Q4 2022 Werner Enterprises Inc Earnings Call

Speaker 1: Good afternoon and welcome to the Werner Enterprise's fourth quarter and annual 2022 Earnings Conference call. All participants will be in listen-only mode. Did you need assistance?

Speaker 2: please signal a conference specialist by pressing the star key followed by zero. The speakers for today will be Derek Leathers, Chairman, President and CEO , John Steele, CFO , and Chris Neal, Senior Vice President of Pricing and Strategic Planning. After today's presentation, there will 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 Neal. Please go ahead. Earlier today, we issued our earnings release with our fourth quarter and annual results.

Speaker 3: The release and supplemental presentation are available on the investor section of our website at Warner.com. Today's webcast is being recorded and will be available for replay later this evening. Please see the disclosure statement on slide 2 of the presentation, as well as the disclaimers in our earnings release related to forward-looking statements. Thank you for your time.

Speaker 4: Today's remarks contain forward-looking statements that may involve risks, uncertainties, and other factors that could cause actual results to differ materially.

Speaker 5: 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.

Speaker 6: A reconciliation of the most directly comparable GAAP measures is included in the tables attached to the earnings release and in the appendix of the slide presentation.

Speaker 7: Now I would like to turn the conference over to Derek.

Speaker 8: Thank you, Chris, and good afternoon. 2022 was another successful year at Warner. Revenues ex-fuel grew by double-digit percentages in both TTS and logistics. And we also set a new record for adjusted earnings per share. My sincere thanks go out to the talented Warner team who remain resolutely committed to our values.

Speaker 9: by providing superior safety and service to our customers. As we look back on the fourth quarter, freight in our large, dedicated fleet was steady and performed well. One-way truckload and logistics were challenged by a seasonally weaker than normal freight market in contrast to the very strong conditions a year ago.

Speaker 10: We expect that the 2023 freight market will be challenging in the first half, and then gradually begin to show improvement in the second half as capacity exits the market and retail inventory recess to normalize levels.

Speaker 11: Over the last several years, we intentionally built a powerful business model that performs well in both strong and challenging freight markets. Our large and durable dedicated fleet, our diversified one-way truckload fleet, and our growing logistics segment provide us with a resilient portfolio of complementary services and industry verticals. For more information, visit www.fema.gov

Speaker 12: This business model, coupled with our seasoned leadership team who averages 26 years of Warner experience, gives us confidence in our ability to weather any economic environment and positions Warner for success.

Speaker 13: Now, let's move to slide 3. Warner is one of the nation's five largest truckload carriers, safely delivering over three million miles each business day with an experienced and increasingly diverse workforce of professional drivers.

Speaker 14: During 2022, we are proud to achieve the lowest DOT preventable accident rate per million miles in the last 10 years, a testament to our continued focus on improving safety and service across our fleet.

Speaker 15: During the quarter, our strong balance sheet provided the flexibility to add two stellar companies to the Warner family.

Speaker 16: Premier Truckload Carrier Baylor Trucking and the Elite Freight Brokerage and Dedicated Carrier Reed TMS.

Speaker 17: Warner is a growing logistics provider with an annual revenue run rate exceeding 1 billion, with a large and growing base of over 70,000 qualified carriers and a pool of 30,000 trailers.

Speaker 18: This large trailer pool and our growing domestic and cross-border Mexico power-only capabilities provide Warner customers with additional solutions and flexibility to effectively manage their supply chain in rapidly changing market conditions.

Speaker 19: Let's move to slide 4 for a summary of our fourth quarter and full year financial highlights. In the fourth quarter, revenues increased 13% to $861 million.

Speaker 20: Adjusted EPS decreased 13% to $0.99.

Speaker 21: Adjusted TTS operating margin for the quarter was 15.8%. For the year, revenues increased 20% to $3.3 billion. Adjusted EPS rose 7% to a record $3.70.

Speaker 22: Adjusted TTS operating margin for the year was 15.1%.

Speaker 23: Dedicated freight demand in the fourth quarter was solid and steady. The normal seasonal freight spike for certain dedicated retail customers didn't occur this year, given the increasingly challenging macro environment and relatively muted consumer spending.

Speaker 24: Fourth quarter freight was seasonally soft and one-way truck load logistics with fewer project surge and peak opportunities compared to the record high levels a year ago.

Speaker 25: On a filler first we acquired Baylor, a high performing truck load carrier based in mylin indiana with 200 trucks.

Speaker 26: Baylor is a 75-year-old company without standing leadership, elite drivers, and impeccable customer service.

Speaker 27: The first week of November , we acquired Reed TMS logistics, a rapidly growing Tampa-based freight broker and dedicated carrier, with a skilled and knowledgeable leadership team.

Speaker 28: RETMS has a 26-year history of developing and expanding long-term customer relationships, supported by a large and growing carrier network, with two-thirds of their revenue coming from the stable food and beverage verticals, including a heavy focus on temperature-controlled

Speaker 29: We are very pleased to retain the strong management teams and talented associates of Baylor and Reed TMS.

Speaker 30: Both companies maintain culture similar to ours with an intense focus on superior safety and service.

Speaker 31: Our implementation team is rapidly integrating these businesses with ours to capitalize on the synergies and mutual learnings between our companies.

Speaker 32: Together, our durable dedicated fleet, which includes 63% of TTS trucks, and our growing logistics business, account for 69% of fourth quarter revenues and is expected to exceed 70% in 2023.

Next on slide six, I would like to discuss Warner Drive. Last August , we introduced Drive, which is the next evolution of our business strategy that delivers our future.

Drive incorporates sustainability, capital allocation, an outcome-oriented approach to operations, innovation, and a culture that supports and values our team members.

