Q2 2019 Earnings Call
Good afternoon, and welcome to the Werner Enterprises second quarter 2019 earnings Conference call.
All participants will be in a listen only mode.
Should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
To ask a question you May Press Star then one on your Touchtone phone.
And to withdraw your question. Please press Star then too.
Earlier. This afternoon the company issued an earnings release for its second quarter 2019 financial results and posted a slide presentation to accompany today's discussion.
These materials are available on the Investor Relations section of the company's website at Warner Dot Com.
Today's webcast is being recorded and will be available for replay beginning later this evening along with the supporting slides.
Before we begin please direct your attention to the disclosure statement on slide two of the presentation as well as the disclaimer included in the press 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.
This disclaimer is a brief summary of the company's statutory forward looking statements disclaimer, which is included in the Companys filings with the FCC.
Additionally, the company reports results using non-GAAP measures, which it believes to provide additional information for investors to help facilitate the comparison of past and present performance.
A reconciliation to the most directly comparable GAAP measures is included in the tables attached in the earnings release and that the appendix in the slide presentation.
And I would now like to turn the conference over to Mr., Derek Leathers, President and CEO .
Mr. Leathers. Please go ahead with your presentation.
Thank you and good afternoon, everyone.
On the call today with me is our CFO , John Steele and we're excited to speak with you about the Warner <unk> second quarter.
2019 earnings results.
I'll start by providing a brief overview of the company and our current positioning followed by the financial highlights for the quarter.
John will then provide additional detail on our financials.
I'll finish by reviewing our business and capital allocation strategies and review our updated 2019 financial guidance and then we'll address your questions.
Now turning to slide four for those of you who may be new to Warner We've included a company snapshot.
In 2018, 77% of revenue was generated in our truckload transportation services segment with the remainder coming from or Warner Logistics segment.
Our customer base is focused on the consumer.
For our revenue by vertical just over half is in retail.
18% is in food and beverage.
18% is in manufacturing and industrial with the remaining 12% and logistics another.
Within our largest industry vertical we focus on serving discount retailers that sell more necessity based products that tend to be less economically sensitive.
We have a diversified customer base with less than half of revenue coming from our top 10 customers and 74% spread across our top 50.
On slide five is a timeline of key events highlighting execution over the last five years to position Warner as a best in class trucking and logistics provider.
Our truck and trailer fleet, or new and where we want it.
This enables us to produce high quality service and attract high quality drivers.
By design, our net Capex in 2019 is lower than 2018 and has returned to normalized levels.
Our revenue portfolio remains relatively balanced between dedicated one way truckload and logistics.
This positions Warner to increase the consistency of our financial results.
Also during the second quarter, we executed our capital allocation strategy, which I'll discuss in more detail in a few moments.
Next let's move to slide six for a brief overview of our second quarter and year to date financial performance.
For the quarter revenues grew 1% to 628 million on an adjusted basis EPS increased 3% to 63 cents per share. This was a strong second quarter performance considering the below average freight market this quarter compared to an unusually strong freight market in second quarter of 18.
Our second COVID-19, adjusted EPS growth of 3%.
Was on top of a 90% adjusted EPS increased in the second quarter.
Of 2018.
Adjusted operating income this quarter increased 1%.
And our total company adjusted operating margin declined slightly by 10 basis points to 9.4%.
Results reflect freight demand that was lower than average from a seasonal standpoint, and well below what we saw in the second quarter of last year and a challenging transactional freight market. We continued our focus on maintaining a relatively low spot market exposure to maximize our trucking operating margin.
As a reminder, approximately 10% of our one way truckload miles or spot or only 5% of our total miles.
Last year, the very robust freight market produced several project in search rate opportunities.
For second quarter 18. These events added over two percentage points to our rate per loaded mile and one way truckload and also contributed four cents a share to second quarter 18 earnings.
Great demand this quarter was lower than average with no meaningful project or surge opportunities, resulting in a tough rate and earnings comp.
Despite this dynamic we improved our second COVID-19, adjusted EPS by 3% year over year and by 20% sequentially.
Year to date revenues increased 4% adjusted EPS increased 16% and adjusted operating income increased 616% versus the same period last year.
We expanded our operating margin by 100 basis points year over year through our focus on execution and cost management in a tougher freight environment.
I'd like to sincerely. Thank all hardworking Warner associates for their continued efforts.
Reflecting our investment in a best in class fleet. We ended the second quarter was 7935 total tractors within our truckload transportation services or TPS segment, an increase of 235 trucks year over year and down 10 sequentially.
Now I will turn the call over to John to discuss our financial results in more detail John .
Thank you Derek and good afternoon, everyone. We appreciate you joining us today.
Beginning on slide eight we provide some additional financial performance drivers in second quarter 2019 versus second quarter last year.
Our revenue per truck per week declined 1% net of fuel and we increased the average number of trucks by 5.2%.
In our logistics segment revenues declined 2%.
Adjusted operating income grew 1% and adjusted TTS operating margin declined 70 basis points.
Our logistics operating margin declined by 20 basis points.
Driver pay increases moderated to nearly 5% in second COVID-19, compared to nearly 9% in first COVID-19, as we began to lap larger driver pay increases from the first half of 2018.
Moving to adjusted EPS, the 3% year over year increase was due to flat net income and 3% fewer diluted shares outstanding due primarily to share repurchases, we achieved meaningful operational improvements in the performance of our driver training schools and generated equipment leasing growth, which on a combined basis contributed three cents a share of EPS improvement. We believe most of these improvements are sustainable going forward.
