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

Yes. Excellent transaction. We're very pleased with it. It's a solid business at scale, top 10 dedicated pure dedicated player over $600 million in annualized revenue. Excellent leadership team, focused on technology innovation, good driver retention and durable end markets, food, beverage, specialized bakery. So everything that was very attractive to us. It fits well and complements our portfolio the desire to continue to be durable, but still lean in and diversify in terms of end verticals and end markets. And it's going well. Day 1, immediately accretive, good durable margins, but a clear line of sight on how we can improve those margins, close the gap to our organic Dedicated margins. The $18 million of synergies that we've talked about, which is basically a 300 basis point expansion to their margin is well underway. We've actioned about half of that with a line of sight on how to action the rest in 2027. So it's going very well, solid customer retention, driver retention and overall integration very much on pace.

Got it. Obviously, the last lever here, logistics. So we spoke about what Montgomery might mean for the asset-heavy business. What do you think that means for the asset-light business in terms of like taking share from smaller players or potentially seeing customers moving to asset heavy? Kind of where does logistics end up net of some of those trends?

Yes. At least with respect to Montgomery, I think it's overall positive. So as we were talking about, I mean, it's hard to put our finger on right now something tangible in terms of how it's moving the needle specifically on on capacity. But overall, I think it's constructive for those larger carriers, sophisticated carriers, both on the asset and the brokerage side that have a safety focus that are well insured and have sophisticated systems and processes in terms of carrier betting. What I can tell you anecdotally is we have large customers on the brokerage side. They might also be doing business with us on the asset side that are asking more questions about our betting practices. Those are great conversations. We like those conversations. I mean it really points to that customers are very much aware of the Montgomery ruling, the precedent that's been set of negligence anywhere in the decision-making process and supply chain can result in liability. Liability can follow that negligence. So shippers are aware, and it's constructive that it's not just about price and on-time delivery, but there's also a broader focus on risk management as part of their equation as they're evaluating risk supply chain.

Got it. So let's put all of that together. You guys obviously have very robust cycle dynamics on the One-Way side. You have the first fleet acquisition on the dedicated side. You have opportunities some Montgomery in the logistics side. What does it mean for OR in 2026 and potentially through the cycle maybe relative to previous up cycles?

Yes. So just to talk about recent trends and trajectory, and then we can talk about where we go from there. But in the first quarter, we were mid-2% on adjusted OI on -- sorry, we were 1.5% consolidated, we are mid-2% in TTS. We basically doubled both of those going Q1 to Q2. So on a consolidated basis, we went from 1.5% to 3%. On TTS, we went from mid-2% to between 5% and 6% to end the second quarter. So from a TTS perspective, mid-cycle margins, we're still targeting low double digits. So we still have a gap to go. It's going to come through market help. It's going to also come through some self-help in terms of tech-enabled cost synergies, what we're doing intentionally around the portfolio, the first fleet synergies. But then from a market perspective, what we're seeing in terms of rate, further demand for a dedicated model that will come with a higher contribution margin. And as equipment resale values on used equipment normalizes, all of that is on a cumulative basis, very helpful and gives us confidence in mid-cycle achieving low double digits. So between now and end of the year, for all of those reasons, we expect overall margins to continue to expand. Logistics add some margin pressure in the second quarter. We talked in our last earnings call about late July, we were already seeing that margin correction. That's continued throughout this quarter. So that's helpful. Our second half guide or I guess, if you look at our full year guide on gains and just kind of do the math on the second half, it really points to gains being favorable second half versus the first half. So all of that favorable and should be accretive to margins. Fuel volatility is a distraction right now and a headwind in the quarter, just given the extreme pace that it's accelerating. And even with having fuel surcharges where we can largely pass that on, particularly in a portfolio that has more dedicated round trip miles where we don't have any empty mile exposure in this type of an accelerated pace of volatility, it's still difficult for those weekly resets to keep pace.

Got it. Let's just talk about that a little bit more because there is some concern about modal shift as well because of $6 diesel. Kind of are you seeing any of that? And also kind of is there any way you guys can accelerate the surcharge mechanism just given the magnitude of the inflation here?

Well, to the first part of your question, I mean, yes, we've really seen some acceleration in transition from truckload to intermodal. I think that started probably earlier in the year just with the tightened market with shippers looking for capacity. We started to see that. Then it was it March, April, we saw kind of that first spike in fuel. So that kind of kick started. And then here we are again with another increase in the fuel price. So those things combined, I think, have moved that over from a truckload to an intermodal perspective. We have an intermodal division that's growing ourselves. That's a one-stop shop that we can provide that service in our brokerage division, not as large as some of the other players out there, but a very quality product.

And it's important to note, Ravi, that we're solution-oriented with large enterprise customers. So when they're trying to navigate fuel volatility or tariffs or other things, we have other offerings in our portfolio to where we can address how to solve problems in the supply chain.