Our intentionally designed durable portfolio of asset and asset life solutions serves a diversified client base of industry leading customers with an emphasis on the transport of necessity based goods.

We relentlessly focus on our results with a company culture immersed in safety and service. Since 2019, we have received 27 unique customer carrier of the year awards.

Warner is committed to innovation through our investment in technology and our WarnerEdge cloud-based platform.

which is improving the experience of our customers, drivers, non-drivers, carriers, and suppliers.

Our core values of safety, service, and integrity are based on an unwavering commitment to inclusion, community, innovation, and leadership.

and we embrace ESG and specifically our impact on the environment through the continuous exploration and development of alternative fuels and equipment.

Executing on our aggressive carbon reduction plan and expanding partnerships through Warner Blue, our company-wide sustainability initiative.

on our aggressive carbon reduction plan and expanding partnerships through Warner Blue, our company-wide sustainability initiative. Next on slide 7 is our revenue snapshot.

For the year, revenues were $3.3 billion with 74% in TTS and 24% in logistics. Baylor and Reed TMS added $71 million of revenues to 4th quarter and the year.

Including these acquisitions, we forecast logistics revenues in 2023 will grow to over 30% of the total.

The recorders of our revenue base this past year came from retail and food and beverage, with customers winning in their verticals.

We intentionally focus on growing companies that ship recurring and repeatable consumer essential products who have rigorous on-time delivery requirements. We ended the quarter with 8,600 trucks, up 3% for the year or 260.

In the fourth quarter, we held our TTS fleet size flat to adapt to the changing freight market. We intend to limit TTS fleet growth until we see signs of freight improvement, which we expect in the second half of the year. Turning to slide 8 in the consolidated fourth quarter results.

Revenues grew 13% due to 5% growth in average trucks, 1% higher revenues per truck, a $41 million increase in fuel surcharges, and logistics revenues growth of $29 million, which includes 8 weeks of the acquired REIT TMS business.

A seasonally soft freight market in fourth quarter compared to a seasonally strong market a year ago was a significant headwind.

Despite this freight challenge, strong dedicated performance limited the adjusted operating income decline to 11%.

At this time, I would like to turn the presentation over to John who will discuss our segment results. John ? Thank you, Derek. On slide 9 are the fourth quarter TTS results.

TTS revenues increase 13% and adjusted operating income decreased 8%.

So, sequentially, TTS-adjusted operating income increased 9% quarter over quarter.

TTS adjusted operating margin declined 240 basis points year over year compared to last year's record fourth quarter operating margin.

Our adjusted operating expenses per mile net appeal increased 6.6% compared to our TTS rate per mile net appeal of 3.5%.

The largest per mile operating expense increases were supplies and maintenance at 18% and insurance and claims at 53%. While driver pay increased 4%.

During fourth quarter, we incurred $11 million higher insurance and claims expense, or an unusual charge of 13 cents a share and $8.5 million lower workers' compensation and salaries, wages, and benefits expense.

or an unusual benefit of 10 cents a share.

For insurance and claims, a limited number of prior year incidents have developed beyond what we had expected.

For workers' compensation, prior year claims are developing lower than what we previously experienced.

Over the longer term, we expect our accident per million miles performance will improve our insurance and claims experience.

While we can't ignore the increasing trend of nuclear, verdicts, and settlements, we expect our 2023 insurance acclaims expense to moderate from 2022.

In fourth quarter we sold more tractors and trailers at lower average gain per unit.

Gains and sales of revenue equipment were 22.5 million, and we had a gain on sale of property of 3.4 million.

As we expect small carriers to exit in greater numbers in 2023, we anticipate the used truck and trailer market will weaken.

We expect our gains on sales of equipment in 2023 will moderate from record highs in 2022.

For 2023, we expect annual equipment gains in the range of $30 to $50 million.

In an effort to partially offset the headwind of lower equipment gains in a more challenging freight market, we are implementing company-wide measures to reduce controllable expenses.

Now let's move to fourth quarter TTS fleet metrics for dedicated and one-way truck load on slide 10.

Dedicated revenues net of fuel increased 9%. Average trucks increased 4%. Revenue per truck increased 5%.

One-way truckload revenues net of fuel increased 2% as average trucks increased 7% from the baler acquisition.

miles per truck declined 5%, and rate per mile increased slightly despite far fewer peak and transactional pricing opportunities.

We expect one-way truckload miles per truck will flatten out on a year-over-year basis in 2023, and we expect a gradually improving pricing environment during the second half.

Moving to one of logistics on slide 11, in the fourth quarter, logistics revenues grew 15 percent due to eight weeks of read TMS offset by less peak and transactional freight opportunities.

Truckload logistics revenues, including read TMS, increase 20 percent, driven by a 34 percent increase in shipments, partially offset by an 11 percent decrease in revenues per shipment, caused by fewer premium pricing opportunities.

Despite the challenging freight market, logistics shipments excluding Reed TMS were flat year-over-year and down 5% sequentially.

Contract shipments increased 89% year-over-year and 62% sequentially with the addition of ReadTMS. kflaph.org

Transactional shipments were up 2%. Contractual mix versus transactional was 55% in fourth quarter.

Intermodal revenues declined 23%, supported by a 3% increase in revenues per shipment, offset by a 25% decline in shipments.

final mile revenues increased 14 million. In total, logistics achieved adjusted operating income of 8 million with a 3.8 percent adjusted operating margin, down 3.9 million year-over-year, and an improvement from third quarter of 2.4 million or an 80 basis point sequential increase.

Next on slide 12, let me spend a moment on our innovation.

