Good afternoon, and welcome to the Werner Enterprises First Quarter 2022 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to John Steele, Werner's CFO. Please go ahead.

Earlier this afternoon, we issued our earnings release with our first quarter results. The release, along with the slide presentation are available in the Investors section of our website at werner.com. Today's webcast is being recorded and will be available for replay beginning later this evening. Before we begin, please direct your attention to the disclosure statement on Slide 2 of the presentation as well as the disclaimers in our earnings release related to forward-looking statements. Today's remarks contain forward-looking statements that may involve risks, uncertainties and other factors that could cause actual results to differ materially. Additionally, the company reports results using non-GAAP measures, which it believes provide additional information for investors to help facilitate the comparison of past and present performance. A reconciliation to the most directly comparable GAAP measures is included in the tables attached to the earnings release and in the appendix of the slide presentation. Now, I will turn the conference over to Derek Leathers, our Chairman, President and CEO.

Thank you, John, and good afternoon. We appreciate you joining our call today. I'm excited to share another quarter of excellent financial results. I'm very proud of our Werner team for achieving strong top and bottom line growth in the first quarter for both our Truckload and Logistics segments. First, let's move to Slide 4 to level set our business. Truckload Transportation Services, or TTS has over 8,200 trucks with a fleet mix of 63% dedicated and 37% One-way Truckload. Werner has a consumer-oriented freight base with over three-quarters of our revenues in the retail and food and beverage verticals. Within the nearly 60% of our business, that is retail, Werner focuses on discount retailers and home improvement with name-brand customers that have extremely high on-time delivery expectations. These winning customers are growing their market share and Werner continues to grow with them. Three of our top five customers are discount retailers that perform well in economic markets when consumers place even higher priorities for value. The other two customers in our top five are industry-leading home improvement and beverage companies. Five of our top eleven customers are in discount retail or food and beverage, and they ship consumer nondurable goods with repeatable freight that is less sensitive to changes in the business cycle compared to durable goods. As validation of our superior service performance during the last year, Werner was honored to receive Carrier of the Year awards from four of our top five customers and seven of our top fifteen. Let's move to Slide 5 for a summary of our financial performance. For the first quarter, revenues increased 24% to $765 million. Adjusted EPS grew 40% to $0.96 a share. And adjusted operating income rose 37% to $86.2 million. For the seventh consecutive quarter, we achieved record quarterly adjusted EPS. Dedicated is our largest business unit within TTS. Dedicated has nearly 5,200 trucks and achieved 5% truck growth year-over-year. Dedicated continues to thrive and grow with strong demand from our long-term core customers. We consistently deliver high service and engineered solutions to meet their complex shipping requirements. And we continue to have a good pipeline of dedicated bid activity with new and existing customers. One-way Truckload has roughly 3,000 trucks and grew its fleet by 7% year-over-year. One-way Truckload experienced strong freight demand in January and February, which then moderated a bit in March, but still ranks very good relative to our historical March freight trends. Morne Logistics continues to execute on its strategic plans and produced another strong quarter with significant growth in revenues and operating income. Economic uncertainties are increasing with inflation, interest rate tightening and the effects of the War in Ukraine, including higher fuel prices. Our business model is well positioned to adapt, perform and even prosper in disruptive markets. During the first quarter, procuring new trucks and trailers has been challenging, and we were not able to receive our full allotment. We are having frequent discussions with the OEMs to plan and coordinate our new truck deliveries based on the very difficult challenges they are dealing with, including semiconductor chips, component parts, labor and other issues. We are ensuring we get our full allotment of new trucks to minimize the impact on maintenance, production service and improve driver satisfaction. In the first quarter, the used equipment pricing market remained very strong, and our fleet sales team performed well. We sold fewer trucks and trailers than we did a year ago due to the OEM challenges. Equipment gains were $20.5 million in the first quarter compared to $21.2 million in the fourth quarter and $10.5 million in the first quarter a year ago. On the cost side, inflationary pressures are challenging, particularly for driver and non-driver compensation, equipment maintenance and insurance and claims. We are effectively managing these costs without compromising the highest level of safety and service for our customers. Now, I'd like to turn the call over to John to discuss our financial results in more detail. John?

