those are all under various levels of inflationary pressures. So we have to offset it our customers understand it and the value. We bring is great enough that they are willing to pay for it they are willing to invest in it with us because.
They need that track to continue to be 90, 90, 690, 95, whatever the number might be.
That is literally where those 5000 plus trucks operate day in and day out.
And if I can just follow up on that did you talk about any startup costs coming on for the expansion or growth that you're focused on and dedicated.
As you go through those slowdowns that John mentioned kind of in each of the.
Prior periods does the mixed matter at that in terms of what you moved in terms of margin impact like if they're if they're moving more fluid because that's what people buy during downturns.
Does that matter or it just matters that Warner is moving trucks, so it doesn't matter.
Well the mix matters, and we've certainly had conversations with some of our dedicated fleets.
Happened to haul a mixed set of goods. So in other words fleets that haul both food and beverage, but also consumer staples and that mix is shifting more to food and beverage versus consumer staples, but the fleet size may not change at all and frankly may grow as a result of that mix shift if that's what you mean.
But overall as we look across our dedicated fleets what isn't in the pipeline at least not in the eminent quarters is what you would.
Startup fog or somebody that's large enough and complex enough that you've got a major implementation kind of startup structure coming at you.
It's really the cleaner stuff that we like the most when you can get it which is several smaller fleets either adding to their existing footprint or adding new locations of business. We know how to do and do every day and so theres always going to be implementation cost, we offset a lot of that with the implementation fees.
But some of it is absorbed but as I look out and think about the next few quarters.
Our view would be that it's absorbable based on how we've modeled it.
Alright, Thank you very much and John again, good luck. Thanks. Thank you.
The next question is from Ari Rosa with Credit Suisse. Please go ahead.
Great Hey, good afternoon, guys and congrats again John .
So sticking on the dedicated side of things Derek maybe you could just reflect on it seems like that's been a pretty consistent message from a number of carriers that demand for dedicated has been strong maybe you can reflect on.
Whats driving that demand and has it accelerated versus past cycles, and then as we think about the runway for future growth and kind of how resilient that might be I mean is dedicated something that can continue to grow.
Kind of on a compounded basis for the next five to 10 years.
Yes, I think the message has been consistent at least here for many quarters.
And I do hear similar messages being echoed around the industry.
The reality is yes, I think it is something that has runway.
The entire supply chain, if you think about what's happening across America.
The economy, and especially in the spaces, we play retail in particular.
Commerce is a growing reality for deployment is growing reality needing to serve at much higher levels of service as a growing reality all of those things feed dedicated.
People talk all the time right now about swap market and clearly spot market has declined significantly this year, none of that freight finds itself into a dedicated fleet. It wasn't in there before it's not in their later and Thats not really.
That works.
What's being modeled for dedicated is customers that are looking to either at their own networks or competitors' networks and seeing them outperform in realizing that supply chain can be turned into a very significant competitive advantage part of doing that is aligning yourself with somebody that strategic and has the capabilities to pull it off we see tons of runway.
Again with our existing customers, but then replicating that across other customers that are taking that next evolutionary step.
And really placing a premium on service and in stock.
And having availability ready and to be delivered and then that dovetails very well with with our with our final mile products and some of the things we do on logistics and Thats why that business unit as of so much importance to us both logistics holistically as well as final mile and no one's asked yet about this.
If you think about the quarter logistics is a big big piece of this puzzle at 44% growth in logistics and a $9 $1 million operating income increase and 360 basis points of operating.
Margin.
The improvement year over year, that's that's a business unit that is really finding its footing and when we think about dedicated b in the middle mile and there are a lot of that work, especially in final mile. We're excited in logistics. It all kind of dovetails together and this was all part of a longer term strategy and I appreciate those that have stuck with us through multiple quarters as well.
We've made this evolution and I hope that they'll stick with us as it plays out.
We feel good about how we sit today.
Bill.
Despite the noise that may have been in the quarter.
We think about our business in terms of years not quarters and I am excited about our ability to execute.
Got it that's really helpful. And then just for my follow up is actually really helps.
Your response to that last question, because I think it leads into.
It leads into my follow up but I wanted to ask about the sustainability of results that logistics. Obviously it was a really strong quarter, but do you think that can continue.
Into the second half of the year and into 2023.
Yes, I think the revenue growth, obviously will moderate some we're not we're not at all signing up for 44%.
Indefinitely.
We know that that's going to moderate.
We're winning business in logistics, we're getting better at what we do in logistics our cost to serve is coming down as we get the enhancements from some of the.
Productivity tools that we've been building out power only it is a real thing.
I know it's been asked in prior calls about whether that's the only real because of.
The tight capacity market that we're in we don't believe so we believe the opposite is somewhat true that it was a it.
It was available to customers because of the tight market and they were willing to implement changes in their network that may be in a loose market. They wouldn't have attempted once they had a taste and realized how much more efficient that yard can operate with large trailer pools in both the blue and non blue component via power only.
Realized the value in it and so there's more and more excitement as we talk to customers about power only even in a market like the one that we're in today, that's evolving a little bit from where it was and so I think that has significant runway within our logistics results as well.
Okay, great. Thanks for the time.
Thank you.
The next question is from Jason Seidl with Cowen. Please go ahead.
Thank you operator again John .
Best wishes in retirement and it's.
It's been a pleasure over the past 25 years Derrick I wanted to just.
Talk a little bit about the.
