Werner Enterprises, Inc.

Good afternoon and welcome to Werner Enterprises fourth quarter and full year 2025 earnings conference call. All participants 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 fourth quarter and full year 2025 results. The release and a supplemental presentation are available in the investor section of our website at Warner.com. Today's webcast is being recorded and will be available for replay later today. Please see the disclosure statement on slide two of the presentation, as well as the disclaimers in our earnings release related to forward-looking statements. Today's remarks contain forward-looking statements that may involve risks, uncertainties, and other factors that could cause actual results to differ materially. The company reports results using non-GAAP measures, which we believe provides additional information for investors to help facilitate the comparison of past, and present performance. A reconciliation to the most directly comparable gap measures is included in the tables attached to the earnings release and in the appendix of the slide presentation. On today's call with me are Derek Leathers, Chairman and CEO, and Chris Wyckoff, Executive Vice President, Treasurer, and CFO. I will now turn the call over to Derek.

Thank you, Chris, and good afternoon, everyone. We see signs of encouragement for the industry and Warner as we move into 2026. During this prolonged and unprecedented multi-year downturn, we have focused on executing our strategy to position our business for revenue and earnings growth as demand returns. We diligently cut costs, increased efficiency, and continued our technology investment to enhance visibility across our execution modes, streamline and automate our operations, and improve customer service. In the fourth quarter, we made a decision to strategically restructure our one-way trucking business to be even more targeted towards specialized, expedited across border Mexico and engineered business. Once fully completed, we expect meaningful earnings improvement in TTS in 2026. And most recently, we used our strong balance sheet to deploy capital to acquire First Fleet, a large, high-quality, dedicated carrier. This acquisition is immediately accretive and dovetails with our strategy to lean further into profitable, sustainable growth and dedicated with large, complex shippers across diverse markets. With ongoing capacity attrition, and the early signs of demand improvement, the outlook for Warner in 2026 is more positive than it's been for several years. Turning to slide five to discuss Q4 and 2025 highlights. Disciplined pricing led to a smaller fleet and lower truckload logistics volumes. Higher one-way miles per truck partially offset those factors, resulting in fourth quarter revenues that were 2% lower year over year. Peak volumes in December in total were flat year over year, consistent with expectations. Peak revenues were up mid-single digits due to higher peak pricing compared to the prior year. In dedicated, revenues increased by low single digits in the quarter, driven primarily by higher average fleet size. As we enter a new year, momentum in dedicated remains positive, with a strong pipeline of opportunities and early realization of some rate increases. Customers remain focused on reliable and flexible transportation partners like Warner, who offer creative solutions and high service and scale. The strength of our dedicated business, combined with First Fleet, creates a more scalable platform to drive sustainable, profitable growth for Werner's future. I will discuss more about the acquisition momentarily. OneWay continues to be pressured across the industry. We remain committed to specialized services in one way, such as expedited, cross-border Mexico, and engineered business. We've taken actions to restructure our OneWay operations and offering that will result in profitability enhancement, which we expect to be noticeable in the second quarter. Our vision for one-way is a smaller, more productive, and specialized fleet complemented by asset-light power link carriers. One-way trucking is an integral part of our portfolio and provides several competitive differentiators. First, it serves as valuable experience for drivers before being placed in dedicated and other high-service fleets. After graduating from one of our 20 vertically integrated training academies, drivers are onboarded through a collaborative pairing process to successfully navigate diverse operating environments while maintaining high safety standards. Second, it is an entry point to get to know customers, to build relationships, and allow new customers to test Warner's solutions, service, and capabilities on a one-year or shorter-term basis. And lastly, OneWay provides flexibility and surge capacity for our dedicated customers, and it allows us to support a wide range of customers during times of increased demand. These restructuring actions are designed to increase miles per truck and shift towards more profitable, specialized freight and lanes. Combined with our large trailer pool and power lane carriers, we believe this positions us to capitalize on improving market conditions and drive greater margin improvement. In logistics, intermodal, and final mile, revenues and profits increased year over year. Both of these divisions exited 2025 in growth mode, and we anticipate momentum continuing in 2026. Truckload brokerage results were challenged in the quarter as purchase transportation costs increased, escalating rapidly in December and resulting in lower logistics operating income in the fourth quarter. While margin compression has continued into Q1 and was further pressured by the recent large storms across much of our operating area, we expect it to moderate as we work through customer pricing agreements and our ongoing efficiency initiative stakeholder. Moving to slide six, Our plan to generate earnings power and deliver value creation remains largely the same entering 2026, and it's focused on three overarching priorities. First is driving growth in core business, which comprises growing our dedicated fleet, increasing one-way production and rates, and expanding TTS and logistics adjusted operating income margin. All of these are underway. Average dedicated trucks grew in the quarter, and new fleets are being implemented in the first quarter of 2026. Dedicated revenues per truck per week have increased 11 over the last 12 years. The addition of First Fleet grows dedicated by 50%, and the combined dedicated portfolio represents over half of our $3.6 billion pro forma revenue. Dedicated provides more consistent revenue streams with long-term customer relationships. The total addressable market for dedicated is over $30 billion, and we expect to capture more market share as customers