Werner Enterprises, Inc.

Good afternoon and welcome to the Werner Enterprise 4th 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 4th Quarter and full year 2024 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 to 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, Treasure and CFO. I'll now turn the call over to Derek.

Thank you, Chris, and good afternoon, everyone. We appreciate you joining us today. There's a saying that everyone has a plan until they get punched in the mouth. In 2024, it's pretty clear that the whole industry took it on the chin as everyone continued to fight through what many have stated is the worst rate recession in their careers. The challenging operating environment of 2023 persisted into and throughout 2024, as supply and demand imbalances resulted in a second consecutive year of depressed rate levels. This was coupled with ongoing inflationary cost pressures and lower resale values of for-used equipment. While capacity has continued to exit the market, the pace has been slow. However, positive signs began to emerge throughout the year, which we believe point to the early stages of an improving environment. One-way rates turned favorable in the second half, and west coast imports remained strong. Peak season was better than expected, with higher rates at double the peak volume versus last year. Post-peak season, we have seen additional green shoots that fuel optimism, such as tender rejection rates that remain seasonally elevated. Spot rates are off the bottom and at a two-year high. Customer sentiment remains positive, while consumers remain resilient. And while there are previously negotiated rates with our customers that remain effective throughout the first quarter, we are also seeing clear opportunities in early wins to positively influence rate. As a result, as 2025 gets underway, we anticipate a challenging but improving environment. During this downturn, we have focused on controlling what we can by investing in ourselves and making strategic decisions that position us to excel in the future. Our portfolio of solutions is more diversified now than at any time in history. We have invested in maintaining a modern fleet, made operational improvements for the leaner, more nimble organization through discipline around cost, operational innovation, and M&A integration. Advanced our technology roadmap leading to improved decision-making, better visibility, and operational efficiencies. Improved one-way miles per truck, which increased 8% year over year. Grown our power link product within logistics, adding more scale and flexibility. And invested in our driver school network to ensure a dependable pipeline of high-quality professional drivers. Thanks to the discipline, grit, and commitment of Warner's nearly 13,000 talented team members, Warner has never been better positioned for long-term value creation as the market improves. Let's turn to slide five and highlight our fourth quarter results. During the quarter, revenues were 8% lower versus the prior year. Adjusted EPS was 8 cents. Adjusted operating margin was 1.6%. And adjusted TTS operating margin was .1% net of fuel surcharges. During the quarter, we had higher than normal insurance expense that included 19 million from unfavorable development on prior period claims. This resulted in a 22-cent negative impact to adjusted EPS. In contrast, our focus on safety continues to drive a near 20-year record low in DOT preventable accidents per million miles. Safety is a high priority and which is demonstrated through our continued safety investments and initiatives such as investing in equipment with the latest collision mitigation systems, leveraging new side view camera technology, implementing NCAB and desktop technologies aimed at improving weather alerts, rerouting and other situational awareness for our professional drivers and fleet managers when it matters most. And collaborating with our vendors and other market participants to bring toward reform and future safety innovations to bear. Despite the uptick in insurance and claims in the quarter in an ongoing difficult operating environment, we are seeing positive signs across our business. Dedicated continue to demonstrate its resiliency and durability during the quarter as revenue per truck per week increased year over year. Average fleet size grew sequentially and our customer retention rate remained strong at over 90%. Our dedicated offering excels when reliability matters the most among large enterprise shippers. And our commitment to quality and service was recognized as we received numerous carrier of the year awards in 2024 from dedicated customers. While one-way truck load remains more pressured relative to dedicated, we continue to focus on operational excellence and are pleased to report another quarter of improved production. For the second quarter in a row revenue per total mile was positive year over year. Our pricing discipline combined with better freight options and execution led to revenue per truck per week that increased .1% in the quarter and .4% for the year. Our logistics division reported adjusted operating income that improved sequentially and represented the best quarter of the year. Gross margins were steady while volumes improved sequentially in truck load logistics and intermodal. Our logistics business continues to represent a key component of our strategy as it complements one-way trucking, provides a greater portfolio of solutions to our larger customers and expands our reach to small and mid-size customers. Moving to slide six, our plan to generate earnings power and drive value creation remains unchanged and is centered around three priorities. First is driving growth in core business which comprises expanding TTS and logistics operating income margins, increasing one-way rates, and growing our dedicated fleet given a pipeline that remains strong. On TTS margins, while we cannot predict timing of a return to our long-term range, we are encouraged by the modest incremental expansion we've seen over the past few quarters. This was particularly true in the fourth quarter absent the impact of insurance reserve adjustments. Second is driving operational excellence as a core competency which we will deliver on by maintaining resolute focus on safety, continuing to advance our technology roadmap through the transition of our one-way business to our Edge TMS platform, providing industry-leading reliability, solutions, and service to our customers, and continuing to control cost. Our focus to improve efficiency along with rate improvement, steady volume, and a focus on growth with existing and new customers on a lower fixed cost base should reflect margin improvement in 2025. I'm proud of Team Blue for their continued focus on operational excellence. Our safety metrics are near record lows. More volume has transitioned to future tech platform where we are seeing momentum in top and bottom line synergies. Our customers are recognizing our superior reliability at high scale, and we are controlling costs where we can. The final priority is driving capital efficiency. This includes maintaining strong operating cash flow through working capital optimization, remaining disciplined and thoughtful in how we allocate capital, and maximizing equipment fleet sales. We have proven our ability to generate earnings power as demand accelerates. 2025 will be a year of growth and improvement from 2024. We will provide you with updates on our progress against our 2025 priorities as the year progresses. Moving to slide seven to highlight our current view of the market. We expect truckload fundamentals to gradually improve throughout 2025. We are not placing bets on a specific pace and timing of a market turn, but we are confident that rates will continue to trend in a positive direction. Carriers continue to exit while at same time demand continues to improve. We expect that the consumer to show ongoing resiliency, resulting in non-discretionary spending holding up, while discretionary spending picks up. Retail inventory levels have mostly normalized, and as a result should no longer be a headwind to freight volumes. The pace at which inventories are replenished on a go-forward basis will likely be impacted by factors such as trends in consumer demand and how the new administration ultimately decides to implement its policy initiatives. Spot rates that have already moved to higher levels are expected to improve throughout the year as supply and demand continues to rebalance. As a result of an improving operating environment, along with upcoming regulations such as EPA 27, we expect used equipment demand and pricing to improve in the second half of 2025 as carriers look to upgrade their fleets and prepare for the upcoming mandates. Potential tariff policy continues to be a moving target. Implementation of tariffs on goods and goods from the world is expected to impact supply chains, although it is difficult to comment specifically on depth and duration as information is changing real-time. Regardless of the tariff impacts, we are prepared for supply chain disruptions and to meet our customer needs with agile solutions. With that, I'll turn it over to Chris to discuss our fourth quarter results in more detail.