The percentage of your business that's now.
On the dedicated side of things.
Yes.
Yes, it's a work in progress we look at it all the time in model different scenarios, we certainly don't think it's maxed out.
At this point.
There was a concern I had once upon a time relative to dedicated potentially getting too large for one way to be able to provide the support that it provides that support comes in a variety of ways. There are times, where the one way truck count may ebb and flow a little bit because it's a place for drivers to be to be brought into Warner and housed within the net.
So to speak as we find opportunities in openings become available within dedicated so for certain quarters, you could see some movement in the one way number that even that is dependent on future dedicated pipeline needs.
But what we've found is dedicated got opened up to 60% of the truck fleet and then ultimately now 63% is we can self serve within dedicated some of the surge needs in surge commitments.
And that's given us greater confidence in our ability, especially as we generate multi dedicated.
Geographic footprint, so multiple fleets within close proximity where we can help serve across fleets that number now in my mind is certainly 65%.
And it could be higher than that and we will revisit all the time and so these are meetings, we have on a regular basis to make sure. We're not sub optimizing some other part of the portfolio and right now we feel like we're in good shape.
That's great color and one more here I'll squeeze in.
If you guys do get the trucks that you want this year with the increased Capex, how should we think about capex for 2003.
Well.
I'd like to get through the back half to be Frank before we start giving guidance on 'twenty three but we do know not just this fleet, but other fleets have aged.
Like that aging, it's not something we did intentionally our fleet is still very new by comparative standards, but I'd like to see that fleet a little younger than it is so we've issued guidance and stuck to that guidance for many years now that we're at.
Or at least a couple of years that 11% to 13% of revenues I think there could be ebbs and flows where you see us a little closer to the higher end of that guidance.
Because we want to refresh the fleet and get them backward belongs ideally that number for me is two two hour lower but that doesn't happen overnight and probably doesn't happen in a year.
But it's there's just too much uncertainty on the supply side of that equation relative to OEM production to try to give a give a number for next year.
If I was to give you just a ballpark I think something like Youre seeing this year is a good starting point with the Kate with the possibility of it being a little higher if things free up but that wouldn't be for some unbridled growth it would be for dedicated pipeline and refreshment of the current fleet.
That actually helps a lot I appreciate the time as always gentlemen, and again John best of luck.
Thank you.
The next question is from Tom <unk> with UBS. Please go ahead.
Hello, Mike <unk> on for Tom.
So Barak you mentioned your view on peak season is mix. So just wondering if that's based on what you're hearing from customers and if anything's changed in terms of how they're thinking about inventory replenishment and the outlook on the consumer.
Yes, it's a little bit of all of the above.
It isn't that we don't believe the peak is coming in that we're not going to have a peak season. This year.
That we have in our network a combination of everything from customers that are in need of inventory ordering now having normal firm conversations with us about what our role will be in that process to customers, who have on paper, the right inventory level or even too much inventory level, but some of it's the wrong inventory and then working through getting that corrected.
And pushed out of the network so that it can be replenished with the stuff they need for this fall.
Beauty of the holiday peak season is that it is holiday stuff that needs to be sold so regardless of your current inventory levels. If it is not the right inventory and if it is not holiday inventory that stuff still needs to come the last piece is probably.
It makes it a little more complex is not knowing what role China will or will not be able to play in some of their networks, we know theres ongoing disruptions and COVID-19 spikes and zero zero zero policy zero Cobra to policy, that's playing a role. So I think everybody is just kind of in a wait and see mode, a little bit more than normal so our tone is less.
Bullish than maybe prior Q2 calls, but it's mostly just our effort to be transparent and cautionary about it.
It's probably too early to assume.
That peak season will look like it has in the last couple of years. The consumer is still in pretty good shape. I mean financially inflation has taken a bite we realize that but the starting point before that inflation and that impact with savings rates were higher overall consumer debt was lower.
In general they are still active participants at the moment in the economy that you, let fuel stay where it is for much longer you'll let inflation continue to leak and get north you're live in the double digits for a very long at all it changes behavior and we have to be cognizant of that the good news is let's say all of that plays out and it's it's more negative than we think this portfolio is built for that.
That's exactly why we have such a defensive position right now that we think it's the right time to be built out just just like we are and we have logistics now positioned to play a bigger and better role in the back half and moving forward.
Again as I look forward.
I'm fairly excited about what I see.
Alright, I'll give it to one and John Congratulations we wish you all the best in retirement.
Thank you Mike.
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 I just wanted to first thank everybody for joining us today I know theres a lot of calls at the moment going on at the same time.
And although the quarter had some noise in it I believe the takeaway is that the story is intact. We're excited about the durability of the portfolio. It's defensive nature. The diversity that it represents across multiple different product offerings in the pipeline is strong and our core offering of dedicated and we look forward to being able to execute on.
That strategy as we go forward, we're going to focus on execution moving forward.
Although I've told the team that we're going to hold our heads high relative to the quarter, we're going to hold our expectations higher.
And lastly, although I appreciate many of you.
Congratulating John for his retirement I, just want to clarify if his intention to retire as we've now started a nationwide executive search.
For John's replacement and John has been more than gracious.
After 33 years of the organization to further commit to stay with us through this transition. So he will be a partner in this process and I am excited for the opportunity both for John and for Warner to be able to find the right person to be able to replace them.
So with that those are my closing remarks, I want to thank you once again.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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