Thank you, Derek, and good afternoon. Beginning on Slide 7. First quarter revenues increased $148 million to $765 million, with 6% truck growth, higher freight rates, increased steel surcharges and strong logistics revenue growth. TTS revenues per truck per week increased 8.8%. The adjusted operating income increased 37% to $86.2 million as a result of 24% revenue growth and 110 basis points of margin expansion. By segment, our adjusted operating income grew 33% in TTS and 158% in logistics. In the first quarter, we grew adjusted EPS by 40%. Here on Slide 8 are the results for our TTS segment. TTS revenues increased by 21% due to 15% higher rates and $32 million of increased fuel surcharges, partially offset by 5% lower miles per truck. The miles per truck change was due to a lower length of haul resulting from our ECM regional fleet acquisition in July, higher driver turnover, fewer team drivers and the January impact of macro. PTS improved its adjusted operating ratio net of fuel by 220 basis points to an 83.6%. Now, let's turn to TTS fleet metrics for Dedicated and One-Way Truckload on Slide 9. Dedicated revenues net of fuel increased 13%, average trucks increased 5% from growth with existing and new customers. Revenue per truck per week increased 7.3% due to rate increases to support driver pay and other cost increases. One-way Truckload revenues net of fuel increased 19%. Average trucks increased 7%. Revenue per truck per week rose 11% due to a 20.8% increase in rate per mile, partially offset by an 8.1% decline in miles per truck for the reasons previously discussed. Spot freight is a small portion of our One-Way network; about 90% of our One-Way Truckload freight is committed contract business with our customers. Contract rate increases so far this year are averaging in the low double-digit percentages. As the one-way freight market moderated in March from the hugely overbooked to significantly overbooked, our truck mileage productivity began to improve with a less disruptive and smoother flowing network. Driver pay per company mile in the first quarter increased 15% year-over-year, a reduction from the fourth quarter year-over-year increase of 22%. During the month of March, the price of diesel took a roller coaster ride and ended the month about $0.80 a gallon higher than it started. Our surcharge programs effectively mitigated most of these volatile fuel price trends. During the month of April, diesel increased by another $0.75. Moving to Slide 10. Here is more information to better understand our dedicated fleet. In dedicated, we provide trucks, trailers and drivers exclusively for a specific customer, typically for a retail distribution center or a manufacturing plant. Werner is one of the four largest dedicated fleets in the U.S. Our Dedicated serves customers with extremely high service and safety requirements, typically executing shorter length of haul shipments in local and regional markets. The superior consistency and reliability of our dedicated on-time service provide our customers with high predictability for their inventory to help them avoid out-of-stock surprises for their customers. Our dedicated drivers have more predictable routes in narrower geographic markets, which increases their satisfaction with a higher frequency of home time. Many of our dedicated customers require specialized driver training, multi-stop deliveries and driver assistance with the unloading process. We are generally paid for all miles in dedicated with steady and stable revenue streams through weekly adjustments based on truck productivity. Our dedicated fleet has steadily grown over the last 13 years with a customer retention rate of over 95%. Four of our five largest customers have been in the top five every year for the last ten, highlighting the long-term relationship nature of our business. Werner associates and professional drivers develop strong relationships with our customers and create solutions to become deeply integrated into our customer's transportation and logistics networks, resulting in a supply chain strategy that creates a competitive advantage. Two-thirds of our dedicated business is retail distribution to store and two-thirds of that business is discount retail. Historically, these discount retailers perform better than the competition in slower growth economies when their customers have less discretionary income to spend and as they look