Thank you, Derek. Let's continue on slide nine. Fourth quarter revenues totaled $1,755 million or down 8% versus prior year. Adjusted operating income was $12.2 million and adjusted operating margin was 1.6%, a decrease of 69% and 320 basis points respectively. Adjusted EPS of $0.8 was down 31 cents. As Derek noted, this includes a 22-cent headwind during the quarter from increased insurance costs due to unfavorable development on prior period larger dollar claims. The remainder of the change stems from a softer used equipment market and lower gains, higher interest expense and lower operating margin in logistics. Turning to slide 10. Percolo Transportation Services total revenue for the quarter was $527 million, down 9%. Revenues net of fuel surcharges declined 5% to $470 million. TTS adjusted operating income was $14.6 million, 61% lower versus prior year. Adjusted operating margin net of fuel was 3.1%, a decrease of 440 basis points of which over 400 basis points was due to higher insurance and claims referenced earlier. Due to intentional steps taken throughout the year, TTS adjusted operating income margins net of fuel improved sequentially the last two quarters and that streak would have been extended in the fourth quarter if not for the impact of higher insurance and claims. During the quarter, consolidated gains on sale of property and equipment totaled $6.5 million, which included a $5.1 million gain on sale of real estate. Total gains including real estate were up $3.4 million compared to last year. Net of fuel surcharges, insurance and gains, TTS operating expenses declined 5% -over-year. We are focused on producing higher operating margins and over time returning to double-digit TTS operating margins. The building blocks to the gap remain unchanged. 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-saving initiatives. Our focus and intentionality to influence rate lift is showing as one-way rate improved over 300 basis points -over-year and sequentially during the quarter. Rate improvement will be the greatest lift to TTS margin going forward. The pipeline of dedicated opportunities remains strong with a good mix of new customers. While still competitive, customers are more engaging on real bids, seeking capacity rather than simply pricing the market. We've seen an early increase in select pop-up and immediate needs that could materialize into more widespread volume normalization. Let's turn to slide 11 to review our fleet metrics. TTS average trucks grew to 7,495 during the quarter. We ended fourth quarter with the TTS fleet up five trucks sequentially and down 7% -over-year. TTS revenue per truck per week net of fuel increased .5% -over-year during the quarter and has increased -over-year for 23 of the last 28 quarters. Within TTS for the fourth quarter, dedicated revenue net of fuel was $289 million, down 7% -over-year. Dedicated represented 63% of TTS trucking revenues consistent with a year ago. Dedicated average trucks increased sequentially by .6% to 4,836 trucks, a decrease -over-year of 7.7%. At quarter end, dedicated represented 65% of the TTS fleet. Dedicated revenue per truck per week increased 1.1%, growing 27 of the last 28 quarters. In our one-way business for the fourth quarter, trucking revenue net of fuel was $170 million, a decrease of 5% versus prior year. Average truck count increased sequentially by 2% to 2,659 trucks but declined .2% -over-year. Revenue per truck per week was up .1% -over-year. One-way freight conditions in the quarter were seasonally better than expected and peak revenue was down 2.7%. After multiple quarters of double digit or high single digit -over-year gains in one-way miles per truck, the positive trend continued but at a more modest increase of 2%. Total miles decreased 8% versus prior year, with 9% fewer average trucks. Our power link offering within logistics continues to grow. Increased miles and power link offset the majority of the decline in one-way truckload miles, ultimately resulting in combined miles that were down less than 2% -over-year. As a carrier of scale and reach, our ability to produce similar miles with a smaller fleet is unique. In a tighter market with better rates, the combination of one-way production gains plus power link volume growth translates to improved ROI and provides more optionality for our customers. Now turning to logistics on slide 12. In the fourth quarter, logistics revenue was $213 million, representing 28% of total fourth quarter revenues. Revenues were down 6% -over-year but grew 3% sequentially. Revenue in truckload logistics declined 6% and shipments decreased 2%. However, shipments increased 2% sequentially as volumes from the existing customer base were generally steady. Intermodal revenues, which make up approximately 13% of logistics revenue, increased 2% -over-year due to 13% more shipments, partially offset by a 10% decrease in revenue per shipment. Final mile revenues decreased 12% -over-year and 1% sequentially. Our fourth quarter was our best top and bottom line performance of the year for logistics. Adjusted operating margin of .1% was down 20 basis points -over-year but up 70 basis points sequentially, driven by further cost control actions during the quarter, including headcount reductions. Moving to slide 13 to