Werner Enterprises - Earnings Call - Q4 2019

Transcript

Speaker 0

Good afternoon and welcome to the Werner Enterprises Fourth Quarter and Full Year twenty nineteen Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. Earlier this afternoon, the company issued an earnings press release for its fourth quarter and full year twenty nineteen results as well as posted a slide presentation to accompany today's discussion.

These materials are available on the Investors section of the company's website at werner.com by clicking on Investors, then News and Events, and then Webcasts and Presentations. Today's webcast is being recorded and will be available for replay beginning later this evening. Before we begin, please direct your attention to the disclosure statement on Slide two of the presentation as well as the disclaimers included in the press 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. Additionally, the company reports results using non GAAP measures, which it believes provide 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. I'd now like to turn the conference over to Mr. Derek Leathers, President and CEO. Please go ahead.

Speaker 1

Thank you, and good afternoon, everyone. With me is our CFO, John Steele. Turning to Slide four, we've included some updated background information for those who may be new to our story, and I'll highlight a few key items. For 2019, over three quarters of revenues were generated in our primary segment, Truckload Transportation Services, with the remainder coming from Werner Logistics. Looking at revenues by vertical for our top 50 customers, just over half is in the retail category, which reflects the continued strength of North American consumers, and about 30% of these revenues are with discount retailers that focus more on selling necessity based products.

20% of our revenues were in manufacturing and industrial, 17% were in food and beverage and the remaining 12% in the logistics and other category. We have a diversified customer base with nearly 60% of revenues coming from outside our top 10 customers and about twothree spread across our top 50. We remain committed to supporting our core customers and their growth while mitigating outsized exposure to any single customer, vertical or seasonal revenue stream. Next, let's move to Slide five for a brief overview of our financial performance. In the fourth quarter, revenues decreased 4% to $622,000,000 Adjusted EPS was 11% lower at $0.67 per share.

Adjusted operating income decreased 14% to $63,400,000 and our adjusted operating margin declined 120 basis points to 10.2%. Considering the more challenging market conditions, we're proud to have delivered a total company double digit operating margin in fourth quarter 'nineteen. For 2019 in total, revenues increased by $6,000,000 to nearly $2,500,000,000 Adjusted EPS increased 0.1 to $2.39 per share. Adjusted operating income declined 1% to $225,900,000 and our adjusted operating margin was nearly flat at 9.2%. 2019 was a below average freight and rate year compared to a stellar freight and rate year in 2018.

We're pleased that in 2019, our exceptional execution, effective cost management and balanced revenue model enabled us to successfully weather the storm and generate strong financial results. Adjusted earnings per share were the second highest we've ever reported in the fourth quarter, and our full year 2019 adjusted earnings per share established a new record high. Our diversified revenue base and operational strengths place us in an excellent position to perform well in different markets and truckload freight cycles. Results for the fourth quarter reflect freight demand that improved sequentially from the third quarter due to seasonality, and volume was comparable to fourth quarter twenty eighteen. The 2019 was operationally more difficult than the fourth quarter twenty eighteen due to a compressed holiday shipping period as a result of the later timing of Thanksgiving and the midweek timing of Christmas and New Year's.

Pricing was challenging as one way truckload and logistics. Projects in surge pricing in fourth quarter twenty nineteen were significantly lower than fourth quarter twenty eighteen. In January 2020, one of our trucks was involved in a serious accident. The company is still investigating the accident, but it is probable that it will adversely impact first quarter twenty twenty earnings. The company self insures for the first $10,000,000 of liability coverage for this policy period and has appropriate excess liability insurance coverage with insurance carriers above this amount.

Additional insurance and claims expense of $10,000,000 in first quarter twenty twenty would result in a charge of $0.10 per diluted share. As a company, we constantly emphasize that nothing we do is worth getting hurt or hurting others. We will continue to live by those words as we strive to reduce and eliminate accidents. Reflecting our investments in a newer best in class fleet, we ended the year with 8,000 total trucks within our Truckload Transportation Services or TTS segment, an increase of 180 trucks year over year and down 55 sequentially. Most of our 2019 fleet growth came in dedicated.

I'm extremely proud of Werner's performance and execution in 2019 amid the challenges we faced. Our team and our business model are well positioned to quickly adjust to whatever conditions present themselves in 2020. We have a flexible and adaptable revenue portfolio, and we are continuing to more effectively manage a broad base of our controllable costs. I'd like to sincerely thank all of our associates, our professional drivers, mechanics and office employees who contributed to this strong performance for all their hard work, dedication, commitment to safety and superior service. At this point, I'll turn the call over to John to discuss the financial results in more detail.

John?

Speaker 2

Thank you, Derek, and good afternoon. Beginning on Slide seven, we provide some additional financial performance drivers for fourth quarter. Starting with our TTS segment. Revenues per truck per week decreased 1.8% net of fuel due to lower miles per truck and partially offset by slightly higher revenues per total mile. A soft and lackluster one way truckload pricing market was more than offset by relative strength and dedicated pricing.

Year over year, we increased the average number of TTS trucks by 3.3% and then deliberately tapered off our truck count during fourth quarter 'nineteen by design. In our Logistics segment, revenues were 12% lower. Our adjusted operating income declined 14%, primarily due to 01/2020 basis point decline in our adjusted operating margin due to the more challenging freight and pricing market conditions. Our adjusted earnings per share were $0.67 or 11% lower than the record $0.75 a share we earned in fourth quarter a year ago. Turning to Slide eight.

Let's look at our full year data. In TTS, revenues per truck per week net of fuel was nearly flat. We had an average of three forty seven more trucks, which was a 4.6% increase. Logistics revenues declined 5% in a softer freight market with increased competition. Our adjusted operating income for the year declined slightly by 1%, and our adjusted consolidated operating margin decreased slightly.

