Werner Enterprises, Inc.

Good afternoon and welcome to the Werner Enterprises second quarter 2021 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one. Earlier this afternoon, the company issued an earnings release for its second quarter 2021 results and posted a slide presentation. These materials are available at the company's website at werner.com. Today's webcast is being recorded and will be available for replay beginning later this evening. Before we begin, please direct your attention to the disclosure statement on slide two of the presentation, as well as the disclaimers in our earnings release related to forward-looking statements. Today's remarks may contain forward-looking statements that may involve risks, uncertainties, and other factors that could cause actual results to differ materially. Additionally, the company reports results using non-GAAP measures, which it believes provide additional information for investors to help facilitate the comparison of past and present performance. A reconciliation to the most directly comparable GAAP measures is included in the table attached to the earnings release in the appendix of the slide presentation. I would now like to turn the conference over to Mr. Derek Leathers, Chairman, President, and CEO. Please go ahead, sir.

Thank you. Good afternoon, everyone. With me today is our CFO, John Steele. I'm pleased to report that Warner delivered record earnings in second quarter, which was achieved through outstanding execution in a robust freight market with unprecedented driver and capacity challenges. The Warner team worked tirelessly and creatively to provide our customers with best in class solutions and superior on time performance. We continue to expect strong freight demand through the rest of this year and well into 2022. Retail inventories require significant replenishing, which will take time, and bodes well for retail freight demand going forward. Strong sales combined with persistent supply challenges resulted in the retail inventory to sales ratio setting another new 30-year low this quarter. At the same time, the driver shortage is as severe as I've ever seen. Traditional industry headwinds remain, including aging demographics and recruiting for the trucking life. Warner is well positioned to thrive in this business environment as a result of our consumer-oriented freight base, driver-preferred dedicated fleets, industry-leading cross-border Mexico business, engineered lanes in our one-way truckload segment, and our comprehensive capacity solutions within Warner Logistics. In addition, just after quarter-end, we added 500 trucks and skilled professional drivers to the Warner family by acquiring 80% of the regional truckload carriers of the ECM Transport Group. Slide 4 provides an updated snapshot of Warner to include the addition of the ECM acquisition, which we completed on July 1st. ECM adds 500 trucks and 2,000 trailers to our combined one-way truckload fleet and provides us with a short-haul regional fleet presence to serve customers in the Mid-Atlantic, Ohio, and Northeast geographic markets. ECM has strong safety and service performance, an outstanding leadership team, and highly skilled drivers with extremely low driver turnover. After the acquisition, Warner continues to have a consumer-centric freight base with over 70% of revenues in retail and food and beverage. Nearly half our revenues are with our top 10 customers and almost 80% from our top 50. Warner and ECM have longstanding and growing relationships with successful companies. Let's move to slide five for a summary of our second quarter financial performance. For the quarter, revenues increased 14% to $650 million. Adjusted EPS grew 40% to $0.86 per share. Adjusted operating income increased 37% to $79.1 million. While our TTS adjusted operating margin net of fuel grew 340 basis points to 17.1%. We generated margin expansion from higher revenues per total mile, continued strong safety performance, effective expense management despite continued cost inflation, and improved gains on sales of trucks and trailers due to much better than anticipated pricing and strong sales execution. Dedicated freight demand remained strong in second quarter as our largest dedicated customers in discount retail, home improvement, and beverage continued to generate robust sales. Our dedicated team once again executed well in second quarter. One-way truckload freight demand was also strong. The rapidly growing economy, combined with several factors limiting industry capacity, resulted in excellent second quarter freight market conditions and our one-way truckload team performed well. We made further strides in our logistics segment in the quarter, stepping up our growth in both revenues and operating income. Despite much higher capacity costs, which impacted our gross margin percentage for our contract business, improved pricing and operational efficiency led to better logistics results. The driver recruiting and retention markets became more challenging in second quarter. High-quality drivers are increasingly harder to find and retain with intense competition from other carriers and industries that are labor-constrained. To address driver turnover, we implemented additional selective compensation increases. Our TTS company driver pay per mile increased nearly 11% year over year. In addition, we continue to deploy innovative strategies to strengthen our driver positioning, which I will discuss in a few minutes. In second quarter, Warner Fleet sales capitalized on a significantly improving pricing market for our premium used trucks and trailers by realizing substantially higher average gains for truck and trailer, and achieved equipment gains of $13.5 million. Fleet sales are a core part of our business for the last 30 years, and our Werner Fleet sales team performed well in the quarter as well. In first quarter, we made a strategic minority equity investment in TuSimple, an autonomous technology company. TuSimple completed its IPO in April and experienced stock price appreciation through June. As a result, we recognized a 20.2 million unrealized gain on our investment, or 22 cents a share, which increased our non-operating income in second quarter 2021. We reduced our second quarter gap EPS for this item in our adjusted EPS reconciliation. In future quarters, we will mark to market this investment based on the change in two simple stock price. We ended the quarter with 7,645 trucks in TTS. five fewer than last year and 90 fewer sequentially. The extremely difficult driver recruiting market prevented us from achieving our goal of organically growing our fleet during second quarter. At quarter end, 66% of our TTS truck fleet was in dedicated and 34% was in one-way truckload. Following the ECM acquisition, our dedicated and one-way truckload fleet percentages changed to 62% and 38% respectively. At this point, I'll turn the call over to John to discuss our second quarter financial results in more detail. John?

