Werner Enterprises, Inc.

Good afternoon and welcome to the Werner Enterprises Third Quarter 2024 earnings conference call. All lines are in a listen only mode until after the presentation. 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 third quarter results. The release and a supplemental presentation are available in the investor section of our website at Werner.com. Today's webcast is being recorded and will be available for replay later today. We see the disclosure statement on slide two of the presentation as well as the disclaimers in our earnings release related to forward-looking statements. 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 GAAP 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. I'll now turn the call over to Derek.

Thank you, Chris, and good afternoon, everyone. We appreciate you joining us today. Before we begin, our thoughts and prayers are with those impacted by the recent natural disasters in the Southeast. Hurricane Celine and Milton have brought devastation to the region, and we wish all those affected by these events a swift recovery. Many of our colleagues and customers have been directly impacted, and I want to thank our team members for providing support to those in need. Moving to our results for the third quarter, we continue to see positive signs that we believe point to the early stages of an improving operating environment. West Coast imports have been strong. We've secured some contractual rate increases, and excess capacity continues to exit, albeit at a slow pace. However, the backdrop for the third quarter remained challenging. These positive signs were more than offset by several factors, including elevated health insurance claims, higher interest expense, pressure on logistics gross margin, and higher costs in the school network. As a result of these factors, our operating income and EPS declined slightly from second to third quarter. The combined impact from elevated health care claims and driver school costs negatively impacted EPS by over five cents per share compared to P2. Core sequential operational improvement would have been realized in our results if not for these headwinds. While the quarter remained challenging, underlying data points reflect a market in transition. This is resulting in cross currents for Warner. The improvements we have been making to our business to drive long-term growth and value creation are being primarily offset by a challenging macro environment. While this is painful, it is also temporary. We remain disciplined on executing our strategy and are continuing to improve the business for today and for the future. As we navigate through this turbulent environment, I'm pleased to report that in Q3, one-way utilization improved year over year for the sixth consecutive quarter and rate per total mile inflicted positive. Strength and momentum continued in our Mexico cross border, intermodal, and power only services. Our dedicated fleet size grew sequentially and revenue per truck increased. We maintained high customer retention and dedicated and our cost savings program progressed. In addition, I'm pleased to report that a small group of professional drivers from our ECM transport subsidiary decertified the union's representation and decided to work directly with company management. In our ongoing effort to remain the best workplace for professional drivers, this demonstrates that our driver-centric culture at Warner is working and that it is as strong as ever. When the going gets tough, the tough get going. And thanks to Warner's over 13,000 talented team members, their grit and determination is positioning Warner for improved operating leverage and long-term value creation as the market improves. Let's move to slide five and highlight our Q3 results. During the quarter, revenues were 9% lower versus the prior year. Adjusted EPS was 15 cents. Adjusted operating margin was 2.9%. Adjusted TTS operating margin was .3% net of fuel surcharges. Dedicated demonstrated its resiliency and durability during the quarter. Revenue per truck per week increased year over year in Q3 while truck count grew sequentially and our customer retention rate remained strong at over 90%. While one-way truck load remains more pressure relative to dedicated, we were pleased with another quarter of improved utilization and revenue per total mile turning positive year over year for the first time in seven quarters. Our pricing this one combined with better freight options and strong miles per truck led to revenue per truck per week that increased nearly 7%. Logistics reported adjusted operating income that was slightly positive. Gross margins were pressured while volumes declined less than 1% sequentially. Our logistics business is a key component of our strategy. Through our brokerage and our modal and final mile offerings, we can provide a greater portfolio of solutions to our larger customers while also expanding our reach to small and mid-size customers. Our truck load brokerage business compliments one-way trucking. By assigning partner carriers to lanes, they're less optimal for our own network while adding incremental revenue and earnings. Furthermore, brokerage provides an opportunity to introduce our service product to customers in a transactional or low risk setting. After showcasing our service and capabilities and developing a relationship with the customer, our business often expands to one-way truck load or dedicated. Our continued advancement in technology is one of the key enablers of growth and logistics with a minimal capital investment. Through 2023, we demonstrated 13 consecutive quarters of growth and logistics. Our business fundamentals remain strong today. We've made two logistics acquisitions in recent years and have moved all of our logistics business except final mile to our Edge TMS platform. As greater demand returns, we expect improved results in logistics through both higher rates as well as more volume and transactional opportunities. In short, despite an operating environment that remained challenging, we continue to see positive signs across the business from early one-way rate improvement to a strong dedicated