Our adjusted earnings per share increased $01 to $2.39 Beginning on Slide nine, let's look specifically at results for our Truckload Transportation Services segment. In the fourth quarter, TTS revenues declined 2% versus the prior year quarter to $487,000,000 primarily driven by a 1.8% decrease in revenue per truck per week. Adjusted operating income was $60,400,000 declining 11 percent due primarily to the decrease in adjusted operating margin of 130 basis points to 12.4%. Despite the challenges, our fourth quarter twenty nineteen adjusted operating ratio net of fuel surcharge was a strong 86%. For the full year, TTS revenues increased 2% to $1,900,000,000 Adjusted operating income declined 3% to $206,600,000 due to 50 basis points of operating margin contraction to a solid 10.8% for the full year despite challenging trucking industry market conditions in 2019.

And our full year adjusted operating ratio net of fuel was 87.7%. Turning to fleet metrics on Slide 10. For Dedicated, we grew full year 2019 trucking revenues net of fuel by 12% to $914,000,000 Fourth quarter twenty nineteen Dedicated revenues net of fuel increased 10% to $237,000,000 Dedicated average trucks grew 7% for the year and 5% for the quarter. Fourth quarter twenty nineteen average dedicated trucks of 46.93 exceeded year end dedicated trucks of forty six thirty by 63 trucks due to the typical post holiday retail truck decline in the latter part of December. Dedicated revenues per truck per week increased 4% for the year and 5% for the quarter.

One way Truckload trucking revenues net of fuel for the full year decreased 4% to $739,000,000 Fourth quarter 'nineteen One way Truckload trucking revenues net of fuel decreased 8% to 188,000,000 One way Truckload average trucks increased 1% for the year and for the quarter. One way Truckload revenue per truck per week declined 5% for the year and 9% for the quarter. Further breaking out the components of the revenue per truck per week changes, One Way Truckload revenue per total mile declined 2.1% for the year and 5.4% for the quarter. One Way Truckload miles per truck declined 3.1% for the year and 3.5% for the quarter. During November 2019, our fleet experienced a temporary unplanned outage for our trucks and drivers caused by our GPS satellite communication provider that was subsequently rectified in December.

This industry wide outage affected tens of thousands of trucks in the market and negatively impacted our One Way Truckload miles per truck by approximately 1% in the quarter. We estimate the incurred costs for this issue reduced our fourth quarter twenty nineteen earnings per share by $01 to $02 per share. Moving to Werner Logistics results on Slide 11. In the fourth quarter, Logistics revenues declined 12% to $120,000,000 primarily driven by a 12% decline in truckload Logistics revenues. We had fewer transactional opportunities, less attractive contract and transactional pricing and increased competition from logistics competitors, including digital brokers.

Our gross margin percentage declined 150 basis points, driven by significantly less project and surge opportunities. While we achieved a 5% reduction in our other operating expenses, gross profits declined by 20% and resulted in a two fifty basis point decline in our operating margin percentage to 2.8%. We are continuing to invest in logistics IT, which is clearly improving our decision making and employee productivity. Logistics operating income decreased 54% to 3,400,000 For the full year, Logistics revenues were 5% lower, gross profit was 4% lower and operating income declined 20%. Our Logistics operating margin declined 60 basis points to 3.3%.

I'd now like to turn the final portion of our prepared remarks back to Derek, who will cover our strategy, CapEx and free cash flow generation and 2020 guidance.

Speaker 1

Derek? Thank you, John. Moving to Slide 13. I wanted to update you on our five T strategy. Over the past few years, we created structural and sustainable improvements with our modern and more efficient fleet, high quality professional drivers and strong management execution.

We expect to generate more consistent results, and that's exactly what we delivered in a challenging year. Our truck and trailer fleet ages remain new, with an average of one point nine four point zero years, respectively. Despite the very competitive labor market, we continue to achieve one of the highest driver retention rates in the last twenty years. We significantly upgraded and expanded our terminal network in multiple strategic locations to improve our driver training and equipment maintenance capabilities. This investment also provides our drivers with the facilities and infrastructure they need and deserve to keep America moving every day.

We are upgrading and modernizing our IT infrastructure and data security as part of our five T strategy, while continually strengthening service to both our customers and drivers. We value the business of IT and prioritize, rank and measure our technology initiatives to ensure they align to the operational priorities, support business strategies and generate strong ROIs. The ultimate goal of our five T strategy is safely delivering superior service to our 5T on time, every time. Last August, we were recognized by Logistics Management as a Quest for Quality award winner in both the dry van truckload and logistics categories. This independent recognition from thousands of shippers that participate in this long standing annual award survey, along with our solid financial results, further validates that our five T strategy is working.

On Slide 14 is a summary of cash flow from operations, net capital expenditures and the resulting free cash flow over the past five years. From 2015 to 2018, we were in a relatively high investment period, focusing on strategically improving our fleet and strengthening our organization. With the significant investment in our fleet and terminals behind us, in 2019, our net CapEx normalized to $284,000,000 and we generated free cash flow of $143,000,000 or a $74,000,000 increase in free cash flow generation year over year. We are continuing to reinvest in a new fleet for the future and are targeting net CapEx to be more consistently in the range of 11% to 13% of gross revenues over the long term. We also expect to once again generate significant free cash flow in 2020.

Looking ahead to our 2020 guidance on Slide 15. We do not plan to grow our truck fleet until market conditions improve. Our fleet count will likely be flat to slightly lower in the 2020. From year end 2019, we expect the change in our fleet count to be in the range of negative 3% to positive 1% for the year. Gains on sales of equipment are expected to decline from $18,000,000 in 2019 to a range of 6,000,000 to $12,000,000 in 2020 due to decelerating used truck demand and pricing and fewer trailers expected to be sold.

We expect net capital expenditures to be in the range of $260,000,000 to $300,000,000 One way Truckload revenue per total mile for the 2020 is expected to decrease in a range of 5% to 7% compared to the same six month period in 2019, similar to the One Way Truckload year over year rate trend we've experienced in the last two quarters. We expect our effective tax rate will be in the range of 25% to 26%. We expect to maintain the average age of our truck and trailer fleet at or near current levels. So far, in the first five weeks of twenty twenty, freight volumes in our One Way Truckload unit have been seasonally normal and slightly lower than the same period in 2019. Pricing remains challenging.

