Werner Enterprises, Inc.

Good afternoon and welcome to the Werner Enterprises fourth quarter and annual 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. The speakers for today will be Derek Leathers, Chairman and President and CEO, John Steele, CFO, and Chris Neal, Senior Vice President of Pricing and Strategic Planning. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the call over to Chris Neal. Please go ahead.

Earlier today, we issued our earnings release with our fourth quarter and annual results. The release and a supplemental presentation are available on the investor section of our website, at warner.com. Today's webcast is being recorded and will be available for replay later this evening. 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 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 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. Now I would like to turn the conference over to Derek.

Thank you, Chris, and good afternoon. 2022 was another successful year at Warner. Revenues ex-fuel grew by double-digit percentages in both TTS and logistics, and we also set a new record for adjusted earnings per share. My sincere thanks go out to the talented Warner team who remain resolutely committed to our values by providing superior safety and service to our customers. As we look back on the fourth quarter, freight in our large, dedicated fleet was steady and performed well. One-way truckload and logistics were challenged by a seasonally weaker-than-normal freight market in contrast to the very strong conditions a year ago. We expect that the 2023 freight market will be challenging in the first half and then gradually begin to show improvement in the second half as capacity exits the market and retail inventory resets to normalized levels. Over the last several years, we intentionally built a powerful business model that performs well in both strong and challenging freight markets. Our large and durable dedicated fleet, our diversified one-way truckload fleet, and our growing logistics segment provide us with a resilient portfolio of complementary services and industry verticals. This business model, coupled with our seasoned leadership team who averages 26 years of Warner experience, gives us confidence in our ability to weather any economic environment and positions Warner for success. Now, let's move to slide three. Warner is one of the nation's five largest truckload carriers, safely delivering over 3 million miles each business day with an experienced and increasingly diverse workforce of professional drivers. During 2022, we were proud to achieve the lowest DOT preventable accident rate per million miles in the last 10 years, a testament to our continued focus on improving safety and service across our fleet. During the quarter, our strong balance sheet provided the flexibility to add two stellar companies to the Warner family, Premier Truckload Carrier Baylor Trucking and the elite freight brokerage and dedicated carrier Reed TMS. Warner is a growing logistics provider with an annual revenue run rate exceeding $1 billion. with a large and growing base of over 70,000 qualified carriers and a pool of 30,000 trailers. This large trailer pool and our growing domestic and cross-border Mexico power-only capabilities provide Warner customers with additional solutions and flexibility to effectively manage their supply chain in rapidly changing market conditions. Let's move to slide four for a summary of our fourth quarter and full-year financial highlights. In the fourth quarter, revenues increased 13% to $861 million. Adjusted EPS decreased 13% to 99 cents. Adjusted TTS operating margin for the quarter was 15.8%. For the year, revenues increased 20% to 3.3 billion. Adjusted EPS rose 7% to a record $3.70. Adjusted TTS operating margin for the year was 15.1%. Dedicated freight demand in the fourth quarter was solid and steady. The normal seasonal freight spike for certain dedicated retail customers didn't occur this year. given the increasingly challenging macro environment and relatively muted consumer spending. Fourth quarter freight was seasonally soft in one-way truckload and logistics, with fewer project surge and peak opportunities compared to the record high levels a year ago. On October 1st, we acquired Baylor, a high-performing truckload carrier based in Milan, Indiana, with 200 trucks. Baylor is a 75-year-old company with outstanding leadership, elite drivers, and impeccable customer service. The first week of November, we acquired Reed TMS Logistics, a rapidly growing Tampa-based freight broker and dedicated carrier with a skilled and knowledgeable leadership team. Reed TMS has a 26-year history of developing and expanding long-term customer relationships, supported by a large and growing carrier network, with two-thirds of their revenue coming from the stable food and beverage verticals, including a heavy focus on temperature-controlled freight. We are very pleased to retain the strong management teams and talented associates of Baylor and Reed TMS. Both companies maintain cultures similar to ours with an intense focus on superior safety and service. Our implementation team is rapidly integrating these businesses with ours to capitalize on the synergies and mutual learnings between our companies. Together, our durable, dedicated fleet, which includes 63% of TTS trucks, and our growing logistics business account for 69% of fourth quarter revenues and is expected to exceed 70% in 2023. Next on slide six, I would like to discuss Warner Drive. Last August, we introduced DRIVE, which is the next evolution of our business strategy that delivers our future. DRIVE incorporates sustainability, capital allocation, an outcome-oriented approach to operations, innovation, and a culture that supports and values our team members. Our intentionally designed durable portfolio of asset and asset life solutions serves a diversified client base of industry-leading customers with an emphasis on the transport of necessity-based goods. We relentlessly focus on our results, with the company culture immersed in safety and service. Since 2019, we have received 27 unique Customer Carrier of the Year awards. Warner has committed to innovation through our investment in technology and our Warner Edge cloud-based platform, which is improving the experience of our customers, drivers, non-drivers, carriers, and suppliers. Our core values of safety, service, and integrity are based on an unwavering commitment to inclusion, community, innovation, and leadership. And we embrace ESG and specifically our impact on the environment through the continuous exploration and development of alternative fuels and equipment, executing on our aggressive carbon reduction plan and expanding partnerships through Warner Blue, our company-wide sustainability initiative. Next on slide seven is our revenue snapshot. For the year, revenues were $3.3 billion with 74% in TTS and 24% in logistics. Baylor and Reed TMS added $71 million of revenues to fourth quarter and the year. Including these acquisitions, we forecast logistics revenues in 2023 will grow to over 30% of the total. Three-quarters of our revenue base this past year came from retail and food and beverage, with customers winning in their verticals. We intentionally focus on growing companies that ship recurring and repeatable consumer essential products who have rigorous on-time delivery requirements. We ended the quarter with 8,600 trucks, up 3% for the year, or 260. In the fourth quarter, we held our TTS fleet size flat to adapt to the changing freight market. We intend to limit TTS fleet growth until we see signs of freight improvement, which we expect in the second half of the year. Turning to slide eight and the consolidated fourth quarter results, revenues grew 13% due to 5% growth in average trucks, 1% higher revenues per truck, a $41 million increase in fuel surcharges, and logistics revenues growth of $29 million. which includes eight weeks of the acquired REITMS business. A seasonally soft freight market in fourth quarter compared to a seasonally strong market a year ago was a significant headwind. Despite this freight challenge, strong dedicated performance limited the adjusted operating income decline to 11%. At this time, I would like to turn the presentation over to John, who will discuss our segment results. John?