look for stable, financially viable carriers offering high service, expertise, and scalable capacity. We took decisive action beginning in the fourth quarter to restructure one-way trucking to improve earnings. In logistics, we've seen a continuous reduction in cost to serve through tech enablement, while intermodal is growing at double digits. And Final Mile has seen the strongest momentum since inception. Second is driving operational excellence, which will be accomplished by maintaining a resolute focus on safety and service, continuing to advance our technology roadmap, embedding cost discipline throughout the organization, and realizing efficiencies and synergies from acquisitions. Our safety metrics remain near record lows, and our transformational technology journey is progressing and continuing to gain momentum, leading to top and bottom line synergies. We remain focused on cost discipline. We've reduced costs by approximately $150 million over the last three years, the majority of which are largely structural and sustainable. In the fourth quarter, OPEX, excluding purchase transportation, fuel, restructuring costs and gains, was down 5%. And relative to acquisition integration, by mid-year 2026, all prior acquisitions, with the exception of First Fleet, will be fully integrated. We have a clear line of sight on expanding historical First Fleet margins through measurable cost synergy realization. We'll also be working to size revenue synergies, such as increased backhaul, surge capacity for First Fleet customers, and cross-selling opportunities for as our integration efforts begin in earnest. Our final priority is driving capital efficiency. This includes preserving strong operating cash flow, optimizing working capital, and improving free cash flow conversion while reinvesting in the business. First lead is expected to be cash flow accretive. Our capital allocation will remain balanced to fund growth, invest in technology, return capital to shareholders, and reduce debt and leverage over time. Our technology journey carries on as we make progress on building out functionality in our cloud-based Edge TMS. By the end of 2025, 95% of one-way loads and 85% of dedicated trips were migrated to the platform. Logistics volumes were transitioned to Edge previously and have contributed to lower OPEX and cost to serve. For example, in the fourth quarter, truckload logistics personnel costs declined 15% year over year. With visibility in the platform to all loads mostly complete, teams are now focusing on building out one-way and dedicated execution functionality. In addition to Edge, the organization is also progressing with implementing AI throughout the business. We've streamlined driver onboarding, increased customer visibility, enhanced predictive maintenance, and increased speed to bill as just a few examples of an AI-enabled workforce. Moving to slide seven to discuss firstly in more detail. We are excited to add First Fleet, one of the leading pure play dedicated trucking companies, to the Warner portfolio. We closed on January 27th and hosted a call on January 28th. Please refer to the press release and presentation relating to our announcement last week. There are several key takeaways worth noting again here. First Fleet accelerates our intentional portfolio shift to higher margin, more resilient, dedicated business. With more than $615 million in trailing 12-month revenues and 2,400 tractors, FirstLead expands Warner's scale, network density, and geographic reach. FirstLead deepens and diversifies our presence in attractive end markets with customers in grocery, bakery, and packaging solutions. We expect immediate EPS accretion with further benefit from $18 million in annual cost synergies. And lastly, FirstLead is a strong cultural fit with a shared commitment to safety, service, and innovation. Moving to slide eight, showing a revenue snapshot before and after the FirstLead acquisition. The combination expands our revenue from approximately $3 billion for Warner on a standalone basis to approximately $3.6 billion on a combined basis. As a percent of our portfolio mix, Dedicated grows from roughly 43% of total revenues today to over half on a combined basis. First Fleet services many leading customers in attractive and resilient markets. Among its top 10 customers, the average tenure is 17 years, and three of its top four customers have been with First Fleet for over 25 years. On a combined basis, First Fleet diversifies our portfolio. Retail remains our largest vertical, though it decreases from 66% to 60% on a combined basis with roughly half concentrated in discount and value retail. Grocery retail expands, adding more resilient, non-discretionary volume. Industrial exposure increases from 13% to 19% on a combined basis, while food and beverage remains steady at 14%. As a result, our overall portfolio is increasingly more durable and resilient. improving revenue stability, deepening customer diversification, and enhancing our ability to produce steady revenue and earnings growth. Before Chris discusses our financial results in more detail, let's move to slide nine to summarize our current market outlook. Capacity exits continue, driven in part from ongoing broad enforcement efforts, and recent tightening between supply and demand suggests that that pace is increasing. Consumers remain selective yet resilient, which bodes well for our mix of retail being more concentrated in discount and value retailers. Value retailers are producing good results as middle class families trade down. And while mixed signals continue to make headlines on the health of the consumer, looking ahead, the potential for lower interest rates and larger tax refunds are creating cautious optimism. Retailers are operating leaner as the inventory to sales ratio continues its year-over-year declines. While shifting trade policies may affect future stocking timelines, the consistent replenishment of non-discretionary items provides a critical buffer against market volatility. Spot rates performed consistent with seasonal trends in October and November, then outperformed normal seasonality in December. So far in January, spot rates remain elevated. As the recent winter weather subsides, we expect spot rates to moderate, but we expect an upward trend throughout the year as capacity exits and demand improves. Used truck values are likely to remain above two-year lows, with pressure tilted upwards longer term. However, we're also cognizant of the possibility that accelerated attrition from enforcement could create short-term pressure. Class VIII net truck builds continue to be below replacement levels, and not only signal truckload capacity tightening ahead, but also that more carriers could be looking to refresh their fleet in the used equipment market.