Q3 2022 Werner Enterprises Inc Earnings Call
Good afternoon, and welcome to the Warner Enterprises third quarter 2022 earnings conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two.
Please note this event is being recorded.
I would now like to turn the call over to Chris Neil Waters, Senior Vice President of pricing and strategic planning. Please go ahead.
Earlier. This afternoon, we issued our earnings release with our third quarter results. The release, along with a slide presentation are available in the investors section of our website at Warner Dot Com.
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. Additionally.
Additionally, 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, Chris and good afternoon.
Despite rising macroeconomic headwinds I am pleased to report that we achieved year over year growth in our quarterly adjusted earnings per share for the ninth consecutive quarter.
Our large and resilient dedicated fleet performed very well.
While we experienced moderating performance in one way truckload logistics and our driving school network given more challenging operating conditions third quarter produced our third highest ever adjusted earnings per share in a quarter in our history.
I'd like to sincerely, thank our talented Warner team for their meaningful contributions to our performance and also welcome the elite driving and non driving professionals of the Baylor trucking team to our Warner family. As a reminder, we acquired baler on October one.
Now, let's move to slide four during the quarter. We added 180 trucks in TTS with most of the increase in dedicated just after quarter end, we added 200 high performing Baylor trucks and professional drivers in our one way truckload fleet.
In light of the softening freight market and including the acquired trucks, we expect our fleet count to be up 100, or 200 trucks in the fourth quarter peak.
Peak season freight opportunities in one way truckload and logistics are more subdued this fourth quarter compared to a record freight market during peak in the fourth quarter a year ago.
While inflationary cost pressures continue to be challenging, particularly for labor and equipment maintenance and insurance, we have begun to see some easing in the competitive driver recruiting and retention markets. In addition, within the consumer staples vertical shoppers are increasingly trading down for value.
By design nearly three quarters of our revenues are and necessity based retail and food and beverage with our freight weighted to winning customers that ship recurring and repeatable consumer staples, let's.
Let's move to slide five for a summary of our financial highlights.
For third quarter revenues increased 18% to $828 million.
Adjusted operating income increased 8% to $79 5 million and adjusted EPS increased 14% to <unk> 90 per share.
Dedicated into the quarter with 50, 430 trucks, adding 110 during the quarter and 310 year over year.
Dedicated continues to experience strong demand from the majority of our long term customers and the pipeline of new opportunities remains strong.
At quarter end, one way truckload had 30 150 trucks, plus 70 for the quarter and up 50 year over year.
A year ago, a bottleneck supply chain and three rounds of stimulus checks produced peak season shipping that started earlier than normal in August of 2021.
In the current freight market there are far fewer project and surge freight opportunities in one way truckload and logistics Warner logistics to achieve lower operating income in third quarter compared to a very strong performance in second quarter due to fewer premium pop up freight opportunities intermodal customer end market challenges and softening demand and startup cost and final mile.
It remains difficult to obtain new trucks and trailers, our deliveries of new trucks continued to show improvement during the third quarter.
Finally, much lower spot freight rates record cost inflation and rapidly rising interest rates are quickly eroding small carrier cash flow.
Strong used truck pricing softened in the third quarter due to the severe challenges facing small carriers.
Our equipment gains in third quarter were comparable to second quarter as we sold more trucks at a lower average gain for drug and we sold a similar number of trailers now I'd like to turn the call over to John to discuss our financial results in more detail John .
Thank you Derek beginning on slide seven third quarter revenues increased $125 million year over year and declined by $9 million sequentially revenues grew 18% driven by 4% more trucks, 5% higher revenue per truck, a $50 million increase in fuel surcharges and $29 million of logistics.
Revenue growth.
Adjusted operating income increased 8% or $5 6 million.
For adjusted operating income by segment TTS grew $11 million logistics declined $2 million in corporate and other which includes our driving schools declined $3 8 million.
The year over year decrease was due to substantial growth in our driver training school locations and temporary issues affecting two school locations this quarter.
Here on slide eight are the results for TTS.
TTS revenues increased 18% due to 4% more trucks, 8% higher rates higher fuel surcharges, partially offset by 3% lower miles per truck due to a 3% shorter loaded length of haul and a softer freight market.
The TTS adjusted operating ratio net of fuel was $85. One a 90 basis point improvement year over year, and 150 basis point improvement sequentially.
Now, let's move ahead to TTS fleet metrics for dedicated and one way truckload on slide nine.
Dedicated revenues net of fuel increased 16% average trucks increased 6% revenue per truck per week increased nine 2% one.
One way truckload revenues net of fuel declined slightly as average trucks increased 1% rate per mile increased nearly 3% and miles per truck declined 4% the year over year increase in driver pay per company mile for the TTS fleet increased 8% consistent with the 8% increase in TTS revenues per total.
Myles.
The average fleet age of our truck fleet held flat sequentially and increased two tenths of a year compared to third quarter a year ago opt.
Operating a slightly older fleet than we would like in an inflationary market increases our supplies and maintenance costs, which were up 19% year over year.
On Slide 10, let me provide an update on our durable and resilient dedicated fleet and.
In dedicated we provide trucks trailers and drivers exclusively for specific customers typically for a retail distribution center or manufacturing plant.
<unk> is one of the four largest dedicated fleets in the U S.
Warner dedicated serves customers with extremely high service and safety requirements typically executing shorter length of haul shipments in local and regional markets. The superior consistency and reliability of our dedicated on time service provides our customers with high predictability for their inventory to help them avoid out of stocks surprises for there.
