Werner Enterprises, Inc. (WERN) Earnings Call Transcript & Summary

Okay. Good morning, everyone, and welcome back again to Barclays 38th Annual Industrial Select Conference. I'm Brandon Oglenski, airline and transport analyst. And next up on the transport track, we do have Werner Enterprises. And in fact, I think it's your first time attending the conference in 38 years. So welcome, gentlemen. Really appreciate having you. And for those that aren't as familiar with the company, Werner is a predominantly truckload asset-based carrier based out of Omaha. 2020, had a revenue of about $2.4 billion and operating margin, I believe, about 10% last year. I know we're going to talk more about that. But joining us from the company today is Derek Leathers, Vice Chairman and CEO. And I think, soon to be Chairman; as well as John Steele, CFO, and both of them have been with the company for a number of decades. And I can say this from the heart, but John might be the nicest CFO we cover as well. So thank you, gentlemen, for both joining us. And as usual, at this conference, we do have the audience response questions. So if you're an investor listening to the webcast, we'd love if you fill up survey questions here asking about your ownership and sentiment on Werner. And if you have any questions during the live webcast, I believe there's a question link that will e-mail me directly, and we can read that out loud here. So gentlemen, thank you for joining.

And I'm just -- I'm going to kick it off. Very short-term focused, but we'll obviously talk more about the long term as well. But I've heard it from every railroad, every transport, every airline that 1Q weather is pretty challenging right now. I think half the continent is frozen. So can you talk to how those dynamics are impacting your business right now?

Sure, Brandon. Well, first off, thanks for having us. We're happy to be here and spend time with you today. The first -- Q1 weather has been a significant challenge, to say the least. This is incrementally more difficult than regular weather. Obviously, weather is always a factor in the first quarter. As we've been working our way through the storm, and we'll continue to dig ourselves out of it over the next probably several weeks, there are a lot of known and more quantifiable impacts that we wanted to share, everything from down driver time to driver pay, where we need to pay them because it's certainly not their fault that they're not able to move, all the way through toes and start -- and jump starts and everything else. The teams are managing it very well, but there is a clear-cut impact in the quarter, and I'll turn it over to John to let him talk through some of those numbers.

Yes. So we've taken a very aggressive safety-first approach to what's happened with the weather here lately. So nothing we do is worth hurting ourselves or hurting others, and we're really focused on taking care of our drivers who are in remote locations at times, and it makes sense to park their trucks until the weather clears. From a cost standpoint, really, it's drivers, it's operations, it's even our driver training schools, we've had several that are shut down due to the power grid impact in the markets in which they serve. And so as a result, we did our best estimate of what we thought the impact was based on what we know at this time and anticipate for the rest of this week with the latest storm. And we expect that the negative earnings impact on first quarter will be in the $0.03 to $0.04 per share range based on what we know at this time.

Okay. But I assume that a lot of this is just really mother nature-related, right? Nothing from a commercial standpoint that has you guys a little bit worried here?

No, not at all. Actually, it's exactly that. This is the incremental impact of above-normal seasonality of mother nature, if you will, what we're going through right now. It's not kind of throwing the kitchen sink at the issue, it's trying to gauge it versus what a normal winter would look like. It's certainly not systemic. And arguably, if anything, what it will do is extends the cycle as it relates to inventory restocking, it extends the cycle as it relates to overall demand. We came into the storm very oversold. And so before any of the weather impacts took hold, we were in an oversold environment with very strong demand. Right now, we're in an extreme oversold environment, obviously, that's weather-related. We'll have to dig out of that over some period of time. But some of the direct costs, to John's point about being safety first at all times are, we've literally had to shut down. And at certain points, we've had in the thousands -- out of a total of 8,000 trucks roughly, we were north of 1,000 trucks that were shut down at any given time over the last couple of days, and that can be painful on your ability to produce. But it's short term in nature, and we'll get through it.

Yes. That sounds pretty [indiscernible], Derek. I mean, what would it be in "normal" winter environment for you, a couple of hundred trucks? Or...

