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

Great. So -- Yes. So, we're going to get started with the next presentation with Werner Enterprises. It's Tom Wadewitz from UBS again. So, we have Derek Leathers, we have -- the CEO; we have the new CFO, Chris Wikoff; and then we have Chris Neil as well. And so, great representation from Werner today. Thanks so much for joining us. As we have been doing, if you do have any questions, you can submit them through the app. I'll keep an eye out for those. But happy to take questions live if anybody wants to raise a hand, and we'll check a couple of times during the presentation.

Derek, maybe just to get started, if you have any intro comments, that's fine. And maybe just some thoughts on freight demand and what you're seeing in the market?

Yes, sure. First off, thanks for having us. We're happy to be here. I would give -- since we have 40 minutes, I'll give a couple of minutes of background on Werner for those that may not be familiar with the story, but, 67-year-old company, have been around a long time, been public since '86, trade on the NASDAQ, about $3.3 billion of revenue last year, a pretty diversified portfolio, especially in this -- for this space. We've got our one-way truckload unit -- a dedicated unit and now a $1 billion logistics business. Been more active in recent years and more focused on growth, both top and bottom line focus. I became CEO in 2016. I would say the only real differentiator at that moment was a pivot toward doing a couple of things and trying to do them very well. Over the subsequent 5 years, we've made significant investment in our business in what we call our 5T strategy, but basically shoring up the core of the business in trucks and trailers and talent and terminals and technology, that we had some tech debt and other things that have built up on us and we spent a lot of money to get the house in order. That was done with the idea that we'd come out of that around 2020, 2021. Ready to kind of launch and really start focusing on growing this business more, doing so with a more diversified footprint, doing so with a more asset-light footprint in the form of this growing logistics business. If you look at that now today, as we sit here, we're more diversified, more defensive than we've ever been. If you think about our truck fleet, it's just shy of 8,500 trucks, where 63% of those trucks are in Dedicated. Those are multiyear contracts, very defensible in good or bad markets, very high, north of 95% retention rates. We're able to renew and hold the rate and revenue in that business because it's extremely hard to serve, very hard to serve business, very complex, driver-involved freight with very high level of drivers and a 99% or better service expectation across that business. That's a strength of ours, as is the one-way side shift into that. It's not kind of the you call we haul commoditized into the spectrum. We really focus on what do we do well and what do we do differently than others. And so we're, if not the largest, one of the largest cross-border operators to and from Mexico. There's only a handful of quality large-scale operators that do cross-border truckload business and do it well. We're the leader in that space. That's a big portion of our one-way business, roughly just shy of 1/3 of it. We do a lot of team expedited work. So freight that's hard to serve, very high service expectations. And the third leg of that stool is sort of this regional engineered business. Over the last 2 years, we've acquired 4 companies [ variant ] from our past, in the sense that we've become more acquisitive. Each one of those served a different strategic fit within our portfolio. So this wasn't just acquisition for capacity's sake or acquisition for revenue's sake, but starting with ECM, a strong 500-truck regional Northeast carrier that was best-in-class at what they did, followed by the acquisition of NEHDS' Final Mile and getting -- augmenting our already existing organic Final Mile capabilities. Then subsequently, we acquired Baylor Trucking, a very best-in-class Midwest regional kind of carrier based in the upper Midwest. And then most recently, and arguably most importantly was the acquisition of ReedTMS Logistics. So a $370 million logistics company based in Tampa, Florida. That dramatically increased our exposure to the refrigerated brokerage market, in particular, expanded our business into food and beverage more greatly. And today, about 3/4 of the business that we do collectively across the enterprises, either retail, food or beverage. And that's really a focus of ours. Within retail, it's a heavy focus on the nondiscretionary kind of consumer staples side, discount retail and home improvement, all of which puts us in a position, we believe, to really prosper in both good and bad economic times. When it's raining this bad outside in terms of the backdrop, everybody gets wet, but we get a lot less wet. I mean, our business is built to stand the test of time during these tougher times. And more importantly, longer term, as we look forward, we're very excited about what the future holds.