pipeline. Evidence of some market tightening response to supply chain disruptions, growing power only volumes and anticipated peak volumes slightly higher than last year. Moving to slide six, before discussing our 2024 strategic priorities, I wanna spend a few minutes underlying the strength and competitive advantage of our dedicated solution. Warner is one of the largest and most well-respected dedicated providers in the US. With our focus on safety and service, Warner provides a highly integrated dedicated solution to large enterprise customers who look to us to service complex and hard to serve networks. Our ability to design, build, operate and maintain fleets sets us apart. We solve problems and add value for our customers that view their supply chain as a competitive advantage. This has enabled us to maintain over a 90% customer retention rate. Given the characteristics of a true dedicated model, our dedicated business has shown resiliency through this prolonged and unprecedented down cycle. By the numbers, revenue per truck per week has increased year over year 26 of the last 27 quarters. And fleet size has increased year over year for 14 of the last 16 years. While the overall dedicated environment has experienced greater pressure than passed down cycles, we do not believe that there has been a fundamental change in the dedicated model. Rather looking ahead, we see opportunities to preserve and grow our existing dedicated business and to stimulate progress through vertical expansion and private fleet conversion. With market momentum shifting back to prioritizing capacity, reliability and service, combined with a total addressable market exceeding 30 billion, we believe Warner is well positioned to capitalize on a robust pipeline of opportunities. Moving to slide seven, 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. With two months until year end, we want to provide an update on progress towards the strategic priorities we laid out for 2024 at the beginning of this year. When we set these goals, we anticipated a more robust acceleration of macro and industry trends in the second half of the year. While continued softness has impacted outcomes, we are making progress. Our three priorities to generate earnings power and drive value creation are driving growth in core business, driving operational excellence as a core competency and driving capital efficiency. Relative to our first priority, driving growth in core business, we are focused on controlling the controllables and implementing changes that positions to grow and capture operating leverage on the market and flex. For example, we are seeing benefits from consolidating freight into a single platform. With truckload logistics now completely transitioned to our HTMS platform and alongside progress converting one-way trucking customers, both operations now have visibility to freight needs of select customers. The shared visibility allows us to optimize how freight is executed and serviced in real time. The synergies we are creating are already driving incremental revenue and the benefits will only grow as more one-way customers are integrated into the platform. Our technology stack is anchored by our in-house designed and architected HTMS platform, which is underpinned by robust API structure. This allows for seamless and real-time data exchange across other systems and winning technologies, significantly improving decision-making, operational efficiency and scalability. This seamless connectivity results in benefits such as rate automation and optimized freight selection. Beyond technology, we've realized other advances that are driving revenue. One-way miles per truck and revenue per total mile are improving. Mexico volumes are growing and power only revenues are also growing, increasing mid-teens year over year and high single digits sequentially. We remain confident in the roadmap to get back to our long-term target range of 12 to 17%. Pacing timing are difficult to predict, but the pathway is clear. Later on, Chris will discuss these key levers to bridge the gap to our long-term expectations. Relative to our second priority of driving operational excellence as a core competency, we've seen advancements here also. In fact, everything we do here at Warner is done with an attention to excellence. As a recent example, Ferguson, a valued customer, recently announced that Warner received their Carrier of the Year in 2024 in the truckload category. We appreciate these relationships and customers that value how we approach safety, reliable service and unmatched capability. As communicated previously, our technology roadmap has been a key focus. In addition to the previously mentioned benefits of our business migrating to our HTMS platform, several other examples illustrate progress in our technology journey, including the automation of our accounts payable processes, being close to completing the migration of our back office to workday and streamlining our internal operations. In reducing the time it takes to qualify, onboard, audit and pay third party carriers and brokerage. These benefits continue to advance us towards processes that are better, faster and cheaper for the long-term. Through Q3, we've realized 40 million in savings through initiatives focused on innovation, leveraging technology and further integrating and centralizing processes across our legacy and acquired businesses. We continue to invest in our future through the five T's, trucks, trailers, terminals, talent and technology, all to position us well when the market turns. And lastly, our third priority, driving capital efficiency. We reported another solid quarter of operating cashflow and our year to date free cashflow is up year over year. CapEx spend and fleet age remain low. Despite the prolonged down cycle, I'm proud of our team's progress on these fronts. These results prove that during the ebbs and flows of market demand, we remain focused on controlling what we can. We continue to push forward with implementing structural improvements that will position Warner for success as the market normalizes. With that, I'll turn it over to Chris for a deeper dive into our Q3 performance.