Well, it's that. In a normal winter environment [indiscernible], it's usually for a couple of hours, a few hours. It usually revolves around road closures and then waiting for them to reopen and/or high winds. This is more widespread. I mean, you have 40 states in the United States right now that have some snow event or some sort of snow precipitation that's way more widespread. You've got ice, which is more dangerous than snow. And especially, you've got a bigger impact in the southern states where they're just still equipped to be able to handle what's going on at the roads. The power outages, obviously, have put another wrinkle on it because if you don't have power to fuel stop, you don't have fuel. If you don't have power at our terminals, you're unable to really conduct business normally. Now we have backup generators for most of our sites and many truck stops as well, but that is a real issue, and we've seen closures and other things that impact our ability to dispatch a truck on a particular route.

Got you. Sounds like pretty challenging right now. I guess if I could talk a little bit longer term, then if I look at your stock valuation, or even some of your peers in the truckload business, who are trading near half the market valuation. And I know you guys aren't necessarily focused on day-to-day trading, but I think the perception from a lot of investors that we're near peak on demand versus supply in the market historically when trucking rates go up a lot, which I think you guys are talking about this year as well that the industry will add a lot of capacity. I guess, do you want to refute that? Or is this cycle potentially going to play out a little bit longer than people anticipate right now?

Yes. I mean I'd like to talk about 2 things. I mean, let's start with kind of refuting the logic around this company and our secular story. I mean, the wrap on Werner traditionally was that we didn't get our fair share during an upmarket or a strong market. We clearly demonstrated that wasn't true in '18. We redemonstrated that in '20. And so that ability to perform in a strong market, like those 2 years where '21 is setting up to be, has been, I think, demonstrated through a multiyear example. The other wrap would be obviously that trucking is cyclical and Werner's in an upmarket, they're always playing too defensive. But if you believe that, you buy into that, then great because nobody is going to have a more defensive portfolio set than what we have right now whenever this cycle may change. I'd point you no further than '18 in a strong market, how we performed and kept pace with the best-in-class carriers out there as it relates to margin and achievement. But then '19 in a down cycle year, our earnings didn't go negative. We held the line and didn't back up, and that's what we've said we'd be able to do. And so we think '21 is a year to expand earnings over '20. And the goal would be if and when that cycle changes, to draw that same line and not back up from there. We think the defensive nature of our portfolio sets up very well for that. And so I'm -- we don't run the business based on quarterly estimates or quarterly sentiment, per se. But yes, it is a little baffling to me because the very people that think of our portfolio as being too defensive seem to not be finding it desirable for the very defensibility that they have concerns about in other times.

Yes, Derek, I think that's a great point that in '19, you didn't see the earnings challenges as some of your other competitors did. Can you talk to how you installed a more defensive mix, in your words, inside the business relative to maybe what it was in the past?

Yes. So there's really several legs to the stool. At the highest most level, it was reevaluating who we do business with and why. And I have this philosophy around aligning our business with winners. And so that means winning companies with winning models that have winning management teams that -- with strong leadership. And if you do that, they tend to be also more cycle-proof. They tend to find a way to persevere during down cycles or tough times. They tend to view their supply chain as a competitive advantage. They tend to view their supply chain with a longer-term horizon. And they tend to view their supply chain strategically. So it starts there. You go down one rung on that ladder, if you will, and you start talking about, okay, now where do you place the trucks within that? And we wanted to have a shift from One-Way [indiscernible] kind of commoditized business and get closer and closer to that extreme service business that has high expectations. There's very few that can do and perform well in that space. And so we don't just look for designated fleets that are being bid or offered as a Dedicated opportunity, we want true Dedicated. Hard to do 99.5% on time or better multi-stop, driver touch, a variety of characteristics that are hard to duplicate. And now we have 63% of our fleet in Dedicated. Within One -- Way, that remaining portion of the fleet, we want to focus on our franchises, which is Mexico, cross-border, we're very strong; our Canadian cross-border operation is a differentiator as well; team Expedited is a differentiator; and the last one is making sure we engineer as much of that One-Way network as we possibly can to create repeatable return-to-home-type employment for drivers so that their lifestyle is very similar to Dedicated although the freight they haul will vary from day-to-day. If you do all of that and you come up with something that's extremely defensible, those engineered One-Way lanes can be done at a very high-efficiency level, and it makes it hard to displace it, even if the market rates are going down because we can perform with high margins at very competitive rate levels because of the engineered nature of the business.