Yes, that's an excellent overview. Thank you for that. When we -- if I go back to the first quarter earnings reports, we heard from truckload of LTL brokers, many of them seeing weakness in March and April and then anticipating that, that would continue in 2Q that you would just see less than normal seasonal improvement in freight in 2Q. How would you characterize what you've seen in April and May? Have you seen some seasonal improvement? Has it kind of been as bad as that, that it just -- really is just kind of flat in terms of activity? And how do you think about June? Are you optimistic that you get some of that seasonality coming in?

Yes. I mean I'll start with the obvious, it's still tough out there. I mean it's a tough market right now. Customers are still working through inventory levels, although they're in the latter innings of that, at least those in our network are. We have seen some seasonal uptick, but it's nothing that I would say has been dramatic or anything to get too excited about. I think we've still got some tough kind of combat days ahead of us as we work through Q2. I'm proud -- when I look back at Q1, what I would say is that, what I'm probably most encouraged by is our ability to hold serve on volumes, both organically and the acquisitions and actually increased revenues during a very tough market. And so, we've been able to take share, specifically in logistics both organically and through acquisition. Both of those are up in volumes, up in gross margins, but it's facing the same kind of inflationary cost pressures as many others are. And so we are positioned well for this turn. We do think it's a supply story. Our storyline all year long, and it remains the same today, is, it will be a supply side story, not demand that will really turn this market. The supply is exiting perhaps not as fast as some might have thought, but it is consistently week over week, every single week exiting. And as we meet that inflection point in our [ belief ] sometime in the back half, and this market tightens, we're probably -- we're in a much better position than we've been previously to be able to capitalize on that.

How do you think about the progression in your pre-books number? Is that -- so I think historically, you've talked about that as an indicator of what you're seeing. Has that number picked up at all in May versus April? Or is it kind of static?

No, it's picked up. But again, it's picked up around the edges. So we're talking single-digit improvement, but nonetheless, picking up. Actually low double-digit might be a better way to describe it. But that's expected -- seasonally it's expected to see that kind of pick up. I think we would have been a lot more concerned if we hadn't seen any of that -- little bit of lift. But again, I don't want to overstate it. It's still very, very difficult out there. And it's been -- that may sound like a bit of a tailwind, but it's faced with a headwind in that, you have more of the contract season rates that are coming to roost in Q2 than you had in Q1. And so if you looked at our Q1 performance, in particular, I was very proud of our ability to hold rate at kind of down 3% versus an industry number of high single-digits. If we go into first half guidance, our guide was kind of negative 3% to negative 6%. We were negative 3% in Q1, and we maintained our guide indicating obviously that Q2 would be a little worse. That's not driven as much by contract renewals as it is contract walkaways and putting more trucks in the spot market based on our conviction that this turns later. And as it turns, we have those trucks to be able to bring back into better contractual terms.

How much are you swinging into the spot market?

Chris, do you want to take some of that?

Yes. I mean, traditionally, we've had a fairly low spot exposure. I think we've framed it up around 10%, plus or minus, over the years. This is in one-way trucking. Again, one-way trucking, 40% of TTS. So across our trucking division, that would be a single-digit spot exposure. But back to the one-way trucking side, we have maintained discipline in the pricing with contract renewals there. That's resulted in a little bit more spot, probably mid-double-digits range right now.

Like mid-teens?

Yes, mid-teens.

Would you swing that up further as you go through more of the bid activity if you're not seeing direct result on bids?

Yes, I think that just depends on the evolution of some of these bids. We are largely through the bulk of the bid process. We still have a little more work to do. And some of these remaining bids, we're going to stay disciplined. You can't price contract business below operating costs. We're not going to allow pricing to go there, if that's where it goes, because somebody is chasing the market that we believe is a temporary market, then we could put more freight into that spot environment. I don't think we'll have to. It doesn't appear we do at this point based on some uptick around the margins in pre-book numbers. Some signs of realism setting in through the bid process. But you don't know. I mean, there's still a few bids of, what I would call magnitude that we're going to work through. And depending on how they settle that mid-15, that 15-ish kind of give or take a few points, could flow a little higher. I don't hate that because it's a temporary pain. It's going to be painful for a little while, but it puts you in a better position to come Q4 with a retail exposure like we have, to better capitalize on peak opportunities as they present themselves.