Customers.
Our dedicated fleet has steadily grown over the last 10 years with a customer retention rate of over 95%.
Four of our five largest customers have been in our top five for the last 10 years, highlighting the long term relationship nature of Warner dedicated.
Nearly two thirds of our dedicated business is in retail and two thirds of that business is with discount and dollar store retailers.
Historically, these discount retail customers perform much better than their retail competitors and slower growth economies when shoppers have less discretionary income to spend and as they look to trade down for value to get the most for their money.
Another one sixth of our dedicated revenues or with food and beverage companies. It's shipped consumable staples with high on time service requirements, historically food soft drinks and alcohol products are much more recession proof than discretionary products are.
Our dedicated business is more stable and predictable because of the high service requirements and relatively consistent freight volumes dedicated revenue per truck has less variability in this metric has increased seven of the last eight years.
As a result of these factors Werner dedicated operates with more attractive and less variable operating margins in good and bad economies. During the last trucking freight recession in 2019 compared to 2018, our dedicated revenue per truck per week growth remained positive.
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.
Moving to Werner logistics on slide 11, and third quarter logistics revenues grew 18% compared to 44% growth in second quarter.
Truckload logistics revenues increased 4% driven by a 6% increase in shipments partially offset by a 3% decrease in revenues per shipment.
As a result of the softening freight market premium priced pop up lows declined 50% year over year and 37% sequentially at.
At the same time, our domestic power only solution continues to gain traction and achieved revenue growth of 118% year over year and 13% sequentially.
Contract loads increased 21% year over year, and 17% sequentially year over year transactional loads were up 5% while revenue per load declined 8% due principally to the reduction in pop up transactional volume.
The decline in pop up business is expected to have a larger impact on logistics revenues and operating income in fourth quarter compared to third quarter.
Intermodal revenues grew 10% supported by a 37% increase in revenues per shipment offset by a 23% decline in shipments declines at customer awarded business and lower volumes with existing customers caused the decrease.
Final mile revenues increased $21 million slowing demand for discretionary products and startup costs for new business implementation weighed on our final mile operating income sequentially.
Logistics produced adjusted operating income of $5 6 million down $2 million year over year, and $7 4 million sequentially.
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 over the last five years compared to the previous five years.
Year to date net capex is $254 million.
On slide 13 is our capital allocation update our first priority for capital continues to be reinvesting in our fleet.
During third quarter, we purchased 215000 shares for $8 3 million, we remain committed to maintaining a strong and flexible financial position and ended the quarter with a net debt to EBITDA ratio of <unk> seven times and.
With these freight markets with a superior driver base Ned is integrated seamlessly with our existing final mile network to produce a compelling home delivery model that is resonating with our customers. We are beginning to grow with new dedicated final mile business with both existing customers and new customers alike.
And we are extremely proud and excited to bring the 76 year history of impeccable service and safety of Baylor trucking to Warner.
Baylor met all our strategic touch points.
Great service outstanding drivers and associates similar company cultures, and an experienced leadership team that we wanted to retain.
Baylor brings additional freight diversity with its many years of experience in customer base in the specialized markets of pharmaceuticals, and expedited deliveries one month, and we're already identifying and implementing opportunities to make Warner and Baylor better together.
We have strengthened and further refined our acquisition process from qualifying and researching acquisition candidates to quickly integrating the company with Warner realized synergies, we will continue to carefully search and remain disciplined to identify additive acquisitions in truckload and logistics that make us better and are accretive to earnings.
Now on slide 16, I wanted to spend some time on our ESG developments in September we issued our CSR update report to show our progress for our ESG goals and initiatives. The report is available at Warner Dot Com in the investors section under ESG.
We announced the pilot project with Kodiak Robotics to test our autonomous truck technology, we signed a letter of intent to purchase up to 500 come in 15 liter hydrogen engines when they become commercially available.
During the quarter, we finalized an agreement with remora to install and test the de carbonization sell on a Warner truck.
And to strengthen and better formalized our ESG data and reporting we subscribed to a salesforce, where kiva tech solution.
Now, let's move ahead to slide 17, and a review of our performance compared to our 2022 guidance.
Year to date, our TTS truck fleet increased 3% primarily in dedicated with the Baylor acquisition of 200 trucks on October <unk>.
This raises our year to date truck growth to 5% include.
Including the acquired trucks, we expect our end of year truck count to be 100 to 200 trucks higher than the 80 580 at the end of the third quarter. Therefore, we anticipate our full year truck growth will be in the range of 3% to 5%.
Net capital expenditures for the first nine months were $254 million, we narrowed our guidance range for full year net capex to a range of $300 million to $325 million.
Dedicated revenue per truck per week increased eight 6% year to date, resulting from higher customer rates to offset inflationary pressures.
For fourth quarter, we expect this metric will grow in the range of 6% to 8%, noting we have more difficult comps in fourth quarter.
One way truckload revenue per total mile for third quarter increased two 5% as we lap the ECM acquisition in July last year for.
For fourth quarter, we expect our one way truckload revenue per total mile to be in a range of negative 3% to flat compared to fourth quarter a year ago.
This expected range is due to moderating one way freight market and difficult comps with much fewer premium pricing opportunities in fourth quarter. This year compared to the same period a year ago.
Our income tax rate in third quarter and year to date was 24, 3%.
For the full year, we expect to be in a range of 24 to 24, 5% during the fourth quarter. We expect the average age of our truck and trailer fleet at year end to be two three years and five years respectively.
