Q2 2023 Werner Enterprises Inc Earnings Call
Good afternoon, and welcome to the Werner Enterprises second quarter 2023 earnings conference call.
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I'll now turn the call over to Chris Neale Senior Vice President of pricing is free to use excuse me strategic planning. Please go ahead.
Good afternoon, everyone earlier today, we issued our earnings release with our second quarter results the release and a supplemental presentation are available in the investors section of our website at Warner Dot Com.
Today's webcast is being recorded and will be available for replay later today. Please.
Please see the disclosure statement on slide two of the presentation as well as the disclaimers in our earnings release related to forward looking statements. Today's remarks contain forward looking statements that may involve risks uncertainties and other factors that could cause actual results to differ materially the.
The company reports results using non-GAAP measures, which we believe provides additional information for investors to help facilitate the comparison of past and present performance.
A reconciliation to the most directly comparable GAAP measures is included in the tables attached to the earnings release and in the appendix of the slide presentation.
On today's call with me are Derek Leathers, Chairman, President and CEO , and Chris <unk> Executive Vice President Treasurer, and CFO Derrek will begin with a high level overview of our performance during the second quarter and an update on execution against our drive strategy, specifically with a focus on innovation, Chris will then provide a deeper dive into our results.
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We will then open it up for questions followed by closing thoughts from Derek now I'll turn the call over to Derek.
Yeah.
Thank you, Chris and good afternoon.
Before we get into an overview of our second quarter results I'd like to thank the 14000, plus talented Warner team members foreseen true to our core values safely, providing superior service to our customers and delivering on our unrelenting drive strategy. We are proud to be the carrier of choice among our deep portfolio valued customers, who rely on us to solve and service their most complex.
Next great challenges everyday.
With that let's turn to our second quarter results on slide six.
On our previous two earnings calls, we shared our expectation that freight conditions in the first half of 2023 would be challenging and competitive as retail inventory Destocking runs. Its course, the fed continues with monetary tightening and excess capacity dissipates.
Following a moderating freight environment in February and March freight was progressively weaker in April and May. However, there was slight improvement mid June which we've seen continue throughout July .
In the second quarter revenues decreased 3% year over year to $811 million net of fuel surcharges are second quarter revenue grew by 2% adjusted.
Adjusted EPS was <unk> 52 sets.
Adjusted operating income was $51 million or an operating margin of six 3% adjusted TTS operating margin was nine 7%.
Despite the challenging operating environment, our TTS segment achieved an adjusted operating margin of 12, 9% on a trailing 12 month basis within our long term guidance range of 12% to 17%.
Our primary focus is on operational execution by leaning into the strength of our dedicated fleet, which has performed as expected through superior customer service and fleet efficiency.
This focus continues to result in strong customer retention and year over year growth in revenue and revenue per truck per week.
As anticipated one way truckload was challenged by overall market conditions with less freight available elevated spot exposure and significant pricing pressure, we remain focused on utilization of one way assets and optimizing the fleet, while maintaining long term pricing discipline.
Within logistics Q2 volume and revenue remained strong delivering double digit growth year over year.
We continue to execute on our cost savings program and have seen sequential and year over year progress in multiple expense categories that said, we continue to experience macro headwinds with lower equipment gains higher interest expense and inflationary factors amid a softer freight environment, which collectively contributed to sequentially lower earnings the.
The second quarter was certainly challenging but our results continue to reflect a business model that is durable and diversified and resilient, even though low even in a lower for longer freight environment, which combined with our elevated rigor on cost saving initiatives puts us in a compelling position to excel as market conditions improve.
Let's move on to slide seven.
In our TTS segment revenue per truck per week net of fuel has grown year over year 18 of the last 22 quarters and while down year over year in Q2 for the first time in 14 quarters. This compares to industry benchmarks showing significantly larger declines.
Our dedicated segment continues to perform and grow revenue per truck reflective of a reliable highly integrated and premium offering for large enterprise customers, who look to us to service complex and hard to serve networks not easily replicated.
Dedicated has steadily grown over the last 10 years across all economic conditions with a customer annual retention rate of over 95%.
Our ability to engineer and optimize fleets over time has resulted in dedicated revenue per truck increasing eight of the last nine years.
Within our one way truckload business revenue per truck net of fuel is also outperforming the industry benchmarks.
Being down mid single digits in the first half 2023.
This durability as a result of our investments and deliberate effort to build a business model, consisting largely of cross border, Mexico engineered and team expedited freight.
Let's move on to slide eight beginning with our five T's strategy, which we launched in 2016 and continuing through today with our drive strategy innovation is at the forefront of transforming the way we do business.
Our cloud first cloud now imperative launched in 2020 represents a robust multiyear investment plan to leverage technology and innovation towards growth and operational effectiveness.
We launched the Warner edge Tms in 2021 a blend of best of breed third party market solutions with proprietary talent and innovation in 'twenty 'twenty. Two we successfully migrated our entire organic truckload brokerage business to Warner edge T. M. S and are currently transitioning other positions including intermodal.
Read one of our recent acquisitions is scheduled for full integration by end of this year.
We plan to initiate the migration of our TTS segment in 2024.
In July we were excited and proud to unveil Warner Bridge, our latest tech driven feature rich logistics solution designed specifically for shippers and carriers.
For our shippers.
Warner Bridge makes it easy to get instant quotes book shipments and manage order smoothly from start to finish with full visibility of their network.
And of course, our representatives will continue to be available and engage at any time.
For our carriers Warner Bridge streamlines, the process of finding a booking freight instantly automating freight matching providing routing guides and interactive maps for ease and visibility and are recommended reload feature designed to enhance recurring revenue for the carrier. While also further establishing Warner is recurring and reliable partner.
<unk> is a clear demonstration of our commitment to provide innovative and advanced solutions streamlining operations and delivering top notch service to carriers and shippers.
When we combine tech enabled customer facing solutions, such as Warner Bridge with our large network of qualified carriers and our deep industry expertise, we have a compelling position to organically grow our brokerage business to significant scale with large medium and small customers alike.
