Q3 2024 Werner Enterprises Inc Earnings Call
The New York Times, the New York Times, and the New York Times.
Speaker Change: Good afternoon and welcome to the Werner Enterprises 3rd Quarter 2024 earnings conference call.
Speaker Change: All lines are an elicit only mode until after the presentation.
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Speaker Change: After today's presentation, there will be an opportunity to ask questions.
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Speaker Change: Please note, this event is being recorded.
Speaker Change: I would now like to turn the conference over to Chris Neil, Senior Vice President of Pricing and Strategic Planning. Please go ahead. Good afternoon, everyone. Earlier today, we issued our earnings release with our third quarter results. The release and a supplemental presentation are available in the investor section of our website at Warner.com. Today's webcast is being recorded and will be available for replay later today.
Speaker Change: We see the disclosure statement on slide two of the presentation, as well as the disclaimers in our earnings release related to forward-looking statements.
Speaker Change: The company reports results using non-GAAP measures, which we believe provides additional information for investors to help facilitate the comparison of past and present performance.
Speaker Change: A reconciliation of the most directly comparable gap measures is included in the tables attached to the earnings release and in the appendix of the slide presentation.
Speaker Change: On today's call with me are Derek Leathers, Chairman and CEO, and Chris Wikoff, Executive Vice President, Treasurer, and CFO.
Speaker Change: I'll now turn the call over to Derek.
Derek Leathers: Thank you, Chris, and good afternoon, everyone. We appreciate you joining us today.
Derek Leathers: Before we begin, our thoughts and prayers are with those impacted by the recent natural disasters in the Southeast.
Derek Leathers: Hurricane Selene and Milton have brought devastation to the region and we wish all those affected by these events a swift recovery.
Derek Leathers: Moving to our results for the third quarter, we continue to see positive signs that we believe point to the early stages of an improving operating environment. West Coast imports have been strong, we've secured some contractual rate increases, and excess capacity continues to exit, albeit at a slow pace.
Derek Leathers: These positive signs were more than offset by several factors, including elevated health insurance claims, higher interest expense, pressure on logistics gross margin, and higher costs in the school network.
Derek Leathers: As a result of these factors, our operating income and EPS declined slightly from second to third quarter.
Derek Leathers: The combined impact from elevated health care claims and driver school costs negatively impacted EPS by over 5 cents per share compared to Q2.
Derek Leathers: Core Sequential Operational Improvement would have been realized on our results if not for these headwinds.
Speaker Change: This is resulting in cross-currents for Warner. The improvements we have been making to our business to drive long-term growth and value creation are being primarily offset by a challenging macro environment. While this is painful, it is also temporary.
Speaker Change: We remain disciplined on executing our strategy and are continuing to improve the business for today and for the future. As we navigate through this turbulent environment, I'm pleased to report that in Q3, one-way utilization improved year-over-year for the sixth consecutive quarter and rate per total mile inflected positive.
Speaker Change: Strength and momentum continued at our Mexico cross-border, intermodal, and power-only services.
Speaker Change: Our dedicated fleet size grew sequentially and revenue per truck increased.
Speaker Change: We maintained high customer retention and dedicated, and our cost savings program progressed.
Speaker Change: In addition, I am pleased to report that a small group of professional drivers from our ECM Transport subsidiary decertified the union's representation and decided to work directly with company management.
Speaker Change: In our ongoing effort to remain the best workplace for professional drivers, this demonstrates that our driver-centric culture at Warner is working, and that it is as strong as ever.
Speaker Change: When the going gets tough, the tough get going, and thanks to Warner's over 13,000 talented team members, their grit and determination is positioning Warner for improved operating leverage and long-term value creation as the market improves.
Speaker Change: Let's move to slide 5 and highlight our Q3 results.
Speaker Change: during the quarter.
Speaker Change: Revenues were 9% lower versus the prior year. Adjusted EPS was 15 cents.
Speaker Change: Adjusted operating margin was 2.9%.
Speaker Change: Adjusted TTS operating margin was 5.3% net of fuel surcharges.
Speaker Change: While one-way truckload remains more pressured relative to dedicated, we are pleased with another quarter of improved utilization and revenue per total mile turning positive year over year for the first time in seven quarters.
Speaker Change: Our pricing discipline, combined with better freight options and strong miles per truck, led to revenue per truck per week that increased nearly 7%.
Speaker Change: Our logistics business is a key component of our strategy.
Speaker Change: Through our brokerage, intermodal, and final model offerings, we can provide a greater portfolio of solutions to our larger customers, while also expanding our reach to small and mid-sized customers.
Speaker Change: Our truckload brokerage business complements one-way trucking. By assigning partner carriers to lanes, they're less optimal for our own network, while adding incremental revenue and earnings.
Speaker Change: Furthermore, brokerage provides an opportunity to introduce our service product to customers in a transactional or low-risk setting. After showcasing our service and capabilities and developing a relationship with the customer, our business often expands to one-way truckload or dedicated.
Speaker Change: Our continued advancement in technology is one of the key enablers of growth and logistics with a minimal capital investment.
Speaker Change: Through 2023, we demonstrated 13 consecutive quarters of growth in logistics.
Speaker Change: Our business fundamentals remain strong today. We've made two logistics acquisitions in recent years and have moved all of our logistics business except Final Mile to our Edge TMS platform.