Beginning on slide nine lets look at our second quarter results for our TPS segment in more detail TTS revenue grew 2% to 480 million year over year, primarily caused by 5% fleet growth $5.5 million of lower fuel surcharge revenues due to lower fuel prices and a 1% decline in revenue per truck per week.
Adjusted operating income declined 4% to $52.4 million due to a 70 basis point reduction in adjusted operating margin. Despite the below average freight market and second COVID-19, we achieved a solid 10.9% operating margin, including fuel our adjusted TTS operating ratio net of fuel was a strong 87.4.
Now on slide 10, let's look at our second quarter dedicated in one way truckload metrics for dedicated we grew a trucking revenues net of fuel by 12% to $227 million.
Dedicated average tractors grew 8% or up 339 year over year.
Dedicated revenue per truck per week increased 4.1%.
One way truckload trucking revenues net of fuel decreased 5% to $184 million, one way truckload average tractors increased 2%.
Revenue per truck per week decreased 6% for the quarter due to 3.4% lower miles per truck and 2.7% lower revenues per total mile.
The miles per truck decline was due to a lower than average seasonal freight market and second COVID-19, compared to a robust freight market and second quarter 18.
They were team driver trucks this quarter.
And government imposed delays at the southern border, which were more challenging early in the quarter and less disruptive as the quarter progressed.
Moving to the Warner logistics results on slide 11.
In the second quarter logistics revenue declined slightly at 2% to 130.9 million, primarily due to fewer project freight opportunities transactional spot pricing declines of over 20% and lower volumes when compared to second quarter 18.
Gross margins and logistics expanded 40 basis points as the early benefits of our new pricing analytics tools enabled more informed decisions and improve capacity generation across our brokerage network.
Our logistics operating income percentage declined 4% down 20 basis points year over year.
We are gaining efficiencies and productivity with our latest software enhancements. However, the operating costs of these technology investments are impacting operating margins in the short term as associates adopt these new tools and more fully realize their intended benefits the rollout across all of our brokerage offices will occur throughout the third quarter.
As users become more proficient the benefits of the investment digital transformation will continue to grow.
I want to highlight that each new application is carefully tested and then piloted to ensure it is both effective and generates improved performance prior to widespread adoption.
We're excited about what we're seeing so far and Derek will discuss this further in a few minutes.
I would now like to turn to the final portion of our prepared remarks back over to Derek who will cover our execution against our strategy capital allocation developments and updated 2019 outlook.
Derrick.
Thank you Joe.
Moving to slide 13, I would like to update you on our five to strategy during our prior prior earnings calls I explained the steps we are taking to position Warner as a best in class organization focused on enhancing our portfolio, increasing our level of service and delivering quality earnings to our shareholders across economic cycles.
We are creating structural and sustainable improvements with our modern and more efficient fleet combined with high quality professional drivers and strong management execution, we expect to be able to adapt quickly to changing market conditions and generate more consistent financial results.
Our truck and trailer fleets remain new with an average age of 1.8 and 4.1 years respectively.
Despite an extremely competitive driver market, we remain committed to quality over quantity with our professional driver force. This is critical to delivering on our brand promise to our customers day in and day out.
We upgraded and expanded our terminal network to better support our customers drivers and lower maintenance cost. This investment provides our drivers with the facilities and infrastructure they need and deserve as we continue to raise our service expectations.
Since 2016, we've nearly tripled our annual IP investment as part of our five to strategy improving service to our customers and professional drivers alike.
During the second quarter freight volumes were below average and below our expectations also the speed of service bar was once again raised for retail companies by competitive forces. These changes as they evolve make on time every time free deliveries even more critical our team is relentlessly focused on flawless execution.
We have been raising the bar for Warner on time service. The last several years to that end. Our 2019 on time service percentage is the highest in the past five years.
Critical to being a customer centric organization, we held our 36th annual Warner Transportation form and Omaha last week with record high customer and supplier attendance every year at the transportation form we facilitate connections knowledge sharing and feedback between customers suppliers and drivers, allowing us to stay current on opportunities concerns and the freight economy from different perspectives.
Leadership in our company and our industry is one of the four pillars of our Warner core values.
Our annual transportation form is a visible example of our commitment to leadership with our customers and suppliers. We thank them for once again setting a new all time attendance record this year.
Turning to slide 14.
Warner has one of the newest truck and trailer fleets in the industry.
A warner truck is less than a third as old as the industry average all our trucks are equipped with the latest safety and training features.
Our Warner Fleet sales operation maximizes, the remarketing value of our trucks and trailers. When they are ready for sale are late model equipment with attractive features provide significant value to repeat customers, who appreciate the long term reputation and integrity of Warner fleet sales.
Now I would like to turn to slide 15.
The labor market continues to be extremely difficult and the market for professional truck drivers remains challenging.
Warner offers numerous competitive advantages to the professional driver.
Attractive pay a newfleet better home time.
Leading industry driver training, a strong military recruiting program and becoming the employer of choice for female drivers are all essential to our success.
In addition, our driver recruiting and retention advantages enable us to be more selective with the drivers we retain.
By addressing those that do not meet our stringent performance standards.
Even in a difficult driver market Theres and continued expectation at Warner for driver Excellence.
All of this leads us to our most important success factor our culture.
Warner was founded by a driver and managed with the driver in mind.
Top quality drivers produced top quality results.
At Warner No matter, who you are or where you fit in our company. There is an expectation of excellence.
A commitment to put team above self it manifests itself in a desire to engage within the communities where we work.