I want to extend heartfelt congratulations to all the winter associates, who put their energy time and talent and the launch in this exciting next Gen technology.
Before I turn the presentation over to Chris why cough, our CFO I'd like to take a moment to comment that in this first three months with Warner Christmas hit the ground running bringing fresh eyes experience perspective, and a new and positive presence to our leadership team and we're just getting started and with that let me turn it over to Chris.
Thank you Derek and Hello, everyone. It's great to speak with you all today and I'm thrilled to be here with 100 days in at Warner I've had a tremendous opportunity to engage broadly with the business and operations seeing firsthand, our operational expertise and momentum for innovation and growth. This is a unique environment with a passion for excellence and winning and I look forward to the work that we can accomplish.
Together here at Werner.
Let's continue on slide 10.
Second quarter total revenue was 811 million, which was down 3% versus prior year net of fuel surcharges Q2 revenues grew by over 2%.
TTS revenues net of fuel were nearly flat despite a softer freight market, while logistics revenue grew for the 11th straight quarter reporting double digit growth adjusts.
Adjusted operating income was $51 million and adjusted operating margin was six 3% a decrease of 34% and 300 basis points, respectively versus prior year adjusted EPS of <unk> 52 cents was down 35 cents a year over year due to the macro environment lower equipment gains higher interest expense and ongoing inflation.
Scenario headwinds.
Turning to slide 11, and our truckload transportation services results as a reminder, we report our TTS adjusted operating results net of fuel.
T T S. Total revenue for the second quarter was $570 million and down 7%, Yeah demonstrated resiliency and durability with revenues net of fuel surcharges nearly flat at 493 million given the macro environment. We are pleased with the top line performance in TTS second quarter TTS adjusted operating income was $48 million.
And adjusted operating margin was nine 7% a year over year decrease of 28% and 370 basis points, respectively. Due in part to lower equipment gains against a strong prior year comp in the second quarter gains on sale of revenue equipment totaled $11 4 million.
The decline of $7 3 million or 39% versus prior year, while we sold over twice as many tractors and nearly three times more trailers compared to prior year period average pricing gains were significantly lower.
Our strategy coming into 2023 was to wait equipment sale, it's more heavily in the first half which is paying off as equipment values are expected to decline further the rest of the year year to date, we have achieved $30 million of equipment gains compared to our full year guidance of $30 million to $50 million.
TTS adjusted operating expenses net of fuel surcharges and equipment gains were up only 2% compared to our T. T S rate per mile which decreased one 7%.
We saw modest improvements in the quarter and various expense categories T. T. S insurance and claims were down 13% versus the prior year, we continue to focus on safety and maintaining our 10 year record low for D. O T preventable accidents, the ryzen cost per claim record verdicts and settlements remains an industry headwind, but we are encouraged by modest year over year.
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Driver pay and benefits continues to moderate and was flat year over year and down sequentially.
Supplies and maintenance expense was up 2% over prior year much lower than the 19% increase experienced in the first quarter compared to the same period in 2022.
We are seeing an improvement in the monthly trend as we are starting to recognize the benefits of shifting more of our repair and maintenance capabilities in house.
Therefore, reducing our reliance on third parties, we've done a lot of work in this area and we are encouraged by the early results.
We are committed to controlling costs and performing within our annual TTS operating margin range of 12% to 17%, which we continue to achieve on a trailing 12 month basis.
Turning now to slide 12.
TTS trucks averaged 8351 during the quarter or up nearly 1% versus prior year. We ended the quarter with the TTS fleet down two 2% sequentially and down one 4% year over year.
Within T T S dedicated revenue was $310 million and up 3%.
Dedicated represented 63% of segment revenues net of fuel compared to 61% prior year dedicated freight demand in the second quarter was generally steady and in line with our expectations.
The dedicated average truck count during the quarter grew 2% to 5276 trucks at quarter end dedicated represented 63% at the TTS fleet.
Dedicated revenue per truck per week increased one 5% year over year and 3% year to date.
Overall dedicated is performing well and remained solid our pipeline of opportunities remains healthy given our unique scale reliability and strong relationships across our portfolio of large enterprise customers as customers continue to monitor the macro environment. We are seeing some delays in expanding existing dedicated fleets, although the dialogue with our customers about future opportunity.
<unk> remains positive.
One way trucking revenue for second quarter was 177 million a decrease of 6% versus prior year, one way average truck count during the quarter was down 1% to 3075.
One way revenue per truck per week is down five 2% year over year.
We've been diligent in maintaining price discipline with over 80% of the bid season behind us.
As such we experienced an uptick in our spot next reaching mid teens in Q2 within one way.
One of my second quarter total miles per truck per week were slightly positive year over year, reversing a multi quarter trend due to more teams improved terminal velocity further engineering or of our fleet and less downtime.
Turning now to our growing logistics segment on slide 13.
And second quarter logistics segment revenue was up 10% year over year at $225 million and now represents 28% of total Warner revenues.
Truckload brokerage revenues drove the largest portion of the year over year growth, increasing over 30% driven by the REIT acquisition and strong performance from our organic business. We completed our second full quarter with read as part of the Warner portfolio and we are very pleased with the performance as read is seeing double digit volume growth compared to its pre acquisition levels.
Excluding reed volumes in truckload logistics increased 4% sequentially and decreased 3% year over year, nearly replacing all of the surge in project volume, which peaked in the prior year quarter, we continue to grow our domestic and Mexico Cross border power only solution as both our customers and alliance carrier see tremendous value in the Warner network and growing.
Trailer pool power only represented a growing portion of the truckload logistics revenue during the quarter.
Final mile revenues increased 15% and the business continues to show strong growth reporting numerous record volume weeks during the quarter.
As expected intermodal revenues, which make up approximately 11% of segment revenue declined year over year from both a volume decline and lower revenue per load.
Second quarter logistics adjusted operating income was $5 5 million and adjusted operating margin was two 4% down 400 basis points year over year, driven by rate and gross margin compression combined with higher operating expenses.