The rate market remains difficult based on challenging customer contract rate negotiations so far in the 2020 bid season and lower year over year spot pricing. Year over year comparisons of rates and earnings in the 2020 are more difficult. Currently, we expect industry dynamics to improve in the 2020, although it is difficult to predict the exact timing of the turn. Werner is well positioned with nearly 60% of our fleet in Dedicated, a more stable and predictable business, 20% of revenue from our Logistics segment and less exposure to the One Way Truckload market. Depending on how the year develops, there could be fleet growth opportunities in the 2020, following expected truckload industry supply contraction in the first half.

Lower industry new truck production, fewer available industry drivers as a result of the buildup of the drug and alcohol clearinghouse, accelerating trucking company failures and other factors are expected to constrain truck supply as 2020 develops. I'm confident that we're positioned for success and to effectively navigate whatever economic environment comes our way in the future. Our fleet is refreshed, our team is rebuilt and our commitment to excellence is unwavering. At this time, I'd like to turn the call over to the operator to begin our Q and A.

Speaker 0

Session. This call will end at five p. M. Central Time following the company's closing remarks. And our first question comes from Todd Fowler of KeyBanc Capital Markets.

Please go ahead.

Speaker 3

Great. Good evening. Thanks for taking my question. Derek, just to the comments on what you're expecting for fleet growth, playing around with the numbers a little bit to get to kind of that flat level in the first half of the year. It seems like Dedicated fleet growth might decelerate from the mid single digits that you've seen in the fourth quarter.

Can you talk a little bit about the Dedicated pipeline and maybe why you're seeing a little bit slower growth in Dedicated in the 2020 versus what you saw in the 2019?

Speaker 1

So first off, thanks for the question, Todd. The assumption may be a little bit off in the sense that Dedicated, the pipeline looks good right now. Actually, as we think about what we have in the pipeline and even as we think about it from a year over year perspective, it's fairly robust. The hesitance on fleet growth in our mind or in my mind right now really has more to do with where we're at in the bid cycle, what's going on in the overall market and our willingness, if needed, to move additional trucks from One Way over to Dedicated to supply that demand that we believe is there and we will be adding as we go forward. I'd rather not.

I'd rather have the opportunity to keep our One Way product out there and available to our customers. But as capacity still needs to bleed off and if there's an expectation of rate that we don't believe is really tenable in our network, we may be in a situation where we'll simply move more trucks from One Way into Dedicated and end up netting either flat to slightly down in the quarter.

Speaker 3

Okay. So it sounds like it's a little bit more of a reluctancy to like lock into where the contract market is right now versus anything on the pipeline side?

Speaker 1

Yeah. I think that's a fair way of thinking about it. I mean think about it really as just sort of execution discipline. We're going to be disciplined in this bid season. We know what's happening with our cost structure.

We know where we need to be from a rate perspective. And if we find ourselves in situations where we have to chase a rate, I'd rather move the truck to Dedicated than to find myself doing that.

Speaker 3

Okay. Understood. I mean, then just a follow-up. The commentary is helpful on expected comparison pressure on the revenue per total mile. You did a good job this year of kind of controlling the margin and controlling costs in a challenging environment, particularly in the back half.

As you look to 2020, what levers do you have on the cost side? And what would your expectation be for where margins can you still be kind of in the high 80s with the pressure that you're seeing right now on rates? And do you think about controlling margins in the environment that we're in right now? Thanks,

Speaker 2

Todd. This is John. We're continuing to expand our cost saving programs throughout the company. The cost saving items that we've initiated are widespread. They're broad based.

We've made meaningful improvements to our cost savings culture over the last year. And the categories range from labor efficiency, both on the non driver and driver side, to maintenance, to supplies, to benefits, to communications, to insurance and claims. I will say that when you get into year two of the cost savings, it's a little bit more difficult than the low hanging fruit that you start with in year one. But we expect to make improvement on the cost side. The biggest variable to margins is where does the rig side shake out.

And we expect the negotiations to be difficult in the first half. We expect the freight market and the rate market to be challenging in the first half and then begin to improve in the second half, partially due to relatively easier comps in the second half compared to the first half. If you remember last year, we had a 6.5% increase in One Way Truckload revenue per total mile in the first quarter. And then that gradually deteriorated down to negative 2.7%, negative 5.6% and negative 5.4 the next three quarters. So we're going to work hard to continue to make improvements as we can, but it will be a challenging first half.

Speaker 0

Our next question comes from Amit Mehrotra of Deutsche Bank. Please go ahead.

Speaker 4

Hey, this is Selman on for Amit. As it relates to your guidance of rate guidance of down 5% to 7% in the 2020, obviously, that implies a bit of a step down from 4Q and comps do get easier as you move into 2Q. What does this assume just from a supplydemand perspective for the market overall?

Speaker 1

So I mean our thoughts on supply and demand is that we think capacity is coming out of the market right now. We're seeing signs of that in a variety of ways. The obvious being truck orders are now translating into lower builds finally, bankruptcies are up. The drug and alcohol clearinghouse has clearly taken an effect and clearly going to make it more difficult or more supply constrained. The bulk of that rate commentary in the first half is really just the lapping effect of what took place over the course of last year, and it's kind of a continuation of where current rate levels are as well as spot exposure and where the spot market is currently at.

We like to be conservative in our guidance. We think that's a number that we feel comfortable with, the guidance that we've given. That's not where we're seeing rate renewals take place at, but it's bigger than that. It's what's the spot opportunity, what are project opportunities looking like, what's our exposure to spot year over year by And when you put all of that in the mix, rates we think are going to be down for the in that negative 5% to negative 7% range. It could be better than that if the turn happens sooner than midyear.

And I think that's really going to be determined on what we see in the accelerated bankruptcy environment with where rates have been for as prolonged as they've been. I think you're going to continue to see pressure on people trying to make it through the other end of the tunnel.

Speaker 4

Okay. And maybe just a little bit of a different way because we don't have the actual rate per mile anymore. What does this kind of assume on an absolute basis relative to as we move from Q4 to Q1 to Q2?

