Werner Enterprises, Inc. (NASDAQ:WERN) Q4 2022 Earnings Call Transcript

Werner Enterprises, Inc. (NASDAQ:WERN) Q4 2022 Earnings Call Transcript February 7, 2023

Operator: Good afternoon, and welcome to the Werner Enterprises Fourth Quarter and Annual 2022 Earnings Conference Call. All participants will be in listen-only mode . The speakers for today will be Derek Leathers, Chairman President and CEO; John Steele, CFO; and Chris Neil, Senior Vice President of Pricing and Strategic Planning. Please note, this event is being recorded. I would now like to turn the call over to Chris Neil. Please go ahead.

Chris Neil: Earlier today, we issued our earnings release with our fourth quarter and annual results. The release and a supplemental presentation are available on the Investors section of our website at werner.com. Today’s webcast is being recorded and will be available for replay later this evening. Please see the disclosure statement on Slide 2 of the presentation as well as the disclaimers in our earnings release related to forward-looking statements. Today’s remarks contain a 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. Now I would like to turn the conference over to Derek.

Derek Leathers: Thank you, Chris, and good afternoon. 2022 was another successful year at Werner. Revenues ex fuel grew by double-digit percentages in both TTS and logistics, and we also set a new record for adjusted earnings per share. My sincere thanks go out to the talented Warner team who remain resolutely committed to our values by providing superior safety and service to our customers. As we look back on the fourth quarter, freight in our large Dedicated fleet was steady and performed well. One-Way Truckload and Logistics were challenged by a seasonally weaker-than-normal freight market in contrast to the very strong conditions a year ago. We expect that the 2023 freight market will be challenging in the first half and then gradually begin to show improvement in the second half as capacity exits the market and retail inventory resets to normalized levels.

Over the last several years, we intentionally built a power business model that performs well in both strong and challenging freight markets. Our large and durable Dedicated fleet, our diversified One-Way Truckload fleet and our growing Logistics segment provide us with a resilient portfolio of complementary services and industry verticals. This business model, coupled with our seasoned leadership team, who averages 26 years of Werner experience gives us confidence in our ability to weather any economic environment and positions Werner for success. Now let’s move to Slide 3. Werner is one of the nation’s five largest truckload carriers, safely delivering over 3 million miles each business day with an experienced an increasingly diverse workforce of professional drivers.

During 2022, we are proud to achieve the lowest DOT preventable accident rate per million miles in the last 10 years, a testament to our continued focus on improving safety and service across our fleet. During the quarter, our strong balance sheet provided the flexibility to add two stellar companies to the Werner family, Premier truckload carrier Baylor Trucking and the Elite freight brokerage and dedicated carrier ReedTMS. Werner is a growing logistics provider with an annual revenue run rate exceeding $1 billion with a large and growing base of over 70,000 qualified carriers in a pool of 30,000 trailers. This large trailer pool in our growing domestic and cross-border Mexico power-only capabilities provide Werner customers with additional solutions and flexibility to effectively manage their supply chain in rapidly changing market conditions.

Let’s move to Slide 4 for a summary of our fourth quarter and full year financial highlights. In the fourth quarter, revenues increased 13% to $861 million. Adjusted EPS decreased 13% to $0.99. Adjusted TTS operating margin for the quarter was 15.8%. For the year, revenues increased 20% to $3.3 billion. Adjusted EPS rose 7% to a record $3.70. Adjusted TTS operating margin for the year was 15.1%. Dedicated freight demand in the fourth quarter was solid and steady. The normal seasonal freight spike for certain Dedicated retail customers didn’t occur this year given the increasingly challenging macro environment and relatively muted consumer spending. Fourth quarter freight was seasonally soft in One-Way Truckload and Logistics with fewer project surge and peak opportunities compared to the record high levels a year ago.

