Werner Enterprises, Inc.

Good afternoon and welcome to the Werner Enterprises Third 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 on your touch-tone phone. To withdraw your question, please press star then two. Earlier this afternoon, the company issued an earnings release for its third 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 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. The reconciliation to the most directly comparable GAAP measure is included in the tables attached to the earnings release and in the appendix of the slide presentation. I'd now like to turn the conference over to Mr. Derek Leathers, Chairman, President, and CEO. Please go ahead.

Thank you. Good afternoon, everyone. With me today is our CFO, John Steele. I'm pleased to report that Warner delivered record third quarter earnings, our fifth consecutive record-setting quarter. During third quarter, freight demand remained strong, and the driver market remained very challenging. Our strategic investments in driver sourcing and driver pay in a competitive labor market enabled us to grow our fleet sequentially by 75 trucks. In addition, we grew another 500 trucks with the ECM truckload acquisition that closed at the beginning of the third quarter. We are very pleased with ECM's performance during our first four months of ownership. ECM's service and safety record is excellent. Their driver turnover post-acquisition remains low. Their financial performance is stellar, and our integration is going well and tracking on schedule. Employment in the trucking industry remains 1% below pre-COVID levels, while the cast truckload freight index is 16% higher. Strong consumer demand combined with extraordinary supply chain bottlenecks are keeping retail inventory to sales ratios at historically low levels, which will boost inventory replenishment for multiple quarters going forward. At the same time, truckload industry capacity is significantly constrained by an ultra-competitive driver market and shortfalls in new truck builds. We expect a strong freight market through the balance of this year and well into 2022. Despite a very difficult driver market, we were able to organically grow 75 trucks in TTS from second quarter to third. Our driver sourcing costs were higher in third quarter due to startup costs for our new and planned driving school locations, increased training pay for drivers hired from schools, driver hiring incentives and driver lodging. In other words, we made investments in driver sourcing that precede the benefits we expect to realize going forward. Warner continues to be well-positioned to achieve strong financial results as we benefit from our consumer-oriented freight base with winning retailers, driver-preferred dedicated fleets, industry-leading cross-border Mexico business, engineered lanes in our one-way truckload segment, our recent ECM acquisition, and our comprehensive capacity solutions in Warner Logistics. Moving to slide four, here's an updated snapshot of Warner. Our truck fleet grew 6.6% year over year to over 8,200 trucks, with just over 5,100 in dedicated and 3,100 in one-way truckload. Warner continues to have a consumer-centric freight base with 75% of third quarter revenues in retail and food and beverage. About half our revenues are with our top 10 customers and 78% from our top 50. Warner has a long standing and growing relationships with winning companies in their industries. Let's move to slide five for a summary of our third quarter financial performance. For the quarter, revenues increased 19% to $703 million. Adjusted EPS grew 14% to $0.79 per share. Adjusted operating income increased 15% to $73.9 million, while our TTS adjusted operating margin net of fuel declined 150 basis points to 14%. Our operating income growth was primarily due to rate per mile increases, fleet growth, and strong logistics results. Our operating margin declined due to lower miles per truck and some higher than normal cost increases, which John will explain further in his comments. Dedicated freight demand remained strong in third quarter, as our customer base in discount retail home improvement retail, and food and beverage continue to generate strong sales. Dedicated average trucks grew over 10% year-over-year and 2% sequentially. To fund that truck growth, we encourage startup costs for driver pay and pay guarantees that increased expenses during a period in which our dedicated miles per truck were 8% lower. One-way truckload freight demand also remains strong in third quarter. ECM's financial results are included in one-way truckload and ECM represents 17% of the trucks in this fleet. We achieved significantly improved results in our logistics segment in third quarter, with a 35% increase in revenues and $8.5 million of operating income growth. During third quarter, we received fewer new trucks and trailers than planned, as OEMs are increasingly challenged to meet current demand levels with shortages of semiconductor chips, raw materials, components, parts, and labor. We expect this industry trend will continue well into 2022. To enable us to organically grow our fleet and continue to meet our freight commitments with our customers, we reduced the number of trucks and trailers we sold in the quarter. Significantly higher used truck and trailer pricing per unit and strong execution by our fleet sales team produced 15.3 million of equipment gains in the quarter. In third quarter, the market value of our equity investments in TuSimple declined, while the market value of our equity investment in Mastery increased. The net effect of these market value changes during the quarter was a $16.1 million unrealized gain, or 18 cents a share, which increased our non-operating income in third quarter. We adjusted for these items in our third quarter non-GAAP EPS. At this point, I'll turn the call over to John to discuss our third quarter financial results in more detail. John?