Thank you, Derek. Let's continue on slide nine. Third quarter revenues totaled 746 million, 9% lower versus prior year. Adjusted operating income was 21.6 million and adjusted operating margin was .9% a decrease of 48% and 220 basis points respectively. Adjusted EPS of 15 cents declined 27 cents, primarily driven by a softer used equipment market, lower gains and higher interest expense combined with rate pressure in one way and logistics. Turning to slide 10. Truckload transportation services total revenue for the third quarter was 523 million, down 9%. Revenues net of fuel surcharges declined 6% to 460 million. TTS adjusted operating income was 24.5 million, 41% lower versus prior year. Adjusted operating margin net of fuel was 5.3%, a decrease of 320 basis points year over year, but a 30 basis point improvement from second quarter. Lower equipment gains drove over 40% of the TTS decline in operating income. During the quarter, consolidated gains on sale of property and equipment totaled 2.6 million, a decline of 6.5 million or down over 71% compared to last year. Net of fuel surcharges and equipment gains, TTS operating expenses reflected our intentional commitment to control costs declining modestly year over year and sequentially, but were more than offset by a 10% smaller average fleet size and a revenue per mile decline of 1%. Year over year, one way revenue per total mile increased .3% in the third quarter and was down .2% year to date. Several TTS expense categories showed improvement in the quarter. Insurance and claims expense dropped 3 million or 10% versus prior year. Operating supplies and maintenance and general supply expense was down 1 million or 2%. We remained focused on producing higher operating margins and over time, returning to our long-term TTS operating margin target range. The building blocks to bridge the gap remain clear. They include first, rate improvement in one way, second, incremental growth for existing fleets and dedicated at a higher contribution margin as we return to normalized volume. Third, normalization in the used equipment market and fourth, structural improvements through technology and our cost savings initiatives. We are seeing pockets of progress in these areas. Our focus and intentionality to influence rate lift is showing as one way rate improved year over year and sequentially during the quarter and our cost savings program remains on track and growing. Let's turn to slide 11 to review our fleet metrics. TTS average trucks declined to 7,414 during the quarter. We ended third quarter with the TTS fleet down 15 trucks sequentially and 9% year over year. TTS revenue per truck per week net of fuel increased .5% year over year during the quarter and has increased year over year for 22 of the last 27 quarters. Within TTS for the third quarter, dedicated revenue net of fuel was 285 million down 7% year over year. Dedicated represented 63% of TTS revenue consistent with the year ago. Dedicated average trucks decreased .5% to 4,809 trucks. At quarter end, dedicated represented 66% of the TTS fleet. Dedicated revenue per truck per week increased .7% year over year, growing 26 of the last 27 quarters. In an improving market, we remain confident in our position to return the fleet to growth given demand improvement within some of our existing fleets and our high customer attention. Growth opportunity remains in retail while also focusing on gaining traction in other high value verticals and hard to serve freight opportunities at reinvestable margins. In our one-way business for the third quarter, trucking revenue net of fuel was 165 million, a decrease of 6% versus prior year. Average truck count declined 12% to 2,605 trucks. Revenue per truck per week was up 7% year over year. One-way freight conditions in the quarter were similar to Q2, but there were pockets throughout the country where better freight options existed. West Coast imports, for example, allowed us to improve our freight mix in the West. We operated some pop-up trucks throughout the quarter and had the opportunity to participate in numerous projects at improving rates. We will continue to utilize our freight selection tools while being methodical, disciplined, and proactive in transitioning our one-way portfolio to improved rates. After two quarters of double-digit -over-year gains, one-way miles per truck increased to solid 7%. Total miles decreased 7% versus prior year with 12% fewer average trucks. We are lapping strong gains in production and utility and expect -over-year improvements will moderate. In addition, our power-only offering within logistics continues to grow. Increased miles in power-only offset the decline in one-way truckload miles, ultimately resulting in combined miles that were flat -over-year. As a carrier of scale and reach, our ability to produce similar miles with a smaller fleet is unique. And in a tighter market with better rates, the combination of one-way production gains plus power-only volume growth translates to improved ROI and provides more optionality for our customers. Now turning to logistics on slide 12. In the third quarter, logistics revenue was 207 million, representing 28% of total third quarter revenues. Revenues were down 10% -over-year and 1% sequentially. Revenue in truckload logistics declined 12% and shipments decreased 10%. Shipments decreased less than 1% sequentially as volumes from the existing customer base were generally steady. Intermodal revenues, which make up approximately 14% of logistics revenue, decreased 1% sequentially but increased 7% -over-year due to 19% more shipments. This was partially offset by a 10% decrease in revenue per shipment. Final mile revenues decreased 5% sequentially and 17% -over-year. An ongoing competitive environment led to slightly lower sequential truckload logistics volumes and gross margins, resulting in adjusted operating income of 0.8 million. Adjusted operating margin was .4% down 100 basis points -over-year driven by rate and gross margin compression. It continues to be a very competitive operating environment which is pressuring logistics margins in the short term. We have taken recent actions, including certain headcount reductions and implementation of other cost controls to further lower our cost to serve. We are working to improve revenue quality as well as building our infrastructure and technology to continue to provide industry leading service and expertise at greater scale. Moving to slide 13 to discuss our cost savings program. We are increasing our 2024 program again and are now targeting 50 million. Through the third quarter, we have realized 80% of our revised full year target. We have clear line of sight on the rest of the program and expect to reach our target by the end of the year. As a reminder, these cost savings are largely long-term and sustainable. While we have been on a journey to reduce costs during this inflationary environment over the last few years, we have continued to reinvest in the business. We have maintained a new fleet and acquired real estate and key geographies. We have also upgraded our terminal network to provide best in class amenities to our drivers and create more capacity to perform repairs at our locations. And finally, we have pushed forward with investing time energy and capital towards our technology journey as we work to transition all business units to one team as platform and build tools to enhance our customer's experience and greater efficiency for our associates. Let's review our cash flow on slide 14. We ended the third quarter with 55 million cash and cash equivalents. Operating cash flow was 61 million for the quarter or 8% of total revenue, slightly lower than the prior year. As expected, net capex continues to trend down. Third quarter was 88 million, down 32 million or 27% year over year. Year to date net capex is 9% of revenue compared to 15% for the same period last year. Yet we continue to maintain a low average age fleet. As a result, free cash flow through the first nine months of this year was 53 million or 2% of total revenues up 300 basis points year over year. Total liquidity at quarter end was 434 million, including cash and availability on our revolver. Moving to slide 15. We ended the quarter with 690 million in debt of 20 million or 3% sequentially, but flat from a year earlier. Net debt decreased 12 million or 2% year over year. Net debt to EBITDA was 1.6 times, driven by EBITDA margin compression. We continue to have a very healthy balance sheet, access to capital, relatively low leverage and no near term maturities in our debt structure. On slide 16, let's recap our strategic priorities related to capital allocation. We continue to prioritize strategic reinvestment in the business while also being balanced over the long term between returning capital to shareholders, reducing debt and funding M&A. Through the first nine months of the year, we generated nearly 260 million in operating cashflow. We utilized 206 million net of used equipment sales for reinvestment in our fleet, terminals, technology and school network. 26 million year today, it was a return to shareholders through our quarterly dividend. We did not repurchase shares during the quarter and therefore remained flat at 67 million in share repurchases year to date. We have 3.9 million shares remaining under the board approved program. Let's continue on slide 17 and a review of our full year 2024 guidance. Our full year fleet guidance has been adjusted from being down 3% to 6% to being down 6% to 8% year to date. We are operating 7% fewer trucks. We see potential for a lower dedicated fleet in the fourth quarter, but expect any decline will be partially offset by growth in our one-way fleet. Our full year net capex guidance range has tightened to be between 240 and 260 million with the midpoint unchanged at 250 million. Through three quarters, dedicated revenue per truck grew by .1% year over year and is expected to remain within our full year guidance range of zero to 3%. One-way truck load revenue per total mile increased .3% in the third quarter, slightly better than the top end of our down 3% to flat guidance. We expect the year over year change in the fourth quarter to be flat to up 3% as we see increasing opportunity for favorable rate changes going forward. Total gains at 8.9 million year to date, including 1.8 million from the sale of real estate last quarter. Excluding the real estate, sales of used equipment and property resulted in a gain of 7.1 million. We are lowering the midpoint and tightening the range to be 7 to 11 million. Our tax rate was .5% in Q3 and .7% year to date, reflecting certain one-time discrete items in the first quarter. We are raising our full year guidance range to be between .5% and 26.5%. Our average age of our truck and trailer fleet at the end of the third quarter was 2.0 and 5.2 years respectively. I'll now turn it back to Derek.