to trade down for value for their nondurable goods purchases. Dedicated revenue per truck per week has grown each of the last five years, demonstrating the high stability and durability of our service product and customer base. As a result of these factors, Werner Dedicated operates with more attractive and less variable operating margins in all economic conditions. If we experience a moderation of freight market trends, the size, strength and customer base of Werner Dedicated places us in a strong competitive position. Let's compare our superior relative financial performance in the last freight moderation period of 2019 against the strong freight market of 2018; Werner was only one of a few truckload carriers that produced earnings per share growth in 2019 versus 2018. Moving to Slide 11 is a deeper dive for our premium truck and trailer fleet. We expect and buy our trucks with advanced safety and comfort features to assist our drivers and provide for superior resale value when our experienced fleet sales team remarkets our equipment. We've been in the business of selling our premium-spec used trucks and trailers in the aftermarket for 30 years. We typically sell our trucks at an age of 4 to 4.5 years in an industry with an average truck age of 5.6 years and climbing. Our experienced fleet sales team has a clear understanding of the market and the needs of our customers. The used truck and trailer market achieved high pricing levels in recent quarters due to record freight demand and limited new equipment availability. Despite selling fewer trucks and trailers than planned in 2021, we realized equipment gains of 19% of adjusted operating income ahead of our 20-year average of 10%. Although it is difficult to predict the timing of when the supply and demand for used trucks and trailers moves back into balance, we expect equipment gains per unit will decline from current levels and return to more normalized levels based on our gains history. When this occurs, we expect to increase the number of trucks and trailers we sell to a more normalized run rate. We expect less pressure on the maintenance expense line, and we anticipate improved driver satisfaction and retention with a newer fleet. Moving to Werner Logistics on Slide 12. In first quarter, total logistics revenues in the quarter grew 37% to $189 million. Truckload Logistics revenues increased 46%, driven by a 24% increase in revenues per shipment and a 19% increase in shipments. Power-only and project business continued to generate strong revenue growth to support our customers in a capacity-constrained market, growing revenues and shipments by 76% and 48%, respectively. Intermodal revenues grew 29%, supported by a 37% increase in revenues per shipment and a 6% decrease in shipments. Werner Final Mile revenues increased $18.1 million, primarily due to our November Final Mile acquisition of Nets. Werner Logistics produced $5.6 million or 158% improvement of adjusted operating income to $9.2 million, resulting from strong revenue growth and 230 basis points of adjusted operating margin expansion. On Slide 13 is a summary of our cash flow from operations, net capital expenditures and free cash flow over the past five years. Expanded operating margins and less variable net CapEx resulted in higher free cash flow during the last four years. We expect to continue to generate meaningful free cash flow going forward. We reduced our net CapEx guidance for 2022 by $25 million on the top and bottom end of the range due to our expectations for lower new truck deliveries. On Slide 14 is a summary of our disciplined strategy for capital allocation. Our first priority for capital continues to be reinvesting in our fleet with newer trucks and trailers with the latest safety, driver-friendly and fuel-efficient technologies. During the first quarter, we purchased $36.2 million of our stock or 1.3% of diluted shares. We remain committed to maintaining a strong and flexible financial position. In March, we expanded our debt capacity with our existing bank group from $600 million to $800 million to provide us more flexibility when the right capital allocation opportunity presents itself. Our long-term leverage goal is a net debt to annual EBITDA ratio of 0.5x to 1x. We ended the quarter with a net debt-to-EBITDA ratio of 0.5x. That concludes my remarks, and I'll now turn it back over to Derek for his remaining comments.