One way truckload freight demand moderated further from second quarter to third quarter and this trend has continued into October .
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 are expecting a subdued peak season in fourth quarter compared to a very strong peak season in fourth quarter a year ago.
This means that projects surge in premium transactional pricing opportunities are much more limited this peak season.
We expected industry truckload freight demand continues to moderate more for discretionary goods and less for consumer staples.
Pressure on small truckload carriers continues to intensify with lower spot rates inflationary cost increases with older equipment high fuel prices and rising interest rates.
Pricing for industry used trucks continues to use resulting in lower gains per truck.
Inflationary cost pressures for labor equipment, and maintenance are likely to continue.
Load capacity remains constrained as new truck build challenges continue and the driver market remains under control.
FMC as a carrier registration and D. Activation data has shown net activations for 19 of the last 24 weeks.
Lastly, I wanted to provide an update on our CFO transition plan that we discussed during our second quarter call.
John remains fully engaged with his responsibilities and our search process is progressing well we have several strong candidates. We are considering and we will provide an update when appropriate.
We are confident in our positioning with the stability of our dedicated and one way truckload freight base and our logistics segment. The proven resilience of our durable business model, our strong driver and non driver associate team and the superior value, we provide to our customers 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.
To ask a question you May press Star then one on your telephone keypad.
Youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
Our first question is from Bert <unk> with Stifel. Please go ahead.
Hey, good afternoon, and thanks for the time.
Afternoon Bert.
Derek maybe first question for you we've heard a lot that's earning season about smaller carriers and the inevitable exits, but we haven't really seen spot rates rebound yet.
Indicate those exits are probably not happening fast enough.
How do you think the next six months play out and what's your viewpoint on whether or not new order activity will ultimately resume its start helping freight despite some of the concerns on the inventory side.
Yes, so great question.
First off.
Ill point, you back to some of the comments in the opening remarks with 19 out of the last 24 weeks, we have seen net D activations, meaning more companies.
Turning to <unk> number versus new registrants coming onboard.
More importantly, I'd say over the last four weeks, we've seen a very sudden and noticeable increase in the quantity of those the activations, especially at the truck count level. So youre seeing 3500, or 4000 trucks, a week kind of net coming out of the market and so we think that that is really starting to gain momentum. There is also two prime.
Larry months of the year, where every year, there's always a big uptick in it and one is June one is December and so as we look into the fourth quarter and you think about the the nearly unanimous commentary on a muted peak season with the backdrop of biofuel.
Insurance high labor and.
And rising interest rates I think youre going to see in.
An increase that will that will.
Kind of accelerate the process thats already underway, it's hard to exactly predict when we think that that.
Reaches equilibrium, but if you look back over the last several cycles in a row, we look back four or five cycles and you see kind of a trend line.
That spot from peak to trough is call it 15% to 17 months and we're kind of at that time now as it relates to what we're seeing in the market. So I think we're close to bottom if not at bottom currently.
And that's only going to exacerbate the problem because it's clearly below many peoples operating costs.
And the last comment I guess I would make is in conversations I've had across fuel networks in America.
There are certainly seeing a rise in delinquencies.
And when it starts showing up at the fuel pump level, which is something obviously you have to have to run that next load. It's real and I think that is only going to grow as we go forward as well.
Yes, that's super helpful commentary, there, thanks, and maybe just a follow up more relevant to your business.
Dedicated seems to be holding up really well despite all of the commentary around softening in freight what.
What do you think is the bear case for dedicated.
Do you see sort of revenue per truck per week trend.
And more on the flattish instead of growing and then volumes soften I know thats not what youre guiding to I'm. Just curious what you think sort of if things went poorly how with dedicated holdup.
Yes, I mean again looking back at a couple of prior cycles.
And really looking at the last eight years I mean dedicated based on the type of business, we do how difficult it is to accomplish that.
A defensible it has because of its complexity, we've seen an environment, where the type of customers. We work with that are winning in their space continuing to grow even during recessionary times, they need those fleets and so they've been supportive of.
The inflationary pressures that are out there I'm not guiding that we're going to see.
Major increases to use your question or to frame. It in the terms of your question Bear case.
We slow the growth in dedicated and we become more prudent and more picky on what we what we what gets through.
And you don't see the momentum perhaps on truck growth that you've seen in recent years.
But I think from a overall profile and how it runs.
<unk>.
The ability and dedicated to have those one on one relationships with long term customers with four out of the top five being with us for greater than 10 years, we've been we've been through some cycles together and Theres history, There on trust and we'll work with them diligently to.
To deliver the high service expectations, they have and as you started the question I'll just reiterate your REIT dedicated has performed very well and continues to perform very well our expectation is that it will continue to be.
The core of this portfolio as we go forward and we think that positions us well during this term.
Thanks Darren.
The next question is from Brian <unk> with Jpmorgan. Please go ahead.
Hi afternoon, Thanks for taking the question maybe.
Maybe a strategic one for you Derrick just to begin to market it season, and Thats cycle coming up I think a couple of quarters ago. You mentioned about this these partnerships you're looking to do longer term maybe in a third tier between one way and dedicated can you give us an update on that in terms of how those are progressing any of this year and then what are your expectations.
Excuse me, we expectations are for next year as well.
Yeah. So we've been working on this for several years. It wasn't just a couple of quarter initiative Youre right. We brought it up recently.
I would tell you is progressing nicely. If you look at our dedicated business by and large in its entirety, it's kind of a multi year longer term relationship with the stickier characteristics et cetera on the one way side.