Speaker Change: As greater demand returns, we expect improved results in logistics through both higher rates as well as more volume and transactional opportunities.
Speaker Change: In short, despite an operating environment that remains challenging, we continue to see positive signs across the business, from early one-way rate improvement to a strong dedicated pipeline. Evidence of some market tightening response to supply chain disruptions
Speaker Change: Growing Power Only Volumes and Anticipated Peak Volumes Slightly Higher Than Last Year
Speaker Change: Moving to slide six. Before discussing our 2024 strategic priorities, I want to spend a few minutes underlying the strength and competitive advantage of our dedicated solution.
Speaker Change: Warner is one of the largest most well-respected dedicated providers in the US. With our focus on safety and service, Warner provides a highly integrated dedicated solution to large enterprise customers who look to us to service complex and hard-to-serve networks.
Speaker Change: Our ability to design, build, operate, and maintain fleets sets us apart.
Speaker Change: We solve problems and add value for our customers that view their supply chain as a competitive advantage. This has enabled us to maintain over a 90% customer retention rate.
Speaker Change: While the overall dedicated environment has experienced greater pressure than past down cycles, we do not believe that there has been a fundamental change in the dedicated model. Rather, looking ahead, we see opportunities to preserve and grow our existing dedicated business and to stimulate progress through vertical expansion and private fleet conversion.
Speaker Change: With market momentum shifting back to prioritizing capacity, reliability, and service, combined with a total addressable market exceeding $30 billion, we believe Warner is well positioned to capitalize on a robust pipeline of opportunities.
Speaker Change: Moving to slide 7, our DRIVE framework continues to inform our decisions over the long term.
Speaker Change: representing our commitment to durability, results, innovation, values, our associates, and the environment.
Speaker Change: With two months until year end, we want to provide an update on progress towards the strategic priorities we laid out for 2024 at the beginning of this year.
Speaker Change: When we set these goals, we anticipated a more robust acceleration of macro and industry trends in the second half of the year.
Speaker Change: While continued softness has impacted outcomes, we are making progress.
Speaker Change: Our three priorities to generate earnings power and drive value creation are driving growth in core business, driving operational excellence as a core competency, and driving capital efficiency.
Speaker Change: Relative to our first priority, driving growth in core business, we are focused on controlling the controllables and implementing changes that position us to grow and capture operating leverage on the market and flex.
Speaker Change: For example, we are seeing benefits from consolidating freight into a single platform.
Speaker Change: Our technology stack is anchored by our in-house designed and architected Edge TMS platform, which is underpinned by a robust API structure.
Speaker Change: This allows for seamless and real-time data exchange across other systems and winning technologies, significantly improving decision-making, operational efficiency, and scalability.
Speaker Change: This seamless connectivity results in benefits such as rate automation and optimized freight selection.
Speaker Change: Beyond technology, we've realized other advances that are driving revenue.
Speaker Change: One-way miles per truck and revenue per total mile are improving. Mexico volumes are growing, and power-only revenues are also growing, increasing mid-teens year over year and high single digits sequentially.
Speaker Change: We remain confident in the roadmap to get back to our long-term target range of 12-17%.
Speaker Change: Pace and timing are difficult to predict, but the pathway is clear. Later on, Chris will discuss these key levers to bridge the gap to our long-term expectations.
Speaker Change: relative to our second priority of driving operational excellence as a core competency, we've seen advancements here also.
Speaker Change: In fact, everything we do here at Warner is done with an attention to excellence.
Speaker Change: As a recent example, Ferguson, a valued customer, recently announced they want to receive their carrier of the year in 2024 in the truckload category. We appreciate these relationships and customers that value how we approach safety, reliable service and unmatched capability.
Speaker Change: As communicated previously, our technology roadmap has been a key focus.
Speaker Change: In addition to the previously mentioned benefits of our business, migrating to our Edge TMS platform.
Speaker Change: and several other examples illustrate progress in our technology journey, including
Speaker Change: The automation of our accounts payable processes, being close to completing the migration of our back office to work day, and streamlining our internal operations. And reducing the time it takes to qualify, onboard, audit, and pay third party carriers and brokerage.
Speaker Change: These benefits continue to advance us towards processes that are better, faster, and cheaper for the long term.
Speaker Change: Through Q3, we've realized $40 million in savings through initiatives focused on innovation, leveraging technology, and further integrating and centralizing processes across our legacy and acquired businesses.
Speaker Change: We continue to invest in our future through the 5 Ts, trucks, trailers, terminals, talent, and technology, all to position us well when the market turns.
Speaker Change: We reported another solid quarter of operating cash flow and our year-to-date free cash flow is up year-over-year
Speaker Change: CapEx spend and fleet age remain low.
Speaker Change: Despite the prolonged down cycle, I am proud of our team's progress on these fronts.
Speaker Change: These results prove that during the ebbs and flows of market demand, we remain focused on controlling what we can.
Speaker Change: We continue to push forward with implementing structural improvements that will position Warner for success as the market normalizes.
Speaker Change: With that, I'll turn it over to Chris for a deeper dive into our Q3 performance.
Chris: Thank you, Derek. Let's continue on slide 9.
Chris: Third quarter revenues totaled $746 million, 9% lower versus prior year.
Chris: Adjusted operating income was $21.6 million. An adjusted operating margin was 2.9%, a decrease of 48%, and 220 basis points respectively. Adjusted EPS of 15 cents, declined 27 cents.