It's built on a foundation of integrity and it supports an unwavering dedication to safety and service above all else.
When you hire the right people give them the right tools and training to do their jobs and set expectations around safely providing a premium service earnings and growth will follow.
On slide 16 is a visual representation of how the five teaser centered around supporting our customers and shareholders alike.
To deliver superior customer service, we are focused on upgrading our infrastructure improving processes and enhancing our systems, while unlocking the power of data analytics to ultimately eliminate defects improve efficiencies and lower our overall costs.
On slide 17, I'd like to focus this quarter on one of the five cities that we havent covered in depth in our previous calls and Thats technology.
As part of our five key strategy Warner's committed to a continued investment in technology and innovation to further strengthen our customer experience our driver experience and market leadership.
Our investment includes a focus on upgrading our infrastructure investing in digitalization to improve processes and systems with smart automation.
And leveraging innovative machine learning technologies to provide real time data to optimize decision making.
To accomplish this we are already leveraging innovative technologies, such as Aiotv automation and machine learning to ensure we capitalize on emerging supply chain trends and changing customer needs.
We continue to strengthen our core I T. and I asked services, including network upgrades and unified communication solutions to support our transformation efforts and our existing technologies.
Warner's digital transformation spans enterprise wide across TTS logistics, human resources, and accounting and finance.
Our technology investment has already driven the following new solutions freight matching capacity generation final mile platform enhancements driver facing apps and safety management solutions here are two examples in our freight brokerage business, we internally developed capacity generation tools using machine learning technology.
We combine them with public and proprietary data and align them with real time pricing support so that we can now intelligently mass carrier capacity with customer freight.
The combination of these innovations has enabled significant employee productivity gains by simplifying the process and has led to higher customer and carrier satisfaction, which has translated into more return bookings from our customers and carriers.
This year alone we've seen the number of single booking carriers with Warner logistics decline.
And our bookings per carrier are up over 15%.
We believe our investments have the potential to continue building loyalty to the Warner brand and return the productivity gains to our shareholders.
Another example, we just launched is a new Warner developed safety management workflow system that consolidates for disparate truck critical event reporting systems.
This solution streamline is real time critical event and forward facing video review.
This enables our safety specialist to quickly receive and identify relevant versus non relevant records and videos. So that we can monitor assess and address these events real time with our drivers. We expect this leading edge safety monitoring system will increase efficiencies, including reducing time spent on following up on false alarms and ultimately help improve our management of safety to further mitigate our risks.
Let's now shift to Capex and cash flow on slide 18.
From 2015 to 2018, we were in a heightened investment period.
Focusing on strategically improving our fleet and strengthening our organization.
With a significant investment in our fleet and terminals largely behind US we are targeting net capex to be more consistently within the range of 11% to 13% of gross revenues over the long term.
We also continue to expect to generate significant free cash flow of 100 million or more in 2019.
With increased cash generation, our capital allocation priorities on slide 19 are as follows.
Our first and highest priority is to continue to reinvest in our business. We remain committed to our drivers customers and associates to maintain a best in class Fleet network and technology platform. We will continue to invest in IP operational and commercial initiatives as well as our logistics technology across our company.
Our fleet age is where we want it we're no longer spending a higher than normal amount of capex to lower the fleet age we expect a net capex to be in the lower end of our 275 million to $300 million range.
We will continue to thoughtfully monitor and prioritize capex based on a goal of high return on investment and the current market environment.
Next we will continue to return cash to shareholders Warner has a long history of paying consistent regular quarterly dividends across economic cycles, as well as utilizing share repurchases and special dividends to return excess cash.
During the quarter, we declared a regular quarterly cash dividend of nine cents per share and repurchased 700000 shares for $21.8 million.
In mid May following the extensive research and analysis of our capital structure, we announced actions consistent with our capital allocation strategy first we announced a $3.75 per share special dividend or $261 million, which was paid on June 7th.
We also announced a new 5 million share repurchase authorization.
Both of these initiatives are designed to enhance returns to our shareholders.
In addition, we entered into a new expanded credit facilities totaling 500 million with two of our existing lead banks.
These facilities extend our bank credit through May of 2024 with attractive pricing terms and covenants.
In the past, we maintained virtually no debt, which resulted in a more expensive weighted average cost of capital by revising our long term goal from no debt to a modest and manageable range of debt in the 0.5 times EBITDA to 1.0 times EBITDA range, we expect to lower our weighted average cost of capital.
In early July we took advantage of historically attractive low interest rates and fixed the interest rate for $150 million of our debt at slightly above 2.3% through may of 2024.
We are committed to maintaining a stronger more flexible balance sheet. Following the June special dividend, we have over $1 billion of stockholders equity and an appropriate and still conservative net debt to EBITDA ratio of 0.7 times.
Next on slide 20, I'd like to discuss our 2019 updated guidance.
For our guidance assumptions, we expect to maintain our modern fleet at age levels at or near 1.8.
For trucks and 4.1 for trailers.
We expect our effective tax rate to be in the range of 25% to 26% for the year.
Next we expect our TTS truck growth from year end 2018 to year end 2019 to be in the low end of our 3% to 5% truck growth range with most of that growth coming in dedicated and the remaining amount occurring in the third quarter.
In the first half of the year. We added 115 trucks. We currently expect to add about 100 more trucks in third COVID-19, with no planned truck growth in fourth COVID-19.
On the freight side, so far in the first three in one half weeks of July freight demand in our one way truckload unit has remained lower than average for a typical July .