We're up to approximately a quarter of our one way business is now tied up into kind of LTA is our long term agreements.
With a variety of different mechanisms and guardrails put in place around those those are again, our alignment with strategic customers that were <unk>.
Believe we have long term futures with and they believe the same.
We will continue to fulfill our into those bargains, we will expect that they do the same and have conversations if there's variances.
But I am pretty.
Excited to be Frank going into what is clearly a slowing economy, because we haven't been set up like that previously we haven't had this percentage of our fleet of 63% now in dedicated in prior turns we haven't had.
The amount of our one way fleet is engineered as it is today and we certainly haven't had.
Key agreements with key customers winning in their verticals that add up to 25% roughly of that entire one way network. So.
It's still going to be a tougher time as we look forward. We know the economy is slowing and there is some pressure out there on inventory levels and other items.
But I like our positioning to get through this and come out the other end even stronger for it.
Great. Thanks for the context, there Jon maybe a quick follow up with a look at the fourth quarter typically seasonally stronger obviously not the case this year for all the comments that you mentioned I wanted to see if you can give us some context on how to think about this quarterly progression relative to seasonality and if.
Any sort of gains.
In there as well or if that's going to tail off because it looks like expectations might be a little bit too high given all what you said here today.
Thank you.
Yes, Brian .
Typically third to fourth quarter, there is an improvement in earnings that occurs.
Last year, there was a very sizable increase it was up 43% from third to fourth quarter, because we had a significant number of projects Serge and special.
<unk> opportunities that occurred during the quarter last year, and it's a very subdued more muted peak season. This year, we expect some peak season opportunities, but not nearly at the level that we saw last year, we expect premium pricing opportunities to be down 60% to 70% in port.
Quarter compared to where they were a year ago. So as a result, we're not expecting a significant.
Improvement from third to fourth quarter because of that environment, but the strength.
Our dedicated business should should.
<unk> help us there.
It's too difficult to predict from a guidance standpoint on on how it will trend, but we don't expect a typical increase from third to fourth quarter.
Okay. Thank you very much for your time.
Thanks, Brian .
The next question is from Jack Atkins with Stephens. Please go ahead.
Okay, great. Thanks for taking my questions.
I guess Dara going back to your earlier comments around.
The longer term.
Nature of a lot of your business, whether it's dedicated or some of these longer term commitments.
How do you think about being able to get inflationary cost increases through with that do you have mechanisms in those contracts to be able to do that.
Because I would imagine over the next.
Several quarters, its going to be pretty tough from a cost perspective.
Yes, clearly Jack it's going to be there will be cost pressures as we go through the next several quarters. We know that inflation is kind of something that every company in America is dealing with up and down the P&L.
We won't.
We won't be sheltered from some of those pressures.
Our goal is to work with our customers, which we are already doing in dedicated and have seen good responsiveness from them.
Around the reality that in order to deliver the kind of service we do.
And at the levels that we delivered.
That we need their support.
They've signed up for that through prior trends, we expected to have similar consistency through this one.
And be able to offset those pressures on one way, it's a little different but there is some there is some tailwind mixed in with all of this.
Other news Mexico, we are seeing some resilience on our Mexico, right now and some growth in that Mexico Cross border business.
Its more productive longer length of haul.
Opportunities that allow us to gain back some things.
That maybe doesn't always come through right.
We are increasing the percentage of our fleet that is operating in a team environment. We always do that this time of year going into peak, but we're doing that and looking to hold that as it relates to an offset to production.
Continue to work with our customers and we're seeing some de congestion.
As they get more normalized in their operation that we hope to to be able to leverage in some some help on the P&L from a production standpoint, as well so theres going to be puts and takes it's going to be difficult.
We are very confident.
That will be well within the ranges, we have been guiding to relative to overall margins certainly one way, we will have more pressure on it and dedicated and.
And it is going to be something we just kind of labor through customer by customer agreement by agreement.
And we're going to be prudent and rational about the size of the fleet I mean, I should point that out as well.
Know what the market that we're going into that it is not a time that youre going to see us leaning in heavy on truck growth and instead, we're going to be very prudent on who we do business with and under what terms.
Okay got it.
For that and I guess, maybe John a question for you on.
On the issues you guys had with the driver school than up in the third quarter are those issues behind you can maybe give a little bit more color on exactly what exactly what sort of the challenge there and.
We're just kind of appreciate some additional color there. Thank you.
Okay. Thanks, Jack Yeah on previous calls we've talked about the investments that we've made in facilities and personnel and equipment at the driving schools. If you remember back to the end of 2020, we had 13 schools and by the time, we got to the end of first quarter 'twenty. Two we were up to 22 schools.
We felt like we needed to vertically integrate our school network to help with a very very difficult driver market and so we accomplish that our driver training school team did a really great job of establishing the new schools to produce high quality driver training.
In markets that are targeted to expand our capacity so the right geography.
Our school network is really one of the Crown jewels at Warner We're really proud of what they've achieved during the first typically 12 to 18 months of developing a new school location theyre typically not profitable and they gradually improve their financial results over time.
Lastly, I would say we had a couple of school locations. This quarter that had some temporary issues that we're working through about a penny a share impact those are nonrecurring and don't expect.
While occur going forward.
Okay, great. Thank you Matt Thompson.
Only thing I'd add to that it's to a much lesser extent, but we did have a.
Totaled five schools impacted for days not weeks, so it's not a major issue, but nonetheless impacted in the quarter as it related to hurricane Ian.
Okay, Okay that makes sense as well Eric.
