Yahoo Finance Werner Enterprises, Inc. (NASDAQ:WERN) Q1 2024 Earnings Call Transcript
Werner Enterprises, Inc. (NASDAQ:WERN) Q1 2024 Earnings Call Transcript April 30, 2024
Werner Enterprises, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, and welcome to the Werner Enterprises First Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Chris Neil, Senior Vice President of Pricing and Strategic Planning. Please go ahead.
Chris Neil: Good afternoon, everyone. Earlier today, we issued our earnings release with our first quarter results. The release and a supplemental presentation are available in the Investors section of our website at werner.com. Today's webcast is being recorded and will be available for replay later today. 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 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 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. On today's call with me are Derek Leathers, Chairman and CEO and Chris Wikoff, Executive Vice President, Treasurer and CFO. Derek will provide an overview of our Q1 results and update on our strategic priorities for 2024 and our market outlook. Chris will cover our financial results in more detail and provide an update on our guidance for the year. I'll now turn the call over to Derek.
Derek Leathers: Thank you, Chris, and good afternoon, everyone. We appreciate you joining us. Before we get started on our first quarter update, I would like to acknowledge the very difficult time many of our associates and fellow citizens of Omaha are enduring as a result of the catastrophic tornadoes that took place this past Friday. It is truly inspirational to see both the Werner and broader community come together to support those in need. Miraculously, there are no reported fatalities locally at this time, but there remains a path of devastation that is hard to even describe. Regrettably, the devastation continued throughout the weekend in Iowa, Kansas and Oklahoma. Our thoughts, prayers and ongoing support go out to those impacted by this horrible disaster that has impacted so many.
I will now turn my attention to the results of the quarter. Our first quarter results reflect the reality that the freight market continues to be challenging and was further compounded by adverse weather in Q1. Despite these industry-wide headwinds, our focus remained on controlling the controllables. We realized another favorable quarter for one-way production, increased revenue per truck and dedicated and maintained high customer retention. We generated solid operating cash flow by proactively managing expenses, executed on additional cost savings, reduced our debt and repurchased shares during the quarter. While we cannot control the macro, we are focused on our long-term strategy and structural improvements to position Werner for success in an eventual tighter market.
Let's move on to Slide 5 and highlight our first quarter results. During the quarter, revenues were 8% lower versus the prior year. Adjusted EPS was $0.14. Adjusted operating margin was 2.4%. Adjusted TTS operating margin was 4.7% net of fuel surcharges. In Dedicated, there's more noise from competition. Despite losing a few fleets to changes in the supply chain approach for select customers and isolated competitive undercutting, Dedicated remains solid and resilient and delivered another quarter of year-over-year revenue per truck growth. We are maintaining price discipline in Dedicated, particularly given our long-term agreements. Our Dedicated offering is superior in scale, service and reliability. Accordingly, we look to large enterprise customers that value their supply chain as strategic, mission-critical and not left to less sophisticated or inexperienced carriers.
As expected, One-Way Truckload volume was steady and seasonally consistent. The revenues remain challenged by ongoing rate pressure. Despite setbacks from weather, miles per truck increased 11%, marking the fourth consecutive quarter of improvement. Our total miles were nearly similar to prior year down less than 3% despite 13% fewer trucks. We are pleased with the operational excellence that has been building to achieve similar volume with less capital intensity. Within Logistics, first quarter volume reflected normal seasonality while results were impacted by further rate pressure. Still, we maintained a 15% gross margin, saw meaningful increases in both domestic and cross-border Power Only volume, drove strong customer retention and realized new business wins and higher volume in intermodal.
In short, despite seasonably stable customer demand, lower rates caused freight conditions to remain challenged. Inclement weather further negatively impacted One-Way and Logistics and a limited driver throughput for our school network. This, combined with higher-than-usual health and workers' comp benefits and elevated insurance expense resulted in lower operating income. That said, we are proud to have achieved a first quarter 20-year record low for preventable accidents in addition to a high level of service to our customers, improved One-Way miles per truck and progress on our cost savings initiatives. Moving to Slide 6. Despite the challenging environment, we continue to push forward with implementing structural improvements that will position Werner for success as rate normalizes.