Thank you, Derek. On slide nine are the fourth quarter TTS results. TTS revenues increased 13% and adjusted operating income decreased 8%. Sequentially, TTS adjusted operating income increased 9%, quarter over quarter. TTS adjusted operating margin declined 240 basis points year over year compared to last year's record fourth quarter operating margin. Our adjusted operating expenses per mile net of fuel increased 6.6%, compared to our TTS rate per mile net of fuel of 3.5%. The largest per mile operating expense increases were supplies and maintenance at 18% and insurance and claims at 53%, while driver pay increased 4%. During fourth quarter, we incurred 11 million higher insurance and claims expense, or an unusual charge of 13 cents a share and 8.5 million lower workers' compensation in salaries, wages, and benefits expense, or an unusual benefit of 10 cents a share. For insurance and claims, a limited number of prior year incidents have developed beyond what we had expected. For workers' compensation, prior year claims are developing lower than what we previously experienced. Over the longer term, we expect our accident per million miles performance will improve our insurance and claims experience. While we can't ignore the increasing trend of nuclear verdicts and settlements, we expect our 2023 insurance and claims expense to moderate from 2022. In fourth quarter, we sold more tractors and trailers at a lower average gain per unit. Gains on sales of revenue equipment were 22.5 million, and we had a gain on sale of property of 3.4 million. As we expect small carriers to exit in greater numbers in 2023, We anticipate the used truck and trailer market will weaken. We expect our gains on sales of equipment in 2023 will moderate from record highs in 2022. For 2023, we expect annual equipment gains in the range of 30 to 50 million. In an effort to partially offset the headwind of lower equipment gains in a more challenging freight market, we're implementing company-wide measures to reduce controllable expenses. Now let's move to fourth quarter TTS fleet metrics for dedicated and one-way truckload on slide 10. Dedicated revenues net of fuel increased 9%, average trucks increased 4%, revenue per truck increased 5%. One-way truckload revenues net of fuel increased 2% as average trucks increased 7% from the Baylor acquisition, miles per truck declined 5%, and rate per mile increased slightly despite far fewer peak and transactional pricing opportunities. We expect one-way truckload miles per truck will flatten out on a year-over-year basis in 2023, and we expect a gradually improving pricing environment during the second half. Moving to Werner Logistics on slide 11. In the fourth quarter, logistics revenues grew 15% due to eight weeks of REED TMS offset by less peak and transactional freight opportunities. Truckload logistics revenues, including REED TMS, increased 20%, driven by a 34% increase in shipments, partially offset by an 11% decrease in revenues per shipment, caused by fewer premium pricing opportunities. Despite the challenging freight market, logistics shipments excluding REED TMS were flat year-over-year and down 5% sequentially. Contract shipments increased 89% year-over-year and 62% sequentially, with the addition of REED TMS. Transactional shipments were up 2%. Contractual mix versus transactional was 55% in fourth quarter. Intermodal revenues declined 23%, supported by a 3% increase in revenues per shipment, offset by a 25% decline in shipments. And final mile revenues increased 14 million. In total, logistics achieved adjusted operating income of 8 million with a 3.8% adjusted operating margin, down 3.9 million year-over-year, and an improvement from third quarter of 2.4 million, or an 80 basis point sequential increase. Next on slide 12, let me spend a moment on our innovation. Our IT team accomplished a great deal this past year as we continue to adapt to a dynamic supply chain through our enterprise-wide technology transformation. A few of the notable achievements include We completed the first phase of our Cloud First, Cloud Now implementation of mastery in December with the conversion of our Werner truckload logistics brokerage business to our Edge TMS platform. We successfully expanded the deployment of Workday across human capital management and accounting applications. We strengthened our data and system security with zero trust security practices. And we continue to invest in and pilot new technologies to reduce our carbon footprint including hydrogen fuel cells and EVs. We continued to live and build on our values of 2022. I'm on slide 13. As evidence of our commitment to safety, in 2022, we achieved the lowest DOT preventable accident rate per million miles in the last 10 years and the lowest work injury rate in the last 17 years. Over the last two years, we significantly strengthened and diversified the leadership of our board, as we carefully selected five new board members with unique backgrounds and skill sets. This has resulted in a more diverse board that bolsters our expertise in transportation and logistics, finance, and sustainability, leading to a wider variety of perspectives. On slide 14, we continue to make progress and receive recognition on our ESG journey. In 2022, we were recognized as the top company for women to work for by Women in Trucking, a top food chain provider by Food Chain Digest, and a top green fleet by Heavy Duty Trucking. We are focused on creating a safe and inclusive culture for our associates while operating efficiently to reduce our impact on the environment. On slide 15, we ended the year at a strong financial position with net debt of $587 million and equity of over $1.4 billion. Approximately one-third of our debt is fixed rate and two-thirds is variable rate. In December, we finalized a new $1.075 billion five-year unsecured syndicated credit facility with six banks to expand our credit capacity and extend most of our debt maturities out to 2027. Following the acquisitions of Baylor and Reed TMS, our net debt to EBITDA ended the year at one, within our long-term range goal of 0.5 to one. On slide 16 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 cap X resulted in significant free cash flow generation. In 2022, we had net cap X of $318 million and generated free cash flow of $131 million. Turning to slide 17 in our capital allocation framework, Our first capital priority continues to be reinvesting in our fleet. We are investing in the latest safety and equipment technology, and we are growing and modernizing our terminal and driver school network. In 2023, we expect to slightly lower the average age of our truck fleet. Turning to acquisitions, we will remain disciplined in our approach by evaluating candidates against our strategic filters. In 2023, our focus is the integration, synergy implementation, and cross-selling opportunities for our recent acquisitions. We will also continue to enhance shareholder value through dividends and share repurchases while maintaining a strong and flexible financial position. That concludes my remarks. I will now turn it back over to Derek.