discuss our cost savings program. In 2024, we achieved over $50 million of in-year savings as an offset to rate inflationary pressures and low equipment gains. This combined with our 2023 savings netted close to $100 million in total cost takeouts over the two-year period, the majority of which were structural and sustainable. We are laser focused on a 2025 program totaling $25 million in incremental in-year savings. Approximately 35% of the 2025 program is carryover from 2024 to get to a full year run rate on initiatives that we actioned last year. The remainder is new initiatives for 2025 that are again largely structural and sustainable. Let's review our cash flow on slide 14. We ended the year with $41 million in cash and cash equivalents. Operating cash flow was $71 million in the quarter and $330 million for the full year. As expected, net cap ex continues to trend down, yet we maintain a moderate fleet and continue to reinvest strategically. Fourth quarter cap ex was $29 million and full year was $235 million, less than 8% of revenue compared to over 12% prior year. Net cap ex for the year was down 174 million or 43%. As a result, free cash flow for the full year was $95 million or 3% of total revenues, up $29 million or 44% and up 110 basis points as a percent of revenue. Total liquidity at quarter end was $460 million, including cash and availability on our revolver. Moving to slide 15. We entered the quarter with $650 million in debt, down $40 million sequentially and up less than 1% from a year earlier. Net debt increased 22 million or 4% year over year. We continue to have a strong 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 relative 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. For the full year, $235 million was reinvested in our fleet, terminals, technology and school network net of used equipment sales. $35 million was returned to shareholders through our quarterly dividend and $67 million was deployed towards share repurchase. We have 3.9 million shares remaining under our board approved authorization. While it's been two years since our last acquisition and despite a challenging market, our acquisitions are showing value. For example, in 2024, ECM professional drivers moved nearly 30,000 loads for legacy Werner customers. With ECM, we have greater density and capabilities in the Northeast, which enables us to better serve new and long-standing shippers of Werner. These Northeast fleets continue to get accolades and high marks from our customers. Baylor Trucking, our other truckload acquisition, recently earned TAPA II certification and is one of eight carriers in the U.S. certified for good distribution practice or GDP. These elite certifications allow Baylor to participate with international customers seeking secure supply chain transportation for first to final mile. GDP certification specifically states that a company meets critical standards for storing and transporting pharmaceutical products and as a result, we stand taller in a vertical of choice where capability matters with highly selective shippers. In final year award as a carryover to what we've experienced and dedicated. These are just a few examples of the value we are seeing from our acquisitions and there's more upside as we look forward to a better market. On slide 17, we are introducing our 2025 guidance. Our truck fleet guidance for full year is a range of up one to five percent with more weighted to the second half. Our full year net capex guidance ranges between 185 and 235 million, lower than historical ranges as our portfolio evolves to be more asset light. Our track record shows consistency in reinvesting the business, maintaining a low mile modern fleet and extending our solutions and capabilities, all of which remains in focus. Dedicated revenue per truck per week full year guidance range is flat to positive three percent. One way truckload revenue per total mile guidance for the first half of the year is positive one to four percent. Our effective tax rate was seven percent in the fourth quarter net of 2023 return to provision adjustments and other discrete items. The effective tax rate for the full year was 21 percent. Our 2025 guidance range is between 25 and 26 percent. The average age of our truck and trailer fleet at year end was 2.1 and 5.3 years respectively, compared to 2.1 and 4.9 years at the end of 2023. Regarding several modeling assumptions, we expect net interest expense this year will be flat year over year, but higher in first half, then lower by a similar amount in second half. We anticipate stable used equipment demand and pricing through first half of 2025, then moderate improvement in the back half. We expect to sell fewer tractors and trailers during the year. Excluding real estate gains, gains on the sale of used equipment is expected to be in a range of eight to 18 million. Relative to the first quarter, while freight volume and market conditions are stronger than expected at this point in the quarter, we expect year over year headwinds from interest expense, lower gains on used equipment, and one less business day. As a result, the encouraging market momentum will have less of a positive impact to our buy line in the first quarter compared to later in the year. With that, I'll turn it back to Derek.