Our drive framework continues to inform our decisions over the long-term. representing our commitment to durability, results, innovation, values, our associates and the environment. Last week, we announced that Werner made it to Forbes list of America's Best Large Employers for 2024. Forbes selected 600 outstanding companies for its list and Werner placed number 10 in transportation and logistics category. This honored award highlights Werner's quality, employee satisfaction and an industry leadership. Relative to our 2024 objectives, last quarter, we communicated three overarching priorities to generate earnings power and drive value creation in 2024 and beyond. They are driving growth in core business, driving operational excellence as a core competency and driving capital efficiency.
Relative to our first priority, driving growth in core business. Topline improvement depends on time and pace of market inflection. In Dedicated, we see increased pressure as the down cycle continues and other carriers seek shelter. We continue to see a strong dedicated pipeline of opportunities to first backfill isolated fleet reductions and then focus on that growth. To achieve our long-term TTS range of 12% to 17% adjusted operating margin, we are executing on our cost savings plan, which is going well. We purposely set this as a long-term target though in certain years could be exceptionally up or down, but most years would fall within the range. From an operational and cost basis perspective, Werner is in a much stronger position and with increased demand, better rates, a stronger used equipment market and further reining in of insurance cost per claim, we are confident we will achieve this and see operating leverage come through.
However, in the current day the freight environment remains very challenging to forecast. If the market stays lower for longer, it may serve as a headwind to reach this goal by the end of 2024. Relative to our second priority, driving operational excellence as a core competency, we are maintaining a favorable safety record, advancing our technology strategy and progressing our cost savings program. Transitioning to our EDGE TMS platform is a multiyear journey, and we remain encouraged by the synergies and value of a single freight platform, enhancing our customers' experience and our visibility while providing additional opportunities to grow revenue and reduce cost. And finally, our third priority, driving capital efficiency. We had another strong quarter of operating cash flow.
We continue with intentionality in our capital allocation. Net leverage CapEx spend and fleet age all remain low. Despite lower used equipment values, we are on track with our expectations and continue to anticipate a greater pace of gains later in the year. You will hear more about these priorities on quarterly calls going forward. Before passing it over to Chris to discuss our financial results for the quarter, I want to provide our current view of the market. Turning to Slide 7. We expect a challenging freight market to continue through second quarter and into the second half of 2024. While inventory levels have normalized and destocking is largely behind us, we haven't seen signs of significant restocking. Attrition is happening, but at a slower pace, and as a result, competitive pricing pressure remains.
We have experienced more seasonal freight trends in April, specifically better demand on the West Coast related to certain spring projects. Recent isolated fleet losses in Dedicated will put pressure on our full year fleet guidance. We performed well in Dedicated, continue to maintain a 93% customer retention rate and we can see a pathway to truck growth with a more normal supply/demand environment, although our focus is first on backfilling losses while managing yield. The One-Way operating environment remains challenging and led to a competitive early bid season with mixed results. We will continue to exercise pricing discipline. The environment in logistics is still very competitive and margins will continue to be pressured. Longer term, our portfolio of customers, our deep network of qualified carriers, our investment in technology and our operational improvement initiatives position us well for long-term profitable growth in this segment.
With that, let me turn it over to Chris to go through our first quarter results in more detail.
Chris Wikoff: Thank you, Derek. Let's continue on Slide 9. First quarter revenues totaled $769 million, down 8% versus prior year. Adjusted operating income was $18.6 million and adjusted operating margin was 2.4%, down 68% and 450 basis points, respectively. Adjusted EPS of $0.14 was down $0.46 with over 95% of the variance, driven by a softer used equipment market and lower gains combined with rate pressure in One-Way and Logistics. Turning to Slide 10. Truckload Transportation Services total revenue for the first quarter was $551 million, down 6%. Revenues net of fuel surcharges fell 4% to $478 million. TTS adjusted operating income was $22.7 million, down 58% versus prior year and adjusted operating margin net of fuel was 4.7%, down 600 basis points.