Our IT team accomplished a great deal this past year as we continue to adapt to a dynamic supply chain through our enterprise-wide technology transformation. A few of the notable achievements include. We completed the first phase of our cloud first, cloud now implementation of mastery in December .

with a conversion of our Warner Truxlow logistics brokerage business to our EDGTMS platform. We successfully expanded the deployment of workday across human capital management and accounting applications.

We strengthened our data and system security with zero-trust security practices.

And we continue to invest in and pilot new technologies to reduce our carbon footprint, including hydrogen fuel cells and EVs.

We continued to live and build on our values in 2022. I'm on slide 13. As evidence of our commitment to safety, in 2022, we achieved the lowest DOT preventable accident rate per million miles in the last 10 years and the lowest work injury rate in the last 17 years. Over the last two years, we significantly strengthened identify and develop our

On slide 14, we continue to make progress and receive recognition on our ESG journey.

In 2022, we were recognized as the top company for women to work for by women in trucking.

a top food chain provider by Food Chain Digest, and a top green fleet by Heavy Duty Trucking.

We are focused on creating a safe and inclusive culture for our associates while operating efficiently to reduce our impact on the environment.

On slide 15, we ended the year at a strong financial position with net debt of $587 million and equity of over $1.4 billion. Only one-third of our debt is fixed rate and two-thirds is variable rate.

In December , we finalized a new $1.075 billion five-year unsecured syndicated credit facility with six banks to expand our credit capacity and extend most of our debt maturities out to 2027.

Following the acquisitions of Baylor and Reed TMS, our net debt to EBITDA ended the year at one within our long-term range goal of 0.5 to 1.

On slide 16 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 cap X resulted in significant free cash flow generation.

In 2022, we had net caffax of 318 million and generated free cash flow of 131 million. Turning to slide 17 in our capital allocation framework, our first capital priority continues to be reinvesting in our fleet. We are investing in the latest safety and equipment technology. We are investing in the latest safety and equipment technology.

and we are growing and modernizing our terminal and driver school network. In 2023, we expect to slightly lower the average age of our truck fleet.

Turning to acquisitions, we will remain disciplined in our approach by evaluating candidates against our strategic filters. In 2023, our focus is the integration, synergy implementation, and cross-selling opportunities for our recent acquisitions. We will also continue to enhance shareholder value and improve our business.

through dividends and share repurchases, while maintaining a strong and flexible financial position.

That concludes my remarks. I will now turn it back over to Dara.

Thank you, John . Moving to slide 18, here you see that over the last 18 months, we executed on four additive and accretive acquisitions, ECM, Neds, Baylor, and Reed TMS.

All four strengthened the durability of the Werner portfolio and expanded our capabilities. Our growing and diverse business provides additional solutions for the increasingly complex needs of our customers.

Today, we have been successfully integrating these companies into the Warner portfolio and our synergy implementation process is running ahead of schedule.

Next on slide 19 is a review of our performance compared to our 2022 guidance, as well as the introduction of our 2023 guidance metrics.

For the year, our truck fleet increased 3%, primarily undedicated. For 2023, we plan to keep the fleet flattish in the first half, with plans in the second half to grow primarily undedicated in the range of 1-4%. In 2023, we are planning net cap X of $350-400 million.

For revenue equipment, most of this capex is to refresh our existing fleet with a small share to fund fleet growth in the second half.

Dedicated revenue per truck increased 5% in the fourth quarter, as we had far fewer project and surge opportunities this year compared to last. For the year, dedicated revenue per truck increased 7.6%.

Noting the freight market outlook in tougher comps, in 2023 we expect dedicated revenue per truck to increase in a range of 0-3%. One-way truckload revenues per total mile for 4th quarter increased slightly, just above our guidance range. In the first half of 2023, in a challenging freight market with more difficult comps, we expect one-way rates to decline year-over-year in the range of 3-6%.

Our full year income tax rate was 24.4%. In 2023, we expect our tax rate to be in the range of 24 to 25%. The average age of our truck and trailer fleet in fourth quarter was 2.3 and 5.0 respectively. For 2023, with increased capex, we expect to slightly lower the age of our truck fleet. One-way truckload freight demand in January was softer than the strong freight market a year ago.

Over 60% of our trucks are in our durable dedicated fleet, and a third of that business is with large and successful discount retailers that are gaining share. As consumers are becoming more value-conscious for their household spending.

With the acquisition of Reed TMS, our mix of revenues increased for contractual food and beverage shipments, which complements the seasonality of our existing logistics business.

For our TTS segment, Spot Freight is less than 5% of our revenues. Small truck load carriers are being whipsawed by 35% lower spot rates while also dealing with much higher operating costs for drivers, equipment, fuel, maintenance, and capital.

As the year plays out and there is a large shortfall between spot rates and carrier operating costs, we expect carrier failures will increase. This trend has already started. FMCSA data shows that truck deactivations exceeded truck activations for every one of the last 19 weeks.

with net deactivations of 53,000 trucks over this period. We expect interest expense this year will be 20 million higher than last year due principally to the higher interest rates as well as maintaining a higher debt level.

We anticipate that OEM new truck and trailer production will show modest improvements in 2023.

Before opening up for Q&A, I want to give a brief update on two executive transitions. First, as of December 31, Marty Norland stepped down as COO to assume a new role focused on fostering and developing strong relationships with some of our largest customers.

Eric Downing became COO in January following his outstanding leadership of our dedicated fleet since 2016.

During the last seven years, Eric and his team grew our dedicated fleet by 50%, while nearly doubling revenue. I want to thank Marty for his continued hard work and loyalty at Warner, and I'm excited to work alongside Eric to grow our business.

Second, as you know, John Steele will be retiring as CFO and has been flexible with his end date as we continue our search for his successor. The search process is going well and we look forward to providing an update when appropriate.