Thank you, John. Moving to slide 18, here you see that over the last 18 months, we executed on four additive and accretive acquisitions, ECM, NEDS, Baylor, and REITMS. All four strengthened the durability of the Werner portfolio and expanded our capabilities. Our growing and diverse business provides additional solutions for the increasingly complex needs of our customers. Today, we have been successfully integrating these companies into the Werner portfolio and our Synergy implementation process is running ahead of schedule. Next on slide 19 is a review of our performance compared to our 2022 guidance, as well as the introduction of our 2023 guidance metrics. For the year, Our truck fleet increased 3%, primarily in dedicated. For 2023, we plan to keep the fleet flattish in the first half with plans in the second half to grow primarily in dedicated in the range of one to 4%. In 2023, we are planning net CapEx of 350 to 400 million. For revenue equipment, most of this CapEx is to refresh our existing fleet with a small share to fund fleet growth in the second half. Dedicated revenue per truck increased 5% in the fourth quarter, as we had far fewer project and surge opportunities this year compared to last. For the year, dedicated revenue per truck increased 7.6%. Noting the freight market outlook and tougher comps, in 2023, we expect dedicated revenue per truck to increase in a range of 0% to 3%. One-way truckload revenues per total mile for fourth quarter increased slightly, just above our guidance range. In the first half of 2023, in a challenging freight market with more difficult comps, We expect one-way rates to decline year-over-year in the range of 3% to 6%. Our full-year income tax rate was 24.4%. And in 2023, we expect our tax rate to be in the range of 24% to 25%. The average age of our truck and trailer fleet in fourth quarter was 2.3% and 5.0% respectively. For 2023, with increased CapEx, we expect to slightly lower the age of our truck fleet. One-way truckload freight demand in January was softer than the strong freight market a year ago. Next, let's move to slide 20 and discuss our view of the market this year and our modeling assumptions. Over the last several years, we carefully designed and prepared our business to outperform in a slowing economy. The last two quarters, we've adapted to retail inventory right-sizing as consumer demand moderated and supply chain bottlenecks began to ease. Over 60% of our trucks are in our durable dedicated fleet, and a third of that business is with large and successful discount retailers that are gaining share, as consumers are becoming more value-conscious for their household spending. With the acquisition of Reed TMS, our mix of revenues increased for contractual food and beverage shipments, which complements the seasonality of our existing logistics business. For our TTS segment, spot freight is less than 5% of our revenues. Small truckload carriers are being whipsawed by 35% lower spot rates while also dealing with much higher operating costs for drivers, equipment, fuel, maintenance, and capital. As the year plays out and there's a large shortfall between spot rates and carrier operating costs, we expect carrier failures will increase. This trend has already started. FMCSA data shows that truck deactivations exceeded truck activations for every one of the last 19 weeks, with net deactivations of 53,000 trucks over this period. We expect interest expense this year will be 20 million higher than last year due principally to the higher interest rates as well as maintaining a higher debt level. We anticipate that OEM new truck and trailer production will show modest improvements in 2023. Before opening up for Q&A, I want to give a brief update on two executive transitions. First, as of December 31st, Marty Norland stepped down as COO to assume a new role focused on fostering and developing strong relationships with some of our largest customers. Eric Downing became COO in January, following his outstanding leadership of our dedicated fleet since 2016. During the last seven years, Eric and his team grew our dedicated fleet by 50%, while nearly doubling revenue. I want to thank Marty for his continued hard work and loyalty at Warner, and I'm excited to work alongside Eric to grow our business. Second, as you know, John Steele will be retiring as CFO and has been flexible with his end date as we continue our search for his successor. The search process is going well, and we look forward to providing an update when appropriate. With that, I'll turn the call over to our operator to begin the Q&A.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. 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 5 p.m. Central Standard Time following the company's closing remarks. Our first question is from Chris Weatherby with Citigroup. Please go ahead.

Hey, thanks guys. Good afternoon. I guess I wanted to start maybe on some thoughts around the sort of way to think about earnings power as we go into 2023. So I think you guys outlined both the gains as well as insurance, potentially providing, you know, somewhat meaningful of a headwind to EPS. And I wanted to maybe get a sense of how you think you can offset that with core results. Obviously, the dedicated business looks like it's more stable. One-way truckload is going to be more volatile. So I just want to get a sense of, as you start to think about some of those headwinds that you've outlined to EPS, what you think you can do with the core business to potentially offset.

Yeah, Chris, this is Derek. Thanks for the question, and good afternoon. Yeah, you're right. There are some headwinds as we start and go into the year. We wanted to be clear about them, and that's why we included them in the opening remarks. When you think about the gain at the mid-range, it's a $40 million type headwind at the midpoint of the range. We know interest expense is going to be more significant. At the same time, we've got the benefit of the integration that's ongoing with both Reed and and Baylor, those integrations are going well. We feel good about that. We believe that the very successful trends that have been going on within our DOT accident preventable frequency is going to lead to an opportunity to at least moderate insurance and take some of the noise out of that line. We've also been pretty clear internally on the need for us to go out and And not just look for synergies relative to the integration efforts, but also around the building. And so we've launched an internal effort several months ago, actually, to prep for what we knew was coming. And we're going to continue to chip away at trying to neutralize those headwinds. It's going to be a work in progress. We also obviously have pretty clearly signaled we think it's a year that's going to be made up of two halves. And the second half has opportunity to for us to continue to improve those results. Lastly, I'll just tell you that one of the upsides, I know people don't like increased CapEx ranges, but as we've seen OEMs start to kind of be able to get through some of the bottlenecks they've been faced with, we're encouraged by early returns in terms of equipment receipts, as well as the quality of that equipment, and specifically the impact we think it can have on the maintenance line.