Chris: primarily driven by a softer used equipment market, lower gains and higher interest expense combined with rate pressure in one way and logistics.
Chris: Turning to slide 10.
Chris: Truckload Transportation Service's total revenue for the third quarter was $523 million, down 9%. Revenue's net of fuel surcharges declined 6% to $460 million.
Chris: Net of fuel surcharges and equipment gains, TTS operating expenses reflected our intentional commitment to control costs, declining modestly year over year and sequentially, but were more than offset by a 10% smaller average fleet size and a revenue per mile decline of 1%.
Chris: Year-over-year one-way revenue per total mile increased 0.3% in the third quarter and was down 1.2% year-to-date.
Chris: Several TTS expense categories showed improvement in the quarter. Insurance and claims expense dropped $3 million or 10% versus prior year. Operating supplies and maintenance and general supply expense was down $1 million or 2%.
Chris: Second, incremental growth for existing fleets and dedicate it at a higher contribution margin as we return to normalized volume. Third, normalization in the used equipment market. And fourth, structural improvements through technology and our cost savings initiatives.
Chris: Let's turn to slide 11 to review our fleet metrics.
Chris: TTS average trucks declined to 7,414 during the quarter. We ended third quarter with the TTS fleet down 15 trucks sequentially and 9% year-over-year.
Chris: TTS revenue per truck per week net of fuel increased 3.5% year-over-year during the quarter and has increased year-over-year for 22 of the last 27 quarters.
Chris: Within TTS for the third quarter, dedicated revenue net of fuel was $285 million, down 7% year-over-year. Dedicated represented 63% of TTS revenue, consistent with the year ago.
Chris: Dedicated average trucks decreased 8.5% to 4,809 trucks. At quarter end, dedicated represented 66% of the TTS fleet. Dedicated revenue per truck per week increased 1.7% year-over-year, growing 26 of the last 27 quarters.
Chris: In an improving market, we remain confident in our position to return the fleet to growth given demand improvement within some of our existing fleets and our high customer attention.
Chris: Growth opportunity remains in retail while also focusing on gaining traction in other high-value verticals and hard-to-serve freight opportunities at reinvestible margins.
Chris: In our one-way business for the third quarter, trucking revenue net of fuel was $165 million, a decrease of 6% versus prior year. Average truck count declined 12% to 2,605 trucks.
Chris: Revenue per truck per week was up 7% year-over-year.
Chris: One-way freight conditions in the quarter were similar to Q2, but there were pockets throughout the country where better freight options existed. West Coast Imports, for example, allowed us to improve our freight mix in the West. We operated some pop-up trucks throughout the quarter and had the opportunity to participate in numerous projects at improving rates.
Chris: We will continue to utilize our freight selection tools while being methodical, disciplined, and proactive in transitioning our one-way portfolio to improved rates.
Chris: In addition, our power-only offering within logistics continues to grow. Increased miles in power-only offset the decline in one-way truckload miles, ultimately resulting in combined miles that were flat year-over-year.
Chris: As a carrier of scale and reach, our ability to produce similar miles with a smaller fleet is unique, and in a tighter market with better rates, the combination of one-way production gains plus power-only volume growth translates to improved ROI and provides more optionality for our customers.
Chris: Now turning to logistics on slide 12.
Chris: In the third quarter, logistics revenue was $207 million, representing 28% of total third quarter revenues. Revenues were down 10% year-over-year and 1% sequentially.
Chris: Revenue and truckload logistics declined 12% and shipments decreased 10%. Shipments decreased less than 1% sequentially as volumes from the existing customer base were generally steady.
Chris: Intermodal revenues, which make up approximately 14% of logistics revenue, decreased 1% sequentially, but increased 7% year-over-year due to 19% more shipments. This was partially offset by a 10% decrease in revenue per shipment.
Chris: Final mile revenues decreased 5% sequentially and 17% year-over-year.
Chris: It continues to be a very competitive operating environment, which is pressuring logistics margins in the short term.
Chris: We have taken recent actions, including certain headcount reductions and implementation of other cost controls.
Chris: to further lower our cost to serve. We are working to improve revenue quality as well as building our infrastructure and technology to continue to provide industry-leading service and expertise at greater scale.
Speaker Change: Moving to slide 13 to discuss our cost savings program. We are increasing our 2024 program again and are now targeting $50 million.
Speaker Change: Through the third quarter, we have realized 80% of our revised full-year target. We have clear line of sight on the rest of the program and expect to reach our target by the end of the year. As a reminder, these cost savings are largely long-term and sustainable.
Speaker Change: While we have been on a journey to reduce costs during this inflationary environment over the last few years, we have continued to reinvest in the business.
Speaker Change: We have maintained a new fleet and acquired real estate in key geographies. We have also upgraded our terminal network to provide best-in-class amenities to our drivers and create more capacity to perform repairs at our locations.
Speaker Change: And finally, we have pushed forward with investing time, energy, and capital towards our technology journey as we work to transition all business units to one TMS platform and build tools to enhance our customers' experience and greater efficiency for our associates.
Speaker Change: Let's review our cash flow on slide 14.
Speaker Change: We ended the third quarter with $55 million in cash and cash equivalents. Operating cash flow was $61 million for the quarter, or 8% of total revenue, slightly lower than the prior year.