We also said in the Q1 call that we don't expect to grow our one-way fleet. And so that will be through the rest of the year until things get better, I guess, is the way we stated it. So that will be another thing that will help us keep the lid on spot is if we keep that fleet size where it is or maybe even a little lower than that.

How would you characterize the outcome on contract rates? And do you -- have you seen that stabilize? Or has that kind of continued to get more -- build more pressure through the bid season?

Yes. It hasn't improved. That's for sure. I mean, as Derek said, it is a tough environment out there. There continues to be pressure on the one-way trucking bid environment. And it's not lightened up yet. So I'd say it just continues at very difficult and challenging levels. We are most of the way through. We do have a couple of large ones out there that are still pending and in progress. But we're making good progress there. We only have, I think, 17% or so of exposure in Q4 there as it relates to one-way trucking contractual renewals. On the dedicated side, again, which is the majority of our truckload business, is 60% of revenues. We have -- we continue to get positive year-over-year results there in our revenue per truck per week as, I mean, contractual increases have occurred in dedicated, that's been stable. About 1/3 of that dedicated business has indexes that are automatically implemented at an annual adjustment time. And so, that's helping to continue to keep that dedicated piece of our portfolio positive. We really view that as a durable part of what we do. That's a franchise part of our business. That's something that we're going to lean into. And if we grow at all the rest of the year, it will be in that dedicated section, so -- or that dedicated segment. So we continue to have pretty good results there, both in utility and on the rate side and dedicated.

Derek, how do you think about activity in June and then activity in the second half? Do you think you see a little further seasonal pickup in June? And it sounds like the retailer feedback is indicating progress on inventory reduction. So does that make you think you see maybe some lift in activity later in 3Q and 4Q? Or how do you think about the -- how do you think about that?

Yes. I would say, for us -- I'll start with the inventory question. I mean, if you look at inventories of our retailers, and so we subscribe to all kinds of data sets of inventory levels holistically, but that's not as relevant to us as the retailers that are in our network. And so we do business with over 50% of the top 50 retailers in America, but specifically in that basket is some of the more successful ones. And so they are largely rightsized with their inventory levels. So I think 8 out of 12 were in a much better position than they were 1 year ago of the top 12, and that kind of trend continues through that list. That puts us in a position to kind of know that certain activities are going to happen. Back-to-school still is going to -- kids are still going to go back to school. You've still got peak related to Christmas and holiday spending and all of the rest. So if they get through that and they start -- we start seeing normal replenishment cycles, which conversations with them seem to indicate that's what they're expecting, and if the consumer can stay engaged at a time that -- let's be frank, it's tough for them to stay engaged with interest rates where they are in inflation and everything else, but so far, so good. And most importantly, if we continue to see supply exit the market, we still believe there's opportunity in the back half to -- for it to get much better. As far as June, I mean, to the extent it gets a little better, it's still around the edges. So I don't want to paint a picture that Q2 is shaping up to have great strength or any kind of Q1 to Q2 acceleration because it's marginal and offset in many cases by the reality of us having to place a little bit more of the fleet on the one-way side in the spot market. But again, I'll emphasize, that's short-term pain to position our fleet better for the future. And so we believe it's the right move.

You do a lot of business with the Dollar stores. Is that piece of the business doing okay? Or is that -- what are you seeing there?

Yes. Our piece of their business is doing okay. I mean there's -- it's hard to paint a broad brush on the Dollar stores, and I try to stay away from talking about any of our customers' results. I'd rather have do that themselves. But our piece with them and our activity with them is holding up pretty well. And so, they rely on us to do some of the most difficult work they have. We've been doing that work for many, many, many years, over 2 decades in a couple of the cases. We are the primary provider for them. We foresee us remaining in that position. We have to earn it every day, and we're committed to doing so.