With that, I'll 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 you're 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 you limit your questions to one question and one follow-up. This call will end at 5pm Central Standard Time following the company's closing remarks. Our first question is from Chris Weatherby with City Group. Please go ahead. Yeah, hey, thanks guys. Good afternoon. I guess I wanted to.

Start maybe on some thoughts around the sort of way to think about earnings power as we go into 2023. So I think you guys outlined both the gains as well as insurance, potentially providing, you know, somewhat meaningful of a headwind to EPS. And I want to maybe get a sense of how you think you can offset that with core results, obviously the dedicated business looks like it's more stable.

There are some headwinds as we start and go into the year. We wanted to be clear about them and that's why we included them in the opening remarks. When you think about the gain at the mid-range, it's a $40 million type headwind at the midpoint of the range. We know interest expense is going to be more significant.

At the same time, we've got the benefit of the integration that's ongoing with both READ and Baylor. Those integrations are going well. We feel good about that. We believe that the very successful trends that have been going on within our DOTAX and preventable frequency is going to lead to an opportunity to at least moderate insurance.

and then take some of the noise out of that line. We've also been pretty clear internally on the need for us to go out and not just look for synergies relative to the integration efforts but also around the building. And so we've launched an internal effort several months ago actually to prep for what we knew was coming.

and we're going to continue to chip away at trying to neutralize those headwinds. It's going to be a work in progress. We also obviously have pretty clearly signaled we think it's a year that's going to be made up of two hats. And the second half has opportunity for us to continue to improve those results. Lastly, I'll just tell you that one of the upsides, I know people don't like increased cap X ranges, but...

Maybe if I'll follow up, you guys have been helpful in terms of giving us some sense of the sequential earnings power of the company. This has been a unique fourth quarter with sort of less project business that we would normally have seen. Any thoughts on normal seasonality as you cross over into the first quarter, should we see the typical step down in earnings power that you normally see or would have potentially

of years driven by COVID and supply chain disruptions. We still had some activity in the fourth quarter on the Pekin project side, just not nearly what we thought it would have been in a normal year. That sets up for possibly a little more muted drop. But realistically, the market we're in today...

It's still a tough market. One way is holding up. I would say better at this point than I would have expected. If this same call existed 60 days ago, but make no mistake, it's tough out there. I think if you look historically, that drop off fourth quarter or first quarter is...

somewhere around 24%. And I would tell you that this year, we're gonna work our tails off to make it be less than that, perhaps, but I certainly expect it's gonna be somewhere in that 20% plus range.

you know around 24% and I would tell you that this year you know we're going to you know work our tails off to make it be less but less than that perhaps but I certainly expect it's going to be somewhere in that 20% plus range. Okay that's helpful caller thanks for the time appreciate it.

The next question is from Jason Side out with Cowan. Please go ahead. Afternoon, gentlemen. I wanted to touch a little bit on your outlook. You seem to think the market is going to moderate a little bit and then gradually recover. Can you put some meat on that and talk a little bit about what your retail customers are telling you about inventories and how long they expect to work through them? Yes, sure, Jason. Thanks for the question.

Look, you know retail inventories are tough because you know holistically there's still issues out there, and there's still people right sizing their inventories That's a fact, but you know we've been very intentional about who we do business with we've talked about it for years About being more of rifle shot versus a shotgun when we go out and pursue new business and try to pursue those we want to grow with

And those better ran more successful retailers, especially folks that work in that discount retail space. You know, they've got through the not all predominantly. So as we talk to those folks, you know, they're in the ladder innings, I would say the network overall across to all customers is not necessarily in the ladder.

If you look at deactivations over that 19-week period and you talk about 50,000, 53,000 net deactivations, that's a big number. And that's only gaining steam. And not only is it 19 consecutive weeks, I think it's 35-37 in total, have been negative. And there's nothing that on that horizon that leads me to believe that that doesn't accelerate as we move forward from here. So...

You put all that together, we still assume a relatively muted economic backdrop in all the modeling we're doing, so we're not banking on some sudden rebound in the economy. And we think the back half setup is for us to get back to a world of inventory replenishment, peak freight movements, etc. in the back half, all of which we'll support.

our portfolio well based on the type of business we do and the people that we do it with. Appreciate the color is always there. Thank you.

The next question is from Scott Group with Wolf Research. Please go ahead. Hey, thanks afternoon guys. Derek, if I look, length of haul is down, I don't know, almost 30% from a couple years ago, dead heads up a couple hundred basis points.

Is this just a mix of the acquisitions or is there something else going on here? And I guess ultimately I'm trying to figure out like how is this impacting your rate per mile, your utilization, and ultimately is this a good thing or a bad thing for margins and earnings, this mix shift?

Scott, great question. I'll attempt to be as clear as I can here. I think it's a mix of several items. So acquisitions certainly play a role. In nearly every case, the acquired company was operating in a more regional footprint with shorter length of haul. And as you continue to blend that in.

it's going to bring it down. I think the ongoing forward deployment of inventories and the ongoing growth of sort of, you know, the smaller regional DC model is going to continue to impact that. I think the ongoing, although much lesser now, conversion opportunities for intermodal, where longer length of all stuff goes more by train.

plays a role. Another one that I think is probably a little more pertinent to Werner than others is our very large Mexico franchise and some of the in all of the robust COVID you know freight activity one place that was impacted negatively was really cross-border during that time frame because you had two different governments with disparate.

that that length of hall erosion is behind us. And we think that moderates, I'm not yet prepared to say it gets longer again, but Mexico early returns so far in the last few months. We've seen the growth come back there. The early earnings of near-shoreing is real. Net direct investment was up 30 billion, I believe, last year.

already and we think that number continues to rise and so those those loads tend to have longer link poll profile and so I think you'll end up in our network with kind of a tale of two cities some of the expedited in Mexico cross-border will be longer and longer. We'll have a longer profile I should say and then an increased focus on regional and our regional footprint is going to be something that's going to be ongoing as we continue to engineer more time at home and life.

a headwind to utilization probably a tailwind to rates I guess. The second question you talked about insurance and maintenance anyway that just sort of put some numbers around how big of a tailwind that could be this year and then what does that mean with puts and takes for the OR do we think we stay within the long-term guidance on operating ratio? I'll take the guidance one and then John will weigh in on some specifics.

we're very encouraged by the most important thing which is having less accidents and especially having less serious ones. With new trucks coming in we think there's opportunities and parts availability I would actually probably put in front of new trucks coming in for maintenance to be less disruptive.