Speaker Change: As a result, free cash flow through the first nine months of this year was 53 million, or 2% of total revenues, up 300 basis points year-over-year.
Speaker Change: Total liquidity at quarter end was $434 million, including cash and availability on our revolver.
Speaker Change: Moving to slide 15.
Speaker Change: We entered the quarter with $690 million in debt, up $20 million, or 3% sequentially, but flat from a year earlier. Net debt decreased $12 million, or 2% year-to-year. Net debt to EBITDA was 1.6 times, driven by EBITDA margin compression.
Speaker Change: We continue to have a very healthy balance sheet, access to capital, relatively low leverage and no near-term maturities in our debt structure.
Speaker Change: We continue to prioritize strategic reinvestment in the business while also being balanced over the long term between returning capital to shareholders, reducing debt, and funding M&A.
Speaker Change: Through the first nine months of the year, we generated nearly $260 million in operating cash flow. We utilized $206 million net of used equipment sales for reinvestment in our fleet, terminals, technology, and school network.
Speaker Change: 26 million year-to-date was a return to shareholders through our quarterly dividend. We did not repurchase shares during the quarter and therefore remained flat at 67 million in share repurchases year-to-date.
Speaker Change: We have 3.9 million shares remaining under the board approved program. Let's continue on slide 17 and a review of our full year 2024 guidance.
Speaker Change: Our full year fleet guidance has been adjusted from being down 3-6% to being down 6-8% year-to-date.
Speaker Change: We are operating 7% fewer trucks. We see potential for a lower dedicated fleet in the fourth quarter, but expect any decline will be partially offset by growth in our one-way fleet. Our full-year net CAPEX guidance range has tightened to be between $240 and $260 million, with the midpoint unchanged at $250 million.
Speaker Change: One-way truckload revenue per total mile increased 0.3% in the third quarter, slightly better than the top end of our down 3% to flat guidance.
Speaker Change: We expect the year-over-year change in the fourth quarter to be flat to up 3% as we see increasing opportunity for favorable rate changes going forward
Speaker Change: Total gains at $8.9 million year-to-date, including $1.8 million from the sale of real estate last quarter. Excluding the real estate, sales of used equipment and property resulted in a gain of $7.1 million. We are lowering the midpoint and tightening the range to be $7 to $11 million.
Speaker Change: Our average age of our truck and trailer fleet at the end of the third quarter was 2.0 and 5.2 years respectively. I'll now turn it back to Derek.
Derek Leathers: Thank you, Chris. We continue to make progress on our near-term initiatives, structural improvements, and strategic tech investments on our path to position Warner for growth as demand returns.
Derek Leathers: The operating environment remains challenging, and while we were optimistic that the turn would occur before pre-season, we are staying the course and focused on controlling what we can.
Derek Leathers: We are pleased that one-way trucking revenue per total mile increased in Q3. One-way miles per truck showed continued year-over-year improvement, and the dedicated fleet grew sequentially.
Derek Leathers: We are a cycle-tested team, and our historical results demonstrate our ability to generate earnings power as the market improves and demand accelerates. Through it all, we will remain steadfast in our approach to safety and delivering best-in-class service to our customers.
Derek Leathers: With that, let us open it up for questions.
Speaker Change: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad.
Speaker Change: If you are using a speakerphone, please pick up your handset before pressing the keys.
Speaker Change: To withdraw your question, please press star then 2.
Speaker Change: To allow for as many callers as possible to ask questions, we ask you to limit your questions to one question and one follow-up. This call will end at 5 p.m. Central Time following the company's closing remarks.
Speaker Change: Our first question today is from Robbie Shanker with Morgan Stanley. Please go ahead.
Speaker Change: Hey Robbie, this is Chris. Sure, we can unpack that a little bit. Not a ton of specifics that we can really provide around it other than it was uniquely elevated.
Speaker Change: During the quarter, you know, potentially even a record for us.
Speaker Change: So, you know, that's just why we called it out in the results You know certainly, you know something that can be volatile from You know from time to time, but you know, this was more of a of an outsized level for us. So it was about five cents of EPS impact
Speaker Change: at least on a quarter-over-quarter basis as we noted.
Speaker Change: I understood that's helpful and maybe as a follow-up I think you also said in your prepared remarks that you secured some rate increases this quarter. Can you just talk about the magnitude of what you're looking at for 2025 bid season maybe starting now through you know going into the peak of it and like you know 1Q2 if you have next year
Derek Leathers: Yeah, Robbie, this is Derek.
Derek Leathers: And so there's a level of assertiveness that goes along with that ask.
Derek Leathers: based on the current state of pricing with certain customers in the network.
Derek Leathers: I think it's too early to try to predict what 2025 looks like. I think the next several weeks will really shape and tell us a lot about what to expect going into the formal bid season. What I can tell you is that
Derek Leathers: the slow build that's been occurring in Q3 with some add-on in Q4.
Derek Leathers: has been obviously somewhat impacted by the very natural disasters we opened up the call talking about.
Derek Leathers: and the port strikes as well. But even in addition to that, there is an ongoing kind of subtle tightening taking place.
Derek Leathers: But it is our expectation as we look into 2025 that the time for rates to be going up is upon us. The question is the magnitude, and I think it's too early to tell.
Speaker Change: Understood. Thanks, Derek.
Speaker Change: Thank you. The next question is from Scott Group with Wolf Research. Please go ahead.