I'll do a quick check on the audience. I don't know if anybody has a question for Werner? Please raise hand. I don't see any, but... Okay. If there are any, let us know, please. Let's see. Chris, I don't know if you've said -- like you talked about the contracts, is like, I think generally people would say, okay, maybe truckload or a rig of the truck down high single, low double-digit for contract rates, maybe for -- where the market is. Do you think that's right?

For us, specifically, I mean, as Derek said on our one-way trucking, our rate per total mile was down around 3% Q1. Our guidance is down 3% to 6%. And so that would indicate that we are down less than double-digits for sure. So I would frame it, around probably a mid-single-digit kind of decline is kind of what we're thinking based on our guidance for the first half. As we roll into the second half, I think that's -- we've not given guidance on that. I think it's going to be a challenging environment. But there are opportunities to get some lift through just some seasonal improvement, a little bit better volume, get out of the spot market a little bit better at more sustainable contract rates. So if those things happen, I think then that will help in the second half offset some of the lower contracts that -- where rates will be reset a little bit lower.

How do you think about -- I don't know, Chris, if this is for you or Derek -- on just 2Q performance? Like it could be truck OR, it could be earnings. I think that -- you've said there's a little seasonal improvement in activity, but maybe not a lot. And I think in general, for truck and intermodal players, they're going to see -- you're handling a lot more freight at lower rates, right? I know that's less true for you with dedicated, but in one way. So do you think we should be anticipating sequential pressure on OR and truck in 2Q because of that rate impact? How would you kind of look at the 2Q OR?

We have maintained the position that we don't give quarterly guidance, but clearly are comfortable talking about various metrics that can lead you to your conclusions. But rate is pressured from Q1 to Q2. We're going to see further decline in rate from Q1 to Q2, especially on the one-way side. Dedicated will hold up better. And yes, it's 60% of TTS revenues, but that means 40% is not. And so that's going to be a headwind. We will chip away and continue to make progress on the cost side. But the normal sequential improvement from Q1 to Q2 is certainly not going to play out in a year like this. And so I think you're going to see pressure from Q1 to Q2 to include potentially OR.

I think it's -- part of it's the intuition that people have, maybe -- well, seasonally, you always improve, right? But this is a different environment just in terms of the magnitude of contract pressure, but also, I think, less a normal seasonal improvement in activity, too, right, probably a factor.

I think that's fair.

The other unique thing is, as it relates to us at least, is equipment gains. And we've given guidance on a $32 million -- $30 million to $50 million annual number there in terms of equipment gains. We recorded about $18 million of that in the first quarter. We knew -- we talked about the fact that it was going to be front-end loaded in terms of the volume of units that we were going to sell as we're able to refresh our fleet a little bit more. So we recognize that the amount of gain is going to be most likely declining throughout the rest of the year, and that will continue to be a challenge as we go forward, something again, we expected, something we accounted for and really plan for in terms of being able to sell more units early while the used price is still holding up relatively well. Especially compared to pre-COVID times, it's still a good equipment gain market, but one that's declining.

And maybe just to add to that, relative to Q1, Q2, talking about OR in general, I mean, there's the top line side, fleet size, rate, there's gains. And then from just a pure cost management perspective, there were some categories that were more elevated for us and above our expectations over the last couple of quarters. We've been focused on that. Some of that's in our control, some of it's not. Some of it's inflationary driven, some of that being on the insurance and claims side that's more of dollar per claim issue rather than a frequency of claim issue. But Derek alluded to in our last earnings call, some cost savings programs that have been underway. Generally, a $35 million target is, I believe, what we mentioned during that call, with roughly 10% to 15% that was realized at that time. Those cost management programs continue to be underway and progressing well, both in terms of the realization rate as well as just the overall target as we continue to identify additional cost-saving opportunities. So a lot of rigor and focus on that, that we're optimistic, will be helpful later in the year in terms of managing OR and profitability. And then there's been a couple of key expense categories that -- probably more so on the supplies and maintenance that just had a number of factors that were driving that to be more elevated in the past in addition to inflation, and we've been taking steps where we can for that to moderate, whether that be by developing more of an in-house repair and maintenance rather than third-party program. That takes some time to build. Whether that be reducing the percentage of our fleet that is higher miles and out of warranty, that was driving some of the elevation in supplies and maintenance category. And there was also an uptick in that category really related to tires and recapping that was associated with a very peak quarter for fleet sales, where we had over 800 trucks that were sold in Q1 versus less than 300 in the prior year, and that had a carry-through in the supply and maintenance line around tire recapping. So there are some avenues that we believe in -- particularly in that category that can translate to some moderation going forward.