Thank you, Chris. As we kick off 2025, our continuous improvement mindset remains at the forefront. The work we've completed over the last several years to further strengthen and expand our core offering, combined with improvements in our cost base, positions Warner well to capitalize with agility and speed on growth opportunities as the market influx. The worst is behind us and incremental improvements are seen across the industry, but other challenges remain. As a result, we remain focused on controlling the controllables. In closing, we are a cycle tested team and our historical results demonstrate our ability to generate earnings power as the market improves and demand accelerates. 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. Our first question today comes from Bruce Chan with Stiefel. Please go ahead.

Hey, good afternoon team. This is Drew Cox on for Bruce. I just wanted to start with, I guess, some questions about Mexico. It's been a wild week or a few days there with with terror threats and then pulled. I just wanted to understand if, you know, what kind of action you guys are seeing, what kind of conversations you're having with your customers, what are they saying in regard to the changes, in regard to the postponement and their expectations for eventual, what will happen eventually. Thank you.

Oh, yeah. Thanks for the question. We are in conversation. Obviously, Mexico is an important part of our portfolio. We've had multiple talks with our shippers in country. I think the consensus going into some of the tariff rhetoric was that it would play out similarly to how it has so far, meaning there would be some strong rhetoric early, hopefully some action on the other side, and that would lead to an opportunity for a postponement or perhaps even an avoidance altogether. What we haven't seen is a lot of fundamental change in shipping patterns or people trying to do any kind of dramatic tariff avoidance type techniques. And rather, it's been a little bit more of a sort of common steady approach from a shipper perspective. What we, you know, what I like the most is that our portfolio is set up well in Mexico. Not only are we a large scale provider of border services, but with our ability to utilize our cross-stock and Laredo, our power only solutions off the border and then being able to move things, both temperature controlled, van and intermodal, we've got optionality for our customers. We're going to stay in touch with them, obviously. I think we both know this could change any time, any day, any hour relative to the tariff situation. But regardless of whatever path it takes, I think our position, our optionality, and our relationship with our customers puts us in a really good spot.

Great, thank you. If I could follow up, you know, just looking back through the previous 10Ks, you know, you have Mexico, you've disaggregated revenues there with Mexico at 159 million last year. I just wanted to understand, does that properly reflect the cross-border opportunity at Warner or can you help us give us some goalposts on what the cross-border opportunity is relative to the size of the business? Thank you.

Yeah, it's difficult. Obviously, we have pieces and parts of our Mexico business that rolls up and reports through its appropriate divisions. So, we've got brokerage off the border that's going to show up in truckload logistics as an example. So, no, that does not represent the totality of the business that we do with Mexico. What we've talked about on previous calls is that, you know, if you think about Mexico and its some of its parts, you know, it's around or a little north of 10% of revenues. And that's really probably a better way of thinking about it. Obviously, we have to be very specific and clear relative to the K and what business is being reported specific to intra-Mexico and Mexico, et cetera. But in total, our exposure, which is really the point of the question, to and from Mexico is roughly a little north of 10% of revenues.

Okay. Thank you, Derek. That's very color. Thank you.

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

Hey, guys. This is Joe Enderlin on for Daniel. Thanks for taking the question. I wanted to ask about dedicated as that's gradually becoming more attractive with shippers looking to lock in rates. Could you kind of go through how you're balancing becoming more selective with fleet growth to insulate rate, how you're balancing that with adding business, what metrics are you ultimately looking at to make those decisions?

Yeah, Joe. This is Derek. Obviously, when we look at dedicated right now, I mean, I'll start at the macro. The pipeline for opportunities is very robust. It's as strong as it's been in some time. But it has also become more attractive from the provider side. And so there's more competition. And then 2024 in particular, there was a lot of exercises, a lot of bids that were out there, but we are selective, as you indicated in your question. What we're really looking for is true dedicated, the stuff that really can't be replicated by one way, doesn't go away when capacity becomes looser. It's the stuff that leads to north of 90% retention rates, which we've had for really our entire history in dedicated. And so right now, as capacity is tightening and as folks are looking for safe havens dedicated to become more popular, we've seen the pipeline get much more active. And our job is really to make sure that we're sorting through it and we're finding the actual true dedicated opportunities that stick here harder to serve, more defensive that will be with us, not just for the cycle, but hopefully for 10, 20 years into the future, which is the case with most of our fleets. And so it's an exciting time, but it's one where we have to be careful and cautious. You mentioned rate versus growth. Obviously, we have to improve the performance, not just in dedicated, but across the portfolio. And rate is the single biggest lever to do so. So that is at the forefront. But growth solves a lot of problems as well when done appropriately. And so on the truck side, our growth will be dedicated, focused, and it'll be priced appropriately to be able to make sense of that growth. In one way, it's going to be more of a initiative and rate approach as we go forward to move the revenue line. And then logistics is open for business and continues to be the fastest growing portion of the portfolio. So there's lots of opportunities for us to support our customers as capacity does continue to tighten. I like our positioning and dedicated will remain still the sort of stable middle of the portfolio that kind of drives the bus.

Yeah, that's helpful. Thank you. Just one on the follow up one on pricing. It sounds like that continues to trend favorably. Could you just give some color on the pace of rate increases so far, how that's trending relative to expectations?

Yeah, Joe, this is Chris. I can take that one. You know, after two consecutive years of lower rates and margin compression, it's clearly necessary that significant rate increases are needed, especially in the one way area that's been more compressed and challenged than dedicated. So as you know, we've been and will continue to be disciplined with our approach. And we've already started to see improvement in one way rates. We reported year over year increase here of just over 3%. That's the second consecutive quarter that we've had a year over year increase. So that's encouraging to us. And it's important to recognize also, you know, last year, we were able to improve miles per truck as well. And so that rate per mile improvement along with the miles improvement led to over a 5% higher one way trucking revenue per truck per week for the quarter. And we expect, you know, as rate improves with the miles that we've been able to improve or the production that we've been able to improve along with that rate, that that will be significant in helping us return one way to better levels of profitability next year. In terms of one way bid season, it's still in the very early innings. You know, we've really only had a few large bids that have closed and finalized. So really nothing yet that we would generate any, you know, significant consensus on. But early results are consistent with, you know, with our expectation here of low single digit to mid single digit type rate increases. Also important, customer sentiment really is improving. And we feel like we're having more conversations about capability and capacity solutions. And customers are just generally more receptive right now to rate adjustments, knowing that we've been in this elongated downturn here for, you know, really close to three years now.