Gains on sales of equipment during the second quarter were $4.5 million compared to $5.9 million in first quarter and $5.1 million in the second quarter of 18.
We have begun to see some moderation in the used truck and trailer pricing market as the freight market has been sluggish.
Year to date, we realized equipment gains of $10.4 million, we continue to expect gains on sales of equipment for the full year of 2019 of 18 million to $20 million and currently expect to be in the low end of this range.
For net Capex, our guidance range remains $275 million to $300 million and we expect to be in the low end of the range.
Now, let's discuss the 2019 guidance we are changing.
Revenue per total mile for the 42% of our trucks and our one way truckload fleet for the full year 2019 compared to 2018 is now expected to be in the range of flat to negative 3%.
While year to date 2019 contract pricing increases are approximately 4% on average with recent contracts renewed in the flat to low single digit range. The lackluster 2019 freight market has provided few project in surge freight opportunities significantly lower spot rates and higher empty miles as such we are assuming the current freight trend will continue into the third quarter with an expectation that there will be a normal seasonal pickup in freight and rates during the fourth quarter holiday shipping season.
Third and fourth quarter, one way truckload revenue per total mile is expected to be lower than the same quarters in 2018 due to significant rate increases and project activity that occurred in the last two quarters last year.
Finally, we expect our interest expense to increase to a quarterly run rate in third COVID-19 of approximately $2.7 million based on our current debt level and interest rates.
As the freight and rate markets moderated in the last several months, we accelerated our cost management initiatives companywide to lower our cost structure to date, we've identified over 10 million in annualized spend savings in multiple cost categories. We expect these cost savings to continue to grow moving forward.
In summary, Warner is well position to navigate a less robust freight market with nearly 60% of our fleet in dedicated a more stable and predictable business over 20% of our revenue from our logistics segment and less exposure to the one way truckload market than many in our industry and a continued focus on operational and digital excellence.
We are positioned to successfully operate in whatever economic environment comes our way we have a new fleet, we have an energized and engaged team.
And we are producing increasingly high quality service to our customers.
At this time I would like to turn the call over to the operator to begin our Q and a.
We will now begin the question and answer session.
To ask a question. Please press Star then one on your Touchtone phone.
You are using a speakerphone, please pick up the handset before pressing Mickey.
To withdraw your question. Please press Star then too.
To allow for as many callers as possible to ask questions. We ask that callers limit their questions to one question and one follow up.
This call will end at five P.M. central time, following the Companys closing remarks.
Our first question today will come from Paul.
Tom Wadewitz of UBI. Please go ahead.
Yes. Good afternoon, thanks for the presentation and all the detail.
Wanted to see Derek if you could offer a view on the cycle.
I guess, most recent cycle, we'd look at in terms of downturn will be 2015 and 16.
So wanted to just see if you could offer some perspective on what what do you think this cycle in this downturn and be pretty similar to that or are there reasons that it might be more more narrow kind of quicker down and maybe quicker recovery. So just some thoughts that to start with maybe on the cycle.
Sure Tom Thanks for the question.
So I do think theres some differences there.
Of importance to note. If you think about 18 or sorry about 19 as compared to 18.
We've had a lot more for lack of a better term sort of white noise or external influences on the market this year between tariff and trade.
Talk some of the extended winter weather delayed produce season.
Things that are not sort of macroeconomic in nature or cycle oriented per se, but more.
Fits and starts within the group the larger economy that I think is very different from what we saw.
And some of the prior cycles, where it was true sort of widespread.
Slowdown.
And overcapacity at times. This time I think we had a ramp up in 18, obviously freight rates took.
A pretty sudden and pretty explosive growth rate over the course of the year followed by some capacity additions specifically at small to midsize carriers.
Followed by really for lack of better term a strong economy framed with economic uncertainty Nonetheless.
Because of trade and tariff. So we saw the correction happened faster a year ago in terms of the market tightening we saw some loosening earlier in the year that I think was caused by sort of a snowballing of several external factors, but the underlying economy.
By and large still is chugging, along and so yes, we do believe capacity, leaving the market. If you look at order rates falling as fast as they are if you look at cancellations of current builds taking place.
And frankly, even bankruptcy trends that are out there, especially at some I would say more meaningfully sized carriers.
The opportunity.
For this to turn around.
Is before us and I think could be just you could be quicker than what we've seen in prior cycles.
Okay. So instead potentially instead of a two year downturn like 15, and 16, maybe you have in some of our more quickly than that.
Yes, I believe so I believe so.
You know there's still we still have peak season ahead of US we've said throughout that our goal is to operate well in down markets as well as strong ones.
And as I think about the quarter, if I was going to.
Kind of summarize it I really think we've delivered on that commitment that we've made.
We're going to weather this and we're going to continue to whether it and continue to use the defensibility of our portfolio and dedicated.
To our advantage that is performing well and we have tailwinds behind us there as it relates to some truck growth coming on in the third quarter and so we like our positioning.
Right. Okay. Thank you and just for the quick follow up.
How do we think about the dedicated pricing impact your your revenue per truck up 4% was pretty strong number in the quarter against the weak freight backdrop in dedicated is that something that it's a matter of lag.
In the pricing effect, there or would you simply affected to be expected to be more insulated that you just wouldn't see.
That much of a decline in.
Revenue per truck per week, or whatever kind of pricing related metric you want to for two and dedicated.
Thank you I think I think the way to think about in this first off you had said weak freight demand in dedicated and we really can't connect those dots.
What's happening in the one way market and what's happening in demand in one way is one thing.
And separate from that completely as customers that need high service expectation on time every time freight.