Scott Group: Hey, thanks. Afternoon.
Scott Group: I think the last couple quarters you've talked about modest sequential margin improvement.
Scott Group: which is how it's played out. Derek, any thoughts there on how to think about the margins, Q3 to Q4? And then can you just clarify, I thought I heard that dedicated fleet might be lower in Q4, but the one-way fleet higher. That feels like a change from last...
Scott Group: A couple quarters of trends, I just want to make sure I heard that right.
Derek Leathers: Yeah, I'll start with the latter part of that question, Scott, which is relative to dedicated. So I think the issue in dedicated right now as we look at Q4 is we know and have decided on a couple of final exits.
Derek Leathers: where we don't believe the profile.
Derek Leathers: because what happens is we're starting the early signs, and this is what you always see in the early signs of a turn, to start seeing individual dedicated fleets adding capacity back, adding trucks back in, and they may or may not offset a couple of known exits that we've decided upon.
Derek Leathers: but also at more of a premium rate environment over the standard contract language where we're needed. So we're optimistic about that. It's not a change in strategy and it is not a long-term read-through, I can assure you.
Speaker Change: Oh, on the first part of your question on margins, look, we're
Speaker Change: You know
Speaker Change: battling away every day and we've been very careful to word it as moderate. I think that's still the same theme. Chris referenced a very abnormal health insurance quarter that hit us in Q3, that's why we called it out. Absent that, the operational improvements have continued to take place. The marginal
Speaker Change: The
Speaker Change: The macro, which it's hard to own the macro to a point like this in the cycle and instead it's going to be focusing on things like the productivity of gains we've made and now being able to put those to work in a little bit of a higher rate environment.
Speaker Change: The improvements we've made in optimization and collapsing around core customers that look at their supply chain as a competitive advantage and then maintaining pricing discipline, which will come potentially at the expense of fleet size, but we believe that at this point, that's the right move, given that there is better times on the horizon relative to market conditions.
Scott Group: That's helpful. And just lastly, I haven't really heard anyone talk about the November 18th deadline with the clearinghouse, and so maybe it's not a big deal. But just wondering your take, Derek, if you think this matters from a capacity standpoint for the industry going forward.
Speaker Change: Thank you.
Derek Leathers: I think it certainly could. It depends on how that implementation, if that implementation happens. And I think, Scott, what you're probably hearing in terms of quietness out of the conversations with fleets.
Derek Leathers: is a lack of confidence in where that lands, how that lands, and the significance of any...
Derek Leathers: but I'll believe it when I see it.
Derek Leathers: to potentially as short as a 10-day visa. It really puts some tightening on capacity because now they really have to do what the law says they should have been doing all along, which is to go into the country, deliver a load, and then exit.
Derek Leathers: That's not what we know is happening in practice.
Derek Leathers: So there's a couple of potential.
Derek Leathers: capacity catalyst or constraining catalyst, I should say, that we're pretty excited about. But look, it's been a rough couple of years, and so we're not gonna bank on that. We're gonna keep our head down, focusing on what we can improve internally, but certainly be excited if we see those things come through.
Derek Leathers: Thank you guys, appreciate the time.
Speaker Change: The next question is from Brian Othenbeck with J.P. Morgan. Please go ahead.
Brian Othenbeck: Hey guys afternoon, thanks for taking the question
Brian Othenbeck: Maybe, Derek, just to follow up on your last comment there about maybe engineering the one-way fleet down a little bit more, just to—obviously, the fourth quarter you mentioned is going up, but do you feel like you're at a point where you don't need to make any more of those adjustments to kind of drive—
Brian Othenbeck: for their utilization.
Brian Othenbeck: or is it still maybe a little bit more to go as you continue to?
Brian Othenbeck: Thank you.
Derek Leathers: Yeah, I mean, we've said on prior calls, and I still feel this way, dedicated as a percent of total fleet will rise further from where it's at today, most likely, we have other alternatives in the one way marketplace to provide our customers both with pure brokerage.
Derek Leathers: as well as Power Only.
Derek Leathers: I think what they're more interested in is the visibility, the suite of services, the portfolio that we bring to the table. But if we can create efficiencies at their dock with a unified trailer pool, provide seamless service and visibility to them along the way, that product continues to gain traction, and that's why it's one of the fastest growing products in our fleet. So, thank you.
Derek Leathers: As it relates to utilization, I want to be clear, like, this utilization miles per truck increase isn't driven by us shrinking the fleet, although, obviously, a smaller fleet forces more demand through it.
Derek Leathers: It really is the result of ongoing engineering and efforts with some of the tech investments we've made.
Derek Leathers: to be able to put...
Derek Leathers: their miles, which both is good for the driver, it's great for the customer because on those lanes where we do operate with our own equipment, we can further enhance both service, safety, and along the way, overall productivity. So that's exciting stuff. It's also a reflection of leaning into Mexico cross-border. It's a reflection of leaning into harder-to-serve markets where time sensitivity is paramount.
Derek Leathers: are not so close to, are not such small margin miles.
Derek Leathers: Structural improvements that have been very difficult and don't pay great dividends in a market rate structure like the one we're in today, but pay off in a significant larger contribution rate as rates improve.
Speaker Change: Okay, and then thanks for that. There's another follow-up maybe on...