We are seeing multi pronged the benefits from our logistics, an asset light businesses as they provide diversification, our west capital intensive and enable broader solution selling that aligns with the needs of our customers.
On slide 14, we provide an update and more color on our cost savings program.
As we have previously discussed we are embedding discipline and rigor around expense management across the enterprise our cost saving program is process oriented and gears towards collaborative identification execution and track ability of numerous initiatives to reduce costs and improve margin.
In the current environment of pricing pressure plus inflationary headwinds our cost saving program is serving to mitigate some of the impact on operating margins through the end of the second quarter. We have now identified in year run rate savings of over $40 million.
The program includes four primary categories of savings first is driver and non driver salaries and other wage related initiatives second is recruitment and training savings from lower driver turnover and maintaining a strong driver pool third is fuel efficiency savings through investments and updating the fleet supplier and equipment innovation.
That improve efficiency, such as auxiliary power units and other fuel efficiency initiatives and finally as supplies maintenance and other savings from growing our in house maintenance capabilities throughout our terminal network in lieu of third party repairs. This is in addition to negotiating reduced costs on supplies and parts lowering facility expenses and the benefits.
From technology driven savings.
Although there is more work to do we are pleased with the progress to date and as of the end of the second quarter, we have realized over 40% of the targeted savings. We will continue to emphasize a lean culture operational innovation and organizational discipline to contain cost mitigate inflationary pressure and improve margins, while also strategically investing for future growth.
Let's look now at our cash flow liquidity and capital metrics on slide 15 and 16.
We ended June with $47 million in cash and cash equivalents.
Operating cash flow was steady at $115 million for the quarter or 14% of Q2 total revenue up 71 basis points compared to prior year.
Year to date operating cash flow was $282 million or a margin of 17%.
Net capex in the second quarter was $151 million or 19% of Q2 total revenue, reflecting lower year over year gains and greater pace of reinvestment in the business. We are catching up the fleet after not receiving all the equipment. We ordered in the last two years with the increased investment we are seeing a lower average age of our trucks and trailers benefiting maintenance expense while <unk>.
Also preparing for future emission changes, having the most modern and safest equipment benefits, our drivers customers and will position us well as the market strengthens.
Free cash flow was a negative $36 5 million for the second quarter year to date free cash flow was positive $27 6 million or 2% of total revenues due to net capex in the first half of the year being elevated we expect net capex for the second half of the year to be lower than the first half.
Our total liquidity at quarter end was strong at $511 million, including cash and availability on our revolver.
On slide 16, we ended the quarter with $640 million in debt down from $691 million at the end of the first quarter. Our debt structure is primarily long term and provides ample credit capacity for growth and accretive investments with over 90% of our outstanding debt not maturing until the second half of 2027.
In July we increased our fixed rate debt to 58% from 35% at the end of the first quarter. This was accomplished by entering into additional interest rate swaps and therefore, achieving our objective of mitigating rate volatility for the majority of our debt portfolio at quarter end, our net leverage was one one times compared to one times entering 2023.
We remain pleased with our long term and low cost access to capital and our overall capital structure.
Moving on to slide 17 to review our capital allocation priorities.
We will continue to prioritize strategic and reinvestment in the business for fueling growth and competitive advantage, including modernizing the fleet. While also investing in safety technology and innovation. In addition, we'll maintain our long standing commitment to return value to shareholders through our quarterly dividend, which grew 8% in the second quarter and through periodic evaluation of.
Share repurchases.
Our opportunities to grow organically remain clear and compelling, particularly within dedicated and our asset light businesses accretive acquisitions also remain an avenue for growth where opportunities are relevant size and synergies in line with our culture and prioritize competitive advantages, we're continuing to integrate the four acquisitions that we have executed to date and <unk>.
Progress is in line with our expectations.
And lastly, we are committed to preserving a strong and flexible financial position with access to liquidity, while maintaining low and modest net leverage.
Turn it back to Derek for an update on our market outlook for the second half of the year and modeling assumptions on slide 18.
Thank you Chris the.
The freight market has been challenging in the first half of 2023. During July we have seen modest signs of improvement in truckload dedicated demand remains steady and we anticipate a pipeline of opportunities that we can capitalize on.
One way pricing will remain disciplined as spot mix gradually moderates, particularly as we flex into more dedicated growth.
Despite a very competitive marketplace. We expect continued solid volume and logistics with continued margin pressure given a prolonged competitive rate environment.
As we look to the second half of the year the collective voice of our larger retail customers continues to reflect the destocking is largely complete and reports indicate that inventories have returned to pre COVID-19 levels on an inflation adjusted basis.
We remain cautious about consumer behavior, given mixed data points and themes impacting spending, particularly for goods versus services headwinds remain in terms of further fed tightening with inflation is still well north of the fed target and potentially ongoing restrictive lending.
Further we expect there will be an accelerated pace of rig capacity exiting the market.
Relative to freight capacity from CSA carrier data reports beauty net truck the activations for 44 consecutive weeks and now exceeds 110000 net activations over that period.
At this point, we believe smaller carriers have been supported by cash reserves generated from our peak 2022 freight market federal stimulus and lower fuel cost.
Accelerated truck capacity attrition seems more imminent as cash reserves reach a point of depletion and.
And we believe even in a gradually improving freight environment that it is unlikely for those carriers to reenter the market given much higher financing costs and other factors, we are well positioned to benefit from the reduced supply more normalized demand and upward momentum to lock in more contractual freight had improving rates.
For the used truck market, we expect continued declining demand with moderating pricing and equipment gains as the year progresses, we reached $30 million in equipment gains for the first half of 'twenty three and we are tightening our expected range for the full year to $40 million to $50 million.
We expect net interest expense this year will be $20 million to $25 million higher than last year. As a result of the continued pace of fed tightening.
Chris mentioned earlier, we've adjusted our fixed versus floating rate debt to reflect a 58% is effectively fixed.
With that background, let's turn to slide 19, and review, our second quarter performance compared to our guidance and our updated guidance metrics.