Delivered.
With with sort of premium reporting and service built around it.
And Thats, a different animal and so in good markets and bad we've said for years that dedicated will hold up better where it shows itself is in our expectation of what that means that we'll onboard. So we started the year with a 3% to 5% truck growth range. We've guided now have lowered the range because what we're not going to allow us to provide that premium service with all of the expectations that come with it.
And not have a fair value for it in terms of the price and so we were confident with where we're at and the range. We have line of sight to where growth is coming from but it but it is difficult to do dedicated well and we think we do it very well and we're going to price accordingly, and it shows through in what you would you commented on with the rates year over year.
Great. Thank you for the time.
Our next question comes from Ben Hartford of Baird. Please go ahead.
Hi, Thanks for taking the question this is Andy on for Ben.
I wanted to get some additional perspective on your comment about continued difficulty finding drivers it seems that the market for drivers has loosened up.
A bit over the past couple of quarters, particularly for the larger carriers.
Are there any specific regions, where your finance still particularly challenging to find drivers. Thanks.
Thanks, Andy for the question so.
I guess my comment is framed in a larger backdrop during the quarter the driver market and how you think about drivers in quarter to quarter and if it is I think you'll find yourself in real trouble in a hurry, we're committed to our drivers over a much longer term than a quarter.
And so what I'm really referring to is the market for qualified professional drivers is tight and remains tight but more importantly, as you look forward and you think about drug and alcohol clearinghouse, you think about the possibility of hair follicle testing.
Coming into play in 2020, we just don't want to ever lose sight of the reality that we need to leverage our driver training schools leverage our brand leverage the investments, we're making in all of the five to use to continue to raise the bar on our expectations. So I specifically commented on that because I don't want people to believe that suddenly just because you have lots of applications means you have lots of drivers you would hire theres a very big difference between the two we're going to continue to push the envelope and expect excellence and in that market is still tight.
Thank you.
Our next question comes from Amit Malhotra of Deutsche Bank. Please go ahead.
Thanks.
Hey, John how are you guys.
Good.
Hi, Matt.
I appreciate the time here Derek I just wanted to ask.
A question on the truck counts and the mix between dedicated in one way, obviously, 60% of the tractors hidden dedicated.
That's up from kind of 50 50, not that long ago.
Shouldn't we or should we.
Continuing to see that mix continued to shift just given the opportunities and dedicated the resiliency the visibility of that business and you know why not maybe make a more aggressive move there given the volatility and lack of visibility in the one way truckload market.
So a couple of thoughts on that amid the first one.
So we're at 58% today, but moving towards 60 as we've talked about we believe the pipeline has fallen off and our opportunities in front of us are strong enough to get us there.
As we think about the overall freight market and where we're at on the one way side.
We're going to continue to focus on building out our strengths, which is Mexico and team expedited.
We don't want to abandon those two key franchises to what we did and we think we can do that well.
And as we think about.
Looking forward.
There's nothing magic about 60% it could creep further than that but that will really be dependent on what happens overall within the one way market and our ability to continue.
To focus our efforts within one way on the leases Commoditized end of the spectrum, which is that team expedited just in time world or the cross border Mexico.
World that we currently are the largest provider in already and we believe we can continue to extend that lead.
One thing I would add a minute.
Just just a quick thing.
For our dedicated fleets there are times, when we need to surge with our customers to help them during busier times, a year and so we use our one way truckload fleet at times to help with that surge capacity needs.
Right. Okay, yes that makes complete sense and just just a follow up John if we if we think about salaries wages and benefits.
And the line item on your cost structure.
The growth in that expense moderated on a year over year basis, but thats the increase as a percentage of sales ex fuel I see you soon that has to do with obviously the mix of more dedicated even less reliance on PT, but hoping you can just give us some sense on how should we think about.
Salaries wages and benefits expense trending on a year over year basis in Threeq and Fourq you just given the outlook for yields.
Okay to start with this quarter, we increased $10 million from 196 million to $206 million.
And about 80% of that was due to drivers.
And of that.
Roughly 8 million increase in driver pay about $5 million of it was due to the 5% higher rate per company mile and then the other 3 million was due to the fact that we had 4.8 more million company miles.
The balance of the increase in that line is the fringe benefits side with.
The higher pay comes higher.
FICA and unemployment taxes work comp four one k. and then medical drugs.
Fringes are up about 7% year over year.
And that's the balance of the increase as we look at the.
The biggest element of that line, which is driver pay.
Going forward.
You can see that our increases have moderated from nearly 9% first quarter to nearly 5% in second quarter I would expect that we will be up somewhere in the 3% to 4% range in third quarter and up in the 2% to 3% range.
In the fourth quarter on a year over year basis.
Because we are beginning to lap some of the larger increases we did last year that assumes the the freight market and the driver market remain fairly consistent with where they are today.
Okay Thats helpful. Something tells me you were anticipating that question.
I appreciate the color thanks, very much guys.
Thanks, Matt Thanks.
Over the next call it two to three quarters, whether it's it'll be R&D to yield the conversion.
Late this year or the national drug and alcohol clearinghouse.
Air Follicle testing, if you could just sort of expand on your thoughts in terms of what that could mean to industry capacity.
Call it over the next 12 months.
Would would be curious to sort of get to get your take on what what all that means for the broader market.
Sure I'd be happy to thanks for the question on on.
It will be our data LD.
I think there is more there there than people realize so we think and we've done extensive testing and have moved our fleet and continue to move our fleet to full implementation will be complete and will be done with that this month.