Got it. That's all for us. Thanks, guys.

Thank you.

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

Hey, great. Good afternoon, Derek. I think that's the fastest I've ever heard you and Chris talk. Chris, thanks for the views on the first quarter and the seasonal softness you're thinking and then maybe the catch up thereafter, given the event you mentioned. But trying to understand the dedicated comments there. And on the last question, the end of period tractors pulled back sequentially, yet you mentioned a 90% renewal rate. So is there another like trend going on in terms of the tractors? Is it timing? Just given the peak season, maybe thoughts on that? And then you noted spot rates should improve. Derek, maybe your thoughts here just, you know, we've seen actually they ran up kind of at the start of the year, but they've really gotten soft a little lately. And, you know, I think we pulled back a couple months worth of the run up. And I'm just wondering with all of that, due to kind of pre shipping, port strike, pre shipping tariffs, and now it's cooling off and we're kind of talking about. Thanks. Sorry for the long question.

Well, speaking of speaking fast, Ken, that might be the longest question I've ever had on the call. So I'll attempt to dissect it. On the dedicated, yeah, I wouldn't read too much in the end of period truck count. We have, there's timing that takes place all of the time when you, especially when you're going through a Q4, where we might add in trucks during the quarter that are known to be sort of temporary and pop up in nature to support a fleet. So there's not a lot of read through there. The only read through on dedicated I would take away would be that the pipeline is very robust. We're starting to see more consistent and more widespread add backs starting to take place. That's something we've talked about for several quarters that when things get tight, some of the best dedicated growth you can get is just adding incremental trucks to existing fleets. The margin contribution on those trucks is better than the core fleet because your fixed costs are largely already in place. So that's exciting and something that we look for more of as we go forward. You know, we're probably a little more positive on spot than where you are, at least based on your question. Clearly, there were some external drivers to some of that lift, but I would just remind folks that in times where capacity is more loose, you can have those same external drivers with no impact on spot because we're not close enough to equilibrium for it to have an impact. And we saw that for two years straight. And whereas now when you see any kind of a external impact, it has an immediate show through or read through with spot market. We've also developed some tools that we're pretty excited about and some tech capabilities that allow us to sort of extract out of the spot market premium. That's something that we have seen continue to grow and not the softening or fallback that you've referred to. So that's exciting as we look forward as well. All this sort of operational focus and execution, I think, puts us in a good position as the market continues to turn. There's very little debate when we're out with customers right now about the market not being more in equilibrium and not starting to see whether it's tender reject rates that are up and have remained up and now really kind of up at really a multi-year high right now. So it's starting to sink in that it is a different day at a new moment. And you balance that with the simple reality that there's been inflation up and down the P&L for not just us but everybody in the industry without the corresponding rate relief. And so we're going to push hard and we're going to plow forward and we're going to ask to be paid what we need. And they'll be good and the conversations that end in a positive place and there'll be other ones where we're going to have to make some decisions. But I don't know if I answer all of it because there's a lot of parts to it, but I did my best there, Ken.

Ken Kuchnoff That was great. You hit on the spot. That's definitely what I wanted to see. Mexico exposure, just a quick follow up for Chris. When you mentioned that on the last answer, was that cross border or just intra-Mexico, the 5% that you break out?

Chris Bounds I'm not following that part. But what I would just say, I'll just reiterate what I said earlier, which is Mexico exposure is north of 10% of our entire revenue base. That's the best way to think about it because there's pieces and parts that roll up through logistics, through brokerage, through intermodal, all over the various segments. And so the way to think about our exposure would be north of 10%.

Ken Kuchnoff Right. But is that intra-Mexico or does it go cross border? Tariffs aren't going to affect intra-Mexico traffic, right? Chris Bounds Yeah.

No, that's not. Intra-Mexico is included in that number, but no, we do not have 300 million plus intra-Mexico. And

that's across all modes, Ken. So that's intermodal, brokerage, the trailer through service, all modes relative to Mexico. Ken Kuchnoff Thanks, guys. Appreciate the time.

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

Scott Group Hey, thanks. Afternoon, guys. So outside of major tort reform, is there a fix on this insurance issue? And then outside of that, just like, how should we think about the margin trajectory from Q4 to Q1? What's a realistic amount of margin improvement we could get this year?

Chris Bounds Yeah, Scott, I'll start and then turn it over to Chris for some more color. But yeah, tort reform certainly is one of the initiatives. But honestly, it's a -by-state battlefield right now. And we're seeing ongoing progress being made at state levels where we're getting some rationality into the room relative to how liability should be treated so that someday we don't wake up with $35 a dozen eggs, which is realistically where this heads if we don't address it in some way. What we are also going to do, obviously, is couple that with an ongoing investment in technology. The tech continues to improve. We can get better not just in the trucks but in the cars. So that leads to a lot of progress and what we believe to be ongoing improvements that will take place in frequency and frequency data. And so that's a piece of the puzzle as well. It is not an easy one to solve. And what I will tell you, which we've talked about previously, is it really does reside in a handful of claims. I mean, you can have a phenomenal year and even have on the handful of claims really good facts and it doesn't necessarily always lead to a good outcome. So all of that together makes it so difficult to predict. But I'll turn over to Chris for some color on how to think about insurance. Yeah, maybe just

a couple more specifics there, Scott, because I think that's what you were getting at. First, just to recap, on the insurance, it was a quarter where we reported 49 million. Clearly an outlier, have never seen that level in a single quarter. And it was the first in eight quarters where we reported over 40 million. As we mentioned in the prepared remarks, 19 million of that was negative development on the past claims as the main driver. I think your question, Scott, was then kind of thinking about run rate. Is that right?