Thank you, John. Moving to Slide 16. During the first quarter, the age of our newer truck and trailer fleet increased slightly. It continues to be more challenging to receive new trucks and trailers, and we have intentionally reduced the number of trucks and trailers we sell to enable us to meet our freight commitments with our customers. Since last quarter, we made good progress expanding our targeted driver school network by three more locations, bringing our total to 22. Our schools continue to perform well and produce highly trained graduates in the competitive driver market. These drivers have been able to further develop their skills with a certified and experienced Werner leader. Throughout the first quarter, technology enhancements continue to drive better communication processes and results for our drivers, customers, carriers and non-driver associates. Our Drive Werner Pro app is improving our drivers' experience by providing them with a single portal to view all the information they need to be safe and successful. With the ongoing improvements to our digital load board, Werner Edge for carriers, we provide alliance carriers with 24/7 access to freight, and we experienced 380% load growth compared to the same quarter a year ago. We continued the rollout of our Werner Edge TMS platform across our logistics network and are now live in all logistics offices in the U.S. and Canada. Looking ahead, investments in emerging cloud technology, including cybersecurity, predictive maintenance, safety and sustainability remain a top priority. Finally, during the first quarter, we completed the new Werner Edge Innovation Center at our Omaha headquarters. Now moving to Slide 17. Here are the ESG developments for the quarter. Last month, we launched a commercial pilot with autonomous truck company Aurora Innovation to test their technology in a freight line between Fort Worth and El Paso. During the first quarter, we launched our Werner Blue Task Force with senior leadership associates and members of our Board to expand our ESG program. We established a pilot program with three large suppliers to use analytics for predictive maintenance and improving our fuel MPG. And we took significant proactive steps to further strengthen our cybersecurity and compliance. Now let's move to Slide 18 and a review of our performance versus our 2022 guidance metrics. During the first quarter, our TTS fleet declined by 115 trucks sequentially from year-end, in line with typical fourth quarter to first quarter seasonal matters. Higher driver turnover and the impact of the Omicron variant in January were also contributing factors. For the year, our 2% to 5% fleet growth guidance remains unchanged. Net capital expenditures in the first quarter were $37 million. We anticipate a full year net CapEx range of $250 million to $300 million. Dedicated revenue per truck per week increased 7.3% in the first quarter, ahead of our expectations due to customer rate increases to offset inflationary cost pressures. For the year, we expect this metric will grow in the 4% to 6% range. One-way Truckload revenues per total mile for the first quarter increased 20.8% above our first half guidance due to a strong freight market and customer support to keep up with inflation. For the second quarter, we expect our One-way Truckload revenues per total model to increase in the range of 14% to 17% over the same period last year. In April, freight demand trends in our One-Way Truckload unit were similar to March and are very good based on our historical April freight history. Our income tax rate in the first quarter was 24.1%. For the full year, we are reaffirming our effective tax rate of 24.5% to 25.5%, and we expect the average age of our truck and trailer fleet at year-end to be 2.2 and 4.8 years, respectively. Truckload freight has moderated from extremely high levels to very good levels in the past several weeks within our One-Way Truckload fleet while dedicated customer demand remains strong. We expect the supply side to remain tight due to a competitive driver market and ongoing OEM challenges for the production of new trucks and trailers. Retail inventory levels began to increase in recent months. However, inventory to sales ratios remain at historically low levels. There is a significant amount of retail inventory in transit on ships or stuck in warehouses due to ongoing supply chain bottlenecks. In addition, we expect the last five weeks of COVID-related shutdowns at the largest shipping port in the world is about to begin to impact freight with a potential big splash whenever that faucet gets turned back on. In recent weeks, there are growing concerns about the direction of the economy and the freight market. And while freight demand has begun to moderate from high levels, our freight demand remains strong and dedicated in this very good in one-way truckload. Industry capacity continues to be limited by ongoing new truck production delays in a very competitive driver market. We are very confident in our positioning with the stability of our dedicated one-way truckload freight base and our growing logistics segment. The proven resilience of our durable business model and the superior value we provide to our customers. At this time, I'd like to turn the call over to our operator to begin our Q&A.