A decline in equipment gains drove nearly half of the TTS decline in operating income. We continue to see gains albeit lower and we are leaning into the expertise and capability of our national fleet sales operation. During the quarter, consolidated gains on sale of equipment came in line with our expectations, totaling $3.6 million, a decline of $14.8 million or down 80% from a tough comp last year. We are maintaining our view of second half versus first half improvement in the used equipment market, although values may be held down for longer. Net of fuel surcharges and equipment gains, TTS operating expenses declined modestly year-over-year and sequentially but were more than offset by TTS trucking revenue rate per mile decline of 2% versus prior year.
and a 7% smaller fleet size. One-Way rate per total mile during the quarter decreased 5.1%. In terms of improvements in the quarter in various TTS expense categories, operating supplies and maintenance expense was down $5 million and 8% versus prior year, and nondriver salaries, wages and benefits were down $2 million or 3%. Driver pay was down excluding fringe benefits. Benefit expense in the quarter increased nearly $2 million versus prior year, driven by outsized health insurance costs in January that subsided later in the quarter. Dedicated remains steady and durable generating double-digit operating margins on a trailing 12-month basis, whereas One-Way remains especially challenging. As Derek mentioned, achieving our long-term TTS operating margin range is a key priority, and we remain focused on producing higher operating margins, but achieving this goal by end of the year will be more challenging given first quarter results.
Turning to Slide 11 to review our fleet metrics. TTS average truck count was 7,935 during the quarter, down just over 7%. We ended the quarter with the TTS fleet down 2% sequentially and 8% year-over-year. Our TTS revenue per truck per week net of fuel grew during the quarter by 2.8% and has increased year-over-year 20 of the last 25 quarters. Within TTS for the first quarter, Dedicated revenue net of fuel was $301 million, down 3%. Dedicated represented 64% of segment revenue compared to 63% a year ago. Dedicated average trucks decreased 4% to 5,149 trucks. At quarter end, Dedicated represented 65% of the TTS fleet. Dedicated revenue per truck per week increased 1.3% year-over-year, growing 24 of the last 25 quarters through all economic conditions.
While our per truck production is trending well, the impact from isolated fleet losses will continue into second and third quarter as those reductions are fully realized. As we've said before, the opportunity pipeline in Dedicated remains strong but competitive. We are focused on winning with customers that value the reliability, scale, safety and service of our proven Dedicated model. Demand improvement will naturally expand existing fleets that contracted single-digit percentages over the last year. And with a tighter market, we are positioned well to further penetrate new verticals and other hard-to-serve freight opportunities. In our One-Way business for the first quarter, trucking revenue was $169 million, a decrease of 8% versus prior year.
Average truck count was down 13% to 2,786 trucks. Revenue per truck per week was up 5.6% year-over-year. One-Way bid season is well underway with mixed results that are customer specific and reflective of the competitive environment. As we focus on the controllables, we are pleased with another quarter of production gains, achieving near similar total miles versus prior year, but with 13% fewer trucks. We expect the favorable production trend to continue throughout the year, although year-over-year improvements will moderate. In addition, our Power Only offering within Logistics segment continues to grow. In a tighter market with better rates, this combination of One-Way production gains plus double-digit Power Only volume growth translates to improved ROI, and it provides more options for our One-Way customers, which we can leverage when the market turns.
Our Baylor acquisition continues to maintain shipper brand loyalty, and in terms of our ECM acquisition, our Northeast density is proving valuable to cross-sell and expand business in the region with long-standing Werner customers. Turning now to our Logistics segment on Slide 12. In the first quarter, Logistics revenue declined $26 million or 11%, representing 26% of total first quarter Werner revenues. Revenue in Truckload Logistics declined 13% and volumes decreased 6%. Shipments declined sequentially from normal seasonality and due to our focus on revenue quality. As previously mentioned, our Power Only solution again represented a growing portion of the Truckload Logistics volume in the quarter. Intermodal revenues, which make up approximately 12% of segment revenue, declined year-over-year due to a decrease in revenue per shipment partially offset by an increase in shipments.
Final Mile continued to show growth in the first quarter, reporting just under a 5% increase in revenue despite a softer market for discretionary spending on big and bulky products. Logistics adjusted operating loss was $1.2 million in the first quarter. Adjusted operating margin was near breakeven, reporting a small loss of 0.6%, down 340 basis points year-over-year and 190 basis points sequentially, driven by rate and gross margin compression. We expect brokerage margins will remain challenged in the near term with operating margins expanding later in the year through our cost savings and integration success. The team was able to improve revenue quality as the quarter progressed, resulting in gross margins that were better in February and March.