Yeah.

So obviously 19 million was more one-time nature in our view. We would not view 49 million in a quarter as a run rate or even north of 40 million. This was an outlier, as I mentioned. I would say in terms of a proxy, looking at our quarter average over the last two years of about 33 to 35 million per quarter. And important to note that our claims are trending down. So we've said many quarters several times our DOT preventables per million mile, near 20-year lows. So it's clearly a cost per claim issue across the industry, as Derek mentioned, not a frequency of claim issue for Werner specifically.

So I guess when you sort of add all up, any thoughts on how to think about operating ratio for the trucking business and Q1 in the year? And then maybe if I could just maybe make it a little bit bigger discussion as well. There's probably very few quarters in our model where you've got price improvement and utilization improvement at the same time. How sustainable is that and how could that translate to margin improvement going forward?

Yeah, I'll start there. So you're right. It's very hard to come by where you get both price and utilization, especially in a market that had not yet really turned or strengthened. So we're really proud of that result, regardless of what the bottom line financials may have come out like from an operational execution perspective. I'm very proud of the work that the team did in Q4. The comps are going to get a lot tougher on the utilization front, but what really matters is if we can hold serve with the dramatic production improvements we've made over the last, call it 18 months, and now have those materialized at a rate level that's more commiserate with the cost structure of running a trucking company in 2025, those miles become very, very valuable. So those are sustainable structural changes we've made. That significant engineering of our fleet that we have done, we believe we can hold those miles. And now really focus on rate. It's the biggest lever that's in front of us. We've got to keep a laser focus on it. And the best setup to do that is with superior service and put yourself in a good position with your customers. And so that's why we call it out during the prepared remarks, the multiple carrier of the year awards that we won in 2024, because we've been laser focused on trying to put the best possible product on the table so that we can also then ask for the rate that's commiserate with that level of service. So a lot of work to be done, Scott. A lot of work to be done. We're in the early annies, but we're signed up to do that work. And that does lead, obviously, as you indicated, to our improvement. It's not a return to the 12 to 17% in 2025, but I do believe the opportunity for us to have a markedly better year this year than we did in 2024 is upon us.

And maybe just to add, Scott, a couple comments around TTS margins. So we had a couple of consecutive quarters of modest sequential increase. The 19 million that we talk about in terms of the insurance reserve adjustment, that was all in TTS. Without that, I mean, that was basically a 400 basis point impact to TTS margin. So that would have put, excluding that, it would have put the adjusted OI for TTS over 7%. So that would have been our best quarter. It would have been three quarters of sequential improvement. And we've talked about the levers to get to double digit margins. That's not to say that we have a pathway necessarily in 25, but we do expect 25 to be a period of margin expansion because of rate lift, because of production, and other things we've talked about in terms of dedicated volume, the cost management, and normalization equipment gains.

Do you think you take a step back from that, call it normalized 7 and Q1 seasonally?

Q1 is always seasonally going to be a tougher quarter, Scott. I mean, if you look traditionally from Q4 to Q1, there's a 35 to 40% drop in operating income and EPS. There's nothing to indicate right now. I mean, there's a little bit better market conditions maybe as we're going through this turn, but that's kind of a normalized approach. But maybe a better way to think about it right now is it relates to Q1, and I'm not deviating from our EPS guidance. We don't want to give EPS guidance, but I do think with the noise in the quarter in Q4, it would be relevant to just point you to Q1 of 23, remind you how much smaller the fleet is this year versus 23. Maybe as a reminder, there's one less business day this year than 23. And with all of that said, I think the Q1 of 23 number is a good zip code to think about relative to Q1 for earnings. But the march forward is really based on focused on the bid season, focused on the execution, keeping miles where they're at, demonstrating superior service and improving margins from here.

I know I've asked you, but you said Q1 of 23. That was 60 cents. Do you mean Q1 of 24?

I meant 24. Thank you for clarifying that. Yes.

All right. Thank you, guys. Appreciate it.

The next question is from Chris Weatherby with Wells Fargo. Please go ahead. Jay, thanks. Good afternoon, guys.

I guess maybe on the fleet, just I appreciate the full year guidance and how you guys are thinking about that. It certainly sounds like dedicate is where you want to kind of focus. Obviously, there's growth on the one-way truckload side, seems like for obvious reasons in the fourth quarter because there was opportunity there. I guess maybe a half or quarters, however you want to think about it. Is there still more opportunity to lean in a little bit more on one-way truckload now because this is where the activity is and the pipeline are dedicated is just a little bit slower moving? Just want to make sure I understand how to think about that as we kind of enter the beginning of 25.