Okay. Okay. That's helpful. I appreciate that color. And I guess maybe a follow-up, you guys have been helpful in terms of, you know, giving us some sense of the sequential earnings power of the company. This has been a unique fourth quarter with sort of less project business than we would normally have seen. So, you know, any thoughts on sort of normal seasonality as you cross over into the first quarter? Should we see the typical step down in earnings power that you'd normally see or would it potentially be a little bit more muted given what's going on or sort of the weakness that you saw in the fourth quarter?

Yeah, so that's a little tougher to put a finger on, but you clearly fourth quarter was muted. You're right, but obviously mostly as it relates to comparing to some very outsized comps in the prior couple of years driven by COVID and supply chain disruptions. We still had some activity in the fourth quarter on the peak of project side, just not nearly what we thought it would have been in a normal year. That sets up for possibly a little more muted drop, but realistically, The market we're in today is still a tough market. One way is holding up, I would say, better at this point than I would have expected. This same call-out existed 60 days ago, but make no mistake, it's tough out there. I think if you look historically, that drop-off fourth quarter to first quarter is somewhere around 24%. And I would tell you that this year, you know, we're going to work our tails off to make it be less than that, perhaps. But I certainly expect it's going to be somewhere in that 20% plus range. Okay.

That's helpful, caller. Thanks for the time. Appreciate it.

The next question is from Jason Seidel with Cowan. Please go ahead.

Afternoon, gentlemen. I wanted to touch a little bit on your outlook. You seem to I think the market's going to moderate a little bit and then gradually recover. Can you put some meat on that and talk a little bit about what your retail customers are telling you about inventories and how long they expect to work through them?

Yeah, sure, Jason. Thanks for the question. Look, you know, retail inventories are tough because, you know, holistically there's still issues out there and there's still people right-sizing their inventories. That's a fact, but we've been very intentional about who we do business with. We've talked about it for years, about being more of rifle shot versus a shotgun when we go out and pursue new business and try to pursue those we want to grow with. And those better-ran, more successful retailers, especially folks that work in that discount retail space, You know, they've got through the knothole predominantly. So as we talk to those folks, you know, they're in the latter innings. I would say the network overall across all customers is not necessarily in the latter, but it's certainly middle to late innings. And so we're encouraged by the opportunity to work for that to burn off. We couple that and probably we're more bullish on what we track and some of the things we've built to track internally on deactivations. You know, if you look at deactivations over that 19-week period and you talk about 53,000 net deactivations, that's a big number. And that's only gain in steam. And not only is it 19 consecutive weeks, I think it's 35 of 37 in total have been negative. And there's nothing on the horizon that leads me to believe that that doesn't accelerate as we move forward from here. So you put all that together, we still assume a relatively muted economic backdrop in the modeling we're doing. So we're not banking on some sudden rebound in the economy. And we think the back half setup is for us to get back to a world of, you know, inventory replenishment, peak freight movements, et cetera, in the back half, all of which, you know, will support, you know, our portfolio well based on the type of business we do and the people that we do it with.

Appreciate the color as always, Derek. Thank you.

The next question is from Scott Group with Wolf Research. Please go ahead.

Hey, thanks. Afternoon, guys. Derek, if I look, length of haul is down, I don't know, almost 30% from a couple years ago, deadheads up a couple hundred basis points. Is this just a mix of the acquisitions, or is there something else going on here? And I guess ultimately I'm trying to figure out, like, how is this impacting your rate per mile, your utilization, and ultimately is this a good thing or a bad thing for margins and earnings, this mix shift?

Yeah, Scott, great question. I'll attempt to, you know, be as clear as I can here. You know, I think it's a mix of several items, right? So acquisitions certainly play a role in nearly every case. The acquired company was operating in a more regional footprint with shorter length of haul. And as you continue to blend that in, it's going to bring it down. I think the ongoing forward deployment of inventories and the ongoing growth of sort of, you know, the smaller regional DC model is going to continue to impact that. I think the ongoing, although much lesser now, conversion opportunities for intermodal, where longer length of haul stuff goes more by train, plays a role. Another one that I think is probably a little more pertinent to Werner than others is our very large Mexico franchise. In all of the robust COVID freight activity, one place that was impacted negatively was really cross-border during that time frame because you had two different governments with disparate approaches to COVID, and you had openings and closures seemingly twice a day in some cases, but certainly multiple times a week. And that's long-length haul freight that really kind of went the other direction. So I tell you that because as we look at it and we look forward, we think that the bulk of that length of haul erosion is behind us, and we think that moderates. I'm not yet prepared to say it gets longer again. But Mexico, early returns so far in the last few months, we've seen the growth come back there. The early innings of nearshoring is real. Net direct investment was up $30 billion, I believe, last year. already. And we think that number continues to rise. And so those loads tend to have longer link call profile. And so I think you'll end up in our network with kind of a tale of two cities. Some of the expedited in Mexico cross-border will be longer and longer. We'll have a longer profile, I should say. And then an increased focus on regional and our regional footprint is going to be something that's going to be ongoing as we continue to engineer more time at home and lifestyle jobs for drivers with high service requirements.

Hey, Scott, I'll add one thing to that. Consistent with our expectation that our one-way truckload length of haul will begin to flatten out, we also think that our miles per truck in one-way truckload will flatten out going forward as well.

Okay, so this has been a headwind to utilization, probably a tailwind to rates, I guess. The second question, you talked about insurance and maintenance. Any way to just sort of put some numbers around how big of a tailwind that could be this year, and then what does that mean with puts and takes for the OR? Do we think we stay within the long-term guidance on operating ratio?

I'll take the guidance one, and then John probably will weigh in with some specifics. But, yes, the answer is yes. We've established that guidance. We've stressed that guidance. I want to encourage everybody to remember that that's annual guidance. And so we believe as we look into 2023 with all the puts and takes, we can stay within that guidance as we go forward. You know, insurance is moderating. We believe we're very encouraged by the most important thing, which is having less accidents and especially having less serious ones. With new trucks coming in, we think there's opportunities and parts availability I would actually probably put in front of new trucks coming in for maintenance to be less disruptive. And I'll turn it over to John for any specifics he might want to add.