Speaker 2

Well, traditionally, rates are lower when you move from the strongest seasonal quarter to the weakest seasonal quarter of the year, and we fully expect that this year. We did have some project and surge opportunities not at the rate that we had hoped for and not at the rate that we saw in 2018. But we expect a traditional step down based on the fact that freight that we're seeing thus far in the month of January is a little bit below where it was at the same time last year.

Speaker 4

Okay. So just kind of assumes normal seasonality?

Speaker 1

Correct.

Speaker 4

Okay. I appreciate the questions. Thanks, guys.

Speaker 0

Our next question comes from Jason Seidl of Cowen and Company. Please go ahead.

Speaker 5

Hey, guys. This is Adam on for Jason. Just wanted to try and dig a little bit deeper on kind of the current environment right now. You mentioned a little bit about the contract increases you're getting now and how things are still challenged, obviously. I just wanted to ask if you'd able to kind of give us a little bit more color or maybe a number around what contract increases what contracts that you're getting right now?

What those numbers look like?

Speaker 1

So first of all, thanks for the question, Adam. We're early in the process. So we've probably got about 20 to 25 of bids that are either in house or in process. Those are finishing in a variety of outcomes. Not very many of those are completely settled and finished yet.

We'll have over roughly 70% of our business in the first half of 'nineteen first half of 'twenty, sorry. And as we sit here today, we've seen renewals from flat to down a few points. We're going to continue to work hard to be in that range. There'll be exceptions to that based on network fits and efficiencies of the freight. One of the things I think we're doing a much better job of over the last year to two years is understanding the operational cost of individual freight lanes and individual customers.

And so that does weigh into the bid process. So there's no one size fits all answer. But the net of it the bid outcomes as well as the spot market is where we come up with the guidance that we've issued.

Speaker 5

Got it. I appreciate it.

Speaker 2

One thing I wanted to add, Adam, was remember One Way Truckload is 42% of our trucks and the commentary relates to One Way Truckload and not to Dedicated.

Speaker 5

The rate number there, the flat to down a few points was One Way Truckload?

Speaker 2

Yes. That's all the commentary we just covered relates to One Way Truckload.

Speaker 5

Our guidance

Speaker 2

is down 5% to down 7%. And the comments that Derek just made also relate to One Way Truckload.

Speaker 5

As does the guidance. Understood. Understood. Understood. Yes.

Thank you for the color. Just as a quick follow-up. When you're thinking about kind of the back half recovery, it seems like everyone's kind of pricing that in. You mentioned some of the catalysts earlier, the insurance bankruptcy, etcetera. What do you kind of think about the timing as we get into that, right?

I mean, do you anticipate that second quarter will kind of continue to be challenged? I guess kind of how do you see the breakdown between the first quarter and second quarter as we get to the recovery in the second half?

Speaker 1

Sure. Well, I mean, I'd start with this. The first quarters are challenged in general. I mean, normal seasonality takes hold. It's a challenging quarter even in the best of times, and this will be no different.

We still are in a situation today where, although I think we're closer to equilibrium than we've been in a while, you've got kind of negotiation headwinds, if you will, from where capacity has been looser over the last couple of quarters than we saw in 'eighteen. With that said, orders are way off. Builds are coming off of and below replacement levels now. As I already mentioned, bankruptcies are rising in a meaningful way. I mean we're not talking of going up by 20%.

We're talking about bankruptcies up fivefold over 'eighteen to 'nineteen and some larger players now being affected as well. So it's not just small shops that are going out of business. It's larger. The two big ones that I think mentioned one of the two was insurance. The hardening of the insurance market and what we're continuing to see in insurance cost is really pushing a lot of people over the edge because they can't takes 50% to 70% insurance renewal increases when it's 5% to 6% of cost line item and they're operating on razor thin margins to begin with.

And the other one is the drug and alcohol clearinghouse. I mean, we know with reliable data that, that drug and alcohol clearinghouse has been receiving two fifty to two seventy five new names a day into that into the clearinghouse. And so if you just think about that over the course of the year, you're talking about a pace that would project out to be over 60,000 drivers entering the drug and alcohol clearinghouse this year. That's a good thing for safety. It's something we fully support, and it's why we have been air follicle testing for many years to make sure our fleet is drug free.

But it will cast some capacity constraints over the industry that will take more hold as we move forward. On the outside, I think it's fully felt in the latter part of the second quarter. On the inside, I think we could start filling it late Q1, early Q2. But for right now, we got choppy times ahead of us, and we're going to continue to keep our head down and focus on what we can control, which is our cost and our execution and the service we provide our customers.

Speaker 5

Got it. Thank you for the color. Appreciate it.

Speaker 2

Thank you, Adam. Thank you.

Speaker 0

Our next question comes from Allison Landry of Credit Suisse. Please go ahead.

Speaker 6

Good afternoon. Thanks. Sorry, I just jumped on from another call. But my question is, how do you see the progression of the upcoming bid season? Would you expect contract rates to perhaps start out on the weaker side and then strengthen towards the latter part?

Maybe if you could just delineate how you're thinking about that.

Speaker 1

Yes. Thanks, Allison. Clearly, we view the market as one that's going to tighten as the year goes on. And so at a high level, that's going to change outcomes on bids as the year progresses as well. At a more tactical level, the fact is we can't afford to go backwards right now.

I mean the fact there may be a little bit of overcapacity out there in the market is a relevant fact. But what's happening with overall cost and all of the things we're discussing in terms of the industry headwinds and, frankly, the undersized margins that the vast majority of the industry is faced with mean to me that we've got to hold the line on rates. And we're going to have very open, frank, professional discussions with our customers on that. Hopefully, they're going to look to a longer term horizon than just a quarter because to save money or to be overly aggressive in a contract, knowing that the market is turning thirty, sixty, maybe ninety days out, to me, would be shortsighted versus a more long term approach. We have customers that take that view, we have others that will be more transactional.

And that's where some of the commentary you missed earlier in the call comes into play and that we could see more movement from One Way to Dedicated because our pipeline there is pretty strong, and we have the opportunity to move more trucks to Dedicated versus taking bad outcomes out of bids if that's the only other option.