Speaker Change: Can you give a little bit more color in terms of what the levers of profitability you think might be out there? You mentioned a few of them, account reduction, cost controls, revenue, quality. But
Speaker Change: I would assume some of that improvement on the profitability side looking to get to would probably just take more of a Stronger less competitive market, but I don't know how much of that you feel you can get to your goal from more of those self-help levers or What really needs a stronger market to get you back to that or get you to the big single-digit target. Thank you
Speaker Change: Yeah, Brian, this is Chris. Maybe a couple of things there.
Chris: Number one, I think the fundamentals in logistics continue to be strong. We've got high customer retention there, serving large enterprise customers, and there's a number of things on the horizon.
Chris: near-term and long-term that we're optimistic about within logistics, including how we're leveraging the technology there.
Chris: to improve not only how we're going about serving large enterprise customers, but also the ability to gain more share.
Chris: but there's continued strength in power only within the truckload logistics that is continuing to grow double digits.
Chris: And a lot of positive aspects for that that's becoming a just a greater mix of the truckload logistics It's growing domestic and cross-border and again, we're utilizing technology there to Capture more overflow from assets and into the power only
Chris: a business. So, you know, I think that's positive as we go forward.
Chris: And then there are certain actions, you know, we've been taking actions on the cost side.
Chris: The, you know, personnel costs, those are down 10% year over year. But we're obviously focused on staying positive in operating income and gradually expanding the OI margin there. So we're taking additional actions in terms of, you know, getting further or more lean in the operations as well as other aspects and improvements in final mile.
Chris: and some other actions that we're taking. So, a lot there, but we're focused on it and long term we feel good about it, but also focused on what we can control in the short term.
Chris: You know, one of the things I would just add is our tech journey.
Chris: Everything but Final Mile is now residing on our Edge TMS platform. We're seeing seat-level productivity that gives us strong...
Chris: margin over time.
Chris: through higher seat level contribution rates.
Chris: And so we're excited about that. We need the volume to come along with it, and we need to make sure we didn't over cut or build a bridge too far when we feel as though we're as close as we are to a stronger market. So when all that comes together, that's something that gives us a lot of encouragement looking forward.
Speaker Change: Okay. Thanks very much, guys.
Speaker Change: Thank you.
Speaker Change: Thank you very much.
Speaker Change: How long will it take you to pivot to growth if, let's say, you start to see the things you want to see in first quarter, second quarter, next year, and then separate from that,
Speaker Change: fleet planning with all of the new CARB regulations and the 2070 EPA out there. How do you feel about managing fleet age and your ability to navigate growth over say the next 18 to 24 months?
Speaker Change: That creates a cost overhang that's real.
Speaker Change: and tough decisions have to be made.
Speaker Change: It's my belief that to curtail that capability...
Speaker Change: We feel very good about our ability in a stronger market if we're in a position where we need to grow.
Speaker Change: but we also improve and get some self-help on the school side.
Speaker Change: Thank you for joining us. We appreciate it.
Speaker Change: that network is built.
Speaker Change: you know, a larger driver count than what it's being asked to produce today, both for Warner and the industry.
Speaker Change: The demand for those high-quality drivers increases kind of right alongside overall market demand. And the folks going through those schools both perform better financially because less bad debt, less other kind of negative issues that go along with a market that maybe isn't as robust from a hiring perspective. Because remember, roughly half those graduates end up at Warner, but about half of them end up in industry placements.
Speaker Change: In general, not all driving trucks, by the way, but whether that be buses or other other activities
Speaker Change: and across the board, that demand has been off.
Speaker Change: aren't where everybody would like to see them. But the fact that we haven't aged out that fleet and have a bunch of sort of fleet age debt, if you will, we've got to go out and spend tons of money to refresh it and prepare it for potential emission changes, puts us in a very unique position it allows us to use capex.
Speaker Change: So, I think we're in a great position, our testing on...
Speaker Change: all of the above as it relates to different
Speaker Change: You know, at the forefront, so we have, you know, we're testing electric, we've got a hydrogen beta.
Speaker Change: Test underway right now. We're going to know and be as knowledgeable as anyone on how we can have worked through that and then lastly you mentioned how we'll tech enable us.
Speaker Change: as it relates to network design.
Speaker Change: to be able to both comply but not be overexposed to some technologies that are very much still yet to be proven. So we'll be able to manage it, I think, well, and I like the positioning overall.
Speaker Change: During this down cycle, we have increased our school network in those locations by, you know, call it about 50%. We've added several locations over the last couple of years, which might sound counterintuitive in a down cycle to be investing in that area, but it does take a couple of years to create awareness of those schools being in certain geographies. So we've, you know, taken some of the investment and pain in doing that, despite a down cycle. And so we're even more positioned now for this up cycle with
Speaker Change: 50% more schools in key geographies than we have been in the past.
Speaker Change: Thank you very much.
Speaker Change: Thank you. The next question is from Jason Seidel with TD Cowan. Please go ahead. Thank you, Robert. Hey, Derek. Hey, Chris. I hope you guys are doing well. Two quick things. You know, you talked about getting some sequential rate increases.
Speaker Change: I think here on the contractual side.
Speaker Change: And what do you think you guys need to get to make sure that you can secure some earnings growth for 25?
Speaker Change: And then my second question revolves around that $50 million target on the savings side. You say you guys are well on the way. You said the overwhelming majority is more what you would consider permanent savings. I was wondering if you can maybe drill down a little bit on that and just tell us how much is permanent out of that $50 million.