Yeah, so for insurance and claims, it was a $44 million insurance and claims quarter. Eleven of that was the year-end charge as we went through the actuarial process at the end of the year. So adjusting for that, that puts it down to 33. While we'd like to be back at that $25 million quarter level we were in the past, that's probably unlikely with the growth in the fleet and with the environment that we operate in. But we'd like to be closer to the 30 million a quarter range, you know, depending on how our experience on severity of claims plays out. On the maintenance side, our maintenance costs are up. That has been gradually coming down on a year-over-year basis as the supply chain improves. We expect that as we move throughout the year that increases in maintenance costs will move into the single digits.

And our next question comes from Jack Adkins with Stevens. Please go ahead.

Okay, great. Good afternoon, and thank you for taking my questions. So I guess, Derek, you know, you referenced stable, dedicated demand in the fourth quarter. I would just be curious if maybe you could talk about, you know, the dedicated pipeline more broadly as you go into 2023. And are you seeing some of your dedicated customers looking to either push trucks back or want more trucks, you know, kind of in a one-off or, you know, onesie-twosie kind of way? Just any kind of color around that and the broader pipeline would be helpful.

Yes, Jack. So good afternoon. And when we think about dedicated, first off, the pipeline remains strong in dedicated right now. That will be tempered somewhat with the reality that in certain dedicated fleets, you might see some shrinkage just due to their business being under duress. We know that there are certain businesses that are going to be more impacted by the economic backdrop than others. And so there'll be some offset to what that pipeline is able to bring to fruition. We're also going to be pretty Disciplined. Dedicated is hard to do business with very high service expectations. We know what it costs to do that. And so we're going to say disciplined relative to price. Our customers have been supportive thus far. And so it's hard to dictate exactly where that fleet goes over the next, call it quarter or two. We've guided to kind of flat because we know there's some puts and takes. Right now, I'm encouraged by the conversations we're having. I'm also encouraged that a third of that dedicated book of business is actually set up on index. It's index to business, so the rate noise on some of that will be less, and we'll have the ability to focus on the two-thirds where there could be activity. You put all that into the blender, and here's what I would say. I think we're a premier dedicated player. I think the service we provide for our customers is second to none, and I think they understand that. We also understand they're under a lot of pressure, and so there's going to be some interesting conversations to be had. But most, I guess in closing, I would say I'm encouraged by the pipeline. I'm encouraged by the ongoing bid activities and dedicated, and I'm probably most encouraged by the fact that we've been able to test the model relative to not letting designated fleet into our dedicated business and therefore having the kind of hemorrhaging that may have happened in past cycles where the business was not set up with a true dedicated construct.

Okay. Now, that's very helpful. I appreciate that. And then I guess maybe for a longer-term question, you know, Derek, if I go back to I think last year in the fourth quarter call, you outlined a plan to grow Werner's revenue by 10% a year on a CAGR basis for the next five years. We're now a year into it. You had a good revenue year in 2017. 22, partially driven by M&A. Could you maybe update us on that longer-term vision for the company, and do you feel like you're on schedule, ahead of schedule, as you sort of think about those longer-term plans?

Sure. I mean, clearly at this point we're ahead of schedule based on the two years that have played out since we first started having that conversation. We're encouraged on the revenue front. We want to continue to always keep an eye on the bottom line, because I've always said that it's not going to be an or proposition, it's an and. We need to grow and maintain our discipline relative to margins and expectations around performance. But right now we're ahead of that schedule. We also indicated at the time, and I'll reiterate today, there's going to be years that don't fall into that 10% plus type revenue growth, because you've got to be smart and disciplined and kind of read the market that you're in. This year, you know, obviously expectations at this point, just doing the math on the recent acquisitions, we've got a really good head start to that 10% plus number. But we're going to have our eye this year on, you know, cost control synergies through the implementation. It's through the integration, probably most importantly, product and portfolio enhancement through these additive acquisitions that we've done and continuing to our larger strategy of just building out yet another layer of defense for some of the economic ups and downs, and then proving it out. Look, at the end of the day, what matters is what's on the scoreboard. And you don't get credit for first downs. We've had a lot of those, but I'm looking forward to working our way through this downturn so we can show what this company is capable of.

Okay. That makes a lot of sense. Thanks again for the time. Thank you.

The next question is from Ken Hexter with Bank of America. Please go ahead.

Great. Good afternoon. Hey, Derek. Hey, John. Can you maybe your thoughts on acquisitions? Your leverage is at the top end of your target, but typically in a downturn, you kind of want to maybe take more opportunities. You just swallowed the four over the last two years as you highlighted. So can you be more aggressive in this market? Do you calm down if we're in a slowdown and step back? Maybe just talk about your thoughts and then how discussions are going.

Yeah, so there's obviously going to be a lot of opportunity out there over the next 12 months. There's a lot of folks looking for an exit. A lot of it's demographic-based as much as anything. But what we've stated, even in the prepared remarks, our focus right now, because of doing four in 18 months, because of the early returns being as positive as they are on those four, and because in each case I think we've learned, we've gotten better, and we've set ourselves up for even further success in the future, you know, I want to see these things integrated. I want to see them all functioning as one. I want to make sure that our cross-selling capabilities are where they need to be. We just came out of our annual sales meeting that I was personally in attendance at and meeting with all of the sales teams from each of the organizations. And I think we've made, you know, large strides to what this looks like going forward. But there's work to be done. So, That's, I guess, my way of saying is nothing's off the table. We've got room with the credit facility to be able to do more. We've got an open mind to look at opportunities as they become available. But in the meantime, our focus will be on integration, on synergies, and on execution.

Thanks, Derek. And then maybe just a little bit, we've heard a lot of shifting in contracts, right? Everything used to be a year long when you talk contracts. I know your dedicated business, a little bit different multi-year. But if the retailers are now talking less than one year, what is your thoughts on the pricing paradigm in that market, given your kind of mid-single digit downtick on one way and slowing and dedicated? How does that change the market dynamics in this environment?