Derek John Thank you.
Thank you Jack.
It gives me. The next question is from Scott Group with Wolfe Research. Please go ahead.
Hey, Thanks afternoon.
Just wanted to clarify any any commentary around gains for Q4, and then Derek your comments about capacity exiting the market at any numbers you can share on the brokerage side about.
X number of carriers in the broker network in Q2, and now it's down to X number in Q3 or anything like that.
Yes.
I'll start on the gain side gains or they are clearly moderating but at the same time OEM deliveries are starting to arrive with a little more consistency.
So we're not giving a game guidance for Q4, but I think directionally, what you will see us.
The opportunity for us to perhaps have a slightly higher volume with.
With slightly lower gains.
That may occur.
Approximate about the run rate, we've been at and that would probably be best case the.
The OEM thing is way too much to bet on just at this point I cant commit that we're going to see all of those trucks arrive.
And so therefore I can't commit to a gain number so but I can tell you that.
The process is still functioning well, we're still moving equipment as we receive and were still have buyers that are interested and available.
The reality is we get this new equipment and is it gives us an opportunity on the maintenance line to start to get the fleet operating both from an uptime perspective, but also just overall maintenance costs by getting the fleet over the next several quarters refreshed.
So.
That would be my thoughts on gains.
Got I apologize the second part of the question you were just talking about capacity.
Yes.
I remember.
Yes, so on the brokerage count I mean, it's a tough that's a tough metric to crack for us because the combination of the growth we're seeing in power only as well as the overall strat.
A strategy that we're taking within our carrier network, we're adding carriers all the time and so yes. We can we can we can see carriers that perhaps we are in the network that now or not.
Aggregate numbers are still growing because of the level of recruitment that we're putting into setting ourself up for long term I mean, I do believe that regardless of where we're at with a subdued fourth quarter. It's my belief that this cycle is shorter in duration and less severe than what we've seen in others and so we want to be prepared and ready to coming out the other end.
With the.
The ground running.
Okay, and then just one big picture question now in a typical downturn in trucking, we don't see much cost inflation. It feels like we will see cost continued cost inflation into next year. So is there just a risk that from.
If costs are up and rates are down and it's just it ends up being just more of a severe correction in margin than we typically see or is that just too negative of a.
Outcome.
Well I think it's a matter of perspective right. So from my perspective.
Especially at the small carrier level, you've got a larger swath of the normal who purchased equipment at higher costs.
Than any time in history, who are faced with rising interest rates at a more rapid rate than any recent history for sure.
In a volatile fuel environment as a backdrop with the spot market that is 37% off its peak so for that population of folks.
It's not a great time to be a trucker and I think thats, where I have some confidence that this correction happens more rapidly now in a large carrier level will still have inflationary pressures and we're still going to try to manage cost out of the system to help offset them.
As well as work with our customers, especially in these longer term relationships, which is the bulk of our asset portfolio and I think that the outcome of all of that on a net basis as we come out the other end looking better stronger and with the potential.
Deeper entrenched relationships with our customers and within our network. So I'm not trying to make lemonade out of women's but I am trying to do to express that.
This turn is an opportunity for high performing fleets to really distance himself further and that is certainly my expectation here.
That's helpful perspective, Thank you Derek Thank you Scott.
The next question is from Todd Fowler with Keybanc capital markets. Please go ahead.
Great. Thanks, and good evening, Hi, Darren Hi, John .
John how are you.
Well Derek Thanks, Derek maybe if you could talk philosophically, how you plan to address contract renewals and one way truckload.
I don't know if you want to share a range because there is many constituents on the call, but in this environment, where it feels like spot rates have come down significantly contract pricing has held in there.
At the same context, where spot rates may start to strengthen later in 'twenty. Three is how do you think about the bid season or what are some of the things you can share with us about the approach to bids as they can.
Come up with one way truckload.
Sure well I mean, the first word that comes to mind is discipline.
We're going to be very disciplined as we go through this process, we have a strong and robust dedicated pipeline and I've already intimated that it is not my goal for us to be leaning in the fleet growth. So with a strong pipeline of dedicated opportunities and not looking to grow the core fleet at least until we have better line of sight, how the <unk>.
Shaping up what it naturally means as the opportunity to move trucks through the bid process from one way to dedicated as appropriate now every time, we have those conversations with our one way customers, who we want to standby and stay committed to it.
The opportunity is afforded to us to do that at a rate that's reasonable we have choices and so it's all about keeping discipline through the bid process and then having the backdrop of 25% of that business tied up in a long term agreement gives us further resilience that perhaps others wouldn't have so works.
I feel like we're set up as well as we can be in this environment to perform well and continue to execute in that certainly the expectation I have as we move forward into the into the bid season in late Q4 and into early Q1.
Yeah, Okay. That's helpful context, and just for my follow up on the <unk>.
Logistics operating margins here in the third quarter, I, certainly understand the nuances with less transactional.
Opportunities, but I was a little bit surprised that kind of negative operating leverage that we saw and John I think you had some comments around your trends into the fourth quarter can you maybe just help us think about a normalized range for logistics margins and any ability to kind of correct. The margins here in the third quarter either into early 'twenty three if not sooner.
Sure I'll take that.
<unk>.
Let's start with this so Q2 was sort of an outsized quarter for us in logistics, we had a tremendous amount of projects and pop up type freight going on within logistics, specifically in our power only unit.
That was something that as that as those opportunities are difficult to do but can also be more lucrative from a margin perspective, as we got into Q3 and continuing into Q4, there's a far lesser degree of that type of work. So really so that's a big piece of it.