During the second quarter, our truck fleet declined 190 trucks, resulting in year to date decline of 4% as we adapted our fleet size to adjust to the challenging freight conditions. As a result, we are lowering our truck growth guidance range for the full year 2023 to down 4% to down to from down 2% to up 1%.
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We are increasing our net capex guidance for the year from 350 to 400 million to $400 million to $450 million as a result of a greater pace of refreshing the fleet as Chris mentioned, we anticipate that this will be at the upper end of our long term net capex range of 11% to 13% of revenue.
Dedicated revenue per truck per week increased 3% year to date. This is at the upper end of our full year guidance range, which remains unchanged.
One way truckload revenue per total mile for second quarter decreased five 2% and was down four 2% year to date within our first half guidance range.
Our guidance range for the third quarter is down seven to down 4%.
Our tax rate in the second quarter was 25, 2% and we are maintaining our full year range of 24% to 25%.
The average age of the truck and trailer fleet in the second quarter was $2, one and $5 one respectively.
Turning to slide 20, we have a powerful business model with a large and durable dedicated fleet diversified one way truckload fleet and a growing logistics segment.
Our approach has created clear competitive advantages that will continue to fuel our growth durability and earnings.
We have significant scale as a top five public truckload carrier with nearly 8300 trucks 14000 plus associates.
A qualified carriers within brokerage.
And uniquely positioned to service the most complex frame needs of large enterprise customers, including over half of the largest U S. Retailers. In addition to growing in other verticals with customers who are winning in their space. We have the benefit of broad solution selling to large enterprises across our highly integrated dedicated offering our branded nationwide final mile solution plus cross border.
And logistics, while also growing share with small and medium sized customers within brokerage.
Our comprehensive footprint and terminal network across the country puts Warner within 150 mile reach of 90% of the U S population and is near shoring increases we have the largest Mexico cross border franchise in truckload and deep experience operating in this complex market, we have a long history of leading in innovation and we are prime to benefit from our recent investments in tech.
Allergy aimed at greater operational effectiveness and enhancing the experience for both our customers and associates.
We continue to attract and retain top talent, including the highly qualified drivers that embrace and carry out our commitment to superior safety and award winning service, which in turn allows us to retain our strong portfolio of winning customers.
I'm extremely proud of our team we were recently recognized by inbound Logistics magazine annual excellent survey is the top 10, three PL provider coming in at number six this is the seventh consecutive year of being recognized and a testimony to our commitment to providing a best in class experience for our customers.
At this point I'll turn the call back over to our operator to begin Q&A.
We will now begin the question and answer session.
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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 five P. M. Central time following the company's closing remarks at this time, we will pause momentarily to assemble our roster.
Our first question is from Ravi Shanker with Morgan Stanley . Please go ahead.
Ah Thanks, often gentlemen.
Thanks, Thanks for the color here would love your views on what are your customers, telling you. I mean, you you kind of hinted about inventory levels, it's kind of coming back to normal here or kind of how do you think are the cycle plays out over the back half of the euro and going into 'twenty four please.
Yeah Ravi Thank you for the question.
I guess I'll start with obviously, it's a bit like the whether it's a localized in nature, meaning each customers that had a little bit of a different set of setting, but the majority of our customers as we've recently had significant dialogue with them on the subject of indicated that destocking is largely behind them. So thats encouraging theyre also encouraged.
From some of the macro backdrop data that we all see labors holding up well jobs reports are you arguably better than what was originally expected inflation seems to be waning, a little and if nothing else, we're starting to enter at least easier comps.
As it relates to that and people are normalizing their perception of it.
We work a lot with winning customers and sort of discount retail space those folks seem to be faring better than most.
So as we put all that together and think about the back half I'd say, we're cautiously optimistic as are they.
But clearly you've still got fed tightening.
Head of us.
You've got some pretty stringent.
Stringent kind of lending backdrop so.
So it's difficult to say, but but but it appears to me that where we're seeing the early innings of what could set up.
More like a normalized Q4 with some difficult headwinds still ahead of us in Q3.
Got it that's super helpful and maybe switching gears for a follow up on the cost side. Obviously you had a few challenges this time last year.
You're a little bit of an easier comp and you guys have made some good progress. There can you talk about kind of some of the line items, you're looking at particularly insurance I think there'd been some significant.
Significant changes in the insurance market and in recent months, a how do we think about cost inflation as a potential offset to any pick up in the cycle.
Yeah Ravi Thanks for the question this is Chris.
In terms of specifically on the insurance and claims.
We did see some year over year benefit there and flat quarter over quarter, Although admittedly Q2 of prior year was a peak for insurance and claims so that's somewhat contributing and just in terms of the comp or some of the moderation a year over year in the quarter, but.
This is still an expense category that just continues to be challenging for the industry or frequency of claims is down remains down our safety metrics continued to be positive and unfortunately, the insurance and claims just broadly for the industry can can be difficult given the cost per claim.
Rise and and and broad issue, but we.
We are seeing some other moderation in supplies and maintenance.
That was up 4% year over year, but it's down 5% quarter over quarter.
A a.
A particular category that we've been very focused on.
A couple of metrics there in terms of our trucks that are over 400000 miles with <unk>.
Can you to see that drop dramatically.
It peaked last September it was still elevated coming into this year by the time, we hit March it was lower than any month last year and then we hit June and hit a low point almost a two year low point in terms of our trucks that are over 400000 miles and out of warranty. So that has a knock on impact.
The supplies and maintenance the other thing that we are seeing some benefit from us.
Getting some traction and seeing the benefit from.
And extended period here of building in house capability for.
Our repairs and maintenance throughout our terminal network. So we've been spending several months in building that capability hiring mechanics, and developing the means to a route trucks to those terminals for in house repairs and maintenance and now we're actually seeing the fruits from that.
And see some encouraging trends, particularly in June that was.
More significantly down so we're seeing some categories that are.
Our encouraging that's on top of our cost savings program, which we talked a little bit about that in our scripted comments.
There's still a couple of categories that are more elevated depreciation being one that has some intangibles the amortization from acquisitions.
And some impact from the newer fleet and some fuel enhancing.
Equipment, but we think those are good decisions long term.