Thank you, Chris. We continue to make progress on our near-term initiatives, structural improvements and strategic tech investments on our path to position Warner for growth as demand returns. The operating environment remains challenging and while we were optimistic that the turn would occur before peak season, we are staying the course and focused on controlling what we can. We are pleased that one-way trucking revenue per total mile increased in Q3. One-way miles per truck showed continued -over-year improvement and the dedicated fleet grew sequentially. As a result of the intentional evolution in our business, Warner has never been stronger. We are a more diversified company and better positioned to capitalize on the market turn. We are a cycle-tested team and our historical results demonstrate our ability to generate earnings power as the market improves and demand accelerates. Through it all, we will remain steadfast in our approach to safety and delivering -in-class service to our customers. With that, let us open it up for questions.

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. To allow for as many callers as possible to ask questions, we ask you to limit your questions to one question and one follow-up. This call will end at 5 p.m. Central Time following the company's closing remarks. Our first question today is from Ravi Shankar with Morgan Stanley. Please go ahead.

Great, thanks. Good afternoon, everyone. Can you just elaborate a little bit more on the health insurance claims and the kind of cost headwinds that you mentioned the quarter, just how many of these are -time-ish versus something that may sustain?

Hey, Ravi, this is Chris. Sure, we can unpack that a little bit, not a ton of specifics that we can really provide around it other than it was uniquely elevated during the quarter, you know, potentially even a record for us. So, you know, that's just why we called it out in the results. You know, certainly, you know, something that can be volatile from, you know, from time to time, but, you know, this was more of an outsized level for us. So it was about five cents of EPS impact at least on a -over-quarter basis, as we noted.

Understood, that's helpful. And maybe as a follow-up, Patney, you also said in your prepared remarks that you secured some rate increases this quarter. Can you just talk about the magnitude of what you're looking at for 2025 bid season, maybe starting now through, you know, going into the peak of it and, like, you know, one Q2Q of next year?

Yeah, Ravi, this is Derek. So the rate increases that we've been achieving as we went through Q3 and into Q4, obviously, we're addressing sort of the most duress freight in our network first. So those numbers tend to be a little bit outsized because that freight is freight that really needs to, at this point, either be repriced or replaced. And so there's a level of assertiveness that goes along with that ask based on the current state of pricing with certain customers in the network. I think it's too early to try to predict what 2025 looks like. I think the next several weeks will really shape and tell us a lot about what to expect going into the formal bid season. What I can tell you is that the slow build that's been occurring in Q3 with some add-on in Q4 has been obviously somewhat impacted by the very natural disasters we opened up the call talking about and the port strikes as well. But even in addition to that, there is an ongoing kind of subtle tightening taking place. So I don't wanna call our shot just yet because I'd like to understand just how much tighter it gets as we go through this peak season. But it is our expectation as we look into 2025 that the time for rates to be going up is upon us. The question is the magnitude and I think it's too early to tell.

Understood, thanks, Eric. Thank you. The next question is from Scott Group with Wolf Research. Please go ahead.

Hey, thanks, afternoon. I think the last couple quarters, you've talked about modest sequential margin improvement, which is how it's played out. Derek, any thoughts there on how to think about the margins Q3 to Q4? And then can you just clarify, I thought I heard that dedicated fleet might be lower in Q4, but the one-way fleet higher, that feels like a change from last couple quarters of trends. I just wanna make sure I heard that right.

Yeah, I'll start with the latter part of that question, Scott, which is relative to dedicated. So I think the issue in dedicated right now as we look at Q4 is we know and have decided on a couple of final exits where we don't believe the profile fits our long-term pricing discipline or our long-term alignment relative to a couple of customers and what their expectations are. As a result of that, but at the same time, there's a lot of add-backs starting to happen within dedicated, it's very difficult to relate or to predict exactly where that fleet lands. Because what happens is we're starting the early signs, and this is what you always see in the early signs of a turn, to start seeing individual dedicated fleets adding capacity back, adding trucks back in, and they may or may not offset a couple of known exits that we've decided upon. So that's the white noise perhaps you're picking up and trying to understand what's happening there. As it relates to one way, it has more to do with two things. One, proper retention of some of those quality drivers in the short term, because our pipeline in dedicated remains robust. And so there are temporary placements where you wanna protect and preserve the relationship with some very high quality drivers we have in those fleets. And then secondly, but equally important is, as we go into peak and conversations we're having with customers, it's about right sizing the fleet on a very temporary basis to be able to serve our customers and really participate in kind of that opportunity to both serve, but also at more of a premium rate environment over the standard contract language where we're needed. So we're optimistic about that. It's not a change in strategy, and it is not a long-term read through, I can assure you. Oh, on the first part of your question on margins, look, we're battling away every day, and we've been very careful to word it as moderate. I think that's still the same theme. Chris referenced a very abnormal health insurance quarter that hit us in Q3, that's why we called it out. Absent that, the operational improvements have continued to take place. The moderate margin improvements have continued to take place. We expect to be able to continue to see that as we go into Q4, but we're early in the peak season. The dialogues are good. Several commitments have landed. There's others still being worked, but it will be moderate because we do still have the macro, which it's hard to own the macro to point it like this in the cycle. And instead it's gonna be focusing on things like the productivity gains we've made and now being able to put those to work in a little bit of a higher rate environment, the improvements we've made in optimization and collapsing around core customers that look at their supply chain as a competitive advantage, and then maintaining pricing discipline, which will come potentially at the expense of fleet size, but we believe that at this point, that's the right move, given that there is better times on the horizon relative to market conditions.