Speaker 6

Okay. That's really helpful. And then just in terms of some of the trends that you're seeing across your retail customer base, maybe specifically low end versus high end retail, could you talk about what you're seeing in each of those end markets relative to historical trends?

Speaker 1

Yes. We don't talk about individual customers, but I will talk about it in general terms. We've aligned ourselves over the last several years with winners, and we've worked hard to do that. So we follow our retailers very, very closely to see kind of who's winning and gaining share and who's losing and maybe losing out to the e commerce reality that's around us. And by aligning with folks that have successful stories and successful products, it's given us the opportunity to grow with them.

At the discount retail level and the home improvement retailers in particular, they've continued to put up strong solid results through their own execution models that we think are winning strategies. Going to continue to align with them and continue to grow with them and be ready as they continue to expand their footprint. So that end of the market looks real good. Some of the other ends of the market, frankly, we don't play in as much, and it's by design. And in particular, folks that are maybe caught in the squeeze of what's happening with e commerce, and we see that squeeze occurring and not see the sufficient strategy on their business model or their approach to the market to keep up with that.

We've minimized our exposure over the last several years for precisely the market that we're now in, and that's what helped us weather the storm this year.

Speaker 0

Our next question comes from Ken Hoexter of Bank of America.

Speaker 7

Derek, maybe you could just kind of keep going on some of the pricing discussion. You focus a lot on One Way. And maybe just talk to us about Dedicated and your thoughts on how that rolls through on revenue per mile through the year. You've given a lot of specifics on the One Way. Maybe Dedicated is slower to ramp?

Does the pain that you're feeling now kind of come through maybe a little bit longer through 2020 than obviously in the One Way?

Speaker 1

So Ken, first off, the best news about Dedicated, especially the Dedicated that we do, is it's difficult to serve. It's high expectation and it's well beyond just the movement of freight. I mean it's the design, optimization, implementation with a heavy focus on the utilization across the fleet. To do that, you have to have a certain amount We think we do that and do it well.

That has not come under the same pressure in 2019 as the One Way did. It certainly doesn't resemble anything that's going on in spot. And had this cycle carried out longer, like if we still thought that we were going to be in an overcapacity situation for another year or another two years, it could have had adverse effects at some point on Dedicated. But having the belief currently that we are closer to equilibrium than not, that you're seeing some relief in the spot market and you're seeing exits of capacity kind of across the multitude of reasons we've already given, we feel pretty good about where we sit with Dedicated. As we talk to those customers and they look for us to grow, there's not a lot of folks that can do what we do for them.

We're going to be fair with them and charge them appropriately based on the services that we're asked to provide. But the risk for that to decline or that story to worsen is largely behind us. We're pretty confident in how we think about the future of our Dedicated model.

Speaker 7

So I think the expectation of One Way was kind of built in, in terms of the minus five, minus seven, but you're not turning negative is what you're saying in terms of the Dedicated side?

Speaker 1

That's correct. The pipeline is plenty robust that there isn't a reason or need to think about turning negative in Dedicated right now at this point.

Speaker 5

All

Speaker 7

right. If I can get a follow-up on the outage. You mentioned the cyber or I guess, was the outage a cyber attack on this supplier? And I know you said you're beefing up your own IT. Is there anything that you've done differently now that you've gone through that?

John, you were talking about that experience in the quarter and the EPS impact, anything to ensure backup? Or was it the drivers kept driving, they just went out of route and so it was a little bit longer on mileage? I just want to understand maybe that impact a little bit in what you're doing.

Speaker 1

Yes. This impact was not a cyber attack or anything like that. It was a global GPS rollover event that took place that affected more than just our supplier, to be fair. And it had to do with a scheduled GPS updaterollover that, frankly, just went afoul. And so it affected a variety of different tech devices around the world that relied on that information.

We were affected as well. What it meant for us is we had to revert to the old fashioned days. So we had to, from one day to the next, over the course of an evening, revert to paper logs, paper routing, atlases and trip planning. And that is a pretty big undertaking. I would be remiss if I don't specifically thank all of the folks here at Werner because the amount of work and effort they put into it, the amount of extra hours and overtime and effort to keep that fleet moving was nothing short of incredible.

It really proved to me what they're really made of. But we got through it. It took several weeks to get through it completely and to come back online. And we've kind of commented already on what we think the EPS impact of the delayed dispatch, delayed ability to have visibility, not being able to use our optimization software because you don't have clear visibility to the fleet. And it was pretty major as to what we can do differently than when it is the telecommunication link between us and our fleet, it isn't something that you would have redundancy on.

It's hard to explain why, but it's just kind of how that works. And so when we went dark, we were all the way dark. We do have one of the things I'm most proud of is we built driver apps, not for this reason, for other reasons, that allowed us to stay in constant communication with our drivers and still send and receive dispatch information. So we had already kind of built technical solutions specifically this kind of outage in mind. But it worked and provided an avenue for us to continue to move goods for our customers.

There were impacts across the service spectrum and other places, but it was widespread, not just at Werner. We just were more impacted than most because it was in the entirety of our fleet, whereas others had pockets of their fleet impacted.

Speaker 7

Great. Derek, John, great job on the quarter in a tough environment. Appreciate the time.

Speaker 1

Thanks, Ken.

Speaker 0

Our next question comes from Scott Group of Wolfe Research. Please go ahead.

Speaker 8

Hey, thanks. Good afternoon, guys.

Speaker 2

Hi, Scott. Afternoon.

Speaker 8

Derek, are we in the first half, are we seeing the same sorts of headwinds from lower project business, lower spot rates than what you saw in the 2019? I'm just trying to bridge to that down 5% to 7%. And then if the market turns as you expect, what do you think is a realistic second half rate recovery? Is it low single, mid single? What do you think?