Actually will be done with that in August I apologize.
But as we've looked at that for us it's less than 1%.
We think for the industry and there's a variety of factors that play into that thought process, it's between one and 3%.
There is more restrictions it is more stringent and there are things that can trip folks up one of the things has been lost in the in the in the club news. If you will this be an L.D. ready and actually he will be compliant are two different things.
So many fleets or youll be ready, but have not yet flipped the switch we feel comfortable and confident that we are in front of that we will be fully ready and implemented before peak season, so as to stand true to our commitment to service.
And we've got over 20 years of experience on electronic logs in total and approaching 19 billion miles delivered.
So we like our chances there and we think we have a competitive advantage drug and alcohol clearinghouse is a bigger deal than folks may realize simply because today, we have no system of record no national database to point us to to know that somebody's fail to drug.
Test or alcohol test previously having this go into effect in January and I do have confidence that it will happen in January and have followed up extensively to confirm that.
What it really does is allows us to shine a light on on past failures and understand and know exactly who were interviewing and so that line earlier I talked about about driver applicants do not equal qualified professional drivers.
We'll be even further delineated.
And so that has a capacity limiting effect that was a little tougher to know because we've never had the database right. So.
We just believe it will clean up and certainly take out some capacity.
Perhaps the biggest of the three would be air follicle when that does in fact go live obviously, the first phase that is simply allowing us to use it as the test of record we've been hair follicle testing for over four years, and we will continue to do so going forward, we'd like to save the money and not due to test, but b, we know that hair follicle testing has a roughly 10 times the failure rate over your analysis and is much much more accurate if that is able to kind of gain a foothold first it's good for safety. It's good for the industry. It's the right thing to do that's the most important thing, but it will have an effect on limiting capacity and I think when you combine it with drug and alcohol clearing house. The combined effect is far greater than even the originally LD impact or this upcoming one that's in front of us in December .
Okay got you so just to sum it up if I if I'm hearing you correctly.
Over the next 12 months, we could really see these regulatory changes have a pretty material impact on underlying industry capacity.
I believe so yes, okay. That's that's that's great and then just for my follow up if I could you know it.
Hey, Derek if I could just kind of get you to talk about.
What you're hearing from your customers obviously, it's been up it was a weaker than expected second quarter just from a seasonal perspective, there's no overhang from excess inventory levels. What are your customers telling you about their peak season plans and then more broadly what are they telling you about.
How they expect their business to perform over the next couple of quarters, and how that could translate to freight volumes.
You know that some of the white noise I talked about earlier, obviously affects them every bit as much or in some cases more than us in terms of concerns about.
Where the economy said it is that as specifically to tariffs and trade.
But at the end of it what we've done is executed a strategy over the last several years to really try to align ourselves with winters.
And so weve worked and scrubbed and kind of gone through a pretty.
Stringent review of our customer list and tried to make sure that we're growing with those that are growing that are financially strong and in particular because of our retail heavy focus making sure. We have a heavy focus on discount retailers that are less economically sensitive with all that said the folks that we plan to work with this fall to surge up with to provide solutions to their end that winning category, they're doing well same store sales look strong inventories have been drawn down they've kind of chewed through what they brought in pre tariff and so we feel pretty good about what we see in front of us relative to peak now we still have to balance that with the reality that we felt.
Great a year ago.
Last year was a year that comes along once in a career perhaps.
But as a core carrier providing premium service when it comes to things like Black Friday, and the service sensitivity around the holidays.
Carriers like Warner are going to be in high demand and all of the conversations have led me to believe that will be that's the case this year as it was a year ago.
Okay guys. Thanks again for the time really appreciate it.
Thank you.
Our next question comes from Todd Fowler of Keybanc capital markets. Please go ahead.
Great Thanks, and good evening.
Derrick in your prepared comments, you mentioned that in the second quarter of 18 that the surge in the project business was about four cents in was 200 basis points of the improvement in revenue per mile. Do you have similar numbers that you can share with us as to what that would have contributed in both the third and fourth quarter of 18.
No I don't have that information of primary topic and.
Work to get it offline, but that may be something that we all need to update in our call next quarter.
Okay, and John I mean, maybe just from order of magnitude I mean was the second quarter. The biggest from a surgeon project standpoint, or you know just have a kind of a sense of how that trended in the back half of the year and obviously what I'm getting at is just trying to think about the comparisons that you guys face and the second part of this year.
I would say third quarter was probably a little bit larger than second quarter from a project certain standpoint.
In terms of.
Being an outlier in 2018, then we had our normal.
Pickup in project surge in fourth quarter due to the holiday season.
Okay got it so fourth quarter ways, what you'd kind of expect some kind of a more typical seasonality last year.
Yes, okay great.
And then just a follow up there were some comments I think Derek that you made.
About your cost saving initiatives and I think you said you targeted 10 million.
Can you give us a sense of the timing of that was that something that you've identified you know.
Here in this second quarter, that's going to start to flow through the numbers you in the back half of the year.
Or is that something that's kind of been in process and you're seeing that the numbers right now thanks.
You haven't have John walk you through that because he has been very involved in this but go ahead John .
Yes, so where we're at through the end of second quarter were at about 80% implemented we expect to be about 90% implemented by the end of third quarter. So we're pretty far along in the process. The initiatives started for the most part.
With effective dates.
At the beginning of this year and then it continues I think there is like 70 different items on the list that we've initiated thus far and we expect.
Growth in that number both in volume and amount as we move forward.
And the only thing I would add is.