Thank you, Derek, and good afternoon. Beginning on slide seven, total third quarter revenues increased $113 million to $703 million. Our TTS revenues per truck per week increased 3.2% due to a 15% year-over-year improvement in revenues per total mile, offset by a 10% decline in miles per truck. The competitive driver market, the acquisition of the shorter haul ECM fleet, which has lower miles per truck, and other factors were the primary drivers of a 5% sequential decrease in TTS miles per truck from second quarter to third quarter. The other significant factors that contributed to lower our miles per truck in third quarter included truck and driver downtime due to delays caused by severe truck and trailer parts shortages, and more drivers were unavailable to work due to COVID quarantine protocols. In addition, parts shortages caused our weekly minimum driver pay guarantees to occur more frequently in the quarter due to increased truck downtime. Adjusted operating income increased 15% year-over-year in third quarter, on top of 19% adjusted operating income growth in the same quarter a year ago. Adjusted TTS operating income increased slightly. In logistics, our revenues continued to strengthen with 35% growth year-over-year. logistics had a strong quarter with significant operating income improvement. Stronger financial performance from our driver training school network and other factors increased corporate and other operating income by nearly $1 million, despite the fact that the school network is incurring higher startup costs for adding new locations. Adjusted earnings per share in the third quarter was $0.79, up 14% year-over-year, on top of 21% adjusted earnings per share growth in third quarter a year ago. Beginning on slide eight, let's review results for our truckload transportation services segment. In third quarter, TTS revenues increased 15 percent due to the higher rates, increased fuel surcharges, more trucks, and partially offset by the decline in miles per truck. Adjusted operating income was 65.4 million. And although our TTS adjusted operating ratio increased 150 basis points, we produced a solid 86 operating ratio. Turning to TTS fleet metrics on slide nine. For dedicated, we added 484 trucks year over year, and dedicated revenues net of fuel increased by 11% to $271 million. Dedicated revenues per truck per week increased slightly, which was below our expectations as 9% higher rates were offset by 8% lower miles per truck. Dedicated miles per truck were lower due to the part shortages, COVID impacts, less driver seniority due to fleet growth, and the addition of 16 new dedicated fleets in the last year with a lower miles per truck profile. We expect to gradually improve our dedicated miles per truck and our revenue per truck per week over the next few quarters. Our dedicated customer pipeline remains very strong. One-way truckload revenues net of fuel increased 10% to $190 million. Average trucks increased 2%. Revenants per truck per week increased 7.8% as a result of a 21.8% increase in rate per total mile. Our one-way truckload miles per truck declined 11.4%. The addition of the shorter haul, lower mileage, ECM fleet, and third quarter had an expected favorable impact to the year-over-year one-way truckload rate per total mile and an expected unfavorable impact on miles per truck. with an overall minimal impact on revenue for truck per week. Driver pay costs were higher in third quarter 2021 due to driver pay per mile increases, incentive recruiting bonuses, and minimum pay guarantees with lower than expected miles per truck. Drivers who had their mileage impacted due to part shortages were compensated. Our TTS driver pay for company mile increased 20%, which we expect will begin to moderate going forward as our mileage productivity improves. Insurance and claims expense increased $4.4 million year-over-year in third quarter and $7 million sequentially from second quarter. The primary factors were less favorable claims development, increases in insurance premiums for liability insurance above our claim retention levels, and less favorable claims experience. Health insurance expense increased 4.6 million year-over-year in third quarter due to increased claim frequency and severity. Health insurance expense increased 6.2 million sequentially from second quarter to third quarter, primarily due to a higher cost per claim, in part due to multiple high-cost medical claims, including four claims paid in third quarter that reached our annual stop-loss insurance level per member. The combined effect of higher insurance claims expense and higher health insurance expense reduce adjusted third quarter 2021 earnings per share by $0.10 year-over-year and by $0.15 sequentially from second quarter. Moving to Werner Logistics on slide 10. In third quarter, logistics revenues of $158 million grew 35%. Excluding Werner Global Logistics, which we sold in first quarter, revenues grew 50%. Truckload logistics revenues increased 63% driven by a 33% increase in revenues per shipment and a 23% increase in shipments. Power only and project business continued to generate strong revenue growth, increasing over 175% from third quarter a year ago. Intermodal revenues grew 19%, supported by a 25% increase in revenues per shipment, while shipments declined 5%. Intermodal volumes were off due primarily to a decline in rail velocity, chassis shortages, and increased dwell throughout the rail and customer networks. Logistics produced strong operating income improvement of 8.5 million in an excellent freight market. We continue to expect our logistics segment to achieve strong growth through this capacity-constrained period. On slide 11 is a summary of our cash flow from operations, net capital expenditures, and free cash flow over the past five years. Expanded operating margins and less variable net CapEx resulted in higher free cash flow during the last four years. We expect to continue to generate meaningful free cash flow going forward. We lowered our net CapEx guidance for the full year of 2021 by 25 million. Based on recent discussions with our OEMs, we expect to receive fewer new trucks and trailers this year than originally planned. The higher sales prices we are achieving for used trucks and trailers are also contributing to lower net capex. On slide 12 is a summary of our disciplined strategy for capital allocation. Our unwavering priority for capital continues to be investing in our fleet with feature-rich trucks and trailers with the latest safety, driver-friendly, and fuel-efficient capabilities. In July, we opened a new driver and maintenance facility, which is strategically located in Lehigh Valley, Pennsylvania, and replace the smaller lease facility. In a subsequent slide, Derek will discuss the progress we are making with our Warner Edge technology initiatives. We see intrinsic value in our stock based on our long-term growth expectations, and we purchased over 1 million shares this quarter at an average price per share of 45.52. On July 1st, we completed the acquisition of 80% of the equity of the elite regional truckload carriers of the ECM Transport Group based in Cheswick, Pennsylvania. ECM performed very well in third quarter and exceeded our expectations for driver retention, fleet growth, and profitability. We implemented several buying power cost-saving synergies with ECM during the quarter and are excited about how our companies are working together. 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 0.5 to 1 times. With the acquisition of ECM and our stock repurchases during third quarter, we ended the quarter with a net debt to EBITDA ratio of 0.5. I'll now turn the final portion of our prepared remarks back to Derek. Derek? Thank you, John.