In terms of.
Fuel efficiency and impact on margin.
Our non driver salaries wages and benefits are also.
A bit elevated but again part of that is the maintenance of head count that we've been building in that category in order to then move forward with this in house.
Maintenance capability.
As well as still some elevated head count from our acquisitions and we have more work to do in terms of integration. It's on pace, but we have more opportunity there going forward and then we've talked about in the past how we have made some investments.
Investments go to market strategy investments in final mile.
So that's a bit elevated but that we're growing that business to scale. We're excited about that and that we look for greater profitability there.
Very helpful. Chris Thank you.
The next question is from Bascom majors with Susquehanna. Please go ahead.
Good evening.
As you think about growing the dedicated business over time.
Can you talk about how some of the in sourcing or a private fleet efforts from your largest customer is impacting that and in the strategy you have to both offset and overcome that.
Either you.
You know with other business or our other customers or are you just strategically to stay engage there. Thank you.
Oh sure Bascom I'll take that one.
I'll start with the obvious they are our largest customer and as such both parties have some.
We have a vested interest in making sure that the solutions, we put in place are sustainable for both of us.
Yeah.
Their growth has been impressive and we will remain impressive and as I think about that moving forward.
It's certainly something that excites us we can't.
Exclusively be that growth partner their growth Avenue for them because as you know we're going to stay disciplined to the diversity within our portfolio, we're going to stay disciplined to our approach.
Both geographic diversity as well as a vertical diversity, but probably most importantly, what our representation with anyone customers with all that said, it's a it's a mutually.
Executed strategy, we worked with them very closely we're actually growing with them.
You know here recently, we have opportunities to continue to do so where it makes sense for us, but we're well aware that they have a strategy to have a private fleet. In addition to that we have many other customers who have private fleets and yet we operate dedicated side by side I, often believe that it makes for a better customer.
Because they are exposed to the weather out there so to speak they understand better and become better buyers of freight.
And there are more educated in their in their acquisition of capacity.
But all of those things lead me to believe we're in good shape. There we're going to continue to have open dialogue.
But what it's really going to do is.
US to continue on our plan that we've set forward some time ago anyway, which is making sure we're diverse diversifying across multiple verticals multiple geographies and expanding the quality service and product that we have to offer to more.
New customers as well as what we've been good at for a long long time, which is growing deeper and broader with existing.
Thank you for that expensive and so I just wanted to touch on one point you made in the middle of it but did you say that despite been growing their fleet, you're still growing trucks with this customer just wanted to make sure that that I heard that.
Yes, I'm, saying as we as they are growing their fleet, we still have opportunity to pick up new opportunities with this customer yes.
Alright, Thank you for the time.
The next question is from Elliot Alper with T. D. Cohen. Please go ahead.
Great. Thank you maybe on the logistics side, you talked about stabilization in the outlook, but called out some margin pressure in the back half of the year or in <unk>.
Can you, maybe parse that out between truckload and final mile and intermodal.
Yeah, I mean look I'm going to focus on truckload with my answer as it relates to the reality that it is the largest portion of that logistics.
Portfolio.
And what we're really saying there is look we're very proud of not only holding serve on our organic brokerage business and really sort of outperforming the market in terms of the amount of revenue we've held onto.
And volume, probably more importantly, but with the read acquisition and their ability to not just be at scale from the time of acquisition, but having grown further since that time, we're pretty bullish on our capabilities in that space. We also love where we're at as it relates to the conversion within our <unk>.
<unk> platform and our ability to operate more efficiently over time as we grow into that business. All of that obviously is offset by the reality that as this market does turn.
There's going to be pressure in the non asset space youre going to see <unk>.
Buy side pressure that that isn't always sync.
Synced with the ability to gain that same relief from a sell side perspective, and so theres going to be some puts and takes as we work our way through all of that.
We're especially pleased about what the logistics, though is the resiliency of the power only product.
That product in particular, which is really an integrated product within our one way network is holding up remarkably well we have we're very optimistic on our ability to continue to grow that give our customers seamless experience, but be able to give ourself, a little bit less asset intensive exposure while providing.
Ongoing freight view.
Warner Bridge in more of a digital format to our customer partners and really lowering their operating costs at the same time so pretty.
Pretty exciting time as I think about that business over the next call. It two to three year outlook.
Alright I appreciate it thank you.
Thank you.
Your next question is from Jack Atkins with Stephens. Please go ahead, okay. Great. Good afternoon, guys. Thanks for taking my questions.
So.
It's Derek if you want to take this or if this one is better for Chris, but you know I guess as you sort of think about the.
The trajectory here as we head into the back half of the year in the context of the longer term, 12% to 17% TTS margin range and I understand this has been a much more challenging great recession than I think anybody could have anticipated, but do you still feel like that the bottom end of that range is achievable for this year end and if.
So I was wondering what sort of <unk>.
Fourth quarter do you need to see to be able to get there.
Yes, Jack Thanks for the question.
Clearly that's going to be challenged.
There is a lot of headwinds.
We've got to continue to work through as it relates to decline in used truck values and volumes.
We've got to continue to deal with the reality that although we're over three quarters of the way through our bid season, we have some of those bids that are still being implemented in Q3, hence.
Hence the updated guidance on price.
Interest rates and where they may go on a portion of our debt that's variable I mean, theres a lot of things to think through.
But we're making progress on the cost side, we're holding serve relative to revenues and volumes and we're proud of our positioning there.
The pipeline in dedicated looks.
Good.
The opportunities in.
For second half implementations and.
In dedicated that are sort of one and yet to be implemented as encouraging.
Frankly, some of the efficiencies that we're finding on the one way side seeing productivity go positive year.
Year over year for the first time in multiple quarters is encouraging we.
We believe we have more work to do to gain even further efficiencies and optimization in the network.
Bottom line this year challenging.
I don't believe it's worthy of us changing our long term guidance.
We may fall out of it for a quarter or two but over the course of the long term, we still feel very comfortable and Thats, where we belong that's where we live and we will continue to drive forward from there. Okay. No I appreciate that Derek and thank you for the context, there I guess for my for my second question I'd Love to get you to talk a little bit more about.