And I'll turn it over to John for any specifics he might want to add. Yeah, so for insurance and claims, it was a $44 million insurance and claims quarter. Eleven of that was the year-end charge as we went through the actuarial process at the end of the year. So adjusting for that, that puts it down to $33 million.

While we'd like to be back at that $25 million quarter level we were in the past, that's probably unlikely with the growth in the fleet and with the environment that we operate in, but we'd like to be closer to the $30 million a quarter range.

you know, depending on how our experience on severity of claims plays out. On the maintenance side, our maintenance costs are up 18%. That has been gradually coming down on a year-over-year basis as the supply chain improves.

We expect that as we move throughout the year that increases in maintenance costs will move into the single digits.

And our next question comes from Jack Atkins with Stevens. Please go ahead. Okay, great. Good afternoon and thank you for taking my questions.

So I guess, Derek, you referenced stable, dedicated demand in the fourth quarter. I would just be curious if maybe you could talk about the dedicated pipeline more broadly as you go into 2023, and are you seeing some of your dedicated customers looking to either push trucks back or want more trucks kind of in a one-off or onesie-twosie kind of way.

fleets you might see some shrinkage just due to their business being under duress. We know that there are certain businesses that are going to be more impacted by the economic backdrop than others and so there'll be some offset to what that pipeline is able to bring to fruition. We're also going to be pretty disciplined. Dedicated is hard to do business with very high service expectations.

We know what it costs to do that. And so we're going to say discipline relative to price. Our customers have been supportive thus far. And so it's hard to dictate exactly where that fleet goes over the next, call it quarter or two. We've guided to kind of flat because we know there's some puts and takes. Right now, I'm encouraged by the conversations we're having. I'm also encouraged.

blender and here's what I would say I think we're a premier dedicated player I think the service we provide for our customers is second to none and I think they understand that we also understand they're under a lot of pressure and so there's going to be some interesting conversations to be had but but most you I guess in closing

I would say I'm encouraged by the pipeline, I'm encouraged by the ongoing bid activities and dedicated, and I'm probably most encouraged by the fact that we've been able to test the model relative to not letting designated fleet into our dedicated business and therefore having the kind of hemorrhaging that may have happened in past cycles.

where the business was not set up with a true dedicated construct. Okay, now that's very helpful. I appreciate that. And then I guess maybe for a longer term question, Derek, if I go back to, I think last year on the fourth quarter call, you outlined a plan to grow.

RONORS REVENUE by 10% a year on a Kager basis for the next five years. We're now a year into it. You had a good revenue year in 2022, partially driven by M&A. Could you maybe update us on that longer term vision for the company? And do you feel like you're on schedule ahead of schedule as you sort of think about the longer term plans?

Sure, I mean clearly at this point we're ahead of schedule based on what we, you know, the two years that have played out since we first started having that conversation. We're encouraged on the revenue front. We want to continue to always keep an eye on the bottom line because I've always said that it's not going to be an or proposition, it's an and. We need to grow and. We've been really excited to get All, and it means so much to me that we really appreciate

maintain our discipline relative to margins and expectations around performance. But right now we're ahead of that schedule. We also indicated at the time, and I'll reiterate today, there's going to be years that don't fall into that 10% plus type revenue growth because you've got to be smart and disciplined and read the market that you're in.

This year, obviously expectations at this point just doing the math on the recent acquisitions. We've got a really good head start to that 10% plus number, but we're going to have our eye this year on cost control, synergies through the implementation. It's through the integration.

probably most importantly product and portfolio enhancement through these additive acquisitions that we've done and continuing our larger strategy of just building out yet another layer of defense for some of the economic ups and downs and then proven it out. You look at the end of the day what matters is what's on the scoreboard and you don't get credit for first downs we've got a lot of those but I'm looking forward to

working our way through this downturn so we can show what this company is capable of. Okay, that makes a lot of sense. Thanks again for the time.

Thank you.

The next question is from Ken Hekster with Bank of America. Please go ahead. Great. Good afternoon. Hey, Derek. Hey, John . Can you, maybe your thoughts on acquisitions, your leverage is at the top end of your target, but typically in a downturn you kind of want to maybe take more opportunities. You just swallowed the four over the last two years as you highlighted. So …

You know, can you be more aggressive in this market? Do you calm down if we're in a slowdown and and step back? Maybe just talk about your thoughts and then how discussions are going Yeah, so there's there's you know, obviously going to be a lot of opportunity out there over the next 12 months There's a lot of folks looking for an exit

A lot of it's demographic based as much as anything. But what we've stated even in the prepared remarks, our focus right now because of doing four in 18 months, because of the early returns being as positive as they are on those four. And because in each case, I think we've learned, we've gotten better, and we've set ourself up for even further success in the future.giegohawk ignore

I want to see these things integrated. I want to see them all functioning as one. I want to make sure that our cross-selling capabilities are where they need to be. We just came out of our annual sales meeting that I was personally in attendance at, and meeting with all of the sales teams from each of the organizations. And I think we've made large strides to what this looks like going forward. But there's work to be done. So.