Yeah, I think the best way to think about it is we're going to be nimble and agile based on the market. We have the opportunity, obviously, with our vertically integrated school network, with our robust pipeline of incoming drivers. To respond to market needs and that could include one-way, but on a strategic level, we're not looking to grow that one-way truckload fleet intentionally, at least until we get a much improved rate environment, but we will be tactically able to do so in certain pockets where it might make sense. Dedicated, you're right, has a longer tail, but we're a long way through some of these negotiations as well. So there's always something that's kind of on the more short-term horizon and then you've got things that will take two to three quarters to develop. So dedicated will be the focus, but in one way we've got both our assets and Powerlink. And Powerlink is really our truckload power-only solution via our logistics group. We're excited about its progress. It continues to grow double-digits year over year and has done so for several years. And so we have multiple ways to kind of respond to these sort of opportunities, as you mentioned. So at a big picture level, fairly limited truck growth in the front half, but capable of doing so as we land dedicated accounts, focus on improving rate, and focus on keeping our eye on the ball in production. Okay,

that's super helpful. And then just maybe zooming out a little bit in terms of the competitive picture of Dedicated. So yeah, how do we think about that in terms of players who had gotten a bit more aggressive at the trough of the cycle? Let's hope we're at the beginning of what could be some improvement here as we move into 2025. Do you sort of feel like the competitive dynamics sort of eases up, providing you more opportunity? Just kind of curious how you're thinking about that.

Well, I think demand will improve the competitive dynamics in Dedicated, specifically. There's just more opportunities regardless of some new entrants. The other thing that I'm excited about personally is a lot of those new entrants came in at the trough of the cycle. They got pretty aggressive with rate. They didn't perform particularly well. Those bids are coming up for renewal. And I think there's opportunity to take share and take accounts into the portfolio based on our track record and our capabilities. So a lot of different moving parts there. The last one I'll mention is I think there's a lot of private fleet growth that took place during the COVID years that hasn't played out the way the shipping community thought it was going to for them. It was out of necessity when the market was particularly tight. Those trucks are now aging out and getting to a point where renewal and capex is going to be significant to renovate those fleets. And that presents yet another example of Dedicated market share that could be taken back as customers are faced with difficult capital decisions on whether they want to continue to do that long term.

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

Hey, good evening. Thanks for taking the question. Maybe Chris, can you talk a little bit about the cost savings opportunity? I would say it started off at one level and ended up pretty high in the last year and accelerated and you got some more going into 25. So maybe just some of the bigger initiatives and you got 65% new ones. And also as you talk about balancing growth with that, how do you feel like you're able to do both successfully at this point a couple years into what's obviously a tough freight market?

Hey, Brian. Well, you hit the nail on the head. I mean, it is finding the balance with continuing our just broad approach to having a cost focus. So we've talked about just our generic approach of focusing on operational innovation, leveraging technology and looking for the expense synergies that come along with that. And then just being more centralized and standardized in everything we do, including from an M&A integration standpoint. And so that's our approach and we've developed some muscle memory with that. We want to keep deploying that as just a general discipline across our business. That said, it's also early stages of an improved environment and we're mindful of not only supporting growth, but also continuing to have high reliability and high service for our customers. So that's some of what went into a lower sized target for 2025, which is the goal of 25 million.

Okay. And then just maybe a related question last year, you guys did a lot of work to increase the miles per tractor across the fleet. Is that another opportunity for this year? I know it's also market dependent. It could be kind of difficult, especially with all the volatility we're seeing in the spot market and elsewhere, but is that another opportunity, guys, you feel like you can lean into a little bit more this year or is that last year event? Thank you.

Yeah, Brian, this is Derek. We are going to continue to obviously further engineer and look to improve anywhere and everywhere we can. But I must tell you that I think the bulk of that step level change has taken place. That's the new baseline and the real objective in a market as it starts to tighten is to be able to hold the line there and look for what I would call incremental improvements, but not the high single digit type improvements that you saw in recent quarters from a year over year basis. So that's the best I can answer that. Focus won't be taken away, but it would be inappropriate to expect that you'll see mid to upper single digit improvements in productivity in 25 over 24 from a comp perspective.

The next question is from Ravi Shankar with Morgan Stanley. Please go ahead.

Thanks.

Good evening,

guys. So to be super candid, I think the tone of your comments are a lot more bullish than your guidance. So I'm just trying to get a sense of like what the message is here. Are you guys being pretty conservative with this guy because he's not sure if this is a head fake or like is this a normal seasonality and you think you do something better than that if conditions continue? Or how do you think about the potential kind of, you know, range of outcomes here on either side of the guide?

Yeah, Robbie, I mean, I'll try to stay away from trying to give range of outcomes, but I think what you might be perceiving is the reality of operating in a business in an environment where some of the largest trading partners that the United States have have been tariffed on Monday, not tariffed on Tuesday, rethreatened on Thursday, and then released from threat on Friday. So it's a very difficult environment to try to provide the clarity that folks like yourself need and deserve. We're going to do the best we can in that environment to try to give you a sense of where the market is, the conversations we're having with our customers. And yes, there is some excitement with the tone of those conversations. That is true. But yet tomorrow or next week, something could change. And we've already indicated that 10% of our business's exposure to Mexico. I think that is a positive, even with the background noise, because what is irrefutable is the direct foreign investment that's taking place in Mexico that this year as of, you know, in 2024, dramatically outpaced 2023, which was a record in 23 that was only surpassed in 2006, if I recall correctly. And so there is significant investment taking place down there. And our capabilities are second to none. So there's a lot to be excited about. The market is tightening. There is a change in the tone with customers, but raising network rates and getting it to flow through to the bottom line is a multi-quarter process. It takes time, takes a lot of effort. And so we're going, we're cautiously optimistic, I guess is the best way I can say it.