Warner Bridge, and kind of going back to the prepared comments into the last the last question, but.
Over the last questioner, but you know as you sort of think about Warner Bridge, you know longer term within the context of your technology journey.
Is this you know is this something that can really integrate what you're doing within TTS.
Broadly within also logistics I mean is this I guess help us kind of think about what this means for more of an integrated kind of go to market strategy within your within your business longer term.
Sure Jack I.
Do my best to do exactly that I think I've got a vacuum up before we get to Warner Bridge and talk more broadly about sort of the edge Tms strategy overall with the with mastermind is kind of the backbone of that strategy. That's really the platform. If you will that allows us over the next couple of years to continue to land.
All of the portfolio on one core platform with full integration visibility and thus.
Flexibility in how we execute.
On our customers' needs.
Warner Bridge as a component within that.
Allowing us to make a large step forward in this sort of digital brokerage space.
That.
Puts us in a position at especially with that small to mid sized customer level to be able to operate highly efficiently with human engagement still where required.
The kind of customer service and support that our customers have come to.
We expect.
And an analogy would be somewhat like pure brokerage versus power only brokerage at least in my mind.
Warner Bridge is going to bring all of the qualities and attributes and flexibility and variability that brokerage brings but power only brings all of that plus that asset back nature and that fully integrated effect within the network Warner bridges is similar in that sense, we want to be able to give people that much more high level.
Visibility efficiency the ability to track reload.
Use predictive AI to be able to maximize their utilization and minimize inefficiencies in the network, but tie it to the Warner brand and tie it to what that means which is still human engagement, where human engagement as necessary as necessary and required and the ability to kind of lift up that customer and their.
Patients out of that pure digital brokerage marketplace that is purely that is more transactional and less customer centric.
Not who we are that's not how we do business. So this is going to be a journey.
We're on that path today.
Not happening overnight or in the next quarter or two but it's it's a journey over the next call. It 18 months that we're really excited about.
That's great. Thank you for the time.
The next question is from Jeff Kauffman with vertical research partners. Please go ahead.
Thank you very much.
I was just looking at the big change in the length of haul in the one way truckload about 600 in <unk>.
90 miles 92 last year dropping to 600 for this year I was just wondering if you could talk a little bit about the dynamics in the marketplace that caused that differential I imagine with the port situation backed up that was part of it.
But I'm just curious if there was something similar in dedicated and can you give us an idea of how much that big drop in length of haul might have affected the <unk>.
Revenue per total mile.
Yes, I'll take that one Geoff this is this is Chris Neal.
We've been having length of haul contraction over the last several quarters as really the industry has due to just a number of different things with the regionalization afraid are dedicated.
I think your question's TTS related so you know our dedicated fleet continues to grow as a percentage of TTS dedicated length of haul on average is much shorter than.
And then what we do on the one way side and then we've got.
A couple of acquisitions over the last two years.
Specifically with regard.
Two ECM that had a more regional footprint than what our one way trucking.
Organic fleet had and so all of those things acting together have resulted in a little bit lower length of haul you all noticed that on one way trucking. This quarter. We were finally able to overcome year over year negative miles per truck trend that had occurred over multiple quarters, leading up to this.
Quarter, it didn't increase significantly, but we did and the sequential declines.
Sequential year over year declines in one way trucking and we do think that we're headed toward better utility for a number of different reasons in the future here. We've built that one way trucking segment on cross border Mexico were focused on engineered business and we're focused on expedited business and we've made.
Progress on all three of those fronts, which have enabled us to.
I think kind of turned the corner as it relates to to length of haul.
Well I appreciate that clarity, but this is just one way truckload 692 down to <unk>. So far that's almost a 13% reduction in length of haul so you're you're showing a change in revenue per total mile up five 2%. So the downside excluding fuel I was wondering how much this change in law.
The hall accounted for out of that five 2% reduction.
What I'm going out here.
Yeah, well clearly is linked to haul shortens and as we look to engineer more of our fleet, which has been a heavy heavy focus during this downturn.
To try to further tighten the belt on the engineered lanes and get less and less random and the application of our assets.
Youre going to see a rate per mile offset to the positive because of the shorter loads shorter length of haul is going to have someone to carry a higher rate that's.
That's why ultimately we oftentimes, we'll look back and talk in terms of revenue per truck per week were actually in the one way side. It's more of a revenue per day metric that we're constantly trying to analyze and make sure we're utilizing those assets efficiently.
Frankly, right now as we went through the bid season, we talked a lot in the prepared remarks about pricing discipline.
We stayed very disciplined with our pricing, which.
Translated frankly at a large a larger portion of our fleet being in that spot market.
We were prepared and willing to do that compared to contractually binding the fleet at rates that we felt were not sustainable.
Not indicative of the reinvestment necessary to serve that business and so the shakeout in those one way bids was call. It the turnover and the bid was a little higher than what we've experienced for the last several bid cycles not unexpected in a down market, but whenever you hold discipline and <unk>.
Rice, you see more mix change in your award you might hold revenues, but have a.
60% different mix and Thats about what you are going to accept and integrate into this new engineered environment that makes the difference and we think we've come out of that in the right place with the with the right amount of business contracted and with more spot exposure than we'd like but that's sort of low for for less duration than what it would have been.
Had we changed right through the bid process.
Okay Derrick thank you.
Yeah.
Thank you Jeff. The next question is from Eric Morgan with Barclays. Please go ahead.
Hey, good afternoon, Thanks for taking my question.
Wanted to ask on dedicated pricing.
Specifically, our guidance for zero to 3% for the year I know you're up three.
<unk>, 3% in the first half so the midpoint.
Obviously implies flat for the back half. So just wondering if you could discuss some of the puts and takes there on the outlook.
What are the chances that could dip negative and maybe if you can believe it into early 2024 and at that kind of rate.
Yeah.
Yes.