That's helpful. And just lastly, I haven't really heard anyone talk about the November 18th deadline with the clearinghouse. And so maybe it's not a big deal, but just wondering your take, Derek, if you think this matters from a capacity standpoint for the industry going forward.

I think it certainly could. You know, it depends on how that implementation, if that implementation happens. And I think Scott, what you're probably hearing in terms of quietness out of the conversations with fleets is a lack of confidence in where that lands, how that lands, and the significance of any, you know, enforcement slash implementation. I would put it in the same category, for instance, as some tightening of visa requirements that are taking place right now relative to the southern border that we're very encouraged by, but I'll believe it when I see it. And so if you go from sort of these six month visa enhancements that drivers can get and then operate under a B1 program, and you reduce that to potentially as short as a 10 day visa, it really puts some tightening on capacity because now they really have to do what the law says they should have been doing all along, which is to go into the country, deliver a load, and then exit. That's not what we know is happening in practice. So there's a couple of potential capacity catalysts or constraining catalysts, I should say, that we're pretty excited about, but look, it's been a rough couple of years, and so we're not gonna bank on that. We're gonna keep our head down, folks who know what we can improve internally, but certainly be excited if we see those things come through.

Thank you guys, appreciate the time.

The next question is from Brian Osenbeck with JP Morgan. Please go ahead.

Hey guys, good afternoon. Thanks for taking the question. Maybe, Derek, just to follow up on your last comment there about maybe engineering the one-way fleet down a little bit more, just to, obviously, the fourth court you mentioned is going up, but do you feel like you're at a point where you don't need to make any more of those adjustments to kind of drive further utilization, or is it still maybe a little bit more to go as you continue to shift the mix more towards dedicated over time as you happen?

Yeah, I mean, we've said on prior calls, and I still feel this way, dedicated as a percent of total fleet will rise further from where it's at today, most likely. We have other alternatives in the one-way marketplace to provide our customers, both with pure brokerage as well as power only. I think what they're more interested in is the visibility, the suite of services, the portfolio that we bring to the table, but if we can create efficiencies at their dock with a unified trailer pool, provide seamless service and visibility to them along the way, that product continues to gain traction, and that's why it's one of the fastest growing products in our fleet. So as it relates to utilization, I want to be clear, like this utilization miles per truck increase isn't driven by a shrink in the fleet, although obviously a smaller fleet forces more demand through it. It really is the result of ongoing engineering and efforts with some of the tech investments we've made to be able to put trucks in the right position to maximize their miles, which both is good for the driver, it's great for the customer, because on those lanes where we do operate with our own equipment, we can further enhance both service safety and along the way overall productivity. So that's exciting stuff. It's also a reflection of leaning into Mexico cross-border. It's a reflection of leaning into -to-serve markets where time sensitivity is paramount. All of those things together is why we believe that's a sustainable system change that's taking place here that we can hold onto and will mean a heck of a lot more from an operating leverage perspective as rates improve and those additional miles are not so close to, are not such small margin miles. So that's what gives us the excitement, and we talk about a stronger foundation going into a market turn. It's those things, those operational structural improvements that have been very difficult and don't pay great dividends in a market rate structure like the one we're in today, but pay off in a significant larger contribution rate as rates improve.

Okay, and then thanks for that. It's another follow-up maybe on logistics. Can you give a little bit more color in terms of what the levers of profitability you think might be out there? You mentioned a few of them, account reduction, cost controls, revenue, quality, but I would assume some of that improvement on profitability side looking to get to would probably just take more of a stronger, less competitive market, but I don't know how much of that you feel you can get to your goal from more of those self-help levers or what really needs a stronger market to get you back to that or get you to the single-digit target. Thank you.

Yeah, Brian, it's Chris. Maybe a couple of things there. I mean, number one, I think the fundamentals in logistics continue to be strong. We've got high customer retention there serving large enterprise customers, and there's a number of things on the horizon, near-term and long-term that we're optimistic about within logistics, including how we're leveraging the technology there to improve not only how we're going about serving large enterprise customers, but also the ability to gain more share with small and medium-size customers within brokerage. So that's just, overall, we're happy with the segment. It continues to be a competitive space, challenging, particularly within brokerage, but there's continued strength in power only within the truckload logistics that is continuing to grow double digits and a lot of positive aspects for that. That's becoming just a greater mix of the truckload logistics. It's growing domestic and cross-border. And again, we're utilizing technology there to capture more overflow from assets and into the power only business. So, I think that's positive as we go forward. And then there are certain actions. We've been taking actions on the cost side. Overall, year to date, year of year, the SG&A expense within that segment are down 9%, specifically around the personnel costs. Those are down 10% -over-year. But we're obviously focused on staying positive in operating income and gradually expanding the OI margin there. So we're taking additional actions in terms of getting further or more lean in the operations, as well as other aspects, some improvements in final mile and some other actions that we're taking. So a lot there, but we're focused on it. And long-term, we feel good about it, but also focused on what we can control in the short term. Yeah, one of the things

I would just add is our tech journey has been most pronounced in the logistics space, and that's where we're the furthest along. Everything but final mile is now residing on our Edge TMS platform. We're seeing seat-level productivity that gives us strong confidence that there is a lot of cap space, if you will, at a seat level to be able to grow revenues and grow margin over time through higher seat-level contribution rates. And so we're excited about that. We need the volume to come along with it, and we needed to make sure we didn't overcut or build a bridge too far when we feel as though we're as close as we are to a stronger market. So when all that comes together, that's something that gives us a lot of encouragement looking forward.