That's, I guess, my way of saying is nothing's off the table. We've got room with the credit facility to be able to do more. We've got an open mind to look at opportunities as they become available. But in the meantime, our focus will be on integration, on synergies, and on execution.

Thanks, Derek. And then maybe just a little bit of, we've heard a lot of shifting in contracts, right? Everything used to be a year long when you talk contracts. I know your dedicated business a little bit different, multiyear. But if the retailers are now talking less than one year, what is your thoughts on the pricing paradigm in that market given your kind of mid-single digit down tick on one way? And, and...

slowing and dedicated. How does that change the market dynamics in this environment? Yeah, great question. First off, I just want to point out the guidance we gave on one way is a first half guidance, so we believe it will end up being a tail and two halves and we're just not comfortable yet talking about the second half.

So I think that's important. As it relates to people going to shorter bid durations right now, I mean normally under almost every cycle I can recall, and every time frame we're always pushing for stability in our network over any short-term type pricing. But if somebody wants to price short right now, we're going to be all ears. I mean we'll have that conversation because

We have conviction that this thing is turning quicker than people realize and I'd rather not be saddled with that price for 12 months if six months will do. So we'll be open minded, we'll have those dialogues and we'll figure it out. We're also going to hold people accountable just like they held us accountable and should hold us accountable.

to the agreements we made during COVID, the same things true now. If we have agreements in place, we're going to look for that to hold up and we'll have those dialogues. Lastly, I'll just point to something you mentioned in the questions. I know you know, but 63% of our businesses and TTS, and TTS is in that dedicated arena. And that is...

almost entirely made up of long-term contracts. But you did talk about decelerating pricing even on the dedicate to write down, I guess, flatish in terms of your pricing now.

Flat to up 3% and that's comping up against 7.6% that we achieved for revenue per trek increases and dedicated in 2022. Not to be cheeky, but look it is raining out there. Dedicated is a pretty darn good raincoat, but it's still raining. We're going to have to perform, we're going to have to execute and dedicate, and we're going to have to ask for what we feel is fair and appropriate.

but it's not gonna be in the first half the rate environment that we've seen over the last couple of years. And we hope to outperform that. But you know us, we're gonna be conservative with our guidance and we're gonna try to make sure that what we put out there is achievable and exceed it where we can.

Sounds good. Appreciate the time and thoughts. Thanks, Derek. Thanks, John . The next question is from Tom Wojtowicz with UBS. Please go ahead.

Yeah, good afternoon. I know you've talked a bit about rates, but wanted to see if you could offer just a thought on what we end up with in terms of the bid season and truck load contract rates. It seems like the comment on the first half down three to six is maybe not exactly what you think the rates could be.

I mean, I guess if you think of the timing being that the contracts get implemented and you know, partially 2Q more in 3Q, do we also expect that the rates would be down more in second half than that 3 to 6? So just, I guess some commentary on kind of how to think about contract rates relative to the guidance. Alright, so they just have all those ingredients that since you have to playkeeper's twist where we go beyond that. The reason they did that was because president Trump's office said where information that people don't necessarily have integrated into currency Iraq will Haley nasty, skinny flying touracy.

Yes, sure. So first let's talk about what that cadence looks like. You know, you really got, you know, kind of 60% of the revenues are done in the first two quarters and 20% and 20% thereafter in Q3 and Q4. We've got a decent feel for Q1 implementations and those of...

those are progressing. At this point, even just this point in Q1, our mindset is already starting to shift relative to how we think about rating business based on when we believe the turn is happening and the recent acceleration of some of these deactivations we've been speaking of. So we're given first half guidance. We think spot rates have gone about a little bit

on how 2022 played out. So that's as much the issue as really anything.

And when we're talking about BID season time, we're talking about the 39% of our revenues in TTS that's one way truckload, the biggest share of it is that it's dedicated and we think that's going to be positive up 0 to 3% in revenue for direct per week.

Yeah, I mean, it makes sense and I understand that. I guess maybe one follow up on.

Yeah, I mean it makes sense and I understand that. I guess maybe one follow up on this topic.

I think generally people are kind of thinking, you know, high single digit decline in contract rates, you know, irregular road truck load. Are you more optimistic than that? You think it's better? And then I guess in terms of the, you know, kind of quicker tightening, you think maybe this really tightens.

meaningfully in second half or it's more just like kind of a gradual improvement. I don't know what I'm more optimistic because that sounds an awful lot like hoping. We put guidance out based on analyzing it and we talk for several quarters about.

Our one-way network being more engineered than ever before. We've talked about LTAs being part of our one-way network at a larger percentage than ever before. And so, you know, I'm not trying to refute what others may be saying about what may or may not happen in their networks. I just feel strongly that in our network, based on both BIDs completed.

LTAs in place and ongoing engineering within that one-way network that our ability to perform where we've guided to is at this point you know what we feel will take place.

Okay, great. Yeah, I mean, I think it's quite clear that you've positioned the portfolio to be resilient, which is great. So thank you for the time. Thank you, Tom. The next question is from Todd Fowler with Keybank Capital Markets. Please go ahead.

Hey, great. Thanks and good afternoon. Hey, Derek. Hey, John . Hi, Chris. There's been a couple of comments on the cost side and it sounds like that there's some opportunity and some things that can help and also some headwinds. I'm just curious, Derek, if you've got a comment on driver pay being one of your biggest cost buckets.

I know that that's moved up substantially in the last couple of years. Is that something that moderates into 23? And then how do we think about maybe, I think John you shared that total operating expense in the fourth quarter was maybe up 6% or so. What sort of run rate are you expecting in 23 on the total side for all the buckets? Thanks.