Dedicated has been a strong resilient business for us for a while and as we indicated dedicated rate per truck per week has increased eight of the last nine years I think so through multiple cycles. We've proved that we were able to maintain that on a positive year over year basis, and I think we're in good position to do that again this.
This year being up 3% through the first half as you mentioned we.
We do have some comps.
With the second half that might result in a lower year over year improvement as we head into the second half.
But at the same time, that's a that's something that we're able to improve both in terms of efficiency and utility as well as top line, we do have.
Some contractual business.
Some contractual.
Escalators.
With dedicated that will result in a year over year increase a slight one but will help mitigate some inflation and so between the productivity gains that we think we're continuing to eke out in dedicated we do have a 95 plus percent retention ratio that enables us to continue to work with customers really become integrated in their business and improve.
How the business operates and we work very closely with customers to do that so part of the gain in revenue per truck is in utility.
Thats an efficiency and then part of it is on top line. We've got a lot of really strong customer relationships and I think in many cases, they understand the inflationary environment that we're in and they understand the importance of.
Keeping their fleet.
Staffed with with professional drivers and in many cases are helping offset some inflationary impacts just with continued partnership as we go through.
This really tough environment and we've stuck with these customers last year and prior year during the pandemic and I think where we're seeing the benefits of that now with good partnerships as we enter through the rest of the next half of the year in a tough environment.
Appreciate that and maybe just a quick follow up on logistics.
<unk>.
Any thoughts sequentially on operating income or our margins there.
There would be helpful or we come in.
Reasonable run rate here in the mid single digits.
Op income.
Yes, I think op income and logistics is going to be determined by the.
Our ability to continue to count on the cost side of the equation some productivity gains some advancements in some of the tack that we're.
Able to start to utilize on a more fully burdened basis in the quarter offset by the reality that.
It is our belief that the sort of worst in the spot market is behind us. The bottom has been found as it relates to pricing and as that pricing starts to balance and you start to enter into buy side pressure and logistics that represents a headwind as you didn't work it out through the sell side tobacco.
And through the customer.
So I think where we're at today as a.
Focus on gaining quality customers into the portfolio holding serve but it's not growing share.
Maintaining a disciplined focus on finding future efficiencies and cost savings, but recognizing that business in particular, unlike dedicated that's multi year.
Very sticky very strategic in nature that has a more.
Transactional feel to it at times.
So there could be or likely would be ongoing pressure in dedicated if that were to happen in.
Logistics are apologize if that happened that's simply bodes well for the asset side of the business because it means we're right in that capacity has in fact started to dissipate at a more rapid rate that we have in fact found bottom and we are seeing sustainable improvements in the spot market.
And so there'll be puts and takes across the various operating segments.
Thanks appreciate it.
Thank you.
The next question is from Amit Mehrotra with Deutsche Bank. Please go ahead.
Thanks.
Hi, Derik, Hi, Chris Welcome Chris My cough.
Derek you know earnings.
Earnings if I look at trucking earnings or sorry T. T. S earnings. They are now below pre COVID-19 levels. If we just look at <unk>. This year versus 2019, I think about 10% below.
We all know it's a tough market I guess the real question is what does the recovery path look from here.
Your cycle Guy you have been doing this for a really long time, what is a normal trajectory look like from where we are today and you know just.
Just given the the idiosyncratic or kind of exceptional.
The COVID-19 brought in terms of freight.
Is it just simply going to take several years to get back to where you guys were a couple of years ago and it's I guess, it's exacerbated by the majority of the assets sit within the dedicated business, which obviously is inherently less volatile. So I'm just to understand where we are back to pre COVID-19 or below pre COVID-19. What is the recovery trajectory look from here in your in your opinion.
Sure Matt I appreciate the question.
Other than the part where I think you're implying that was old.
But okay.
Yeah.
Uh huh.
Look this cycle is certainly different you're right. We've all seen several cycles, but this is different I don't think we've ever seen a cycle, where the high was as high as it was where freight was as robust as it was in 2020 in 'twenty, one and 'twenty two.
The fall was further to go really the closest comparison I would give would be the OE to nine financial crisis. So the idea that the pressures have been greater than what they were pre COVID-19 isn't surprising to me given.
How much the consumer how the consumer behaves during those Covid years I would also point out that there is a step level change in the insurance line from pre Covid until today, not just at Warner but across the entire industry, but certainly eating into some of those pre COVID-19 margin levels as you think about it.
But how do I see it playing out from here you know the best analogy I could use is.
I think this.
To me there are multiple indications and metrics that we watch closely that would indicate that we have in.
In fact, <unk> seen kind of the bottoming from a spot and rates and market condition perspective.
But I don't expect as a sudden and dramatic rebound from here I think it's going to be a slow climb we've never seen carriers come into a market is tough as this one with an abundance of cash that was accumulated during COVID-19 that allowed them to survive leaner for longer.
Like we have at this time.
But now that is largely exhausted we've done a lot of internal analytics on what we think the average carrier had coming into this downturn and how many months that might allow them to exist and we think that those months are up now.
Now that find themselves in an environment with rising interest rates and their finance costs are higher than ever they've got expensive equipment.
Rates, although bottomed or bottoming and moving up from here not looking to move up as aggressively as we might have seen in prior cycles and now you see fuel back on the rise you put all that together I know I do not believe it's two to three years out before you see us returning to where we've been here in recent years I think we're talking about.
Focusing on the cost side of the equation, making sure that our operational execution and our work on our engineering of our fleet.
Stays the course, having a much more sort of disciplined.
Approach to what we lead in the building.
Taking growth and putting that a little bit.
On the side burner on the at one way asset side and focusing instead on margin improvement and bottom line above all else and if we do all of that while embracing our dedicated franchise at our cross border franchise within one way as well as the success, we're having and gaining share in logistics.
I like the positioning as this thing turns.
When that turn happens precisely is tough to tell we obviously the bid season is predominantly over but peak season is still here.
Ahead of us.
Consumers hanging in.
Showing durability that I think has been a bit surprising to most.
If that continues and the market holds up I think there is an opportunity for us to see improve.
Improvement as we close out the year and start into next year.
