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

Hey, good afternoon, everybody. We're continuing with day 2 of Deutsche Bank's 2021 Transportation Conference. My name is Amit Mehrotra. I'm the transport and shipping analyst here at Deutsche Bank. I'm really happy to welcome Werner Enterprises' Chairman, President and CEO, Derek Leathers; Executive Vice President and CFO, John Steele, both I strongly believe among the best in the industry from an operational and financial perspective. I think both of you combined have over 50 years of tenure just in Werner and really, were instrumental in kind of building it to the high quality and admired company it is today. So I really thank you both for joining us. We really appreciate it.

Derek, there's no prepared remarks, so we'll just going to get into Q&A. I'm going to ask the usual questions around the market and demand and pricing a little bit later on. I think we all know it's pretty good, and we can get into that in a little bit more detail later. But I wanted to focus more on your vision for the company, strategic priorities for Werner. I really think the company is kind of an important strategic fork in the road, so to speak. And I wanted to understand your thinking and priorities a little bit better. You became Chairman of the company a little over 3 months ago. You were the first non-Werner CEO of the company. I know you had a close and long relationship with CL Werner in building the company to where it's today. He obviously created an incredibly strong foundation that you want to build upon. So maybe we could start by just talking about as you made your first acquisition, the company's first acquisition in a long time, what's your vision for Werner Enterprises? Where do you see the company 2, 3, 4 years down the road, both with respect to organic and inorganic opportunities? Let's start there.

Sure, Amit. First off, thanks for having us. We're happy to be here and spend some time. I mean you're right. I have a close relationship with CL, and I think that will show itself through in the fact that we're not going to stray real, real far from our roots. I mean this is still going to be a driver-focused organization, a service-focused organization as we go forward. It's going to be one that's built around an eye toward best-in-class results. I think over the last 5 years, we've consistently improved those results as we've moved forward, and I'm really proud of the efforts that we've been making. But there will be some differences, right? I mean one of those is going to be that we -- I have an eye toward growth. I think we have to grow this business in this time, especially over this next 5-year run when you think about what else is going to be coming at us. There's a lot of opportunities for large, well-capitalized, strong execution-type firms like Werner to do more and to step into it, lean into some of the change. And so everything from electrification to what's happening with autonomous really lends itself well to large carriers with the thoughtful approaches and strategies. In a nutshell or an elevator pitch, what I'd tell you is as I look out 3, 4 years from now, I want us to be a true portfolio company, and we're kind of on our way to that today that's mode neutral in our approach to the market, meaning we'll meet the customer where they're at. We're asset-backed meaning we're going to stay true to the assets and the importance of being an asset operator and not just fall victim to being just a pure nonasset player at any point. And we're going to be service-focused. And as we do that, we think we're building something that's better, stronger and more sustainable through the cycle. We think we have an extremely defensive portfolio relative to our Dedicated footprint, but also relative to the engineered nature of our One-Way business. We're going to reinvest in ourselves first, that's not going to change, because we think this model is worth reinvesting now. We think we have runway with what we're doing on the cost side as well as runway with what we're doing overall on the yield side. And so we're going to reinvest first. But we're open-minded M&A. We just showed that with ECM. I mean we acquired a high-quality operator up in the Northeast, Mid-Atlantic states, 500 trucks, 2,000 trailers. That integration is ahead of schedule and ahead of our internal projections as it relates to retention of those drivers, management and leadership. We're excited about what that looks like. They won't all go that smoothly that early, we know that, but we're going to learn and be open-minded to new opportunities as they arise. We're going to continue to return money to our shareholders through regular dividends, unless the historical special dividend approach that Werner did at times in the past. And really, all of that is intended to show very consistent behavior through the cycle. We think this portfolio stands up really well when and if this thing flips. And we think this cycle, by the way, will be stronger for longer. And that's our belief, and there's a lot of reasons to believe that. But when we come out the other side, I think you'll see a better positioned organization that's continuing the improvement we've shown over 5 years. And we'll do all of that through solid execution, but more open-mindedness and more of an eye toward growth along the way.

Okay. And we'll get into that in a little bit more detail. And I wanted to just focus first on the recent, I would say, acceleration in performance. It's not just the last couple of quarters, where obviously, the market opportunity has also been quite strong. But it really seems to be that, at least looking from the outside in, an acceleration in kind of the operational excellence of the company you're operating at kind of a low 80% OR range in TTS on average for the last several quarters. But you've also kind of raised your through-cycle margin target, that 10% to 16%, kind of 13% long-term target through the cycle. What's changing in the business, either market-based or how you're executing that's kind of allowing you and maybe some of the other kind of higher-quality truckload companies to kind of rerate the return profile in the business, either both in good markets and bad because that's really where your long-term target kind of applies?