Yeah, great question. First off, I just want to point out the guidance we gave on one way is a first half guidance. So we believe it will end up being a tale of two halves. And we're just not comfortable yet talking about the second half. So I think that's important. As it relates to people going to shorter bid durations right now, I mean, normally under almost every cycle I can recall and every time frame, we're always pushing for stability in our network over any short term type pricing. But if somebody wants to price short right now, we're we're going to be all ears. I mean, we'll have that conversation because we have conviction that this thing's turning quicker than people realize. And I'd rather not be saddled with that price for 12 months if six months will do. So we'll be open-minded. We'll have those dialogues and we'll figure it out. We're also going to hold people accountable, just like they held us accountable and should hold us accountable to the agreements we made during COVID. The same thing's true now. If we have agreements in place, we're going to We're going to look for that to hold up, and we'll have those dialogues. And lastly, I'll just point to something you mentioned in the question, so I know you know, but 63% of our businesses in TTS, of TTS is in that dedicated arena, and that is almost entirely made up of long-term contracts.

But you did talk about decelerating pricing, even on the dedicated, right down, I guess, flattish. right, in terms of your pricing now?

Flat to up 3%, and that's comping up against 7.6% that we achieved for revenue per trek increases and dedicated in 2022.

Yeah, I mean, not to be cheeky, but, you know, look, it is raining out there. Dedicated is a pretty darn good raincoat, but it's still raining. So we're going to have to perform. We're going to have to execute and dedicate, and we're going to have to ask – for what we feel is fair and appropriate. But it's not going to be, in the first half, the rate environment that we've seen over the last couple of years. And we hope to outperform that. But you know us. We're going to be conservative with our guidance, and we're going to try to make sure that what we put out there is achievable and exceed it where we can.

Sounds good. Appreciate the time and thoughts. Thanks, Derek. Thanks, John. Thank you.

The next question is from Tom Wadowitz with UBS. Please go ahead.

Yeah, good afternoon. And I know you've talked a bit about rates, but wanted to see if you could offer just a thought on what we end up with in terms of the bid season and truckload contract rates. It seems like the comment on the first half down three to six is maybe not exactly what you think the rates could be. I mean, I guess if you think of the timing being that the contracts get implemented and, you know, partially 2Q more and 3Q more, Do we also expect that the rates would be down more in second half than that three to six? So just, I guess, some commentary on kind of how to think about contract rates relative to the guidance.

Yeah, sure. So first, let's talk about what that cadence looks like. You know, you really got, you know, kind of 60% of the revenues are done in the first two quarters, then 20% and 20% thereafter. In Q3 and Q4, we've got a decent feel for Q1 implementations, and those are progressing. At this point, even just this point in Q1, our mindset is already starting to shift relative to how we think about rating business based on when we believe the turn is happening and the recent acceleration of some of these deactivations we've been speaking of. We were given first half guidance. You know, we think spot rates, you know, gone about as low as it can go and it's well below people's operating costs. We're fortunate that less than 5% of our revenues are in the spot market, but we think that flush happens quicker than maybe it has in past cycles. So, I mean, that's more color and context maybe than an exact answer, but certainly I'm encouraged. Lastly, I'll just tell you the comps in first half are significantly tougher than the comps in the second half just based on how 2022 played out. So that's as much the issue as really anything.

And when we're talking about bid season, Tom, we're talking about the 39% of our revenues in TTS that's one-way truckload. The biggest share of it is a dedicated, and we think that's going to be positive, up 0% to 3% in revenue per truck per week.

Yeah, I mean, that makes sense, and I understand that. I guess maybe one follow-up on this topic. I think generally people are kind of thinking, you know, high single-digit decline in contract rates, you know, irregular truckload. Are you more optimistic than that? You think it's better? And then I guess in terms of the, you know, kind of quicker tightening, you think maybe this really tightens meaningfully in second half, or it's more just like kind of a gradual improvement?

Well, you know, I don't know that I'm more optimistic because that sounds an awful lot like hoping. You know, we put guidance out based on analyzing it. And we talked for several quarters about our one-way network being more engineered than ever before. We've talked about LTAs being part of our one-way network at a larger percentage than ever before. And so, you know, I'm not trying to refute what others may be saying about what may or may not happen in their networks. I just feel strongly that in our network, based on both bids completed, LTAs in place, and ongoing engineering within that one-way network, that our ability to perform where we've guided to is, at this point, what we feel will take place.

Okay, great. Yeah, I mean, I think it's quite clear that you've positioned the portfolio to be resilient, which is great. So thank you for the time. Thank you, Tom.

The next question is from Todd Fowler with KeyBank Capital Markets. Please go ahead.

Hey, great. Thanks, and good afternoon. Hey, Derek. Hey, John. Hi, Chris. You know, there's been a couple of comments on the cost side, and it sounds like that there's some opportunity and some things that can help and also some headwinds. I'm just curious, Derek, if you've got a comment on driver pay being one of your biggest cost buckets. I know that that's moved up substantially in the last couple of years. Is that something that moderates, you know, into 23? And then, you know, how do we think about maybe, I think, John, you shared that total operating expense in the fourth quarter was maybe up 6% or so. What sort of run rate are you expecting in 23 on the total side for all the buckets? Thanks.

Yeah, so I'll have John take the second part of that. But on the driver pay question, yes, we think there's going to be moderation. That market is still going to be tough. We're still going to hold our expectations high and only hire the best of the best. That does come at a premium cost, but nonetheless, in that market, the pressure has moderated some. We also, you know, I'd remind you, especially on the one-way side, you know, pay is a reflection of both pay rate and miles. And so as we've endured the last couple of years and some of the disruptions that were going on, and you saw miles degrading, you had to make that up at times with the pay rate. As we start to stabilize miles and start to see some of that congestion or disruption, if you will, evaporate, it provides us an opportunity for our drivers to still be paid very well, still make a very good living, and actually have less disruption in their life as well. And so all those things factored in. Yes, that's a line that we envision moderating this year compared to what you've seen over the past couple years as we continue to focus on other items. Look, holistically, there's still a lot of pressure. Trucks, trailers, tires, fuel, most likely, and a moderating driver wage, but still not going down, clearly, are all going to put pressures on the P&L. So our job is to go find every other line item in there that we think we can extract savings from and then execute on it. At the same time, it's going to be having those tough conversations with our customers about you know, what we need to have sustainable pricing to be able to support their future growth and their needs. Those customers that aren't growing or are struggling, you know, obviously that conversation has a different tone. That's why we try to align ourselves with folks that win at what they do.