During the quarter, we further integrated the Reed acquisition, along with completing certain technology advancements in EDGE TMS and implementation of improved freight payment and audit processes. We are seeing the fruit from these initiatives, and this will aid in sustainable margin improvement in coming quarters. Our strong and growing brokerage refrigerated services should also position us to capitalize on improving seasonal trends related to produce and food and beverage. Overall, we remain encouraged about the mid- and long-term benefits of our logistics business. Given a strong customer portfolio and growing contract business by growing Power Only solution, advancing our technology strategy and long-term opportunity for growing Final Mile and Intermodal.
On Slide 13, we provide an update on our cost savings program. Executing well on our cost savings program remains key to expanding margin and earnings in 2024 and beyond given a freight and used equipment market that will continue to be challenging. In 2024, we continue to expect to capture over $40 million of savings that are largely structural and sustainable. We have realized $12 million of savings through the first quarter and have a clear line of sight on the rest of the program. Let's look at our cash flow on Slide 14. We ended the first quarter with $60 million in cash and cash equivalents. Operating cash flow remained strong at $89 million for the quarter or 11.5% of total revenue. Net CapEx in the first quarter was $19 million or 2.5% of revenue, down $84 million or 81% year-over-year.
Free cash flow for the quarter was $70 million or 9% of total revenues, up 130 basis points year-over-year. Our total liquidity at quarter end was very strong at $619 million, including cash and availability on our revolver. Moving to Slide 15. We ended the quarter with $598 million in debt, down $51 million or 8% sequentially and down nearly $94 million or 14% compared to a year earlier. Net debt to EBITDA was steady at 1.2x. We are committed to maintaining a strong balance sheet and access to capital to fund growth in investments that are accretive to earnings. On Slide 16, let's recap our capital allocation priorities and strategy. We will continue to prioritize strategic reinvestment in the business and returning capital to shareholders.
We spent $6.5 million on share repurchases during the quarter and will remain opportunistic. Regarding capital expenditures, 2023 was an elevated CapEx year, reflecting lower year-over-year gains and a greater pace of reinvestment in the business. For 2024, we are expecting net CapEx to be between $250 million and $300 million, with 80% towards trucks and trailing equipment and 20% towards technology, terminals and our school network. Next, on Slide 17, is a review of our guidance for the year. We are lowering our full year fleet guidance from down 3% to flat to down 6% to down 3%. We are down 2% year-to-date with visibility to additional reductions from known isolated losses in Dedicated. Although greater than anticipated, we are not surprised by a more competitive Dedicated environment through this prolonged weak market.
We are seeing new business wins to assist with backfilling losses, and we see potential for growth in Dedicated in the second half, but we recognize the challenge and believe it is reasonable to lower fleet size expectations at this time while we focus on maintaining price and margin discipline across our portfolio. Net CapEx is being lowered by $10 million on either end to a range of $250 million to $300 million. Dedicated revenue per truck grew year-over-year and is expected to remain within our full year guidance range of 0% to 3%. One-Way Truckload revenue per total mile for first quarter decreased 5.1% and is within our guidance range the first half of the year. Equipment gains were $3.6 million in the first quarter, consistent with our expectations.
We expect similar gains in the second quarter but now anticipate lower equipment values to linger into the second half. As a result, we are lowering the top end of our range and now expect equipment gains in the range of $10 million to $20 million, down from $10 million to $30 million previously. While our tax rate in the first quarter was 32.9% due to certain one-time discrete items, we expect this to level out throughout the year. Our full year guidance range is now 24.5% to 25.5%. The average age of our truck and trailer fleet in the first quarter was 2.1 and 5 years, respectively, compared to 2.1 and 4.9 years at the end of 2023. I'll now turn it back to Derek.
Derek Leathers: Thank you, Chris. Despite the challenging macro backdrop, our leadership team of nearly 14,000 talented Werner team members stayed the course by executing our strategy. They remain focused on upholding the Werner brand and reputation, making safety our top priority and providing superior service to our highly valued customers. We are actively taking steps to improve our operations and advance our competitive strength in the marketplace by investing in technology, reducing costs and optimizing cash flow. While times have been tough, we're cycle tested and built to last. Our historical results demonstrate our ability to generate earnings power as demand accelerates and the proactive actions we have taken position Werner to capitalize on opportunities as they present themselves in the future. With that, let us open it up for questions.
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