Okay, thanks very much, guys. Thank you.

The next question is from Jeff Kaufman with Vertical Research Partners. Please go ahead.

Thank you very much. I wanted to focus a little bit more on pivoting for growth and longer term. I guess two parts to this. Number one, the driver market, and not just getting drivers, but quality drivers. How long will it take you to pivot to growth if let's say you start to see the things you want to see in first quarter, second quarter next year, and then separate from that, fleet planning with all of the new CARB regulations and the 27 EPA out there. How do you feel about managing fleet age and your ability to navigate growth over say the next 18 to 24 months?

Yeah, great question. So let's start with the driver side. First off, this is where our school network and our vertically integrated approach to developing high quality drivers is a true asset. It's one of the toughest areas over the last couple of quarters, because financially it obviously underperforms in an area when you're, at a time if you're shrinking your fleet or even holding your fleet stagnant, that creates a cost overhang that's real, but, and tough decisions have to be made. It's my belief that having to curtail that capability for short term gain would have been a major strategic error. We feel very good about our ability in a stronger market. If we were in a position where we need to grow specifically dedicated and add to those fleets and do so in short order, not only do we get the benefit of having a larger fleet and under long-term contracts and a higher margin profile, but we also improve and get some self-help on the school side through greater throughput. That network is built to produce a larger driver count than what it's being asked to produce today, both for Warner and the industry. The demand for those high quality drivers increases kind of right alongside overall market demand. And the folks going through those schools both perform better financially because less bad debt, less other kind of negative issues that go along with a market that maybe isn't as robust from a hiring perspective. Because remember, roughly half those graduates end up at Warner, but about half of them end up in industry placements in general, not all driving trucks by the way, but whether that be buses or other activities and across the board, that demand has been off. And so we feel really good about our ability to respond from the driver side. As far as the fleet age and all of the emission changes, I love our positioning there. So that's one of these areas that's underappreciated. It doesn't matter much when the financial results aren't where everybody would like to see them. But the fact that we haven't aged out that fleet and have a bunch of sort of fleet age debt, if you will, where we've got to go out and spend tons of money to refresh it and prepare it for potential emission changes puts us in a very unique position. It allows us to use CapEx to grow if growth is there for the taking, particularly on dedicated, again, I wanna reinforce that without having to have outsize CapEx just to try to get our fleet age down to where we would traditionally want it. So I think we're in a great position. Our testing on all of the above as it relates to different emission enhancing technologies is at the forefront. So we have, we're testing electric, we've got a hydrogen beta test underway right now. We're going to know and be as knowledgeable as anyone on how we can work through that. And then lastly, you mentioned how will tech enable us as it relates to network design and some of these emission changes. And I think us like others are working at all kinds of creative solutions as to how fleets might manage which trucks and how often they go into and out of certain regions and geographies. And I think our ongoing Edge TMS journey uniquely positions us to be able to handle that very, very well and to be able to use some of these engineered solutions to design fleets within fleets, to be able to both comply but not be overexposed to some technologies that are very much still yet to be proven. So we'll be able to manage it, I think well, and I like the positioning overall.

And Jeff, I would just add one more comment to that relative back to your first question around the schools and the drivers. During this down cycle, we have increased our school network and those locations by, call it about 50%. We've added several locations over the last couple of years, which might sound counterintuitive in the down cycle to be investing in that area, but it does take a couple of years to create awareness of those schools being in certain geographies. So we've taken some of the investment and pain in doing that despite a down cycle. And so we're even more positioned now for this up cycle with 50% more schools in key geographies than we have been in the past.

Thank you very much.

Thank you.

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

Thank you Robert, hey Derek, hey Chris. So I hope you guys are doing well. Two quick things, you talked about getting some sequential rate increases, I think here on the contractual side. How should we think about the upcoming bid season and what do you think you guys need to get to make sure that you can secure some earnings growth for 25? And then my second question revolves around that $50 million target on the savings side. You said you guys are well on the way. You said the overwhelming majority is more what you would consider permanent savings. I was wondering if you can maybe drill down a little bit on that and just tell us how much is permanent out of that 50.

Yeah, Jason, thanks for the question. We are, as I mentioned earlier on the call, it's too early for us to predict where the rate environment is ultimately gonna land as we get more firmly into the bid season. What I can tell you is that we are, early returns have been positive. You can see that in the fact that we had our first -over-year improvement in rate per mile in the one-way division in I think seven quarters. We believe we could build upon that momentum as we go into Q4. We believe that sets the stage and we've seen through recent events that were closer to tightness that then we've been in a long time. Those events being both the port strikes as well as the hurricanes and even some of the pull forward on the West Coast that may have happened. In all cases, it's driven kind of a sudden, immediate and relatively steep reaction in the spot market. We've seen across our network, our spot pricing now roughly equate to equal to contract and in certain geographies now exceed contract for the first time in a long time. And so all of that are indications of where we're at in the cycle. As we go into this bid season, there's a clear cut cost need. So like as it relates to cost justifying increases, that's pretty apparent and easy to do across the industry relative to how difficult this period has been. And then there's the market drivers of where rate ultimately will land. I think if you look at the last couple of up cycles, we've performed head to head with the sort of best performers as it relates to rate. It's our expectation we'll do the same again. It's just too early to give you an exact number.

Understood and on the cost side.

Yeah, hey Jason. So again, just recapping, it's almost 100 million over the last two year period from these cost saving programs, I think you specifically were just asking about the extent that they're permanent. We've said that well over 60% of these are structural and sustainable and I think as we go forward, there will continue to be a high degree of savings that we're realizing and executing on that just by their nature are structural and lasting over time. The way that we approach these is really focusing around operational innovation, leveraging technology as well as M&A integration. So just by the nature of our process, how we go about seeking those opportunities and executing on them, how we identify and prioritize those opportunities, they're just naturally areas that come from change that is lasting and permanent. That's not to say all of them are that way, but for sure the vast majority are.