Speaker Change: Thanks for the question. As I mentioned earlier on the call, it's too early for us to predict where the rate environment is ultimately going to land as we get more firmly into the midseason. What I can tell you is that our early returns have been positive. You can see that in the fact that we had our first
Speaker Change: We believe we can build upon that momentum as we go into Q4. We believe that sets the stage, and we've seen through recent events...
Speaker Change: I think if you look at the last couple of up cycles we've performed
Speaker Change: Thank you.
Speaker Change: Understood and on the call side.
Speaker Change: Yeah, hey Jason. So, again, just recapping, you know, it's almost $100 million over the last two-year period from these cost-saving programs. I think you specifically were just asking about, you know, the extent that they're permanent.
Speaker Change: We've said that well over 60% of these are structural and sustainable, and I think as we go forward...
Speaker Change: There will continue to be a high degree of, you know, savings that we're realizing and executing on that just by their nature are structural and lasting over time. The way that we approach these is really focusing around operational innovation, leveraging technology as well as M&A integration. So just by the nature of our process, how we go about seeking those opportunities and executing on them, how we identify and prioritize those opportunities, they're just naturally areas that...
Speaker Change: Okay, fair enough. Appreciate the time, gentlemen.
Speaker Change: Thank you. The next question is from
Speaker Change: Yeah, hey, good evening, guys.
Speaker Change: I want to step back a bit on the demand backdrop. I think others' discerning season has sounded more mixed on peak season expectations, but in the prepared marks, you mentioned seeing price opportunities and some underlying improvements. So, Derek, try to square that away, and square away kind of what you're seeing in the business that gives you confidence into a more normal peak season. Is that what you're hearing from your customers or kind of what you're seeing in the market? Just any more color on why you sound maybe more bullish on the fourth quarter?
Derek Leathers: Yeah, I don't know the read-through to be that I'm bullish on the fourth quarter, but as it relates to peak...
Derek Leathers: and volume incremental lift this peak season compared to last. Both of those things are positive. When you can put them together, they're a little more positive.
Derek Leathers: So that's exciting, but we also know, obviously, that there's ongoing macro headwinds and Peak is only a small part of the overall organization as we think about fourth quarter.
Derek Leathers: And so it's a mixed bag, right? But yes.
Derek Leathers: In terms of what's the source of my statements, the source is our customers.
Derek Leathers: It's our ongoing relationships that we've built over many, many years. It's their confidence in our ability to actually serve.
Derek Leathers: So, you put all that together, that's what gives us the confidence to make the statements I'm making today. But, I'd be remiss if I don't remind everybody that no matter how good PEEC is, it is still a subset of the overall total network of Warner Enterprises, and so I'm not...
Derek Leathers: saying that it's going to be some up-and-to-the-right major shift from Q3 to Q4, but it does set us up for sort of that moderate sequential improvement as we go forward.
Speaker Change: That's helpful. And maybe on the cash flow side, I think you mentioned about a positive buyback this quarter. But following up on an earlier question, you invested a lot in the down cycle, driver schools, reinvesting in the fleet. I guess into 2025, Chris, how would you expect CapEx to trend versus this year? Could that actually moderate and still support growth? Or is there further investment needed if we did see a market begin to recover? And then how would share buybacks fit into the algorithm?
Speaker Change: to invest in growth. And that is how we first and foremost prioritize.
Speaker Change: Capital allocation is reinvesting the business. So
Speaker Change: where there's a need to do that, investing in growth, investing in, you know, finding ourself in a turn and an up cycle and needing to do that, we can certainly, you know, pull that lever.
Speaker Change: and do that. I mean, it's too early to say, you know, specifically on what we expect the net capex to be for 2025, but certainly we'll invest in growth.
Speaker Change: at the appropriate time.
Speaker Change: You know, by and large,
Speaker Change: As a percent of revenue, our net capex has been trending down.
Speaker Change: and we think that, you know, that...
Speaker Change: You know, it certainly makes sense just as a portfolio.
Speaker Change: continues to evolve to be more asset light.
Speaker Change: From a share repurchase perspective, we're pleased with the long-term value that we created with the $67 million that we repurchased through the first half of the year.
Speaker Change: That's, you know, modestly creative right now. Obviously, we'll be more creative as earnings improve.
Speaker Change: Thank you.
Speaker Change: and we have Headroom in our board-approved program.
Speaker Change: evaluate all of the options in terms of deploying capital across a variety of criteria, how it impacts earnings, how it contributes to our long-term strategy, and all of that in the context of our leverage profile. So we look at share repurchase, we look at M&A, where we've been active in looking at opportunities, and we'll continue to be balanced in that approach as we go forward.
Speaker Change: Thanks for watching.
Speaker Change: The next question is from Eric Morgan with Barclays. Please go ahead.
Eric Morgan: Hey, good evening. Thanks for taking my question.
Speaker Change: See lots of drivers why this upcycle would certainly be a multi-year event
Eric Morgan: Those drivers being some of the regulatory environments, some of the emission changes, some of the higher cost of capital, thus a little bit higher buried entry for the first time in a long time with some of the new engines and emission changes, the ongoing onslaught of sort of nuclear verdicts and the risk profile of entering this business from the outside.
Eric Morgan: There's lots of different things that make.