How do we think about the timing on that improving cost performance? Is that something we would expect to see meaningfully in 2Q? Or is that more of a second half event?

I don't think it's meaningfully. I think it's over a period of time as we just apply more rigor and focus and keeping this visible for all of us in the business and focused on executing savings that have been identified and just really developing that as more of a robust discipline and practice within the business. So I think we'll see benefit from that over time.

Yes, I don't make this statement relative to Q2, but I will say, in general, go looking forward -- I mean, Chris has been in the CFO role now for 7 old weeks, but has clearly brought a vision and a vigor and a disciplined approach to the cost side of the equation that I think is going to lend itself very well to kind of a new, better version of ourselves. It's been exciting to have him in the building. It's been exciting to have him kind of asking the questions that maybe need to be asked when you have somebody from the outside coming in and pushing us on the cost side of the equation. So I look forward to where that progresses over time.

Let's see. How do you think about -- I guess maybe just going back to a little bit of that. Where are you at with the equipment deliveries? And you mentioned bringing fleet age down is helpful on the cost structure. So where are you at kind of deliveries and fleet age and where you want to get to?

Yes. So deliveries are certainly freeing up quite a bit. They're starting to see the ability to actually get the truck you wanted, to expect the way you want it on, the date you wanted it. And that's crazy to say that, that's like some kind of revolutionary concept. But for the last 2.5 years, that has not been the case. And so that will lend itself to a much better fleet makeup. Even before you need it to show through in age, it shows through in just getting the truck you want, expect the way you want it at the time you wanted it. And that's, I think, knock on wood, but I think we're at a point where we can look forward and feel confident through the remainder of the year, we'll be able to continue to take deliveries. So that's exciting. Even within the fleet age, as commented earlier on some of the breakouts that 2.2 was what we came into the year at, 2.2 is where we're at. We guided to an end of the year of 2.2 average age of truck. But that doesn't mean the fleet makeup is the same. I mean we had that -- to get to that 2.2, the latter part of last year, we still had a lot of -- much older trucks than we wanted and then a lot of kind of newer trucks. And now as we've been able to kind of refresh on a more consistent, regular cadence, we're getting out of some of that -- the older out-of-warranty trucks at a more rapid rate. The age hasn't changed much, the average age, but the fleet makeup has. And so we're -- that's where some of that supplies and maintenance moderation comes from as well. So that's exciting.

That's kind of lowering the tails on the distribution?

There you go. Yes, exactly.

Let's see. How do we think about, I guess, capacity attrition? So you think capacity attrition is taking place. What are the key metrics you look at to gauge that? And how do you see those progressing?

Well, the first one is, I mean, we really focus a lot on net deactivations, the FMCSA data that you can look at in scrap weekly. It's 36 straight weeks of net deactivations, meaning more people deactivated than activated their DOT authorities. If you multiply that by the number of trucks registered to that authority number, you end up north of 90,000 deactivations. We know that, that number is very conservative because you only have to update your fleet count every other year. And so it's -- during COVID, everybody was growing, not shrinking. And so it's 90,000 at a minimum. It's probably far in excess of that. Then you compare that to BLS data, and you see a little bit of an uptick in BLS data, but it's been relatively stable now for -- in long-haul trucking, it's been relatively stable for, call it, 6 months. And so deactivations continue. BLS data has been fairly stable. Yes, some of those deactivations have become company drivers, but not enough to offset the quantity of deactivations. And then in recent weeks or even months, you're now starting to see actual bankruptcies, actual filings, actual closings of doors, drivers not being paid, drivers being stranded on the side of the road, none of which is stuff we wish upon anyone, but it's a reality. I mean you can't have spot rates at about 15% with operating costs for a carrier in the United States, 15% above that, if they're lucky and live very long. We'll survive this. We'll come out of the other side stronger. The industry will be a little less fragmented when the dust settles, and I think we'll be better positioned. But it's -- in the meantime, there's still some attrition that has to continue to take place.