Thank you, Derek, and good afternoon. Beginning on slide 7, total second quarter revenues increased $81 million to $650 million, or plus 14%. Our TTS revenues per truck per week increased 6.7% due to a low double-digit percentage improvement in revenues per total mile, offset by a mid-single-digit decline in miles per truck caused by a greater mix of shorter length of haul dedicated versus one-way truckload and fewer team drivers. And logistics continued to strengthen, growing revenues by 29%. Adjusted operating income grew 37% based on 33% growth in TTS, 25% growth in logistics, and improved financial performance from our driver training school network. Adjusted earnings per share were 86 cents, up 40% year-over-year. Beginning on slide 8, let's review results for our truckload transportation services segment. In second quarter, TTS revenues increased 10% on higher revenues per mile, lower miles per truck, and 1% fewer average trucks. Adjusted operating income was $74.4 million, or a 33% increase driven by a 340 basis point expansion in our adjusted operating margin net of fuel. Our adjusted operating ratio continued to show strong improvement with an 82.9 OR. Turning to TTS fleet metrics on slide 9, for dedicated, we grew trucking revenues net of fuel by 10% to $262 million. Dedicated average trucks increased 7%, and revenues per truck per week increased 2.4%. Dedicated rates increased above our guidance range of 3% to 5%, and miles per truck were lower due to fleet mix changes. Our dedicated customer pipeline remained strong. One-way truckload revenues net of fuel decreased 1% to $166 million. Average trucks decreased 14% due to trucks that moved into dedicated and the challenging driver market. Revenues per truck per week increased 14.8% as a result of higher revenues per total mile, which grew 16.7%. This was partially offset by a miles per truck decrease of 1.7% due to fewer team drivers. Like others, we anticipate ongoing inflationary pressure for our main costs, specifically fuel, driver wages, and driver sourcing. We will continue to drive operational excellence initiatives to gain greater efficiency and address cost issues including working with our suppliers and attempting to recover these costs from customers wherever possible. Moving to Werner Logistics on slide 10. In second quarter, logistics revenues of $142 million grew 29%. Adjusting for the sale of Werner Global Logistics in the prior quarter, total logistics revenues grew 52%. Truckload logistics revenues increased 49%, driven by a 37% increase in revenues per shipment and a 10% increase in shipments. Power only and project business continued to generate strong revenue growth, more than doubling from second quarter a year ago. Intermodal revenues grew 52%, supported by a 17% increase in revenues per shipment and a 30% increase in shipments. Our logistics gross margin percentage decreased 350 basis points year over year, due to the much higher cost of truckload capacity for contractual brokerage and intermodal shipments. To address the increase in cost of truck capacity, we reduced our contractual truckload logistics shipments from 58% to 48%. Also, intermodal dwell time increased at customer and rail locations during second quarter, which impacted profitability. As we move forward, we expect to see continued performance improvement from Warner Logistics through revenue growth, and margin expansion. On slide 11 is a summary of cash flow from operations, net capital expenditures, and our growing free cash flow over the past five years. Expanded operating margins and less variable net capex resulted in higher free cash flow during the last four years. We expect to generate continued meaningful free cash flow going forward. For 2021, we continue to expect net capex to be comparable to the last two years, in a range of $275 to $300 million. This guidance range assumes we maintain our new truck and trailer fleet, and we continue to invest in WarnerEdge, the innovation arm of Warner, by building out our technology platform with solutions that are more advanced, more productive, and with enhanced safety and security. Our net capex guidance assumes no significant delays in delivery of new trucks and trailers in the second half. On slide 12 is a summary of our discipline strategy for capital allocation. The first priority is reinvestment in our new fleet with feature-rich trucks and trailers with the latest safety, driver-friendly, and fuel-efficient capabilities. Earlier this month, we opened our second new terminal facility of 2021. This terminal is strategically located in Lehigh Valley, Pennsylvania, and replaces a smaller lease facility. We are making meaningful and sustainable progress enhancing Warner Edge, our technology initiative and platform. And during the quarter, we raised our quarterly dividend by 20%. In prior quarters, we said we would consider strategic acquisitions that are additive and accretive. Just after quarter end, we were excited to announce the acquisition of the elite regional truckload carriers of the ECM Transport Group. ECM operates with industry-leading operating margins and its accomplished and experienced leadership team remains in place as a standalone business unit. We will leverage our collective strengths and generate synergies to serve our existing and new customers at even higher levels. We are committed to maintaining a strong and flexible financial position. Our long-term leverage goal is a net debt-to-annual EBITDA ratio of one-half to one-turn. We added a $100 million fixed rate loan on June 30 at an interest rate of 1.3% to partially fund the ECM acquisition the following day. Since the acquisition did not occur until the beginning of third quarter, our net debt to EBITDA ratio was 0.2 times at quarter end, an increase to a pro forma 0.4 times the following day. On slide 13 is a summary of the benefits of the ECM acquisition. ECM strategically expands our operations in the Mid-Atlantic, Ohio, and Northeast regions by adding eight terminals and 18 drop yards to our footprint, as shown on the map. Our companies share similar cultures based on the highest standards of safety and on-time service, and the combination will boost our fleet size by nearly 7%. The integration is going smoothly, and the transaction is expected to be accretive to adjusted EPS in year one. I'll now turn the final portion of our prepared remarks back to Derek. Derek?