Okay, fair enough, appreciate the time gentlemen.

Thank

you.

The next question is from Daniel Embro with Stevens. Please go ahead.

Yeah, hey, good evening guys. I wanna step back a bit on the demand backdrop. I think others this earnings season is at a more mixed on peak season expectations, but in the prepared marks, you mentioned seeing price opportunities and some underlying improvements. So Derek, try to square that away, and square away kind of what you're seeing in the business that gives you confidence into a more normal peak season. Is that what you're hearing from your customers or kind of what you're seeing in the market? Any more color on why you'd have made more bullish on the fourth quarter?

Yeah, I don't know that I want the read through to be that I'm bullish on the fourth quarter, but as it relates to peak, I can't speak to where others are coming from. I don't know what their dialogues with their customer base is. What I know is in our customer base, we believe we're gonna have both a price and volume incremental lift this peak season compared to last. Both of those things are positive. When you can put them together, they're a little more positive. So that's exciting, but we also know, obviously, that there's ongoing macro headwinds, and peak is only a small part of the overall organization as we think about fourth quarter. And so it's a mixed bag, right? But yes, in terms of what's the source of my statements, the source is our customers. It's our ongoing relationships that we've built over many, many years. It's their confidence in our ability to actually serve that peak and do what we say we're gonna do. And it's our ability to ask for their support and gain it as it relates to the projects that we've signed up for and will be performing and already have begun in some cases to perform. So you put all that together. That's what gives us the confidence to make the statements I'm making today. But I'd be remiss if I don't remind everybody that no matter how good peak is, it is still a subset of the overall total network of Warner Enterprises. And so I'm not saying that it's gonna be some up into the right major shift from Q3 to Q4, but it does set us up for sort of that moderate sequential improvement as we go forward.

That's helpful. And maybe on the cashflow side, I think you mentioned you about a buyback this quarter, but following up on an earlier question, you invested a lot in the down cycle, driver schools, reinvesting in the fleet, I guess into 2025, Chris, how would you expect CapEx to turn versus this year? Could that actually moderate and still support growth or is there further investment needed if we did see a market begin to recover? And then how would share buybacks fit into the algorithm?

Yeah, Daniel, first on the CapEx side, we certainly have the optionality and capability to invest in growth. And that is how we first and foremost prioritize capital allocation is reinvesting the business. So where there's a need to do that, investing in growth, investing in finding ourselves in a turn and an up cycle and needing to do that, we can certainly pull that lever and do that. I mean, it's too early to say specifically on what we expect the net CapEx to be for 2025, but certainly we'll invest in growth at the appropriate time. By and large, as a percent of revenue, our net CapEx has been trending down. And we think that that certainly makes sense just as our portfolio continues to evolve to be more asset light. From a share repurchase perspective, we're pleased with the long-term value that we created with the 67 million that we repurchased through the first half of the year. That's modestly creative right now. Obviously we'll be more creative as earnings improve. And we have headroom in our board approved program to lean back into that when it's opportunistic. But we continue to evaluate all of the options in terms of deploying capital across a variety of criteria, how it impacts earnings, how it contributes to our long-term strategy and all of that in the context of our leverage profile. So we look at share repurchase, we look at M&A where we've been active in looking at opportunities and we'll continue to be balanced in that approach as we go forward.

Thanks so much. The next question is from Eric Morgan with Barclays. Please go ahead.

Hey, good evening. Thanks for taking my question. I wanted to ask about the long-term margin range in PTS. It sounds like you're still pretty confident getting back there. I appreciate you've outlined the drivers earlier. Just wondering if you could offer some high level thoughts, if we sort of see an average up cycle from here or something akin to pre-pandemic, you think you can get back in that range within a single cycle or do you think just given where your margins are running today that it could maybe take a little bit longer?

Yeah, I think we're certainly not able to commit that it could be done in a single calendar year but a single cycle whereby we see lots of drivers why this up cycle would certainly be a multi-year event. Those drivers being some of the regulatory environments and the emission changes, some of the higher cost of capital, thus a little bit higher buried entry for the first time in a long time with some of the new engines and emission changes, the ongoing onslaught of sort of nuclear verdicts and the risk profile of entering this business from the outside. There's lots of different things that make the potential for this up cycle to be a multi-year cycle. We're gonna work our tails off to get there as quickly as we can. And I think the timing and pace is, it's just too early in this cycle to predict but that's why we've sort of outlined the pillars of that both in some of the opening presentation as well as in some of Chris's answers. Happy to elaborate on any of those if needed but it's just a bit premature for us to give great granularity to the arrival point in that range.

But Eric, I would just reinforce again, I mean, we're seeing progress. As we go forward just as a market, the progress is going to be gradual but we're seeing progress in all of those areas and that's why we have confidence as we kind of dimension each of those building blocks out that it gets us back to that long-term range and we're holding on to that long-term range. I mean, we've seen improvement as we've talked already here on the one-way side, which is probably the largest contributor of those four building blocks. So whether you look at spots, supply chain disruption lift, some of these early contract increases that we've talked about and then just what's coming from peak season. I mean, all that contributes to rate improvement from a one-way standpoint. So there's progress there, there's progress on the cost savings. It's really on normalization in that dedicated demand and normalization in the resale market that have a bit more progress for us to start to see overall progress across all four of those pillars. But I think at the beginning.

Yeah, appreciate that. And just a quick follow-up on the guidance and dedicated. You still have the zero to 3% revenue protractor for the full year. Anyway, you can put a finer point on that just given how far along we are in the year maybe just put some takes that might take it up or down from here.