Speaker 1

So the environment has not dramatically changed from currently in the first quarter from what we were seeing in the 2019, to answer the first part of your question. Now I will tell you there are fundamentally less projects and surge opportunities even in a good year in the first quarter and most of the second quarter than there would be in the third or fourth quarter. So the impact, if you will, of that environment isn't as great. We will have to continue to battle through the fact that we're in the bid season and the turn is not completely upon us, but at least it's visible from where we're standing. And I think that's generally recognized across the shipper, carrier and investor community.

And as it relates to the back half, rates are going to really be heavily dependent on what happens with project surge and those type of opportunities because we've built a lot of product lines around that, and we do it very well. We need that stuff to come to be available back half, and it's just too early to try to give you a prediction on what that looks like. I like where the consumer stands right now. They're staying engaged, and consumer confidence looks good. We've got a trade deal in USMCA that makes me feel pretty good given our presence in Mexico.

Phase one China is certainly better news than what we were dealing with throughout all of 'nineteen. But on the flip side, you've got an election coming. So who knows what that does relative to confidence one way or the other. So it's a bit early. We'll update quarter to quarter.

But I can assure you that rates need to recover. And when it's time for them to recover, we'll be out there doing our part.

Speaker 8

Okay, thanks. And then if I can ask one to John. So the salaries costs were down, I think 4% or 5% sequentially. Is that fourth quarter a good run rate? And I get you didn't want to answer the question about full year margin that someone else asked earlier.

But at least in the first half, rates are down similar first half as they were in back half twenty nineteen, do you think the margin impact should be similar as well?

Speaker 2

Yes. Salary wages are improvements came from the non driver and the logistics payroll side, helped sequentially as we gained some productivity and efficiency improvements. We had 3,300,000 fewer company miles in fourth quarter compared to third quarter, partially because of the GPS outage, partially because we got two holidays in fourth quarter and one in third, and we had a little bit more dedicated shorter haul in fourth quarter. We also had improved work comp and health insurance in the fourth quarter. Those are a little harder to predict as to how much that's going to be sustainable going forward.

We'd like changes that we've made to make improvements there, but you're always somewhat subject to your claims experience for those costs. So I would expect salary wages to continue to trend favorably based on what we know right now. But our claims experience was pretty good in fourth quarter for work comp and health insurance. So I wouldn't want to predict that we'll keep all of that.

Speaker 1

The only thing I would add to that is that all of the things John said and then the other factor to keep in mind is we did have some tailwinds in the fourth quarter from incentive comp. Although this was great news in some respects for the quarter in terms of how we performed, it certainly did not meet our expectation. Our internal goals were higher, and incentive comp will reflect that. And so there will be some headwinds that will exist as it relates to that going into next year as we hope to exceed our goals and exceed our expectations.

Speaker 0

Our next question comes from Jack Atkins of Stephens. Please go ahead.

Speaker 9

Derek, John, good afternoon. Thanks for taking my questions.

Speaker 1

Good afternoon.

Speaker 9

So I guess just to go back to the rate expectations in One Way Truckload just for a moment, not to belabor the point, but I'm just trying to bridge to it. I think the other folks are as well. The down 5% to seven you've got less of a headwind year over year from special project business. Spot market rates appear to be roughly flattish, just the public published rates. And your contract rates are flat to down slightly.

On an easier year over year comparison, it seems like a pretty steep decline in that One Way business in the first half. So could you just kind of maybe put a little bit more context around sort of how you're getting to the down five to seven I think that'd be helpful for folks.

Speaker 1

Yes. Well, I think the first thing that might be getting overlooked is we were up over 6% for Q1 last year. And so if you do nothing on contracts and you don't renew anything, just the effect that we've already been experiencing throughout the year both in spot and spot has two effects, right? Higher spot miles exposure and a much lower spot rate. You compound that with a normal seasonally slow first quarter, which has happened it's like most first quarters right now, you're going to be negative right out of the gate.

Those contracts that then renew that may end up renewing flat to slightly down still only add to that issue, although they may be better than what you're experiencing in spot. And so we are being conservative with our estimate. It's probably has upside in the second half perhaps or the second quarter perhaps, but that will really get back to an earlier question around project and spot and surge opportunities. The only time they really come to fruition in the first half of the year, even in good years, is at the end of the second quarter. And it's just too early to be looking into a crystal ball right now and predicting what happens in June.

So we're going to assume and plan based on what we know and what we're lapping. And what we're lapping is a reality of being in that range for one way truckload, not total company, in as we start this year. So that's our best view on it right now.

Speaker 9

Okay. No, that makes sense. And I appreciate the extra color there. So for a follow-up question, I'm sorry for two relatively short term questions, but I just think it's important for everyone to have their expectations calibrated correctly. When you think about OR trends within the TTS segment, John, if I'm hearing everything that you guys are saying correctly, you had some healthcare and other sort of workers' comp tailwinds in the fourth quarter and incentive comp was a good guy.

But conversely, you had the disruptions from the supplier there, which negatively impacted the fourth quarter. How should we think about sequential OR trends? Typically, you see about a 400 basis point, maybe a little bit more than a 400 basis point degradation fourth quarter to first quarter. Is that the right way to think about that this year? Or are there puts and takes on either side?

Speaker 2

Well, I think the biggest variable is the rate challenges that Derek had talked about and being down 5% to 7% in one way. I think it's still going to be pretty tough sledding, at least in first quarter and more than likely in second quarter. We're not forecasting significant project in surge business in second quarter at this point. It could show up in June. But at this point, we're thinking it's going to be fairly difficult environment when you combine spot rates, which we're forecasting to be down in the range of fifteen percent first quarter, five percent second quarter.

And contract rates that Derek talked about, flat to slightly negative. And we're not planning on special project business at this time. So those factors all enter into the thought process as it relates to margins.

Speaker 9

Okay. That's helpful. Thanks very much.

Speaker 0

Our next question comes from Jordan Alliger of Goldman Sachs. Please go ahead.

Speaker 10

Yes, hi. Just a quick question. Obviously, most of the conversation rightly so is on Truckload. But can you maybe talk a little bit about the Logistics business and Brokerage? And is there any thought that the improved environment for Truckload, you start to see a trickle down to the Brokerage side of the equation later this year?