Yeah, and just a quick follow up if I may do we take another leg down in the or and <unk>. It looks like based on your guidance revenue in both dedicated and one way it should be flat to up slightly but obviously you got a little bit.
Greg gain sequentially or are we at the point now where <unk> kind of holding the line here or do we take on another tiny leg down and then recover from there.
Well the used market is a big.
Gray area right now the gain on the gains wind is going to.
Play a role in that answer we know it's decreasing we know volumes will be lower.
And margin per unit will be lower we also know we're gaining momentum on the cost side of the equation.
And as I previously mentioned, we have this opportunity with what is currently a negative which is an outsized portion of the fleet in the spot market to be able to improve upon that with some immediacy as we if we see rate improvement in the quarter.
At this point and if you really look back historically at Warner Q2, Q3 flattish is kind of the best word to describe it I think thats.
A fair way to think about this year as well.
This year has got some unknowns in it that we've got to grind through I can tell you that the team is focused on doing exactly that.
And we are not going to be looking to grow that when we.
Fleet.
Certainly in this environment and if we have the opportunity through some implementations to see more fleet migration from one way to dedicated that also takes pressure off of that or.
Yes that makes sense. Thanks, Thanks, a lot a couple of weeks appreciate it.
Alright, thank you.
The last question today comes from Brian Austin Beck with J P. Morgan. Please go ahead.
Hey, good evening, Thanks for taking the question maybe.
Maybe Derrick just to go back and drill.
Drill down on that point you are talking about the you know as of.
Wait and see how the inherent upside with the extra spot, which I think you mentioned it was about 15% of of one way or mid teens rather.
You have some shorter duration contracts in there as well that could help but maybe just help us think about the speed with which you can turn that around and maybe sort of a benefit you would expect if and when that market does start to inflect.
So in one way, we're about mid teens on the spot side and that is.
Essentially.
Immediately fluid capacity that can move either up.
Up into the right within spot to better opportunities and or support customers' needs as they're cautious optimism comes through and fruition with actual volumes. So we're in those dialogues all of the time, we've seen some movement even within July thus far.
That's positive and encouraging.
As it relates to some remaining contractual renewals, obviously the environment and our discipline has only further entrenched as we get into the back half of the year based on trends, we're seeing with capacity.
So that allows for some optimism there those are countered of course with the reality that some of the first half bids are being implemented as we speak and actually taking effect.
For the quarter.
So yes, we are cautiously optimistic we can make that may make some moves.
The biggest one of the biggest two would be.
Movement within or we're moving out of spot with that mid teen percentage.
And.
Playing a more active role in even a muted but relatively normalized peak season will play a fairly pivotal role given that 15% of that fleet is operating at significantly lower.
Rates and where they would traditionally have come in to the to the fall operating at and we're seeing activity in that as well. So that's so a lot of things to look encouraging, but but I don't I want to make sure that we're clear.
There is still a tough fight ahead of us that we're still in this for a quarter or two.
And we're going to win we're going to put up a good fight.
Understood. Thanks, Derek and just on the self help side, it's a follow up Chris maybe you can talk little bit more about the cost savings program. You know where you are currently in terms of a run rate how much of these are our structural versus ones that might be more volume variable.
No actually you think maybe.
Maybe you even raised.
The number to 40 million from 34, so if you can address those.
Yeah, Hey, Brian Yeah happy to do that yeah from the last earnings call in quarter, we have raised it at the targeted.
Targeted and identified in year savings for 2023 has over $40 million and the realization rate has also progressed, both the target and the realization over 40% is realized through the first half.
Multi pronged in terms of what makes up that $40 million. It's.
It's a combination of driver and non driver salary and wage changes whether that be through head count or through just structural changes, particularly for new drivers coming in.
There's.
Savings from having reduced turnover.
And the driver pool lower spend on recruiting.
And and just overall impact by having less turnover, it's expensive to train and onboard a driver and get them into place I'll need to see turnover. So the more that we're focused on reduce turnover. There is significant savings there as well, it's just having a strong driver pool and spending less on recruitment.
Then investing in fuel efficiency, whether that be through a certain equipment that we believe.
It has a ah.
A big opportunity to improve margins going forward as we invest in certain equipment that helps with fuel efficiency auxiliary power units and other things that we've looked at and just other initiatives that we as we track the data we're seeing increases in miles per gallon.
And then in supplies and maintenance, which is a topic that I mentioned earlier, so it's really a multi pronged it's across the organization, it's very process oriented and we feel good about where we're at and where we're going.
Okay. Thank you Chris.
This concludes our question and answer session I will now turn the call over to Mr. Derek Leathers, who will provide closing comments. Please go ahead sir.
Thank you I would just like to thank everyone for joining us on our second quarter earnings call and while Q2 represented a further extension of an already challenging freight environment capacity right sizing is gaining momentum across the industry.
The consumer is holding up strong inventory destocking is largely complete and the labor market has held up well nationally.
We've remained and we will remain disciplined on price across our organization, while staying focused on growth in dedicated and logistics and our tech investments are maturing as as is our disciplined approach to lowering our costs to execute we remain committed to operational excellence and I think the entire Warner team for their passion to deliver every day and then speaking of the.
Warner team I, just want to take one last moment here and comment on the situation yesterday.
It was our driver a million mile professional driver thats been with us for a long time that was part of the.
Situation in Ohio, where two fugitives abducted truck with our driver in it and held them hostage for a multi hour standoff with police.
Kept him in the truck and a high speed police chase.
And.
He was thankfully through the efforts of the men and women of the police.
Force in Ohio able to exit that very vulnerable situations safely our thoughts.
Unfettered supporter with him and his family, but also I just would like to add for all truck drivers out there because this is a tough industry. These folks on the backbone of this country and I think we have quickly moved on from Covid and soft and forgot about the efforts and the work that they do to make America. What it is everyday to keep this economy moving and so don't want to.
Thank all of them for those efforts and I want to thank the men and women of <unk>.
Blue in the state of Ohio for having eliminated that threat and safely.
Returned our driver to both us, but more importantly to his family. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
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