Got it. I think that was a very comprehensive unpacking of kind of what we see in the environment right now. I want to spend some time thinking of the long term as well because autonomous trucking has been a topic that has really come up the investor interest curve for us this year. You guys are doing a lot of work there. So maybe unpack for us kind of what have you done so far when it comes to autonomous, what your current partnerships are, kind of what have you found, what's working well, what still needs to improve?

Yes. So I would say we were early in this. We joke about how early on we were going to see autonomous companies wearing disguises because we didn't want people to know that we were kicking the tires, so to speak, on the autonomous because of a fear of driver flight. And the louder carrier -- there's a theory that the louder carrier is about interest in autonomous, the more skittish your drivers get. We've been loud with our driver fleet. We've got a driver town hall in Fontana tomorrow, and I'll say this to them tomorrow that even if the bull case of autonomous takes flight, that we will need more drivers next year and 10 years from now than we have right now. And so it's an additive to the portfolio story. And we've been saying that to drivers for years and years, and our drivers are now overall pretty comfortable with that as -- I can't speak for 10,000 drivers all at once, but pretty comfortable with that. So the strategy is right now, we're partnering with several autonomous companies. We think we're with the leaders of the pack. And right now, we're brokering freight to them. So in the truck typically is a safety driver behind the wheel, not driving, an engineer in the jump seat for data purposes, and then the truck is driving itself for 99 or-plus percent of the trip. That's the usual model right now. I sat through your fireside this morning with Chris Urmson from Aurora, and Chris talked about how the shift from TAS to DAS, so driver as a service is what our vision is, too, that eventually we'll get to fully driver out and that will be the solution that we will start to use. The question is at what scale? I know that's part of what's baked into your question and how soon. There are a lot of unknowns there. So the economics in your report -- it's not your report, who wrote it?

Well, Nancy.

Nancy wrote the report. You get credit for it, but Nancy is a wrote the report. Yes. We know how that works. So Nancy's great report is a great starting point for having the conversation about the economics. We believe, Werner, we believe that the economics are not that favorable to Autonomous right now, and you and I had a conversation in the hall about some of those factors. But it is great to get something on paper to start talking about where do we have a disagreement. And by the way, if Aurora was in the room, we've had those conversations with Aurora directly as well. That's one piece of the economics, probably the biggest. The next piece is the insurance and claims side. So there are some things that are crystal clear. If the software fails and causes an accident, the autonomous companies across the board have said, we'll take care of that. If the Werner or the carrier did something to cause the accident, of course, that's our problem. There's a lot of gray between those 2 that we have to figure out before anybody would go to scale or at least any publicly traded company would be able to go with this at scale. We're having those conversations with the AV companies. It's just not as maybe linear as it might sound. If you think -- I could probably come up with every example of an accident. I'd love to sit down with somebody who thinks they can do that because we can come up with 1,000 more than what you can think of. And we have to have some agreement in advance of where is the line because the last thing that we need is a plaintiff lawyer suing an AV company and Werner with 2 deep pockets sitting in front of them and Werner and whoever, the -- I'll say, Aurora, fighting over who's at fault because that just drives up the verdict. So we need to get this stuff sorted out in advance. There's other components. I'll give you the last one so we can move to another topic. But the infrastructure at the beginning point and the endpoint, it's not -- again, you and I talked about this briefly, but it's not that the truck has to go all the way to the destination, but it's got to get somewhere better than just to an exit ramp. And where is the infrastructure, the real estate infrastructure or the people infrastructure at the beginning and endpoint to unhook the truck from the trailer or hook it up or do a pre-trip or do a post trip or any of the other things that have to happen, there's -- that has to get figured out, too. And I'm not sure that, that costs back to economics not sure that cost is baked in enough. But it's something we're excited about, and I should have started here. The technology is the real deal. Like if anybody wants to say, I can't believe that a truck can actually do all the things that these companies say, the truck can do it. We're 100% bought in on that.

Got it. First of all, that was an incredibly thoughtful response and you guys are in the weeds on this. So thank you for that. Maybe one follow-up here kind of as a sell-sider, I think in very simplistic terms, let us assume that all of those friction points are friction points. Let us for now put them in the category of dotting eyes and crossing keys. Let's say, at some point, let's not figure out the time frame, you figure all that out. What does this mean for your business 3 years, 5 years, 10 years from now?