Speaker 1

Yes. Jordan, thanks for the question. Logistics has got challenges, both sort of market based, if you will, in terms of supply and demand right now and what we've seen happen with rates and some of the rate pressure. And then additional as it relates to new entrants into the market that are making that market more competitive than even the underlying supply and demand would warrant, in my view. We're going to continue to try to be disciplined.

We believe in that product. Volumes were actually up despite revenues being down, and that's just a reflection of rate and where rates went. We are going to stick to our knitting on walking from business that we think is putting ourselves in a position to leave our customer in a bad spot when the market turns, I. E, we're not going to enter contracts where we're going to have to go back and rip them up and tell them, here's new deals. We're going to try to make sure and price with sustainable pricing, and we hope customers will understand that.

And frankly, I think it will be a little bit of a test to see how long they can lose this much in some of the digital brokers that have entered the space and how much staying power they have. In the meantime, what we're going to focus on instead is continuing to build our tech, continue to gain efficiencies and continuing to build products that we think can compete head to head with any of them regardless of where they might want to price the business. We have to be able to execute and operationalize it every bit as well as what they do and then back all that up with our assets. And so when we put that together, that value prop, I think, makes sense for our customers. The response has been positive.

But it's going to come down to us being pretty defensive around where we're willing to go with rate. And I think the story is yet to be written on how much more aggressive some of these folks get.

Speaker 10

Our

Speaker 0

next question comes from David Ross of Stifel.

Speaker 11

Yes. Good afternoon, gentlemen. Good afternoon, Dave.

Speaker 2

I've got some questions on some of the Ts. Firstly, expanded terminal network that you talked about, how much did that grow in 2020 over 2019? Do you plan for any more expansion of that this year? And is that to support mainly the One Way operation, the Dedicated operation or both?

Speaker 1

Yes. It's a multiyear plan to continue to expand terminals where we think they make sense and support our business and lower our overall cost structure. It's all in the CapEx numbers, and we can do this multiyear plan and still stay within the ranges that we've guided to. I only point that out because I don't want people to be worried or thinking that we're unnecessarily expanding. Yes, there's terminal expansion happening this year.

We are expanding and building the terminal in Pennsylvania. We are continuing to expand existing terminals where appropriate. In almost every case, they support both. Actually, in every case, they support both. In some cases, it might be a terminal that's 80% dedicated focused and twenty percent one way, and the inverse is true in other terminals in the network.

And it really has to do with the difference between incumbent terminals that we've had for a long, long time and new terminals that we're building to better support a more widespread fleet that is more regionally concentrated than it has traditionally been.

Speaker 2

So how many terminals did you end 2019 with? And how did that compare to a year earlier?

Speaker 1

So in 'nineteen, we would have added two. It's difficult. I'm not trying to be evasive, but we have Tier one, Tier two and Tier three terminals. And so there are a multitude of stats around each of those. I can just tell you that at the Tier one level, we've added a terminal in each of the last two years.

We're adding a terminal this year. But there are also takeaways. So there's terminals that are either being downsized or removed from the network. The net effect is we'll probably be plus three at the end of the process, net. And that net number would be about 13 of the large Tier one terminals, similar number of Tier two and Tier three.

Speaker 2

Excellent. Thank you.

Speaker 0

Our next question comes from Tom Wadewitz of UBS. Please go ahead.

Speaker 11

Hey, guys. This is Mike Triano on for Tom. I was wondering if you could provide an update on customer inventory levels. Are customers looking to build inventory at this point? Or do we need to see some more drawdown before activity picks up?

Speaker 1

So John is the expert on that. I'm going be quick and turn it to him because he follows us closer than anybody I know. I just would say this. I think on a very, very macro level, we have to continue to contemplate e commerce when we think about inventory, and we know that it takes more inventory for people to go to this omnichannel model and to continue to grow and have a more robust e commerce fulfillment strategy. They've been pulled down some in recent reports.

But by historical standards, they probably still look a little elevated. I think they have to stay somewhat elevated as it relates to having a best in class e commerce strategy. With that, I'll turn it over to John for more color.

Speaker 2

So with the quarter ended October for our retail customer base, in general, inventory levels got a little bit better. But it does vary from retail customer to retail customer depending on their strategy. Our customer base had a pretty solid quarter in October from a margin standpoint. They're in slow growth mode, so I'm not saying they're expanding their sales significantly. But they are keeping a close eye on inventory.

And now that they have a little more clarity on the tariff situation, I think that has helped them to manage their inventories more effectively. So I think we're in a good position from an inventory standpoint, not excess, not significantly lean either. I think we're in a fairly balanced inventory situation.

Speaker 11

Okay. Yep. Thanks for that. And I guess with the recent ratification of USMCA, are you guys expecting any impact or change to your Mexico business within One Way Truckload longer term?

Speaker 1

Yes. I mean, we're still bullish on Mexico, both for our own story and our network and what we've built down there and having what we believe to be the leading the industry leading position already. You couple that with the fact we've had multiple exits over the last twelve months of carriers that have decided to exit the market, which is bodes well for us. USMCA gives folks confidence now that they can go and put back on the front burner plans they had for expansion. And so all of those things are positives.

It will the other question mark, I would say, is Mexico GDP for this year looks to have come in at either flat to maybe slightly negative for 2019. And the expectations for 'twenty is growth of 0% to 1%. So we have to keep our eyes on what happens overall with their general economy. But general terms, I'm bullish on our ability to continue to leverage our Mexico footprint.

Speaker 11

Okay. Thanks. Appreciate it.

Speaker 0

Our next question comes from Chris Wetherbee of Citi. Please go ahead.

Speaker 12

Hey, thanks for squeezing me under the wire here. I wanted to maybe see Derek if you could elaborate on some of your comments around sort of early 1Q. I know January is always difficult to get a read on sort of what true demand kind of looks like. But when you think about it versus what you saw in the fourth quarter, is this sort of where we'd expect to be sequentially any signs of improvement or maybe stagnation? Just kind of want to begin with a little bit more color around the January comments.