On October 1, we acquired Baylor, a high-performing truckload carrier based in Mylan, Indiana with 200 trucks. Baylor is a 75-year-old company with outstanding leadership, elite drivers and impeccable customer service. The first week of November, we acquired ReedTMS Logistics, a rapidly growing Tampa-based trade broker and dedicated carrier with a skilled and knowledgeable leadership team. ReedTMS has a 26-year history of developing and expanding long-term customer relationships, supported by a large and growing carrier network with two-thirds of their revenue coming from the stable food and beverage verticals, including a heavy focus on temperature-controlled freight. We are very pleased to retain the strong management teams and talented associates of Baylor and ReedTMS.

Both companies maintain culture similar to ours, with an intense focus on superior safety and service. Our implementation team is rapidly integrating these businesses with ours to capitalize on the synergies and mutual learnings between our companies. Together, our durable dedicated fleet, which includes 63% of TTS trucks and our growing logistics business account for 69% of fourth quarter revenues and is expected to exceed 70% in 2023. Next on Slide 6, I would like to discuss Werner Drive. Last August, we introduced Drive, which is the next evolution of our business strategy that delivers our future. Drive incorporates sustainability, capital allocation and outcome-oriented approach to operations, innovation and a culture that supports and values our team members.

Our intentionally designed durable portfolio of asset and asset life solutions serves a diversified client base of industry-leading customers with an emphasis on the transport of necessity-based goods. We relentlessly focused on our results with the company culture immersed safety and service. Since 2019, we have received 27 unique customer Carrier of the Year awards. Werner has committed to innovation through our investment in technology and our Werner EDGE cloud-based platform, which is improving the experience of our customers, drivers, non-drivers, carriers and suppliers. Our core values of safety, service and integrity are based on an unwavering commitment to inclusion, community, innovation and leadership. And we embrace ESG and specifically our impact on the environment due to continuous exploration and development of alternative fuels and equipment, executing on our aggressive carbon reduction plan and expanding partnerships through Werner Blue, our company-wide sustainability initiative.

Next on Slide 7 is our revenue snapshot. For the year, revenues were $3.3 billion was 74% in TTS and 24% in Logistics. Baylor and ReedTMS added $71 million of revenues to fourth quarter and the year. Including these acquisitions, we forecast Logistics revenues in 2023 will grow to over 30% of the total. 3/4 of our revenue base this past year came from retail and food and beverage with customers winning in their verticals. We intentionally focus on growing companies that ship recurring and repeatable consumer essential products who have rigorous on-time delivery requirements. We ended the quarter with 8,600 trucks, up 3% for the year or 260. In the fourth quarter, we held our TTS fleet size flat to adapt to the changing freight market. We intend to limit TTS fleet growth until we see signs of freight improvement, which we expect in the second half of the year.

Turning to Slide 8 and the consolidated fourth quarter results. Revenues grew 13% due to 5% growth in average trucks, 1% higher revenues per truck, a $41 million increase in fuel surcharges and logistics revenues growth of $29 million, which includes eight weeks of the acquired ReedTMS business. A seasonally soft freight market in fourth quarter compared to a seasonally strong market a year ago was a significant headwind. Despite this freight challenge, strong dedicated performance limited the adjusted operating income declined to 11%. At this time, I would like to turn the presentation over to John, who will discuss our segment results. John?

John Steele: Thank you, Derek. On Slide 9 are the fourth quarter TTS results. TTS revenues increased 13% and adjusted operating income decreased 8%. Sequentially, TTS adjusted operating income increased 9% quarter-over-quarter. TTS adjusted operating margin declined 240 basis points year-over-year compared to last year’s record fourth quarter operating margin. Our adjusted operating expenses per mile net of fuel increased 6.6% compared to our TTS rate per mile net of fuel of 3.5%. The largest per mile operating expense increases were supplies and maintenance at 18% and insurance and claims at 53%, while driver pay increased 4%. During fourth quarter, we incurred $11 million higher insurance and claims expense or an unusual charge of $0.13 a share and $8.5 million lower workers’ compensation in salaries, wages and benefits expense or an unusual benefit of $0.10 a share.