Yes. So again, it would be a part of our growth strategy. So it's not -- it would not be to replace drivers that are currently in our fleet. It would be to grow the fleet with that as an additional component. It would be to improve drivers' experiences. So a driver who currently is on a long haul, that autonomous can do the long haul and they can do a little bit of more what looks like dedicated or even dray work at the origin destination, great. They get home more often. They get to see their kids' soccer games more often. That's a high-quality job close to their home, great, let's do that. It's really an and proposition. And in 3 to 5 years, we can see that having an impact. Now an impact that is transformative to the business, honestly, no. But 3 to 5 years from now is we'll blink and we'll be there. And 10 years ago, people were saying, I don't believe that autonomous will ever get there. And I just got done saying that technology is the real deal. So it's going to be an exciting 3 to 5 years. And again, the safety case has been proven over and over again by the companies.

Got it. That's super helpful. Any questions from the audience? Nancy is going to want to talk about her core report again.

Yes, we can move on from my report. I had a quick question on M&A. I know the First Fleet integration is tracking well, even a bit ahead of plan. How has that changed your appetite for further M&A? Are there any segments that you're looking to augment? Any commentary around that would be great.

Good question. Obviously, we have enough to focus on with First Fleet optimizing value. It's going well, but we have more to do. So that has our attention. But you also can't control when other quality opportunities are coming to market. I think more are coming to market. We have -- we've seen an elevated volume of just inbound inquiries even if within 30 seconds, we determined that, that's nothing that we're interested in. Still, the volume is up. We also know potential opportunities that might meet some criteria that could be coming to market or are held by private equity and maybe beyond a normal hold period. So there's pent-up demand. There's opportunities that will be coming to market as this market improves. We can't control that timing. And so we'll continue to balance that and evaluate those opportunities. FirstFleet is a great proof point for us of what checks the boxes, a strategic fit, a cultural fit and one that we can continue to grow revenue synergies, cost synergies. It meets the return thresholds that we had, and we feel like we had achieved a very good value with it being accretive on day 1 and just more value to optimize from there. So where we can find additional opportunities like that, for sure, those could be opportunities we would be interested in as well as other opportunities in asset-light where they've got technology, especially in a particular vertical, opportunities that complement what we're doing in Mexico, cross-border, Dedicated final mile. So we'll continue to be aware, engaged and evaluate opportunities, but we're going to be disciplined and selective along the way.

Chris, really quick, let's talk about your actual fleet, CapEx needs, CapEx plans, growth versus replacement versus emissions regs kind of how are you thinking about that '26 and '27?

Real short answer. Obviously, our CapEx is elevated in '26. It's really coming more weighted here in the second half. That's all aimed for the most part of reducing average age that's on tractors, that's helpful for the P&L. It's helpful for drivers. It's helpful for customers. Reinvesting in the business is a priority, and we'll continue to prioritize that from a capital allocation perspective.

Sounds good. We appreciate our time. So gentlemen, thank you so much. Obviously, a fascinating time, both from a cycle perspective and from a long-term perspective. So excited to see what happens here.

Thank you so much everybody.

Great. Next up, we have on enterprises and very happy to have with us President and CEO -- CFO, Chris Wikoff. President and COO, Nathan Mesker; and SVP of Pricing and Strategic Planning, Chris Neil. I hope all that, right? Gentlemen, thanks so much for joining us. Obviously, the cycle has taken precedence in terms of the kind of the topic majeure. So maybe start off by giving us a sense of how has 2026 progressed relative to your expectations? Where are we right now? And kind of what kind of visibility do you guys have for the rest of the year? .

Sure. Maybe I'll start on that. Thanks again, Ravi, for having us. Good to be here and a 10-year conference again. Overall, I mean, from our view, the headline of the market would be continued momentum that we've seen so far this year in terms of just overall market fundamentals -- the fundamentals are strong. The better balance between supply and demand is helpful. For us, it all translates. I mean, a number of different metrics that we can point to, but really, it all translates to rate. I know there's been a focus and maybe some over-indexing on more recent spot rates being a little bit softer, debate on, is that seasonal? Or is that subseasonal it's a data point, but when we're talking about rate, we're really talking about overall blended rate, contractual rates that continue to be high single digits, low double digits in terms of contract renewals. So all of that is positive. It's more supply-driven. We think that's going to continue. Enforcement has been multipronged. It's also maturing. So not to deep dive into that right now. But while it's supply-driven, the freight flows continue to be a positive study. We're seeing higher bid volume and some record highs on bid volume and dedicated. -- some continued elevated many bids in 1 way as I think shippers are transitioning from spot and evaluating the market and transitioning to more to contract and some of that in-between space. So overall, I think it's positive. Not much to point to in terms of demand outside some of the tech and data center build out. But overall, I think the fundamentals are strong despite the fact that it's more supply driven. .

Got it. That is great to hear. Maybe to unpack that a little bit. My next question was about the seasonality, kind of what we saw in the late summer kind of that lull, if you will, in some of the data again, do you think that's largely seasonal? Or do you think there's something else going on? .

I think some of it is seasonal. As I said, I think there's going to be ebbs and flows to spot as in a tighter market, shippers who have had a slice of their supply chain that's been