Speaker 1

Sure. So we saw the freight environment improve sequentially from Q3 to Q4, not surprising, obviously, with surge and other opportunities that exist. But it started to give us strength beyond that in terms of what we're seeing in the overall non surge network. I would say in Q1, that trend line It's still seasonally, obviously, lower than what we had seen in Q4 but compares favorably to most of the prior years.

I think it's way too early to say we're out of the woods yet. We've commented that it was it's still a lesser environment than what Q1 of 'nineteen looked like. And the next few weeks is really when things become a lot more clear. We think assets are going to matter again, and they're going to matter again very soon. And we'll continue to try to position those assets where we think they make the most sense for our core customers and our shareholders.

Speaker 12

Okay. No, that's very helpful. I appreciate that. And that kind of leads into the second question. Just sort of conceptually, when we think about sort of coming out of 'nineteen, which is a challenging particularly for One Way Truckload and maybe there will be a recovery coming in the back half of 'twenty or maybe 2021.

How do you think about sort of the real flexibility of the fleet to go back and forth a bit between Dedicated and One Way Truckload? How much capacity can you really swing back and forth in any given cycle? Or should we assume that sort of the sixty-forty ish type of split is maybe where the run rate is going to be going forward?

Speaker 1

Yes. So I think it's relatively easy to move fleet move trucks from One Way to Dedicated, and to do that in a fairly fluid way, just depending on how bid outcomes are progressing and bid negotiations are taking place. It's a little more difficult to move them from Dedicated to One Way simply because dedicated contracts, the very reason they're sticky for us, they're also sticky for our customers. They're three year deals usually or sometimes longer. Our commitments are have been made, and those trucks generally are going to remain.

As far as the mix, we really do believe that sixty-forty is about where we want to be. But ultimately, it's people are going to compete for assets internally. I mean the belief I have is that when we think about what it takes from a CapEx perspective to continue to operate a best in class fleet, those are expensive assets, and there ought to be competition for their service. And so our van division folks, One Way Truckload, Mexico, Dedicated, they're all going to be arguing over why those assets should be in their area, and returns will dictate where they end up. But sixty-forty as a guideline, general guide would be where I'd tell you to think about our fleet as we go forward.

Good drivers help us be able to achieve that goal. And having high expectations of our fleet and fleet discipline has really been rewarded with high retention rates. That serves us well if we were to have to grow and to boost up One Way Truckload from the outside. That's why we commented on being a market we're open to a if the market supports it in the back half to thinking about fleet growth. But right now, we're going to stay disciplined.

Speaker 12

Got it. Helpful guys. Thanks for the time. Appreciate it.

Speaker 2

Thank you, Chris.

Speaker 0

Our next question comes from Brandon Oglenski of Barclays. Please go ahead.

Speaker 13

This is David Zuza on for Brandon. I apologize, I do not have a question on Q1 rates, if that's okay.

Speaker 1

Perfect.

Speaker 13

So when you guys started the five gs strategy in 2015, I think the goal was to try to outperform in all rate environments. And judging by the results of 2019, it seems to be bearing fruit. Could you maybe pick out one of those elements of the strategy you think was most critical in the declining rate environment in 2019? Maybe contrast that as investors try to evaluate the strategy with an element you think will be most critical in a recovering rate environment in 2020.

Speaker 1

Yes. So I think in the early decline of the market, the clear commitment that we made, starting with our Chairman, C. L. Warner, and delivered upon and kind of throughout our culture to our drivers, so the talent team, really carried the day. But that will carry you and allow you to change momentum and change culture in an organization.

But you have to back it up with really some of the other Ts. And so tech has and our investment in technology has started to really kind of pay dividends. And we've got a lot more to do there and a lot more money will be spent. But it will be spent based on tangible returns and tangible time lines. And so that is one that we think, as we look forward, has more opportunity.

The terminal and infrastructure and trucks and trailers honestly, are really a way to envelop the driver in the type of tools that he and she need to do their job. We think we have some of the best drivers in the industry, but we had to up our game on the kind of tools that enabled them to really achieve what we knew they were capable of. That was what 'nineteen was about. And as we go into 'twenty, it's continuing that culture and focus, but backing it up with better tech and finding the more frictionless environment with how we interact with customers, drivers, mechanics and throughout our organization even internally. And we have some runway left ahead of us to improve some of those productivity measures, and I'm excited about what that looks like as we continue to invest in tech as we go forward.

Speaker 13

Thanks, Eric. Just a quick follow-up. Judging by the performance in margins this year, is it time to revisit the 11% or better average through the cycle? And if not, what would spur kind of that internal conversation for you?

Speaker 1

Well, I think look for updates on that maybe as the year progresses. We want to make sure we're, in fact, through the turn and that we understand how we've performed kind of through a full cycle with this new culture and new environment and new operational focus. But certainly, my expectations and those of my leadership team are to continue to improve, and we have to continue to find ways to kind of create this evolution at Werner towards a better future. I think we're on our way. I think the fourth quarter shows that.

I think posting year over year EPS earnings increase is pretty remarkable. And yet we I'm excited about the number of things that we have in front of us to continue to execute even better on. So not looking to change that goal just yet, but I can tell you that it's on our mind.

Speaker 13

Thanks, Derek. Congrats on the quarter and the year.

Speaker 2

Thank you. Thank you, David.

Speaker 0

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

Speaker 1

Yes. First off, I just want to thank everybody for being on the call with us today and for taking the time to spend time to understand our story. Appreciate those that have been had the faith for some time and those that are coming to us more recently. If I was going to leave you with comments, it would be really that we're going to stay committed to what we've been doing over the last several years. We're going to put a best in class product out there.

We're going to expect best in class returns, and we're going to work with best in class customers. Assets will matter again, and that turn is upon us as we sit here today. We are going to continue to keep discipline through the last few innings or last inning perhaps of what was a tough rate environment. The first half will be challenged. The second half looks more promising.

And in the meantime, we're going to find ways to execute and continue to put up results that we can be proud of. Again, thank you for attending our call. We look forward to talking to you all more in the future.

Speaker 0

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