And Todd, the year-over-year increase in driver pay has tracked from quarter to quarter throughout 22. First quarter was up 15%, second quarter up 15%, third quarter up 9%, fourth quarter up 4%. So the year-over-year increase is moderating and the cost, while it's not flat, it's moving to lower single digits. We expect it'll stay in the low single digits as we move forward in 2023.

Okay, good. That helps. And maybe just for a quick follow-up, you know, on the logistics side with kind of the change in the portfolio and the acquisitions, the margins in the last two years on a full-year basis have kind of been in the mid-single-digit range. Is that kind of the right, you know, longer-term range, not looking for 2023 guidance, but just kind of a general range to think about the logistics margins at this point, or is there something that, you know, makes the margins stronger or weaker at, you know, for any reason? Thanks.

Sure. I mean, first off, I'll point out logistics is now greater than 30% of revenues, and we have eyes to growing that at an outsized pace over the more incumbent book of business and dedicated in one way. So I think you see that becoming a larger portion over time. We're super excited about how the integration is going with ReadTMS and the opportunities that stand in front of us. That integration in particular, especially as it relates to the real productivity gains and system enhancements when you bring people together on one platform, is a back half of 23 initiative. It takes a while to get there. We operate predominantly in different verticals today with different customer groups. They do what they do very well, but we are actively working toward that integration date. So at this point, I am not looking to change any kind of guidance on mid-single-digit logistics expectations, but we will certainly be updating as we get further along in that integration as to what we think that potential could look like when you get all the freight into one network with one central kind of visibility platform.

Sounds good, Derek. Thanks for the time tonight. Yeah, thank you, Todd. Yep.

The next question is from John Chappelle with Evercore ISI. Please go ahead.

Thank you. Good evening. Derek, you mentioned Mexico earlier, and it sounds like the nearshoring thematic is starting to gain some momentum again. Can you just give a little bit more insight as to the trends you're seeing there from a volume perspective and then also from pricing? How does that compare relative to some of the trends you're seeing in the U.S. and from a competitive landscape as well?

Yeah, sure, John. I mean, first off, yes, it's early innings, but we are seeing sort of irrefutable proof that nearshoring is taking place. Obviously, it starts with expansion of existing plants and facilities because that's easier to do than to build new plants and facilities, although those are also starting to come out of the ground. I think it plays out over many years, not just a couple of quarters, so this is not a short-term thing, but we are reaping benefits as we speak from the increased activity to and from Mexico. Our franchise is one of the strongest, if not the strongest, that exists on the southern border. Our sales team is very tenured and high quality, and we are seeing volumes picking up there. That's higher price freight with longer length of haul that has lots of positives for our drivers, so we love it kind of all the way across the board. You know, as it relates to you know, longer term, you know, what, how the magnitude of that, I think it's too early to tell. But we're certainly encouraged by what we see at this point.

Okay, great. Thanks. And then just a clarification, trying to match up the 30 to 50 million of expected gains this year with the one to 4% total TTS truck growth from beginning of year to end of year. Should we think about those ranges as kind of overlapping? So if you have only 30 million of gains, you're going to grow the fleet 4%. And if it's 50 million, 1%. And I guess really the reason I'm asking is if the used truck market really does continue to roll over, is there a chance that you either would have to not grow the fleet or contract the fleet on a net basis to get to that range or that that range of gains comes in lower than the 30 to 50?

Yeah, so that's a tougher one to predict. I think if someone was to ask what's the most speculative or what's the most difficult to pin down aspect of the assumptions that we put forth, it would be gains. But I think a way to think about it is we think 1% to 4% based on pipeline alone is pretty realistic, and that's likely to happen sort of regardless. What will happen relative to the gain line, what the gain line will dictate is how much work we get done on refreshing the fleet. If we can continue to move equipment and move it at a high velocity, then we will get on with the business of lowering our fleet age more quickly. If that used market were to roll over, And we felt like that rollover was short-term enough that we might let that refreshing of the fleet take a little longer, then we'd go that route. But I think sort of regardless of what happens in the used market, we got too strong of a pipeline to not see some back half growth, specifically in dedicated at this point. And the gains and gain per unit, I should be more specific, the gain per unit will dictate how aggressively we can refresh the fleet this year. We do want to bring the fleet age down. That is something that is important, but we're not going to do it at all cost.

Got it. Thanks, Derek. Thank you.

The next question is from Bert Subin with Stiefel. Please go ahead.

Hey, good afternoon. Derek, you've made a lot of comments on the contract market, which I imagine you anticipated coming into this call. We've heard from some of your peers that the focus on trailer capacity is maybe changing the shape of the cycle for with rates generally not falling as much for large carriers, at least those with large bases of trailers. How do you assess that with regards to your one-way segment? Could the focus on trailer capacity help those asset-based discussions such that rates maybe don't fall as much as they otherwise would have?

Yeah, I certainly think that trailer pools and the efficiencies that are incumbent with those that have large trailer pools and a robust power-only offering like we do are better positioned through downturns to be able to have more rational conversations because there's less folks that can replace you. You can't replace the efficiencies we bring with a blended solution of our assets and power only with a large trailer pool presence with a non-asset broker. You can't really do it with somebody that's asset only that doesn't have the ability to assign lanes based on differentiated strengths, meaning we'll take the stuff that works in our assets. The broker carrier that may be better at particular lanes takes those lanes. And so trailer pools and the inherent efficiencies that come with them are a competitive advantage. Even within our power only solution, as an example, they predominantly play within the contract market. Very little of that is even done in the spot market. And so it gives those partner carriers a better opportunities to build a future around stable rate levels and stable experiences. So I think both for the carriers that do business with us, the customers that participate in this product offering, and for our shareholders, it truly is a win. That is also, relatively speaking, in the early innings. All early returns are positive. We're excited about it. We're growing it very rapidly. But I think there's a lot of runway ahead of us.