And I guess, can you talk about the shift in Dedicated, the customers that you're seeking. I hate to reference any of your competitors, but we understand the Dedicated business at J.B. Hunt pretty well. They'll talk about private fleet conversions and not necessarily just going after the run-of-the-mill opportunity in that segment. Is that sort of the direction you guys are taking as well?

We certainly look at private fleet conversion as one of the opportunities. We certainly don't look at run-of-the-mill Dedicated opportunities as something we're really interested in. I think there's a tremendous amount of Dedicated business out there today that is anything but run-of-the-mill but may not be a private fleet conversion. It's got to be hard to execute, true Dedicated. As I mentioned, we like the advent and growth of e-commerce because Dedicated fleets built around that have extremely high service expectations. We like successful retailers. Our retail has been under duress. But within that, there are retail stories that are doing phenomenally well. We're big in the discount retail space in particular, because it's more cycle-proof. We're big in home improvement because it's more cycle-proof. And then the last piece is making sure as you add those Dedicated fleets, it's always with an eye toward building kind of the pieces of the puzzle. So we want countercyclical surge events, we want Dedicated surges at different times during the year so that we can actually cross-pollinate and utilize fleets to maximize and select the assets. It's beneficial to our customer from their cost perspective. It's beneficial to us because we can better utilize those very expensive assets.

And Derek, is there any way that, that is also working together with the more engineered nature of your One-Way network as well?

Well, sure. I mean, there's cross-pollination between One-Way and Dedicated. One of the reasons we used to talk about having 60% being kind of the cap of what we thought the Dedicated fleet could be was we relied a lot on the One-Way assets to provide that surge and provide that flexibility. As Dedicated got bigger and bigger, we started to enlarge and get better at relying within our own Dedicated fleets for that surge and being able to utilize assets better to lower our customers' costs but also increase our margin potential at the same time, which is great if you could do that. And so that 60% barrier was removed, and we talked about a 65% barrier. I actually think that's a soft barrier, if one at all. We've modeled recently and believe north of 65% is very possible. Maybe even approaching 70% someday. Right now we're -- as I said, we're at 63% on our way to 65% this year, probably. And we'll revisit throughout the year to make sure all of our assumptions are still correct. The specific engineered drivers inside of One-Way, they're on pretty regimented schedules. I mean, they're going to work at a specific time, going home at a specific time. Those aren't the drivers that would then bleed over to Dedicated. It would be more the One-Way over-the-road folks that the further we can be careful about how much exposure we have to that commoditized end of trucking, the better, I think, we'll be over the long-haul over the full cycle.

Got you. And I think as it relates to this year, you guys have guided to fleet growth of 1% to 3%. Is that right, in aggregate?

Yes, we've guided to 1% to 3%, and that is almost predominantly driven, not by opportunities, but by ongoing structural supply constraints. There's this fear about all this capacity coming. I don't think it's on its way. I don't think it'll be here anytime soon. I think you start at the production level, at the manufacturing level and you look at OEM comments, and public statements, and it adds up to roughly replacement level builds, regardless of what the order board says. Even if you look at the order board, you factor in the 6 months preceding August and the 6 months subsequent to August, and you put them together, it's a replacement cycle-level order board. They're not going to be able to produce 400,000 trucks this year. They're not going to be able to produce, in my estimation, in their own words, 300,000 trucks this year. You're looking at replacement level. In the event vaccinations accelerate, in the event that somehow there's a breakthrough on some of the supply shortages of parts and other things and they were able to ramp up later in the year, the driver shortage is still alive and well, and it's more significant this time and more structural. Schools produced nationwide last year something in the neighborhood of 40% less graduates. Drug & Alcohol Clearinghouse threw about 56,000 drivers out of the mix, with less than half of the fleets actually registered into the Clearinghouse. And now that number up ticking to -- it will get near 100%, I think, throughout this year. That number of 56,000 is likely to double. If you look at the advent of the number of states that added more drug legalization across the country in November. That's only going to make that Drug & Alcohol Clearinghouse be more of an issue. So I don't believe the calvary is coming anytime soon as it relates to capacity. Our job is to do the best we can to increase capacity with the trucks we have.

Yes. I think you said on the up cycle, you want to be aggressive with your rate structure, you said. I think contract rates, up high single digits or low double digits, is that still the view because the constraints in the first quarter in any way maybe push that a little bit?