Next piece is the mix of transactional to contractual although transactional I'm sorry contractual business as a percent of total has continued to grow even sequentially from Q2 to Q3.
It is still not yet at the percentage, we'd like to see and so we're at 44% today contractual we'd like that number to be 50% or north of that we're on our way and have made several percentage points of gains in just one quarter, but that plays into it as well and then the last piece. That's mixed in there is honestly good news in the short term doesn't look so great in that.
It's about $1 million of startup cost and final mile because of the success of that dedicated final mile.
Product that we have and the number of implementations that we endured in third quarter that don't start that start to reap benefit in Q4, and then certainly going forward.
So theres a little bit of a lot of things.
That make up the answer but.
But globally, yes, we have line of sight to stabilizing that logistics unit.
Comp in Q4, I must point out is also tough.
<unk> of the peak and project opportunities that existed in Q4, a year ago that logistics played a major part in those will be much more subdued this year, but sequentially I feel better about our opportunity to make improvements Q3 to Q4 and logistics, but the comp year over year is a mountain is probably a hill to high based on the.
The lack of project opportunities.
Okay understood. Thanks, a lot Darren thanks, John Thanks, Todd.
The next question is from Jon Chapell with Evercore ISI. Please go ahead.
Thank you and good afternoon Derik.
Eric.
Question around capacity, leaving the market and the owner operators are struggling under insurance and fuel and buying equipment for incredibly high prices I think everyone. Just to expect that some of the older capacity into the market, but I'd have to expect that some thought relatively modern equipment at elevated prices as well.
There may be some discounts to be had I know, you're not leaning into fleet growth, but a bulk of opportunity in their newer equipment, but maybe in the hands of owners that are struggling a lot worse than some of the bigger players and thats an opportunity for you to get relative bargains or do you just stick with your Oems and the wait in the queue for that.
Our model has always been based on buying new under our spec with our set of with our setup.
The way our drivers expected like it to be to be delivered.
The benefits of the extended warranties and the way we operate our trucks to be Frank I Hope, what you've just outlined isn't something that presents itself as an opportunity because it puts pressure on our own used truck sales, we do expect to used trucks.
To moderate.
But still the opportunity for gains is there in the market is actually relatively stabilized as of late.
How long that holds up is yet to be determined but it really comes down to the question that all of us want to have better clarity on which is how quickly this capacity cleanse takes place.
I believe for the reasons previously stated it's going to happen a little more rapidly than people expect.
Okay.
My follow up might be a bit off the reservation a bit but you've done some transaction leaned into final mile. Obviously on the dedicated.
Where does intermodal.
With your portfolio there are a lot of cross selling opportunities as their scale to be had there it sounds like theres been some transactions in intermodal, where maybe there's some decent prices.
Does that put your portfolio longer term or is that an opportunity to really focus on what you do at scale.
We're committed to intermodal as we go forward and you're a student of the reality that that is one path by which we might be able to make up some ground our intermodal product today is.
It does perform well from.
From a customer perspective.
It has performed well from a growth.
Margin perspective, but it is a more difficult space right now the rails have had more than their share of disruptions in service interruptions and being a <unk>.
Smaller player out of the larger field, which is where we are today does put us at certain competitive disadvantages. So we're in the we're in the process right now of working through a longer term intermodal strategy.
I think it's fair to say that we've got to.
<unk>.
Get we get a gain share and relevancy in order to shore up some of the issues that we face as well as continue to grow our increase our operational efficiencies. We are growing our dray fleet and our percent of Gray continues to increase which helps our ability to deliver more efficiently.
But that is a challenge space not just for us for it but for everybody right now from a service perspective.
If you think about our portfolio and how retail oriented it is and how service oriented is.
Intermodal and the challenges that exist within that delivery mode and have existed now for for way too long.
As in can grow into at times with the kind of customer portfolio in the kind of mix of what we have but where it fits and where we can cross sell we certainly do.
Okay understandable thanks Derek.
<unk>.
The next question is from Ken I'll start with Bank of America. Please go ahead.
Hey, great Good afternoon, John and Derek and John Best of luck whenever whenever that day does come soon.
And in the past downturns to Eric I want to I know you were talking about this on an inflation driver inflation, but.
I think in the past we've seen drive our rates come down when rates came down is that just I mean deflation in spot rates does that ever reality, given what's in the backdrop now or no chance and then.
John you talked a bit about the earnings on a sequential basis, maybe can you talk about your thoughts on operating ratio.
Typically you have an improvement of about 200 basis points over the last couple of years.
Given the backdrop you talked about it is it is it possible to be flattish or or.
Or do you see continued improvement I guess, maybe if you can give us your high load thoughts on on the AOR.
Yes, I'll start on the driver question look taking.
Wages down in a market with unemployment as low as it is an inflationary pressures at the household level. What they are is going to be.
Very difficult if not impossible its certainly not part of our plans at this time there are opportunities as we continue to create better lifestyle jobs, often there is a compensation tradeoff that goes along with that as you get people home more often and more consistently and especially if you can find engineered opportunities to get people home daily.
But I think a better way to think about driver wages is the inflationary environment in the upwards slope that we've seen for so many quarters in a row have really started to moderate and we think the <unk>.
Opportunity.
Hold the line or towed the line there for a bit is in front of us in front of us. So we're going to continue to focus more heavily on the lifestyle side of the equation and the equipment side of the equation, our fleet has aged far less than many other fleets across the country, including many major trucking companies and so the desirability factors there.