Yeah, Bert, we've had five straight quarters of sequential growth in our power-only business, and that's during a period of time when the freight market is moderating. So there's some real staying power with power-only. Yeah, no, that's great.

Maybe just a follow-up then on the logistics side. How does growth in that platform play out from here? In 22, as you noted, John, you're expanding your presence in power-only, and that's been a success. And then you acquired ReadTMS, and that significantly grew your top-line footprint. As we progress maybe as a longer-term question, as we progress through the decade, what's the vision for that platform? Is it to be trailer-centric? Is it to be a digital automated broker? Is it all of the above?

Yeah, so as we go, first off, giving guidance out a decade is tough to do, but clearly power only is something that's gaining traction at a pace that's unique compared to traditional brokerage. And so we do anticipate that that will grow at a faster pace. The majority of what we do in brokerage is still traditional brokerage, and yet power only is quickly making that gap up. I think over time, The simple reality from a product offering standpoint is that power only is tough to compete with. It's very difficult to recreate that in a traditional brokerage format. I think, you know, as we brought Reed into the Warner family, you know, even, you know, they were very excited about having that opportunity to complement the exceptional sales force and the customer relationships that they have. coupled with, obviously, our ability to add trailing capacity at rates that would have been difficult to do for them as a standalone. So I'm encouraged by it. I'm not going to try to predict a 10-year-out percentage or ratio at this point, but I think it's going to be a larger and larger player.

Just to clarify, Derek, I meant it more like, you know, what is your strategic vision for logistics, not, you know, looking for long-term guidance or anything like that. But I think you answered it. Thanks, Derek. Thanks, John.

Thank you, Bert. The next question is from Brian Osendeck with J.P. Morgan. Please go ahead.

Hey, good afternoon. Thanks for taking the question, guys. Maybe just two quick follow-ups on dedicated, looking at the revenue per truck per week. I know you said it's off a tough comp from last year, but 0.3% seems like it's going to be tough to exceed inflation this year when you talk about driver pay as part of that. So maybe you can elaborate that a little bit. Is there ability to go back? It seems like you might be having some conversations to possibly move that up. Is this something we should look at more in the multi-year period, one strong year offset by a little bit weaker one? Maybe you can offer some thoughts around that.

Yeah, Brian, so the multi-year approach is certainly one lens that I think does matter. You know, when you're coming off of some of the comps over the last couple of years and we were able to shore up driver pay and other things at a rate that, A, the market would support, but, B, we felt was appropriate for our drivers, it is certainly going to – that line item will moderate as we look into 2023 – The other reality of dedicated agreements that we have in place is the driver pay is almost always set aside as a standalone item. So if we see pressure there, we feel as though the market has tightened, you know, sometime during the course of the year relative to driver availability, there's always the opportunity and dedicated to go back and have that conversation. It's not as easy as just asking and getting it, of course, but it'll be a data-driven analytical discussion. You know, 0.3%, Growth has a lot to do also with a year ago there was a lot of project type work or incremental trucks on many of these dedicated accounts. So you've got a base contract and then you have incremental trucks that are playing a role. This year you've got a base contract and you might have some incremental shrinkage in that same fleet. just based on their shipping volumes. And so you've got to put all that into the mix. The comps are probably one of the toughest things about that zero to three, not looking as impressive as you might have hoped for. The last thing I'll point out is dedicated revenue per truck per week has grown eight out of the last nine years. And I think that it really covers multiple different swings in the market. Then it really kind of gives you a better insight to just how stable that business can be If and only if you execute. And so we always start and end with that concept. We've got to be absolutely best in class on our execution, and we are. And so when we look back at 2022, you know, over the course of the entire year for all of those trucks operating and dedicated, and you look across the entire fleet, that fleet operated north of 99% on time throughout the entirety of the year. And that's something that I think I want to thank all of our folks once again for making possible.

All right, thanks, Derek. John, just a quick one for you then on the cost side. You mentioned going after some controllable costs. I don't know if you can elaborate on that. I know you've got a few things on maintenance. It sounds like parts could be a big deal, even more so than getting the new trucks in place, which obviously have a knock-on effect on maintenance and other line items. But maybe you can elaborate a little bit on what you have line of sight to that's controllable over the next year. You're looking to pull the lever on. Thank you.

Yeah, thank you, Brian. Yeah, we definitely have a cost focus across the entire business, and we're realizing savings in several categories, such as driver hiring and advertising, lower driver guaranteed pay, synergies related to the acquisitions that we've done, actually all four acquisitions, and then IT savings to implement our Cloud First, Cloud Now strategy that are helping with both efficiencies and productivity, and we're taking aggressive actions to improve our cost structure. We know we have a big headwind with the reduction in gains in 23 compared to 22, but we're confident that we can make a meaningful dent in that with the cost improvements that I just elaborated on.

All right. Thank you, John.

Thank you, Brian.

This concludes our question and answer session. I'll now turn the call back over to Mr. Derek Leathers, who will provide a closing comment. Please go ahead.

Yes, I want to thank you for joining us today on the call. We're proud of our results in 2022 and encouraged by the durability of our business as we enter a weaker setup, at least in the first half of 23. Dedicated is going to remain the lead horse on our wagon, but Warner Logistics now surpassing $1 billion in freight with increased customer and industry diversity is exciting. You know, I believe this year will be a story told in two halves. Capacity is already exiting. Inventories are coming into balance. And while there remains macro uncertainties, the one thing I feel strongly about is this. Strong, well-capitalized carriers focused on operational execution will have an opportunity to shine, and we look forward to that challenge. I want to thank you for spending your afternoon with us today.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.