You know our nature, we're conservative in nature and so the dollar figures were talking about there is really on true cost control it doesn't take into account.
The progress we've made.
Oh on maintenance and as you've seen year over year, the progress we're making in.
Risk and insurance.
And then the last one is kind of the effects and working the way. It was designed to work on non driver salaries year over year be it those are down considerably based on our incentive packages and the way we structured pay for performance types of metrics.
So this is really a true kind of cost or spend to control project and we are ramping those goals and will continue to be aggressive to look for further savings.
Okay. Good got it thats helpful. Thanks for the time thanks, guys.
Thanks that thank you.
Our next question comes from Scott Group of Wolfe Research. Please go ahead.
Hey, Thanks, guys.
So sometimes we have a third quarter better than second sometimes worse than second from a from an earnings standpoint, maybe can you just walk us through the puts and takes as you see it for third.
And then Doug your views about hopefully a shorter down cycle than normal you think we get back to positive pricing next year.
Yes, so I'll start.
So the pricing dynamic obviously is going to be tied very closely to how.
How much continuation discipline and commitment folks have to their order rates.
Their build rates, even because we've seen cancellations rising in and then carrier health.
If you think about the majority of our industry or the vast majority of our industry being under 50 trucks in spot pricing being down 20% year over year, nobody was making 20% or anything near that a year ago and so we know there's a lot of duress out there.
These did that portion of the marketplace portion, we don't play in March, but nonetheless that exists is really having a rough go and its going to cleanse out any of your you are less efficient operators and I think pretty quickly.
I really believe and we've talked about this a lot internally Scott that this market place. We're in today will react both up and down more more rapidly than what we've seen in prior cycles and if you think about 17 and 18 and now what we saw in the first half a 19 that certainly has played out.
So that's that's kind of my thoughts on the pricing question. I think 20 would then set up if you. If you follow that logic. It would certainly be my expectation when you think about.
Driver pay isn't going to go down.
Equipment comes that increasingly with with better and more advanced technologies and those come at a price.
Oil and thus diesel and the IMO hitting in 2020.
There is no reason to believe diesel pricing isn't going up next year. The question is by how much and so theres going to be activity in the pricing.
Market, there and we're going to go and ask to be paid our fair share.
We just got out of the all time record attendance at our form and we put in our comments because in a time when market. The market is more lose customers, obviously have even more choice on whether they want to take valuable time to attend and spend time to understand where the market is headed and why and what our views are on it and we had the record all time attendance. So theres clearly an interest level.
And on the third quarter to second quarter question and you know, we don't provide guidance, it's difficult to predict how the freight market is going to trend from here and then other factors like fuel and the used truck market.
Insurance claims how they will develop and.
As we look forward that makes it difficult to predict over a long long period of almost 20 years, typically second quarter and third quarter has averaged out to.
Fairly consistent level of earnings, but we're going to work as hard as we can to produce.
At least as strong as earnings in the third quarter as we did in second.
Okay. Thanks, and then if I could just ask the dedicated versus over the road breakouts really helpful. We don't have a lot of history do you by any chance can you share what.
The dedicated revenue per truck did in 2016, I think it might be helpful. Just to understand like how well that held up last cycle. So we can think about it going forward.
Okay.
You know dedicated revenue per truck.
In the four quarters of 2016, I just have the absolute numbers here.
First quarter was 30.
502nd quarter was 30 445 third quarter was 30 435 fourth quarter was 30 445. These are each quarter of 2016 revenue per truck per week average in dedicated and there's a history on our web site of that data and other data that we have made available once we did the break out the way we did it.
And then did you also on the website do we have the year before so we can see the year over years.
I think 16 was the first year that we shows we have 16 17 18 and now two quarters in 19 that are out there so you've got.
14 quarters of data.
Okay, but do you know if the year over years were how much they were up or down Im just I guess, it's sort of a follow up to I guess was Tom's question earlier this understanding.
Clearly very good revenue per truck in dedicated right now we just want to understand if this is lagging the one way or if it's going to.
So I don't know.
Scott I would just say to us.
Rather than us trying to calculate it on the call.
It is on the website. So it's it's easily calculable, but I will tell you that if you think back to 16 and think about where we were out in our transition and think about the fact that we were its still within what I would call sort of an aggressive shift mode, meaning moving aggressively to get more trucks into dedicated versus where we're at today, which is basically where we want to be plus.
Roughly a 100 trucks that we know and have guided to happening.
In the third quarter, our selectivity and our ability to be selective today.
Post kind of turnaround post revamping of the fleet is higher than it was in 16. So yes, there's some information to be gleaned.
And I haven't even done the calculation and May look very positive.
I'm, just saying the market is different than the state of Warner today versus 16 is to fundamentally different things.
Okay that makes a lot of sense. Okay. Thank you guys.
Thank you.
Our next question comes from David Ross of Stifel. Please go ahead.
Yes, good afternoon gentlemen.
Hi, Dave how are you doing.
Great first question is on the comment you made about.
I guess the spot exposure, you said, 10% to one way 5% of total into Q, what was in the year ago quarter.
It would have been so I was just looking at that actually and a year ago for the quarter. It was roughly it fluctuated between seven and eight.
But it's always going to be somewhere in that neighborhood in the best of times, because there's there's a portion of that you need to simply fill a rebalance your fleet no matter how much freight is out there you don't want to make commitments on as you want to use it to be fluid with your fleet.
And so yes, it is up year over year.
And it's something that actually is a major focus item of our of ours right now.
There was 17% of one way last year.