Are you of the mindset that we're going to see a V -- And so I mean, you talked, I think, constructively about second half when you see that attrition take hold and some of the retailers maybe being in a better spot to [ replenish ]. Or do you think more of a U where it's just you got to be at a kind of a weak level for a bit longer?

Well, I think just the reality of spot rates going sideways now for 6 to 8 straight weeks has already determined that it's a bit of U.

It's already a U.

We've been scraping the bottom now for almost 2 months on the spot rate side of the equation. And so I think a U is sort of where we're at. I mentioned in the -- right out here, we were talking about it, and I almost feel like it's -- maybe a checkmark is kind of a better way to think about it, like it's going to be a slow, gradual lift. But the way this industry has always worked is at some point in the not-too-distant future, there will be an inflection and it goes from loose to equilibrium or maybe a little tight. In all likelihood, in our view, that coincides this year -- this particular year, relatively speaking, close to the start of peak. Peak will still happen. Whether it's subdued peak or not, there's always a peak. Even last year there was a very subdued, but there was some lift that takes place in the fourth quarter. So if you have that lift taking place right about the same time that you have this equilibrium point reached relative to supply and demand, it sets up an opportunity for a more normalized or even possibly robust fourth quarter. It's too early to say that today or to sit here and predict that, but we think the likelihood of that is as great as really any of the other choices on the menu. And so we just have to follow the supply side, focus on the supply side and continue to monitor the consumer, which at this point, yes, they spend more on leisure, yes, they're transitioning more to experiences over goods, but the goods line is more holding serve. It's not necessarily declining, it's just not growing at its normal rate. That, we think, sets up a backdrop for us to be able to prosper better in the back half.

Are your retailer customers -- the feedback you get, are they concerned about the consumer having another leg down? Or do they feel like the consumer is going to be kind of stable, and it's really much more about the inventory reduction in terms of the amount of freight demand they have?

Yes. I think it has been more about the inventory reduction. I think I'm very pleased by their agility they have shown, meaning our customer base. Their agility relative to reconfiguring stores and strategies to the consumers buying of today, meaning as you look through their store footprints, we spend a lot of time talking about and we haul it, so we know what's in the trailers, but they're shifting to more staples, more nondiscretionary, more of the discounted basket of goods, and they've shown great agility. I mean, these folks are good at what they do. If you're working with winning retailers, they adapt and we see them adopting before our eyes, and we think they're setting the stage to do well for themselves and ultimately for us as well as we go forward.

So it sounds like the feedback is constructive, that they think they're agile, they're able to adapt, they're, I guess, constructive on the outlook.

Yes, I think that's right. Now look, we've still got the backdrop of the banking issues, which I don't think are completely behind us. The interest rates, which very much may not be completely behind us and then there could be another uptick. So there's still headwinds. I mean, so I don't want to -- we're not here to project some unfounded optimism. What we're saying, and I think the way I feel is our organization and our portfolio has never been structured and set up better for the game that we're in, which is the long haul. It's not 90 days at a time, although we were publicly traded and we've got to address that reality, but we're here to play long term. We're here to grow, and we're here to expand with winning customers. And I think we are set up better to do that today than at any point in our history.

I'll do another audience check. Any questions, please raise their hand. Let's see. The -- On the growth commentary, how do we think about the pace of growth and the -- I guess, the drivers of growth on a multiyear basis? Is it -- if you put one-way and dedicated together, are you growing fleet low single-digits and you're doing a little bit of M&A, and then you've got one of logistics that maybe has a different growth profile? How do you think about the different pieces of that, that are like, I don't know, 3- to 5-year growth framework?