Turned the corner.
On some turnover issues within the fleet in and as we create these better jobs.
The drive to driving the experiences are more sticky and they tend to stay.
So we think there is the better way to think about it is that the worst is behind US we think it moderates from here and.
And the opportunity as it relates to driver applications is certainly up for the very reasons, we've been talking about with capacity exiting.
Now within that opportunity, we have to be very selective and very careful about who we learnt through the door and we're going to continue to have our standards stay high and so it's just a matter of picking through a larger pile.
Applications.
Okay and Ken on the operating margin, we Didnt 85, one in TTS net of fuel in third quarter last year. We didn't 81 eight in the fourth quarter net of fuel I don't think that's that's very likely that that was a step.
All our performance a year ago with all the project and surge in premium pricing opportunities, we had last year.
My expectation is that 85 one.
Achievable to match that or slightly improve that from third to fourth quarter.
But on the logistics side.
The level of income we saw last year.
Was it was pretty strong in fourth quarter and I would think we will probably be closer to the level that we're at currently maybe slightly better in fourth quarter for logistics operating income than third but but.
Probably approach what we achieved last year.
That's real helpful.
I think talking to TTS, So that's real helpful and your thoughts there.
And Derik just on the 3% <unk> rate declined by 3% down to flat.
Do you think that's more stable than the market given your mix of business on the on the dedicated and your end user customers you talked about more as it is not as bad in the staples.
No.
I guess is there more stability there.
I think the biggest way to think about it is the lack of project and peak it has less to do with rate renewals at all a matter of fact, it's almost completely nothing to do with rate renewals and even.
And it's immaterial relative to spot.
It's literally the the comp issue year over year relative to the subdued peak this year.
Our core customers in our core agreements are holding up extremely well at this point.
We're going to continue to hold up in standby them from a service perspective.
And so it's just the lack of opportunity to put some framework around it it's our expectation that our.
Our peak.
Opportunity. This year is somewhere in the neighborhood of about 60% less than what it was a year ago. So that portion of that rate per mile that was specifically attributable to peak and project is about 60% lower Q4. This year versus Q4, a year ago. The other thing I'd point you to is that we do expect.
Dedicated revenue per truck per week year over year to still despite all of this backdrop, we've been talking about the largest portion of our fleet. It is still our expectation will be up 6% to 8%.
<unk> fourth quarter, this year versus a year ago.
Great. Thanks, Scott Thanks, guys. Thank.
Thank you.
The next question is from Ari Rosa with Credit Suisse. Please go ahead.
Hey, good afternoon, Derrick so I.
Kind of wanted to stay on that theme. So you had mentioned you think from a cost inflation standpoint.
The worst of the conditions are kind of behind you and you just mentioned dedicated pricing up 6% to 8%, which I think is still pretty robust maybe lagged inflation a little bit but.
It's still pretty robust typically in a down cycle. We do see earnings turned negative here you are still posting double digit adjusted earnings growth do we have to go through a period do you think where we see earnings turned negative and maybe even meaningfully negative.
Before we start to see that tick up and if so kind of what's the mechanism by which that happens is it.
Higher cost continued cost pressure or do rates come down or kind of whats. Your whats your view on kind of the puts and takes there of how that plays out.
So first I'll start with this.
It's the industry rate, that's going to be more relevant on windows thing turns not just one company and I think the industry is certainly going to see some negative negative earnings turns, especially the more exposed they are to one way.
Furthermore, more than you are exposed to spot and so that's already happening and where.
90% of this industry is made up of carriers with 20 trucks or less and they are negative as we speak and not just year over year, but just flat negative in many cases.
So as that washout continues I think our job is to hold the line and continue to allow dedicated to perform the way it does and to continue to embrace what we have in that in that portion of our portfolio and hold the line in one way.
And guard against.
That big negative turn that Youre talking about if you go back to 18 to 19, we were up 1% year over year at a time that most everybody was down.
If you go back further than that.
It was it was a case, where our portfolio is just fundamentally different I'm not guiding that there won't be an EPS decline in 'twenty two 'twenty three versus 22, what I am saying is the traditional decline. If you were to look back over four or five cycles is absolutely not in the cards. This time around at least from our perspective, our portfolio is different our defensibility.
<unk> is stronger our long term agreements are more robust.
And dedicated is simply a much larger portion of the pie.
So so we will we will continue to chip away at it.
Not going to guide to 23, especially not on the Q3 call.
But at this point.
There's just too much uncertainty to know to be able to give you much more color than that.
No no thats terrific color and certainly impressed with the results so far.
The resiliency of dedicated and it's just been impressive to watch just for a quick follow up on the M&A point, you mentioned intermodal is there anything outside of intermodal.
Seen some of your truckload peers.
Looking at LCL looking at maybe expanding in logistics other areas or do you think it's mostly asset base that you guys are really thinking about us as kind of an M&A opportunity.
Yeah, I would start by saying there is it's not mostly anything that's important to note we are.
We really believe I really believe that to do M&A appropriately at least within our network and our business. We've got to be eyes wide open to all opportunities. So if you look at the three we've done so far on paper, they look very different but they all fit a piece of the puzzle that matter then was important to us.
Net the ECM acquisition really solidified the northeast region for us in a way that was uniquely capable of being done through acquisition NEDS was a dedicated final mile not just final mile but dedicated final mile provider that really fits hand in glove with our current dedicated offerings in our philosophical bend toward.
<unk> and longer term tougher to do relationship.