So I'll have John take the second part of that, but on the driver pay question, yes, we think there's going to be moderation. That market is still going to be tough. We're still going to hold our expectations high and only hire the best of the best. That does come at a premium cost. But nonetheless, in that market, the pressure has moderated some.

We also remind you, especially on the one way side, pay as a reflection of both pay rate and miles. And so as we've endured the last couple of years and some of the disruptions that were going on, and you saw miles degrading, you had to make that up at times with the pay rate. As we start to stabilize miles and start to see some of that can...

as we continue to focus on other items. Look, holistically, there's still a lot of pressure. Trucks, trailers, tires, fuel most likely, and moderating driver wage, but still not going down, clearly, are all going to put pressures on the P&L, so our job's to go find every other line item in there that we think we can extract.

savings from and then execute on it. At the same time, it's going to be having those tough conversations with our customers about what we need to have sustainable pricing to be able to support their future growth and their needs. Those customers that aren't growing or struggling, obviously that conversation has a different tone. That's why we try to align ourselves with folks that win at what they do. And Todd, the year-over-year increase in driver pay.

to lower single digits, we expect it'll stay in the low single digits as we move forward in 2023.

Okay, good. That helps. And maybe just for a quick follow up, you know, on the logistics side with kind of the change in the portfolio and the acquisitions, the margins in the last two years on a four-year basis have kind of been in the mid-single-digit range. Is that kind of the right, you know, longer-term range not looking for 2023 guidance?

but just kind of a general range to think about the logistics margins at this point, or is there something that makes the margins stronger or weaker for any reason? Thanks.

Sure, I mean first off I'll point out logistics is now greater than 30% of revenues and we have vies to growing that at an outsized pace over the more incumbent book of business and dedicated in one way. So I think you see that becoming a larger portion over time. We're super excited about how the integration is going with ReadTMS.

We operate predominantly in different verticals today with different customer makeups. They do what they do very well, but we are actively working toward that integration date. So at this point, I am not looking to change any kind of guidance on mid-single-digit logistics expectations, but...

We will certainly be updating as we get further along in that integration as to what we think that potential could look like when you get all the freight into one network with one central kind of visibility platform. Sounds good, Derek. Thanks for the time tonight. Thank you, Todd. Yep.

The next question is from John Chappelle with Evercore ISI. Please go ahead. Thank you. Good evening. Derek, you mentioned Mexico earlier and it sounds like the near-shoring somatic is starting to gain some momentum again. Can you just give a little bit more insight as to the trends you're seeing there from a volume perspective and then also from pricing, how does that compare?

relative to some of the trends you're seeing in the U.S. and from a competitive landscape as well. Sure, John . First off, yes, it's early endings, but we are seeing sort of their refutable proof that Nearshorian is taking place. Obviously, it starts with expansion of existing plants and facilities because that's easier to do than to build new plants and facilities, although those are also

So if you have only 30 million of gains, you're going to grow the fleet 4%, and if it's 50 million, 1%. And I guess really the reason I'm asking is if the used truck market really does continue to roll over, is there a chance that you either would have to not grow the fleet or contract the fleet on a net basis to get to that range, or that that range of gains comes in lower than the 30 to 50? Q&A & Tom Taste

Yeah, so that's a tougher one to predict. I think there's, you know, someone must ask what's the more, the most speculative or what's the most difficult to pin down aspect of the assumptions that we put forth who would be gains. But I think a way to think about it is we think 1 to 4% based on pipeline alone is pretty realistic and that's likely to happen sort of regardless. Regardless what will happen relative to the game line.

What the game line will dictate is how much work we get done on refreshing the fleet. If we can continue to move equipment and move it at a high velocity, then we will get on with the business of lowering our fleet age more quickly. If that used market were to roll over, and we felt like that roll over was short term enough that we might let that

refreshing of the fleet take a little longer, then we'd go that route. But I think sort of regardless of what happens in the used market, we've got too strong of a pipeline to not see some back half growth, specifically in dedicated, at this point. And the gains, and gain per unit, I should be more specific, the gain per unit will dictate however.

ahead.

Hey good afternoon Derek you've made a lot of comments on the contract market which I imagine you anticipated coming into this call. We've heard from some of your peers that the focus on trailer capacity is maybe changing the shape of the cycle with rates generally not falling as much for large carriers at least those with with large bases of trailers.

How do you assess that with regards to your one-way segment? Could the focus on trailer capacity, you know, help those asset-based discussions such that, you know, rates maybe don't fall as much as they otherwise would have?

Yeah, I certainly think that trailer pools and the efficiencies that are incumbent with those that have large trailer pools and a robust power only offering like we do are better positioned through downturns to be able to have more rational conversations because there's less folks that can replace you.

You can't replace the efficiencies we bring with a blended solution of our assets and power only with a large trailer pool presence with a non-asset broker. You can't really do it with somebody that's asset only that doesn't have the ability to assign lanes based on differentiated

strengths, meaning we'll take the stuff that works in our assets, the broker carrier that may be better at particular lanes takes those lanes, and so trailer pools and the inherent efficiencies that come with them are a competitive advantage. Even within our power only solution as an example, they predominantly play within the contract market. payments are limited in a way that our Robo device in general, has to be?

very little of that is even done in the spot market and so it gives those partner carriers a better opportunity to build a future around stable rate levels and straight and stable experiences. So I think both for the carriers that do business with us, the customers that participate in this product offering and for our shareholders, it truly is a win.

That is also, relatively speaking, in the early innings. So all early returns are positive, we're excited about it, we're growing it very rapidly, but I think there's a lot of runway ahead of us. Yeah, Burt, we've had five straight quarters of sequential growth in our power only business, and that's during a period of time when the freight market is moderating. So there's some real staying power with power only.