Yes, yes, yes of one way, so and and dedicated was a slightly smaller percentage. So I'd have to back into that math, but but seven call it 7% to 8% a year ago versus 10%. This year and if anybody is wondering how that is 5% of your miles with 58% of your fleet and dedicated it's because dedicated as lower productivity and higher revenue per mile.
Yes, I get that and then just real quick on the used truck market you'd said that pricing is moderating.
Approximately how much.
More or less of the trucks selling for today than it was a year ago.
You know Thats a.
Yeah, I don't I don't Dodge very many questions, but that one is a tough one to answer in the best of times because it seldom is so much what is price doing.
As it is just what are you are if you think about us as a retail seller I should be clear, but I'm talking about are secular story, that's different than many others. It's really there are times when freight uncertainty takes hold and shippers im sorry.
Carriers, who are looking to buy trucks simply.
Choose to take a time out so volume has been more depressed than it has been with the price and although you may think lowering the price would suddenly solve that if those small to mid sized carriers simply not in the market for a truck they are not in the market for a truck.
As we look forward that's why we wanted to guide to the low end of the range, we feel comfortable doing so we've got some work ahead of US and then the last thing on that would just be to remind everyone that our trucks and trailers that were selling and in particular on the truck side are pretty dramatically newer than the population at large with more safety technology on it that has become much more in demand and they are now fully automated manual transmissions that are in our used truck inventory and those are also in high demand. So we'll weather that storm better than many.
We think our retail outlet is holding up well, but we are.
Cautioning toward the low end of the range just based on current trends.
Maybe just me an inventory issue rather than a pricing issue you can hold the pricing firm yield compact you're correct on the line just wait till they correct correct, we might see some inventory.
That rises between now and end of year under over the ideal level, but I can assure you we're not going to let it pile up either.
Understood. Thank you.
Thank you Dave.
Our next question comes from Jason Seidl of Cowen and Paul. Please go ahead.
Thank you operator and afternoon, everyone you talked about.
Reducing your fleet growth a little bit slow end of the range. How did you go about doing that to cancel the orders or did you push the orders out into maybe 2019.
Yes, I'll, probably steer clear of how our contracts and negotiations work with Oems, but I'll, just say that when we have that fleet growth range.
Safe to assume that also translates to a range of orders how they process those on their end is really.
Somewhat unknown to me, meaning do they publish at the high end of the order range or the low end of the order range I'm not really sure.
We're very careful to be.
You'll compliant.
With our with our truck partners and stay within the ranges that we've established with them for the year.
And so in real time, what it means like means is that often there may be a midpoint that we agree on and if that was the case in this particular year, we might have to take something away from the midpoint.
Depending on how the year plays out.
But but at this point, we're comfortable with adding the 100 trucks, we said exclusively in the third quarter. Obviously anytime you are talking about dedicated there could be some leakage into the fourth quarter, but by and large we view it as a third quarter.
Truck AD and some and you could see more growth than that in dedicated with slightly slight shrinkage in one way to further kind of diversify and set us up for the market.
In case that turned doesn't happen as quickly as we believe.
Derek let me ask a different way because I'm not coming at it from the OEM angle on actually coming at it from a truckload industry angle. So do you.
The number of trucks, you've taken it down by doesn't mean, you're going up by that amount in 2019 2020 necessarily.
That is correct, sorry, I didnt understand that was the the angle you were looking for via that's correct, we will not be going up by that because we went down by X or this year.
Okay perfect.
I guess I wanted to touch on dedicated for my follow up you described your good pipeline and Thats been a great sort the source of growth for you over the years can you talk a little bit about sort of the ideal customer that you guys are landing in dedicated and what they look like.
Sure I mean, so first and foremost it's about starting with a winner. So we do a lot of work and spend a lot of time trying to identify what we believe to be up and coming sustainable stories.
Or.
Sort of Blue chip long term winners in their space. Once we've done that we want to make sure that it's dedicated through the cycle, meaning it is truly high hard to service and high service sensitivity 99, five or better.
Kind of service levels.
We want to make sure it's geographically layered over where our strength is in terms of driver domiciled in network.
And we frankly want to make sure that the economics work and that it's something that we can deliver upon so there is a tremendous amount of activity in the pipeline to get a much smaller amount out the other end.
But if we sign up for it we want to make sure that we deliver what we said.
Kind of on time every time it meets our economic return levels and our expectations and it fits our driver lifestyle issues that we're continuously trying to address with home nightly in weekly good paying jobs in markets, where we can hire.
Okay. Appreciate the time as always.
Thanks, Jason Thank you.
I will now turn the call over to Mr. Derek leather.
Provide closing comments. Please go ahead.
Thank you.
Before we conclude the call today I wanted to leave you with some final thoughts which are outlined on slide 22.
We've spent the last three years strategically investing in and diversifying our company to perform better across various economic conditions.
Our heavy investments are behind us and the resulting benefits to our free cash flow our head.
The high customer service levels at Warner provides are expected to strengthen with our new fleet increasingly experienced team of associates and commitment to industry leading technology.
Looking ahead, our long term margin and return expectations are higher than what they've been in the past we've begun to implement changes to our capital allocation strategy to optimize our capital structure and deliver enhanced returns to our shareholders. We're better positioned today than we have been in our recent past and we are firmly committed to delivering superior shareholder value across the cycle.
So to close I just want to thank everyone for participating in our earnings call today and for your interest in Warner If you have any follow up questions at all.
Please don't hesitate to reach out to us.
The conference is now concluded. Thank you for attending today's presentation you may now disconnect.