So I'll just leave them separated versus putting them together to make it more simple. We think logistics has the opportunity for outsized growth in the coming years. We've shown that even in Q1 in a very tough market, holding serve and actually growing volumes in both our organic logistics as well as the ReedTMS. We feel strongly that we're able to continue to gain share even in this market that we sit in today, both organically and in ReedTMS. So we see that, that logistics business will have that inflection point and that rate lift as well as ongoing organic growth within that $1 billion sort of franchise, and that's exciting as I look forward. Dedicated, we continue to win. We win in that space. We're a top 4 player in that market today. You can count all the players of quality in that market on a hand and a half. So it's not the fragmented market that everybody thinks about when they think of trucking. There's only 7, 8, 9 players that are really any good at doing that at scale. So that has opportunity to always be a grower in our business. And yes, there'll be less – there'll be lower growth years like this one where the backdrop isn't as strong. But that's not because we're not landing new accounts, it's because there may be some shakeout within that portfolio. And then on the one-way side, honestly, it's really, longer term will be determined by the customer because, as long as they want to treat that as a commoditized into the portfolio, we're going to continue to migrate assets away from the commoditized end of the spectrum. And so we're going to see more of our trucks in dedicated. We'll see more focus on logistics and technology and our approach to sort of some of the work we're doing with our digital platform. But within one-way, we're going to lean into what we're really good at, which is Mexico cross-border, again, not commoditized, very difficult to do. Team expedited in some of those engineered regional lanes and regional fleets that we're putting together. But the one-way long-haul kind of you call we haul business is shrinking, will continue to shrink, and that is not the part of the spectrum that we feel like we want to or need to play in. That business will go the route of being increasingly commoditized over time.

And I would just add to that, just from my perspective, coming into the business over the last 7 weeks, really assimilating in, understanding more of the piece parts and where we're going, basically, all the same things Derek said, but just from my perspective coming into it just a number of aspects of the business that are very well positioned for the future, very exciting, have a good growth potential and really just having the scale, the capability and expertise in the market and in places in the market where there's themes within supply chain that are going to be excellent inflection points for us to capitalize on those. The business has been investing time, energy, money over the last couple of years in technology -- best-of-breed technology to improve back office and re-benefit from that as well as investing in technology to offer more customer-facing solutions that I think will be key in really being a competitive advantage within our brokerage business. Just some of the themes within supply chain, of more velocity in the supply chain, fulfillment centers and inventory getting closer to the customer and how that can really boost building out a branded final mile offering, near-shoring for the -- being #1 in a cross-border carrier market. Certainly, as that pace continues to accelerate, we're well positioned for that. And then, of course, dedicated just being very unique in terms of size, scale, reliability and the portfolio of the type of clients that we have. So all very exciting. While this is a challenging environment, the company is very well positioned to capitalize on those aspects in the future.

Is there a minimum size that you think the one-way fleet needs to be that you just kind of lose something in terms of efficiency or scale? Is it 1,500 tractors? Is it 1,000? Or do you just kind of keep whittling that down?

Well, I would say that traditionally, our belief, or maybe stated more, honestly, my belief was that it had to be somewhere in the 40% range of the total fleet in order to support our dedicated growth, and it's really the farm system in many respects. When you go into dedicated contracts north of 99%, sometimes 99.5% on-time delivery requirements, you need known entities that have been driving your trucks, that know your culture to then transition into dedicated to be able to do that. What we have found is as dedicated got large enough, it self-serves itself. So we've got the ability to inculcate drivers within dedicated and the new dedicated fleets come on, and they can go to that fleet, and we can replace that driver with drivers that have experience from the outside. And so there is no limit on our ability to have that decrease. Now what's going to hold that up over time, I believe, is the growth of Mexico. It's a big part of that one-way fleet today. 25% to 30% of that one-way -- the entire one-way business is to and from Mexico today. That number could rise, probably likely will rise. And our ability to execute in Mexico is second to none. And so we know we have lots of opportunity to continue to grow that North-South traffic pattern, and we do it very well. So I didn't really answer your question, but no, I don't think it's going to -- we're not going to wake up someday with being 1,000 truck enterprise, I don't believe. But it is certainly not the area of greatest focus as it relates to driving this growth strategy that I've talked about a couple of times. That's going to be driven by logistics and brokerage --I mean logistics and dedicated. And then within logistics, it's predominantly going to be brokerage.

