Werner Enterprises, Inc.

Good afternoon and welcome to the Werner Enterprises second quarter 2024 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. 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 conference over to Chris Neal, Senior Vice President of Pricing and Strategic Planning. Please go ahead.

Good afternoon, everyone. Earlier today, we issued our earnings release with our second quarter results. The release and a supplemental presentation are available in the investor section of our website at Warner.com. Today's webcast is being recorded. and will be available for replay later today. 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. On today's call with me are Derek Leathers, Chairman and CEO, and Chris Wyckoff, Executive Vice President, Treasurer, and CFO. Derek will provide an overview of our Q2 results and update on our strategic priorities for 2024 and our market outlook. Chris will cover our financial results in more detail and provide an update on our guidance for the year. I'll now turn the call over to Derek.

Thank you, Chris, and good afternoon, everyone. Hope you're having a nice summer so far, and we appreciate you joining us today. Despite an operating environment that remains challenging, we are structurally improving the business with a commitment to delivering customer excellence while driving long-term growth. Our earnings improve sequentially in Q2, and while industry-wide headwinds persist, we are encouraged by early signs that the freight market is progressing towards equilibrium. Tough times don't last, but tough people do. And thanks to the resilience and professionalism of Warner's over 13,000 talented team members and their continued focus on controlling the controllables, I'm pleased to report that one-way production increased for the fifth consecutive quarter. Mexico volume is growing. Dedicated revenue per truck was up, and we continue to maintain high customer retention. Our logistics segment returned to positive operating income after a challenging first quarter. We continue to identify and execute structural changes to reduce operating costs and we are increasing our estimated 2024 in-year savings to over $45 million. We generated solid operating cash flow and purchased more than 1.6 million shares during the quarter. We are executing on our strategy to generate long-term value with a focus on safety, service, operational excellence, and innovation. Overall, market challenges linger, but we continue to strengthen and actively position Warner to capture operating leverage as the freight market improves. Let's move to slide five and highlight our Q2 results. During the quarter, revenues were 6% lower versus the prior year. Adjusted EPS was 17 cents, adjusted operating margin was 2.8%, and adjusted TTS operating margin was 5% net of fuel surcharges. Despite a lower for longer freight backdrop, Dedicated has demonstrated resiliency and durability. The prolonged environment combined with our pricing and margin discipline resulted in a lower Dedicated fleet size at the end of the quarter. However, the pipeline of opportunities and dedicated remains strong. One-way truckload demand was stable early in the quarter, then improved during and following road check, which as most of you know is a vehicle inspection and regulatory compliance initiative that is known to sideline some truckers for the week. Spot rates and tender rejects increased during the week, reflecting the tightened environment and a market closer to equilibrium. One-way revenue per truck per week increased nearly 8% due to operational excellence and technology tools that have contributed to a favorable production trend. Intentional focus on revenue quality led to sequential gross margin improvement in logistics and the highest in the last three quarters. In addition, volumes in truckload logistics and intermodal increased sequentially. Power-only volumes were strong, reporting six straight quarters of sequential volume growth and increasing over 30% year over year. In short, while we are encouraged to see positive signs of an improving market, we need more evidence over a longer period before we can call a definitive inflection from the unprecedented freight downturn. Challenges remain and our results continue to reflect a smaller dedicated fleet, pressure on one-way rates as previously negotiated contractor renewals become effective, and lower gains on the sale of used equipment. That said, we are pleased with the second quarter improvement and anticipate modest sequential improvement moving forward. Moving to slide six, we continue to push forward with implementing structural improvements that will position Warner for success as rate improves. Our DRIVE framework continues to inform our decisions over the long term, representing our commitment to durability, results, innovation, values, our associates, and the environment. We recently communicated three overarching priorities to generate earnings power and drive value creation in 2024 and beyond. They are driving growth in core business, driving operational excellence as a core competency, and driving capital efficiency. Relative to our first priority, We are focused on controlling the controllables and implementing changes that position us to maximize leverage when the market inflects. Dedicated trucks represented 65% of our fleet at the end of the quarter. One-way miles per truck increased for the fifth consecutive quarter. Mexico portfolio volumes increased low teens compared to the prior year period. Our one-way service offering gained strength in the northeast through our ECM segment that received several new business awards in the quarter. We remain confident in our ability to bridge the gap from recent results to our long-term target range, although pace and timing remains difficult to predict. We are making good progress on our second priority of driving operational excellence as a core competency. Measurable progress is being made on safety performance due to our investment in quality professional drivers, evolved training programs, and newer equipment. We are starting to realize a new pace of benefit from our technology investment. Our truckload logistics and intermodal business has now migrated to our Edge TMS platform, and the transition of our one-way business is progressing as planned. This is a multi-year journey, and we continue to be encouraged by the results. The synergies and value of a single freight platform will enhance both our customers' experience and our operational capability, as well as provide additional opportunities to grow revenue and reduce costs. Our cost savings initiatives continue to expand, growing to over $45 million. And finally, our third priority, driving capital efficiency. We had another strong quarter of operating cash flow from ongoing favorable trends in working capital. We continue with intentionality in our capital allocation, including $60 million of share repurchases during the quarter. CapEx spend and fleet age remain low. We will continue to update you on our progress against these priorities. Turning to slide seven to discuss our current view of the market. While it remains too early to call an inflection, we are encouraged by signs of tightening. Freight demand has been steady but competitive. One-way freight conditions in particular improved midway through the quarter and continued into July. We experienced a tighter environment during road check week, which led to improving spot rates, and those gains have held. While we recognize broader spot indices underperformed Q2 seasonality, our one-way segment maintained higher spot rates during the last half of the quarter, enabled by strong execution and freight selection tools. We experience more seasonal freight trends with better demand on the West Coast related to certain projects. We expect typical seasonality leading up to peak season in the fall. Recent conversations with customers are encouraging relative to inventory levels. Moving to slide eight, before turning it over to Chris to discuss our Q2 results in more detail, I want to take a moment to recognize our Mexico colleagues. July marked the 25th anniversary of our operations in Mexico. Together, With our carrier partners, many of whom we have relationships spanning multiple decades, we've built a premium and large-scale Mexico operation with a broad portfolio of services over nearly every crossing location across our southern border. We have a first-class terminal in Laredo that includes a dry and refrigerated transload facility within our property boundaries, providing a high degree of product integrity and security. Several of our management team members in Mexico have been with us for nearly all of our journey, and they manage a workforce of over 200 associates, with over half of them located in numerous offices throughout Mexico, including Mexico City, Guadalajara, Monterrey, and Querétaro. We are uniquely positioned to assist our customers as they expand into Mexico with our 25 years of relevant experience, including cross-border regulatory expertise, expansive footprint, and customer-specific approach. We were recently honored to celebrate this achievement with many of our Mexico-based associates, customers, and partner carriers at our annual transportation forum here in Omaha. We would not be one of the largest and most reliable cross-border transportation companies without their support, and we look forward to many, many more years of excellent customer service and growth.