For insurance and claims, a limited number of prior year incidents have developed beyond what we had expected. For workers’ compensation, prior year claims are developing lower than what we previously experienced. Over the longer term, we expect our accident per million miles performance will improve our insurance and claims experience. While we can’t ignore the increasing trend of nuclear verdicts and settlements we expect our 2023 insurance and claims expense to moderate from 2022. In fourth quarter, we sold more tractors and trailers at a lower average gain per unit. Gains on sales of revenue equipment were $22.5 million and we had a gain on sale of property of $3.4 million. As we expect small carriers to exit in greater numbers in 2023, we anticipate the used truck and trailer market will weaken.

We expect our gains on sales of equipment in 2023 will moderate from record highs in 2022. For 2023, we expect annual equipment gains in the range of $30 million to $50 million. In an effort to partially offset the headwind of lower equipment gains in a more challenging freight market, we are implementing company-wide measures to reduce controllable expenses. Now let’s move to fourth quarter TTS fleet metrics for Dedicated and One-Way Truckload on Slide 10. Dedicated revenues net of fuel increased 9%. Average trucks increased 4%. Revenue per truck increased 5%. One-way Truckload revenues net of fuel increased 2% as average trucks increased 7% from the Baylor acquisition. Miles per truck declined 5% and rate per mile increased slightly despite far fewer peak and transactional pricing opportunities.

We expect One-way Truckload miles per truck will flatten out on a year-over-year basis in 2023, and we expect a gradually improving pricing environment during the second half. Moving to Werner Logistics on Slide 11. In the fourth quarter, Logistics revenues grew 15% due to eight weeks of ReedTMS, offset by less peak and transactional freight opportunities. Truckload Logistics revenues, including ReedTMS, increased 20%, driven by a 34% increase in shipments, partially offset by an 11% decrease in revenues per shipment caused by fewer premium pricing opportunities. Despite the challenging freight market, Logistics shipments, excluding ReedTMS, were flat year-over-year and down 5% sequentially. Contract shipments increased 89% year-over-year and 62% sequentially with the addition of ReedTMS.

Transactional shipments were up 2%. Contractual mix versus transactional was 55% in fourth quarter. Intermodal revenues declined 23%, supported by a 3% increase in revenues per shipment, offset by a 25% decline in shipments. And Final Mile revenues increased $14 million. In total, Logistics achieved adjusted operating income of $8 million with a 3.8% adjusted operating margin, down $3.9 million year-over-year and an improvement from third quarter of $2.4 million or an 80 basis point sequential increase. Next, on Slide 12, let me spend a moment on our innovation. Our IT team accomplished a great deal this past year as we continue to adapt to a dynamic supply chain through our enterprise-wide technology transformation. A few of the notable achievements include: we completed the first phase of our Cloud-First, Cloud Now implementation of mastery in December with the conversion of our Werner Truckload Logistics brokerage business to our EDGE TMS platform.

We successfully expanded the deployment of Workday across human capital management and accounting applications. We strengthened our data and system security with Zero Trust security practices. And we continue to invest in and pilot new technologies to reduce our carbon footprint, including hydrogen fuel cells and EVs. We continue to live and build on our values in 2022. I’m on Slide 13. As evidence of our commitment to safety, in 2022, we achieved the lowest DOT preventable accident rate per million miles in the last 10 years and the lowest work injury rate in the last 17 years. Over the last two years, we significantly strengthened and diversified the leadership of our Board as we carefully selected five new board members with unique backgrounds and skill sets.