Type of freight and then balers pharmaceutical expedited sort of expert in their field and although it isn't a large acquisition.
By any means it's still brings a skill set and management team our leadership philosophy and of this building that I think makes us better as we look forward, we're going to have that kind of same broad Matt as we think about things and.
I didn't bring up intermodal I answered a question about intermodal. So I don't want anybody to believe that thats, some heavy focus or any kind of.
Narrow band that we're looking at as it relates to acquisitions logistics is certainly in play.
As it relates to that and as our other opportunities.
And lastly, I just want to remind everyone that our first and foremost objective is to grow this thing organically to invest in ourselves invest in the quality men and women across Warner enterprises, because I believe.
That's where our best return will be found but when we find the right opportunity that we think makes us better.
Going to be so proud as to pass up on it.
That's great color thanks for the context thank.
Thank you.
And the last question will be from Amit Mehrotra with Deutsche Bank. Please go ahead.
Thanks.
Hey, John .
I wanted to ask on the one way side, if you've seen any.
Shipper inflections in terms of bid compliance or the amount of volume, they're tendering relative to the contracts I'm just trying to sniff out if theres anything going on either because of lower demand or.
The spot market opportunities, maybe move that any anything to.
Note there on that Paul.
Yes sure.
So first off we have really sophisticated tools to manage.
Customer commitments.
<unk> customer compliance and it's difficult it's easy to measure.
Harder to understand the wide and so I say that because clearly there is an economic backdrop that is causing shippers volumes to decrease the.
The combined impact of in some cases excess inventory and in other cases, just simply consumer sentiment.
But what we try to manage is when it's clearly greater than the impact of those two items and so when that happens we have mechanisms to address it we bring it to their attention we have dialogues about it and the response has been pretty positive.
I would tell you that the majority of the folks we work with we've chosen to work with over a long history because of their commitment integrity and approach to how they manage their business and occasionally somewhere in People's networks.
Somebody might.
A little Australia of that and when that happens we have to have those conversations. So we will continue to manage it I feel good about our ability to catch it if it's happening I'm very comfortable with our ability to.
Have that that conversation when it needs to be had and our team will continue to address and resolve them as we see them I think youre going to see that going forward. That's always part of the process. It's always part of the cycle turn and our job is to help manage it.
Relative to two others.
And make sure our customers understand just like we stood by them during COVID-19 and our spot market at its peak in one way was still low low double digits, which is virtually.
No exposure.
It's showing our commitment to them I will have every.
I have every confidence that we will voice.
Converse on that with any customer that we feel is.
Behaving differently than that now that the market may have loosened zone.
Okay, and then just for my follow up.
You guys put out this.
Bookended range for margins in TTS I think you even raised the bottom end of it last year I forget what it always was 13% to 17 on 2014 to 17 I forget what it was maybe you can remind us but as we think about 2023 and the environment. It sounds like you still feel very comfortable.
That youre going to operate within that range next year in a potential downturn I'm just wondering.
With the freight selection opportunities may be.
You guys were at the high end last year about range, even exceed it I think in the quarter or so do you think kind of the low end of that range makes more sense not necessarily due to price, but just the freight selection and surge opportunities.
So our range is 12% to 17%, we stress tested that range, many ways and even against economic backdrops far worse than the one we're in right now and we are comfortable sticking with that range and comfortable with our ability to perform within that range.
It would not be my expectation to find us at the low end of that range.
In the ensuing quarters.
But certainly for the year.
It's my belief that by the Middle of next year. This thing is corrected and we've started to enter into a period of equilibrium, if not tightening and that sets itself up well for the back half of 2003, and so for a yearly range.
The low end would not be something that I would be expecting.
Or accepting is probably a better word.
Q1, depending on how Q4 plays out obviously could be tougher, but even in that scenario, it's our belief, especially again.
I know I sound like a broken record, but I have to point you back to the strong execution long term history in and the longevity of the relationships and dedicated and the defensibility of what that freight looks like.
That will only increase and its importance and increase probably in its scale as we go through bid season because of the combination of a strong pipeline in dedicated with a a market going through its normal cycle change on one way lends itself to rather than growing simply migrating.
And I think you can expect more migration from one way to dedicated depending on how those bid season goes.
Okay. Thank you Dan I appreciate the thoughts.
You.
This concludes our question and answer session I will now turn the call over to Mr. Derek Leathers, who will provide closing comments. Please go ahead.
I just want to thank everybody for joining our call today and although we're entering a time of increasing uncertainty relative to the direction of the overall economy, our business model and our customer mix is designed to execute well at the macro level the industry dealt with the shifting logistics landscape and we faced cost challenges with our investments in schools, while at the same time.
Steady and durable dedicated business continued to perform as advertised we added to our portfolio and other pieces of the puzzle this quarter with the acquisition of the high performance team at Baylor and despite its relatively small size I'm super excited about the capabilities and industry verticals. It allows us to further develop our dedicated pipeline remains strong and are less asset intensive.
<unk> only offering continues to show promise as we go forward.
Activations of carriers are on the rise and capacity constraints remain lending confidence to our view that cycle duration will be shortened and less severe.
And while peak season, this year as underwhelmed, thus far it will only hasten the capacity correction that is already underway.
I remain confident in this team's ability to execute as we work through this correction and come out even stronger on the other side and finally and perhaps most importantly, I just want to thank the entire Warner team for their tireless dedication and commitment to excellence that makes me proud to be part of this team every day.
Thank you for listening and thank you for spending your time with us today.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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