Let's see. I think we have time for about one more here. You put in place a number of changes over time as you've risen to the leadership roles and the CEO position over time, Derek. And I think one was just developing the scale and the muscle to do M&A, right? I think that's something Werner historically didn't do. You -- at the beginning of the presentation, you mentioned the 4 deals you've done. How do you think about your strategy and approach on M&A in the future? Is it something where you want to keep doing that? Is it something where you say, look, we'll just drive even more scale. So there's a dedicated player with 900 trucks, we'll go buy that player because we love dedicated, we're great at it, and that just kind of fits in well. Maybe just some broader thoughts on how you view M&A, how active you want to be, where you want to be involved?

Sure. So I guess I'll take you back through kind of memory lane a little bit. But in '16, when I became CEO, there was -- probably one of the most prominent questions I got asked was, are you guys going to start doing M&A right away? The answer was no because we had to get our house in order. There was some work that needed to be done to shore up Werner and return Werner to its level of prominence from a service perspective, safety perspective, et cetera. I talked about the 5 Ts and the investment back in the business that was required. That was a focus. And I was a big believer that unless your house was completely in order, that was not the right time or place to be going into an M&A. We did that, accomplished that and then started to look around our portfolio and ask where can we find assets that there are businesses that will be additive and accretive, that will make a difference in our portfolio, that will change our customer experience? And those are the kind of things we look for. Now we started by doing small ones because -- maybe it's the conservative nature in me, but I wanted to walk before we ran. And so we did 500 truck ECM, the 200 truck Baylor, then NEHDS was $78 million, $79 million type of business and then much larger with Reed. We have learned and found that, a, we're gaining those reps, gaining that muscle memory, getting better at it. Certainly haven't perfected it, but I do feel that we've accomplished and learned a lot. But we also found that the larger, more scalable one was probably in many respects, the easiest one. So the Reed acquisition was the one that was most easy to assimilate, a like-minded ability to understand what it is like to run a big business and to be part of a big business. And so I think that lends us to say, as we look forward, to the extent M&A will be part of the strategy and it will play a role when appropriate, if it meets the criteria and others that I've talked about. But they'll be more material over time than small tuck-in. Now, never say never. I always tell people to write a M&A strategy and pencil because you have to be opportunistic. If you're going to do it right and be smart about it, if there's -- if the right little gem came along, but it happened to be the only negative is that it's small, we're not going to not do it only because it's small. But our preference would be for more material acquisitions as we go forward and someday, perhaps even transformational.

So you think you could do something that's pretty large? Like could you do something that's a couple of thousand tractors?

I think we could absolutely do something that was as large as a couple of thousand tractors. The question is, what is it bringing to the portfolio that is specifically enhancing our ability to serve our customer or our shareholders? And so I don't see us as being somebody that's going to try to get to this growth. I've talked a lot about growth and a lot differently than this company has talked about it historically. But I'm not going to grow just for growth's sake. So I'm not going to go buy 2,000 trucks or something just to get the revenue. But if they're doing something different or something additive to our portfolio that we think makes us better and has the ability to, through synergies, do so at a much lower cost basis while maintaining the revenues, that's different. But if it's just doing what we do on 2,000 trucks more of it, that's going to be less attractive, but at that scale, we certainly would look at it. And if the time is right, we could execute on something like that. My preference is things that make us better kind of -- nothing makes you better day 1, but certainly shortly thereafter, where we can both learn from one another and we're both bringing value to the table.

With that, I think we need to wrap up. Derek, Chris and Chris, thank you so much for joining us. Thank you. I appreciate it.

Thank you.