This has resulted in a more diverse board that bolsters our expertise in transportation and logistics, finance and sustainability, leading to a wider variety of perspectives. On Slide 14, we continue to make progress and receive recognition on our ESG journey. In 2022, we were recognized as the top Company for Women to work for by Women and Trucking, a top food chain provider by Food Chain Digest and a top green fleet by heavy-duty trucking. We are focused on creating a safe and inclusive culture for our associates while operating efficiently to reduce our impact on the environment. On Slide 15, we ended the year at a strong financial position with net debt of $587 million and equity of over $1.4 billion. Approximately one-third of our debt is fixed rate and two-thirds is variable rate.

In December, we finalized a new $1.075 billion five-year unsecured syndicated credit facility with six banks to expand our credit capacity and extend most of our debt maturities out to 2027. Following the acquisitions of Baylor and ReedTMS, our net debt-to-EBITDA ended the year at 1 within our long-term range goal of 0.5 to 1. On Slide 16 is a summary of our cash flow from operations, net capital expenditures and free cash flow over the past five years. Expanded operating margins and less variable net CapEx resulted in significant free cash flow generation. In 2022, we had net CapEx of $318 million and generated free cash flow of $131 million. Turning to Slide 17 and our capital allocation framework. Our first capital priority continues to be reinvesting in our fleet.

We are investing in the latest fleet and equipment technology and we are growing and modernizing our terminal and driver school network. In 2023, we expect to slightly lower the average age of our truck fleet. Turning to acquisitions. We will remain disciplined in our approach by evaluating candidates against our strategic filters. In 2023, our focus is the integration, synergy implementation and cross-selling opportunities for our recent acquisitions. We will also continue to enhance shareholder value through dividends and share repurchases, while maintaining a strong and flexible financial position. That concludes my remarks I will now turn it back over to Derek.

Derek Leathers: Thank you, John. Moving to Slide 18. Here, you see that over the last 18 months, we executed on four additive and accretive acquisitions, ECM, Nets, Baylor and ReedTMS. All four strengthened the durability of the Werner portfolio and expanded our capabilities. Our growing and diverse business provides additional solutions for the increasingly complex needs of our customers. Today, we have been successfully integrating these companies into the Werner portfolio and our synergy implementation process is running ahead of schedule. Next on Slide 19 is a review of our performance compared to our 2022 guidance as well as the introduction of our 2023 guidance metrics. For the year, our truck fleet increased 3%, primarily in Dedicated.

For 2023, we plan to keep the fleet flattish in the first half with plans in the second half to grow primarily in Dedicated in the range of 1% to 4%. In 2023, we are planning net CapEx of $350 million to $400 million. For revenue equipment, most of this CapEx is to refresh our existing fleet with a small share to fund fleet growth in the second half. Dedicated revenue per truck increased 5% in the fourth quarter as we had far fewer projects and surge opportunities this year compared to last. For the year, Dedicated revenue per truck increased 7.6%. Noting the freight market outlook and tougher comps, in 2023, we expect Dedicated revenue per truck to increase in a range of 0% to 3%. One-way Truckload revenues per total mile for the fourth quarter increased slightly, just above our guidance range.

In the first half of 2023 in a challenging freight market with more difficult comps, we expect one-way rates to decline year-over-year in the range of 3% to 6%. Our full year income tax rate was 24.4%. In 2023, we expect our tax rate to be in the range of 24% to 25%. The average age of our truck and trailer fleet in fourth quarter was 2.3 and 5.0, respectively. For 2023, with increased CapEx, we expect to slightly lower the age of our truck fleet. One-way Truckload freight demand in January was softer than the strong freight market a year ago. Next, let’s move to Slide 20 and discuss our view of the market this year and our modeling assumptions. Over the last several years, we carefully designed and prepared our business to outperform in a slowing economy.

The last two quarters, we’ve adapted the retail inventory rightsizing as consumer demand moderated and supply chain bottlenecks began to ease. Over 60% of our trucks are in our durable dedicated fleet and one-third of that business is with large and successful discount retailers that are gaining share as consumers are becoming more value-conscious for their household spending. With the acquisition of ReedTMS, our mix of revenues increased for contractual food and beverage shipments, which complements the seasonality of our existing logistics business. For our TTS segment, spot rate is less than 5% of our revenues. Small truckload carriers are being whipsawed by 35% lower spot rates while also dealing with much higher operating costs for drivers, equipment, fuel, maintenance and capital.