Yes. I mean -- I think there's a lot there. But for us, it started really back in '16. When we came out with the 5T strategy, it was about getting the house in order, focusing on very consistent investment in 5 major categories and doing everything we could to build best in class across all of those 5 categories. It's fairly tactical in its nature, but it had an eye toward a long-term strategy, which is to clean the house up, fix the house, make sure the infrastructure is strong and solid. And with that, now we can talk about additions and expansions and all the rest. We also, during that time, kind of revamped everything from pay-for-performance metrics inside the building, a more metric-driven approach, a more competitive environment relative to where assets and capital will be deployed based on results that individual divisions are achieving. Those things kind of have a culture -- they caused a culture shift over time to a team that's engaged. This team is good. It's not John and I. We appreciate the accolades, but there's a whole team of people out there that are working on this every day, and they've bought in. And so that's big. And so once you get people buying in and you get that cultural momentum, that's what carries us forward, and that caused us to increase the range of expectations on guidance. And as you pointed out, I mean, we're right now outside of the range to the positive. And we're going to work hard to stay outside of the range whenever possible. But even on the downside, we're going to protect the downside probably more than ever before based on the portfolio mix. So there's a lot going into it. I just gave a few of the highlights. But an eye towards free cash flow would be another one. I mean we -- there's no reason in our business. Truckers allowed themselves to have these volatile swings in CapEx year-to-year, there's no reason to do that. Like we can be thoughtful. We can bring in noncapital equipment-type CapEx in years where we're not buying as many trucks and trailers because it has to get done at some point. We can do predominantly capital equipment in years where it's all going to be about the fleet. But over the ride, we should be able to give investors a free cash flow kind of profile that's interesting. And that's part of who we are now and who we're going to be going forward.

And you guys were achieving, like you just said, the high end of your through -- the high -- above the high end of kind of your through-cycle margin at TTS. I mean is that -- to get to kind of the low end, that 10% margin, would basically imply kind of an almost 50% cut in profitability from where you are today. I guess that's always been the problem, right? I mean that's always been the problem that the public equity markets have had, the truckload companies is that volatility of peak to trough earnings declines. And so either that 10% is kind of a little bit too conservative and you actually think [ through a cycle of -- throughout the cycle ], you can be better than that. It's not maybe the low multiples of TL stocks at this point in the cycle is actually quite there. Wondering how you think about that and how much you're kind of "overearning" today because of the unprecedented kind of capacity crunch and what the other side looks like in terms of your ability to kind of protect the profit pool of the company in the bad market.

Yes. I think it's a great question. And I'm not prepared today to change the guidance on the range or to issue any new guidance on this call. But I will tell you that we recently had an offsite meeting amongst our management team. And part of my dialogue in that meeting is as frustrated as we get on how the investor community kind of may treat all truckers the same, even though we're all created quite a bit differently and we have different strengths and weaknesses, we fall victim of our own verbiage sometimes. And so you're right, we are conservative, and we tend to guide conservatively, and we tend to be conservative in our statements, and then we outperform those statements more often than not. But we owe it to the investor community to really challenge ourselves on that 10% on the low end because it is inconsistent with this Dedicated footprint and all the things we're building. And so we've acknowledged that. We just haven't updated at this point. And we'll be working on that as we go forward. But it tends to be -- the purpose of the guidance, in our mind, was to give the goalpost. Our job is to make sure that we're not claiming the ball off of any time soon. So we'll work hard to be improved better than the low end and better than the high end of time. And perhaps you'll see some change in that guidance as we continue to work through the analysis.

Okay. I appreciate that. And Derek, one of the -- obviously, one of the big problems in -- and TL companies are having today is driver availability. I mean you're seeing utilization challenges, truck count challenges across the board, not just at Werner, but everywhere in the industry. It seems like it's worse today than it's ever been, and that's obviously limiting the industry's ability to kind of lean into a good market. I mean pricing is great, but if your utilization continues to decline, I mean, it's a little bit of a -- I would imagine that you'd like to have it coming in from both sides, so to speak. So you're trying to work around this issue with acquisitions like ECM is obviously adding 500 good quality, low turn -- low -- high tenure kind of drivers to the rank. But are you seeing any led at all on the driver front that will help you actually improve utilization? You obviously have driver schools. Just talk about kind of what you're seeing there and then whether you think some of this is transitory, some of this is structural. There's -- you haven't prescribed to the idea that there are a lot of drivers sitting on the couch, extending -- getting extended unemployment benefit from truckload competitors, have talked about that as an issue. Wondering if your views have evolved in that and if you think some of these driver challenges get easier as some of these extended unemployment benefits lapse.