That's helpful. And thank you for sympathizing with how hard it is to be a self-sat analyst. And maybe as a follow up, on the insurance side, is there anything you can do from a technology angle? You guys were early to implement tech in your trucks, obviously, it's one of your 5G strategy. Anything more we can do there? And how does what is happening influence your thought process on autonomous trucks in the next few years?

Yeah, we're going to continue to lean in on tech. And yes, we've always been a leader, but, you know, we do a lot of work both within our walls, but there is more and more benchmarking going on across fleets as well. It's the one place where we are fully allowed to collaborate and work together to try to find a way to make a safer road network out there. The biggest tech improvement, in my opinion, honestly, is the ongoing improvements at the car level. As individuals in their cars, I've long ago given up on the idea that we can stop them from texting or get them to focus. But as they have technology in their cars that makes better drivers of them, it certainly puts our trucks in a better position -a-vis their performance on the road. But in addition to that, obviously, we've got collision mitigation across our truck where we talked about on this call for the first time side view cameras to give even more perspective while going down the road and more accident reconstruction capabilities to the fleet as we roll that out. It also improves our ability in close quarters and backing. But that's not where the dollars are. The dollars are really in these small handful of very large claims where in some cases, I'll end up retiring or going to the grave with the same conviction that we were not at fault. But that doesn't mean that's how the outcome in a courtroom ends up. And so we're going to fight the good fight, continue to invest in tech, continue to invest in training as well. Our drivers are experiencing an improved training program, and every time we find an opportunity to improve it further, we'll do so. But it's a tough battle. And hopefully, along the way, we're going to get some sanity from a tort reform and -by-state kind of legal reform level. And we are having some success on that front as well.

The last question today is from Eric Morgan with Barclays. Please go ahead.

Hey, good evening. Thanks for squeezing me in. I guess I'll ask one on logistics. Can you maybe help us understand how you're thinking about the cadence of gross margin spot rates? You start to move back up again this year. And then just on the operating margin, I think this time last year, you've been thinking like mid-single digits entering 2025 is in the cards. Would you roll that forward a year to now, just given some of the momentum that you discussed earlier?

Yeah, so I'll start with the fact that there's some real positives going on with logistics relative to our operating expenses. We've been really digging in and aggressively looking for productivity gains. We've gotten through the knothole of some of the major technology investments we've made and now are starting to see the outcome and the outputs of that technology. So our Edge TMS platform now, logistics is 100% implemented on that platform. And that's exciting. We indicated in the prepared remarks that there will be some spot pressure as the market continues to tighten. Buy rates will come under some pressure and we've got to make sure and do our job on the sell side relative to our customers to try to mitigate that. The most likely outcome is we're going to continue to see productivity gains and lower operating expense and more efficiencies. At the same time, those will get offset in the short term by rising buy rates as the market further tightens. But by mid-year, we should be able to see expansion or the fruits of that labor, so to speak, where the productivity gains and efficiency gains far away, any spot rate pressure plus at that point we've been able to reprice the sell rates with our customers. So mid-single digits, is it in the card? Yes. Before we get there, I want to get to consistent 3% to 4% type margins and then work our way to 5%, 6% over time.

I appreciate that. Maybe just a quick follow-up on the dedicated discussion with respect to the guidance for revenue per truck. I guess I'm just curious how locked in that is at this point. Because I know you've discussed dedicated participating in an eventual upcycle. If that does start to materialize, is there a potential upside to that range or would upside come more from maybe getting to the higher end of the truck count?

Well, I would start with the fact that the dedicated margins have held up significantly better than the rest of the portfolio throughout this downturn. So the move that they need to make isn't as great to get back into the long term, to play their position relative to the long term range. Adding trucks back is the single biggest mover, probably more so even than rate because the incremental margin contribution is significant. Having a better spot market to work with relative to dedicated backhaul is probably every bit as important as rate or revenue per truck per week from a rate perspective. So it's going to take on all the above strategy. And then lastly, as we add new fleets, we are now finding ourselves in certain geographies with density that is such that those new fleets can come on board and not have the same burden of all of the same fixed costs that they would if they were standalone fleet kind of in a state where we didn't have density all around it. So there's a whole lot of pieces and parts, but yes, dedicated will participate in the upcycle. It did last time, if you look. I don't want to confuse my ears here, but I believe it was 18 to 19 where we had EPS growth despite dedicated being a concern for folks that it was going to not be able to do so. Certainly during COVID, it didn't hold us back at all when we saw the significant tightening in the marketplace. Dedicated performed very, very well. I think this will be another opportunity to show that that can be true, and we're excited to do so.

This concludes our question and answer session. I would like to turn the conference back over to Derek Leathers for any closing remarks.

Yeah, thank you. I just want to thank everybody for taking their time to be with us today. As I've indicated a few times on the call, I do believe the worst is behind us. We have tried to focus during this downturn to take the right actions to drive change in this business, lower our cost structure, and position us to capitalize on an improving market. We have a history of being able to perform well when the market conditions normalize, and we're excited to demonstrate those capabilities again. I'll close by thanking our customers. We're committed to them, and we thank them for their business. We look forward to working with them during this changing marketplace, and also our 13,000 associates for their dedication as we keep America moving. Thanks again for your time today and your continued interest and your support of Warner.

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