Yeah, no, that's great. Maybe just a follow-up then on the logistics side, you know, how does growth in that platform play out from here? In 22, you know, as you noted, Jon, you're expanding your presence and power only, and that's been a success. And then you acquired ReadTMS, and that significantly grew your top-line footprint. As we progress maybe in the longer-term question, how does growth in that platform play out from here?

as we progress through the decade, what's the vision for that platform? Is it to be trailer-centric? Is it to be a digital automated broker? Is it all of the above? Yeah, so as we go, first off, giving guidance out a decade is tough to do. But clearly, power only is something that's gaining traction at a pace that's unique.

over time the simple reality from a product offering standpoint is that power only is tough to compete with. It's very difficult to recreate that in a traditional brokerage format. I think as we brought Reed into the Warner family, even they were very excited about having that opportunity.

to complement the exceptional sales force and the customer relationships that they have, coupled with obviously our ability to add trailing capacity at rates that would have been difficult to do for them as a standalone. So I'm encouraged by it. I'm not gonna try to predict a 10 year out percentage or ratio.

at this point, but I think it's going to be a larger and larger player. Just to clarify Derek, I meant it more like, you know, what is your strategic vision for logistics, not, you know, as long as they're for long-term guidance or anything like that, but I think the answer to that.

but I think it's going to be a larger and larger player. Just to clarify Derek I meant it more like you know what what is your strategic vision for logistics not you know looking for long-term guidance or anything like that but I think you answered it. Okay.

Thanks, Derek. Thanks, John . Thank you, Rick. The next question is from Brian Olson-Deck with JP Morgan. Please go ahead. Hey, good afternoon. Thanks for taking the question, guys. Maybe just two quick follow-ups dedicated looking at the revenue and per truck per week. And I said it's off of.

a tough comp from last year, but 0 to 3% seems like it's going to be tough to exceed inflation this year when you talk about driver pay as part of that. So maybe you can elaborate that a little bit as their ability to go back, as seems like you might be able to have some conversations to possibly move that up. Is this something we should look at more in a multi-year period?

one strong you're offset by with a weaker one and you can offer some thoughts around that yeah Brian so the multi-year approach is certainly one lens that I think does matter you know when you're coming off of some of the comps over the last couple of years and we were able to shore up driver pay and other things at a rate

that A, the markup and support that B, we felt, was appropriate for our drivers. It is certainly going to, that line item will moderate as we look in the 2023. The other reality of dedicated agreements that we have in place is that the driver pay is almost set, always set aside as a standalone item, so who he.

We see pressure there, we feel as though the market has tightened sometime during the course of the year relative to driver availability. There's always the opportunity and dedicated to go back and have that conversation. It's not as easy as just asking and getting it of course, but it'll be a data driven analytical discussion. You know, zero to three percent growth has a lot to do also with a year ago there was a lot of committed information, but number two is financial regulation. We are delivering early days of break fifty that maybe the company Grammy would still be able to progressive in the graphic as 14 days, but, those days think there's a lot of bringing leads in here, in the storytelling setting we're going to continue with we are secondary but we're also, in the external tools, it's more catalog Corporate

project type work or incremental trucks on many of these dedicated accounts. So you've got a base contract and then you have incremental trucks that are playing a role. This year you've got a base contract and you might have some incremental shrinkage in that same fleet just based on their shipping volumes. So you've got to put all that into the mix.

The comps are probably one of the toughest things about that zero to three, not looking as impressive as you might have hoped for. The last thing I'll point out is dedicated revenue per truck per week has grown eight out of the last nine years. And I think that it really covers multiple different swings in the market. Then it really kind of gives you a better insight to just how stable that business can be.

If and only if you execute it and so we always start in with that concept, we've got to be absolutely best in class on our execution and we are. So when we look back at 2022, you know, over the course of the entire year for all of those trucks operating and dedicated and you look across the entire fleet.

that fleet operated north of 99% on time throughout the entirety of the year. And that's something that I want to thank all of our folks once again for making possible.

All right, thanks, Derek. John , just a quick one for you then on the cost side. You mentioned going after some controlable costs, and if you can elaborate on that, and you've got a few things on maintenance, sounds like parts could be a big deal, even more so, than the getting the new trucks in place, which obviously have a knock-on effect on maintenance and other line items. But...

Maybe you can elaborate a little bit on what you have behind the site too that's controllable over the next year. You're looking to pull the lever on. Thank you.

Yeah, thank you, Brian . We definitely have a cost focus across the entire business and we are realizing savings in several categories such as driver hiring and advertising, lower driver guaranteed pay, energies related to the acquisitions that we've done, actually all four acquisitions.

And then IT savings to implement our cloud first cloud now strategy that are helping with both efficiencies and productivity and we're taking aggressive actions to improve our cost structure. We know we have a big headwind with the reduction in gains in 23 compared to 22 but we're.

confident that we can make a meaningful dent in that with the cost improvements that I just elaborated on. All right, thank you, John . Thank you, Brian . This concludes our question and answer session. I'll now turn the call back over to Mr. Derek Leathers, who will provide a closing comments. Please go ahead.

I just want to thank you for joining us today on the call. We're proud of our results in 2022 and encouraged by the durability of our business as we enter a weaker setup, at least in the first half of 23. Dedicated is going to remain the lead horse on our wagon, but Warner Logistics now surpassing one billion in freight with increased customer and industry diversity is exciting.

I believe this year will be a story told in two halves. Capacity is already exiting, inventories are coming into balance, and while there remains macro uncertainties, the one thing I feel strongly about is this. Strong, well-capitalized carriers, focused on operational execution will have an opportunity to shine, and we look forward to that challenge. I want to thank you for spending your afternoon with us today.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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