Yes. So I mean there's a lot there. I'll try to remember and touch on all of it. But to a 40,000-foot level, the driver situation is as bad now as it's been at any time. It's certainly worse than it's been in -- most any time in my career. We -- I don't -- I haven't changed my view on the extended unemployment benefits being a game changer as far as driver availability. And keep in mind, my primary driver on that, my reason being on that is simply that with all of the pay increases that have happened with drivers, the wage opportunity to be a truck driver today was still one of the few roles for a new career where you could actually start significantly higher than you would make even in that extended or that enhanced unemployment environment. Where it will help us and where it is helping us with the unemployment benefits running out is customers being able to hire those people and getting warehouses fully staffed and start -- and improving on the extended well we've seen with equipment, and so we think there's some upside there. The utilization metric, just to be careful is -- this is company-specific, but with the acquisition of ECM, we brought in 500 trucks, but those are very short length of haul trucks, they're going to be part of our One-Way utilization metric going forward. So you're going to see some obvious changes with negative impact on utilization, positive impact on rate per mile. Revenue per truck per week will be relatively similar in both organizations because they just get there a different way. But the biggest obstacle are not -- one of the largest obstacles, I should say, relative to utilization, honestly, has been the COVID impact on teams. We have a lot less teams in our network today, and it's hard to get 2 -- 1 person to want to be a truck driver and travel as the primary job description during COVID, it's a lot harder to get 2 in 1 truck to do the same. And so we've got work to do there. We're going to continue to grow that team count as people become more comfortable. But this curveball with Delta has certainly put some dampening on that. And I -- so I don't expect that improvement in Q2. The improvement on utilization will come through throughput at the DCs as they get better staffed through the enhanced unemployments expiring, those benefits expiring. It will be offset somewhat by enhanced congestion, which is happening as people get more engaged in the economy. It will be offset a little bit from the ECM acquisition when you put 500 trucks inside of a network that's less than 3,000 trucks in One-Way. It is a -- it's not material in the grand scheme, it is material in One-Way Truckload. So we have a lot of moving parts, but I can tell you the acquisition was done with an eye toward improving results. And so the results that matter, earnings, those types of things, we think this was an acquisition worth doing, and it's ahead of schedule.

Okay. And if I just get into a little bit more of the details on tractor count, I fully understand the utilization mix issue with ECM. But if you look at the tractor guidance for this year, obviously, that will go to ECM, but indeed you kind of stripped that out, the implied decline is actually about like 4%, which I assume all of that is coming in One-Way, which would imply the One-Way tractor count is kind of down double digits ex ECM. That's a really big number. And I know some of that is a pivot to more Dedicated, which makes sense. But wondering if John has a perspective on terms of -- like when do you think we can see tractor count stabilized on the One-Way side kind of ex ECM?

Yes, I think we've already felt most of the impact of that in the first half. And so our goal in the second half is to maintain -- potentially see a slight decline in truck count if the Delta variant is a big challenge we all have to deal with it. But we've made good progress here lately. The addition of the new driving schools that we talked about, we started off the year at 13. We're now at 16. We'll be at 19 by the end of the year and 22 by the end of first quarter. That gives us more opportunities and more markets that are geographically favorable to recruiting and retaining truck drivers. So we think that will help us deal with the significant headwind of recruiting drivers in this market. So our goal would be to be flat or as close to flat in the last half of the year on truck count relative to the first half where we lost a little bit over 2% on truck count.

Got it. Okay. And Derek, you talked about growth a little bit in terms of leaning into growth, maybe inorganically even. One of the problems or issues I find with Werner is you guys are doing a lot of great things and executing really well, but it's on a $2.5 billion revenue base, kind of a $3 billion equity capital base. Is there appetite? I mean I know you wanted to be conservative initially and that makes perfect sense, and ECM seems to be a good step in that direction. But is there an appetite to get even more aggressive on M&A so you can grow the asset base of the company and apply the same principles that have gotten the profit in front of Werner and you guys just get more credit for all the good things you guys are doing?

Yes, there is an appetite, but it's going to be, obviously, with a lot of filters on it. We want to make sure, as we do this, that we don't just try to transform or turn a battleship on a dime. We think the business that we have is worth reinvesting in as I mentioned previously, but ECM has already taught us a lot of valuable lessons. We've already learned and got through a lot of the initial friction that comes along with any acquisition and got those reps under our belt. We'll look at future ones as we go forward. We are open-minded. And one of the reasons that we've continued to guide on a debt-to-EBITDA ratio of 0.5:1, which is conservative, I realize that, but still higher than where we ended at post-ECM acquisition, is that we have dry powder, we have the ability to go out and make moves as we see fit and we will do so. But first and foremost will be our fleet and investing in the business and growing it, not holding it constant but growing it, and then alongside of that is now M&A and looking for opportunities that we think will be out there. The pipeline is pretty robust. I mean we look at deals every week. And so we'll look at them, filter them and try to find things that are additive and accretive that enhance our portfolio, that -- but stay within our lane of North American logistics and transportation, not far-field stuff because we think our Dedicated franchise is still a premium, premium asset in the space, and we're going to put -- we're going to plow investment in there as appropriate.