I think the biggest reason that it's hard to put a finer point on it is that we're in conversations and actually have started to add back into dedicated fleets, some of those trucks that have exited during the downturn. So we've talked for several quarters about fleets that are off three to five, five to eight trucks. And it's really the pace and placement of where they add back in that will determine some of that. There are certain dedicated fleets that obviously operated a much higher rate of revenue for truck per week profile because they have higher utilization rates and others that are equally profitable but have a much lower utilization rate, therefore a lower revenue per truck per week. All of that goes into the soup. And so it's difficult until we have greater clarity on exactly the pace and placement of those trucks to give them any finer point than that. Again, I think the takeaway is less about the percentage and more about the activity. And the activity at this point is positive that we're starting to see some of those add backs. And unfortunately in Q4, they're countered by the reality that we have a couple of exits that we've decided to execute on relative to it not meeting our margin and long-term strategic profile that we're looking for.

I understand, appreciate it.

Thank

you.

And the final question today will be from Chris Weatherby with Wells Fargo, please go ahead.

Hey, thanks. Thanks for taking the question. Yeah, I guess I wanted to come back to Derek, your comments about the fourth quarter. And I think you talked about it in the context of margin. Sometimes you talk about it in the context, I think of earnings as well. Just kind of curious how to think about the progression into the fourth quarter. I guess maybe specifically is the five cents is sort of these extraordinary cost items that you recognize in the quarters. That's a base that we should be thinking about. I just wanna make sure I'm understanding like kind of level set, how we should be expecting kind of the progression from three Q to four Q in a rough sense.

Yeah, I think of a five cents, the concern I would have there is, I think early in the call somebody asked, is this a one-time event? Well, I'd love to be able to predict the future health of all of the associates at Warner. I can't, what I can tell you is this was a very large anomaly in terms of the large number, a small number of very large claims that occurred during the quarter. Because the HIPAA laws and other things, it's not like we have great clarity on what exactly those claims were and are they going to recur or not. It would be our belief that there certainly wouldn't be repeated nearly the magnitude because that's what history would tell us. But it is one of the areas of the business that unfortunately we operate a little bit more blind than we would like just out of privacy laws, HIPAA laws and other things, where we'd simply like to be able to plan for it if it's an ongoing treatment that's gonna extend it further into Q4. So I don't think it's as easy as just saying, yeah, the five cents all come back and that was a one and done situation. But we do believe that a decent proportion of that would likely, based on history, not repeat itself. And then from there, it's just the ongoing grind of all of these operational things we've been talking about continuing to take hold as well as a potential for a little bit of lift across the peak, the normal Q3 to Q4 peak season. It's not yet a robust peak season. I'm not here to say that. I'm just saying in years past, we've been to a couple of years where we either had more volume but much lower price or perhaps price held up okay, but there just wasn't a lot of peak there to be had. This one is slightly up in volume, slightly up in price. So that has a good setup as we go from Q3 to Q4. But so I mean, I guess that's about as good a clarity as I can give you at this point. And on the health side, it's just something that's an ongoing battle to try to do everything we can to maintain a healthy workforce. But usually when you see these singular claims that are very large individual amounts, it isn't related to ongoing health and wellness. It's related to some sort of unique event that took place and had to be addressed in the US medical system, which is not a place that's got a low price for admission.

Yeah, that's for sure. And I appreciate that, Clary, that's helpful. And I guess just one other point on the dedicated fleet. So I think your end of period count was above the average. And I know it sounds like there's some exits that you're making. Do we think about that from the end of period for the third quarter or off of the average number on the dedicated fleet for Q?

Yeah, great question. I think you think about it from the end of period. I think the end of period number was actually kind of materially up from the average number, which is really indication of two basic things. One, the landing and implementation of some new business opportunities, said differently, dedicated still open for business and we're still landing new accounts. And two, the add backs that I've been referring to a few different times during the call where we're now starting to see fleets kind of return to their normal size and shape. Because even though these dedicated contracts are dedicated in nature and binding, they do have certain levels of flexibility to ebb and flow. And as that flow starts to ebb up versus down, you get a lot of natural lift because we have over 160 dedicated fleets out there. And so when twos and threes start adding back, it really can add up to real numbers pretty quickly. Again, those are offsetting Q4 specifically by a couple of remaining exits that are still in front of us that will be happening. Those are known and it's offset by how many more add backs and as well as some new business coming in into the quarter.

Yeah, and just to be specific. Okay, very helpful. The end of quarter dedicated fleet from end of Q2 to end of Q3 was up 80 trucks, 1.6%. And you're looking at it exactly right, it sounds like. There was a late in the quarter strong push, particularly with large enterprise customers, both expanding existing fleets as well as recognizing and implementing some new business. So that was a late push and realization late in the quarter.

Okay, that's very helpful. I appreciate the call, guys. Thank you.

Yeah, thank you,

Chris.

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

Yeah, thanks, Gary. I wanna thank everybody for being with us today. Despite the difficult industry environment, we've utilized this downturn to try to bolster Warner and invest for our future positioning. It'll take time for it to fall to the bottom line, but the ongoing progress in production, revenue per truck, and now this quarter, early signs of rate inflection all lead us to better results over time. We remain focused on sustainable cost cutting but will not starve our strategic investments in fleet readiness or our technology roadmap or our commitment to safety and service. We'll continue to lean into our differentiators that's dedicated Mexico cross border and a stronger logistics portfolio than we've had previously. All of an eye towards operating leverage as the market improves. I'll close by thanking our over 13,000 associates for their dedication and commitment to our customers and frankly to each other throughout this difficult market. Warner is structurally stronger company today with a lot to be excited about moving forward. Thanks for your continued interest and support.

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