Eric Morgan: But that's why we've sort of outlined the pillars of that, both in some of the opening presentation as well as in some of Chris's answers. Happy to elaborate on any of those if needed, but it's just a bit premature for us to give great granularity to the arrival point in that range.
Speaker Change: But Eric, I would just reinforce again, I mean, we're we're seeing progress as we go forward just as a market, the progress is going to be gradual.
Speaker Change: Chris Neil, Derek Leathers, Chris Neil, Derek Leathers, Chris Neil, Derek Leathers, Chris
Speaker Change: It's really, you know, on normalization in that dedicated demand and normalization in the resale market that, you know, have a bit more progress for us to, you know, start to see overall progress across all four of those pillars, but I think it's a beginning.
Speaker Change: Yeah, appreciate that. And just a quick follow-up on the guidance in Dedicated, you still have the 0 to 3% revenue protractor for the full year. Anyway, you can put a finer point on that, just given how far along we are in the year, maybe just put some takes that might take it up or down from here.
Speaker Change: There are certain dedicated fleets that obviously operate at a much higher revenue per truck per week profile because they have higher utilization rates.
Speaker Change: to give them any finer point than that.
Speaker Change: Again, I think the takeaway is less about the percentage and more about the activity. And the activity at this point is positive that we're starting to see some of those ad backs.
Speaker Change: That we have a couple of exits that we've decided to execute on relative to it not meeting our margin and long-term strategic profile that we're looking for.
Speaker Change: Understood. Appreciate it.
Speaker Change: and Chris Weatherby.
Chris Weatherby: Hey, thanks. Thanks for taking the question
Chris Weatherby: Yeah, I guess I wanted to come back to, Derek, your comment about the fourth quarter. And I think you talked about it in the context of margins. Sometimes you talk about it in the context, I think, of earnings as well. I'm just kind of curious how to think about the progression to the fourth quarter. I guess maybe specifically, is the $0.05 sort of these extraordinary cost items that you recognize in the quarter? Is that the base that we should be thinking about? I just want to make sure I'm understanding, like, kind of level set how we should be expecting kind of a progression from 3Q to 4Q in a rough sense.
Speaker Change: Yeah, I think of a five cents the concern I would have there is I think early in the call somebody asked is this a one-time event
Speaker Change: Because of HIPAA laws and other things, it's not like we have great clarity on what exactly those claims were and are they going to recur or not.
Speaker Change: It would be our belief that there certainly wouldn't be a repeated nearly the magnitude because that's what history would tell us.
Speaker Change: So I don't think it's as easy as just saying, yeah, the five cents all come back, and that was...
Speaker Change: And then from there, it's just the ongoing grind of all these operational things we've been talking about continuing to take hold as well as
Speaker Change: Chris Neil, Derek Leathers, Chris Neil, Derek Leathers, Chris Neil, Derek Leathers, Chris
Speaker Change: or perhaps price held up okay, but there just wasn't a lot of peak there to be had. This one is slightly up in volume, slightly up in price, so that has a good setup.
Speaker Change: as we go from Q3 to Q4.
Speaker Change: usually when you see these singular claims that are a very large
Speaker Change: individual amounts.
Speaker Change: It isn't related to ongoing health and wellness, it's related to some sort of unique event that took place and had to be addressed in the U.S. medical system, which is not a place that's got a low price for admission.
Speaker Change: Yeah, that's for sure, and I appreciate that clarity. That's helpful. And I guess just one other point on the dedicated fleet. So I think your end of period count was above the average, and I know it sounds like there's some exits that you're making. Do we think about that from the end of period for the third quarter or off of the average number on the dedicated fleet for 4Q?
Speaker Change: Dedicated, still open for business, and we're still landing new accounts.
Speaker Change: and two...
Speaker Change: the ad backs that I've been referring to a few different times during the call where we're now starting to see fleets kind of return to their normal
Speaker Change: and GeoMmerce.
Speaker Change: that are still in front of us that will be happening, those are known, and it's offset by how many more add-backs and as well as some new business coming in into the quarter.
Speaker Change: particularly with large enterprise customers, both expanding existing fleets as well as recognizing and implementing some new business. So that was a late push and realization a little late in the quarter.
Speaker Change: Okay, that's very helpful. I appreciate the call, guys. Thank you.
Speaker Change: Yeah, thank you, Chris.
Speaker Change: 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.
Derek Leathers: Thanks Gary. I want to thank everybody for being with us today.
Derek Leathers: Despite the difficult industry environment, we've utilized this downturn to try to bolster Warner and invest for our future positioning. It'll take time for it to fall to the bottom line, but the ongoing progress in production, revenue per truck, and now this quarter, early signs of rate inflection, all lead us to our goal of $1.5 billion.
Derek Leathers: to better results over time. We remain focused on sustainable cost-cutting but will not starve.
Derek Leathers: Our strategic investments in fleet readiness, or our technology roadmap, or our commitment to safety and service. We'll continue to lean into our differentiators. That's dedicated Mexico cross-border and a stronger logistics portfolio than we've had previously. All with an eye towards operating leverage as the market improves.
Derek Leathers: I'll close by thanking our over 13,000 associates for their dedication and commitment to our customers and frankly to each other throughout this difficult market. Warner is a structurally stronger company today with a lot to be excited about moving forward. Thanks for your continued interest and support.
Speaker Change: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Speaker Change: [music]