As the year plays out and there’s a large shortfall between spot rates and carrier operating costs, we expect carrier failures will increase. This trend has already started. FMCSA data shows that truck deactivations exceeded truck activations for every one of the last 19 weeks with net deactivations of 53,000 trucks over this period. We expect interest expense this year will be $20 million higher than last year, due principally to the higher interest rates as well as maintaining a higher debt level. We anticipate that OEM new truck and trailer production will show modest improvements in 2023. Before opening up for Q&A, I want to give a brief update on two executive transitions. First, as of December 31, Marty Norlen stepped down as COO to assume a new role focused on fostering and developing strong relationships with some of our largest customers.

Eric Downing became COO in January following his outstanding leadership of our Dedicated fleet since 2016. During the last seven years, Eric and his team grew our Dedicated fleet by 50%, while nearly doubling revenue. I want to thank Marty for his continued hard work and loyalty at Warner, and I’m excited to work alongside Eric to grow our business. Second, as you know, John Steele will be retiring as CFO and has been flexible with his end date as we continue our search for his successor. The search process is going well, and we look forward to providing an update when appropriate. With that, I’ll turn the call over to our operator to begin the Q&A.

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Q&A Session

Operator: Our first question is from Chris Wetherbee with Citigroup.

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

Derek Leathers : Yes, Chris, this is Derek. Thanks for the question. And good afternoon. Yes, you’re right. There are some headwinds as we start and go into the year, we wanted to be clear about them, and that’s why we included them in the opening remarks. When you think about the gain at the midrange, it’s a $40 million type head range or headwind at the midpoint of the range. We know interest expense is going to be more significant. At the same time, we’ve got the benefit of the integration that’s ongoing with both Reed and Baylor. Those integrations are going well. We feel good about that. We believe that the very successful trends that have been going on within our DOT accident preventable frequency is going to lead to an opportunity to at least moderate insurance and then take some of the noise out of that line.

We’ve also been pretty clear internally on the need for us to go out and not just look for synergies relative to the integration efforts, but also around the building. And so we’ve launched an internal effort several months ago, actually, to prep for what we knew was coming, and we’re going to continue to chip away at trying to neutralize those headwinds. It’s going to be a work in progress. We also obviously have pretty clearly signaled, we think it’s a year that’s going to be made up of two halves. And the second half has opportunity to — for us to continue to improve those results. Lastly, I’ll just tell you that one of the upsides, I know people don’t like increased CapEx ranges. But as we’ve seen OEMs start to kind of be able to get through some of the bottlenecks they’ve been faced with, we’re encouraged by early returns in terms of equipment receipts as well as the quality of that equipment and specifically the impact we think it can have on the maintenance line.

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

Derek Leathers : Yes. So that’s a little tougher to put a finger on. But clearly, fourth quarter was muted. You’re right. But obviously, mostly as it relates to comparing to some very outsized comps in the prior couple of years, driven by COVID and supply chain disruptions. We still had some activity in the fourth quarter on the Pecan project side. It’s just not nearly what we thought it would have been in a normal year. That sets up for possibly a little more muted drop. But realistically, the market we’re in today is still a tough market. One-Way is holding up, I would say, better at this point than I would have expected. if you — the same call it existed 60 days ago. But make no mistake, it’s tough out there. I think if you look historically, that drop off first — fourth quarter to first quarter is somewhere around 24%.

And I would tell you that this year, we’re going to work our tails off to make it be less than that perhaps. But I certainly expect it’s going to be somewhere in that 20%-plus range.

Chris Wetherbee: Okay. That’s helpful color. Thanks for the time, appreciated.

Operator: Your next question is from Jason Seidl with Cowen. Please go ahead.