We will now begin the question-and-answer session. Our first question comes from Brian Ossenbeck with JPMorgan.

You mentioned the impact of China and when activity resumes there. Do you think this will have a negative effect in the near term, as things may not arrive at the same pace we were previously experiencing? It seems like things might get a bit worse before they improve. What are your expectations regarding this part of the supply chain, which still appears to be experiencing a whiplash effect?

Yes, I think it's a bit of - I think the way I would think about it, Brian, is it's really part of the story of what we're already seeing in the marketplace today, meaning there's a bit of a bubble that's taken place that explains at least partly some of the slowdown in freight overall. I think though, when you look at it and you think about normal seasonality and what's about to take place as we get deeper into Q2 and the uptick in freight that's happened year in and year out, it's going to simply double down on that uptick. Especially if these ports were to clear or the restrictions were to clear and you would start to see these vessels in route. There's been a lot of conversations about things like ports clearing up and decongesting. I would argue that's much more related to the lack of inbound than it is to any kind of productivity gains that have taken place. There's been conversations about the West Coast not being as strong as it was earlier in the year, and it's hard to be as strong when you've got 500-ish vessels, depending on which data source you look at, that are anchored or offshore in China. At some point, that will move. Our best prediction would be late June arrival on the West Coast at this point. It could be extended further if the restrictions last longer. But in the event that were to take place that would coincide exactly with the ILWU labor negotiations. And we've seen time and time again that best case that translates to a slowdown in work productivity at the port, worst case an actual stoppage. So we just think that as you look out, there's a lot of disruptive material out there to think about as we try to analyze what Q2 and into Q3 could look like. And I think the takeaway is that we feel very well structured and set up as that plays out to be able to serve our customers and our shareholders alike.

Okay. Derek, maybe one follow-up on the capacity side. You mentioned driver turnover is increasing a little bit. Maybe you can elaborate on the reasons for that. And just overall sort of your cost of marginal capacity, especially in the one-way trucking side. And where do you think that is for carriers who are obviously facing higher equipment costs, higher fuel, higher maintenance, all the other things that we’ve seen? So I guess where do you think the breakeven point or the tipping point where maybe we start to see some of that capacity exit the market as most of those carriers are more tied to spot?

Yes, I think it's a great question. Yes, we did see a slight uptick in Q1. I think Omicron is a part of that and some of the pressures that's created. I think in general, there's the ongoing desire for people to continue to search out and find local and lifestyle jobs that are more conducive to the lifestyle they want to lead. We're building those jobs every day as we continue to expand dedicated. So it's not meant to be a call out of an ongoing uptick or concern. We've already actually seen progress on that front, but it certainly impacted a little bit in Q1. When you think about the overall operational cost, I would point more towards the industry as a total that I would get into specifics here. Only in that over the last couple of years, we've seen an absolute explosion of single-vehicle registrants as new entities chase the spot market opportunities, especially when it was inflated as high as it was. And what they all have in common is they overpaid for equipment. They've paid up to get drivers or to source, if they were to have more than one truck, to source the drivers for those additional trucks. They're bearing the brunt of overexposure to a spot market that has seen deflationary pressures over the last 90 days. And in many cases, they're all-in rates with fuel included, while fuel was increasing dramatically. So, I think the washout will be severe. And I think the conversation about whether there is or isn’t going to be a bloodbath. It’s hard to ignore the fact that 90% of the industry is 20 trucks or less, and there’s going to be blood in the water at that level. But that has very little to do or bearing on what we do for a living. We’re a large, well-capitalized fleet with much better cost controls. We didn’t go out and buy dramatically more expensive used equipment in a market and chase spot rates with that equipment. We stay true to who we are. We’re more dedicated today than we were the last time we spoke. We’re more contractual today than we were the last time we spoke, we’re more defensible. And so we think what happens in all of this is that in the event that the spot market continues to erode, you have a faster and deeper cleansing of that small carrier capacity than we’ve seen in prior cycles. And thus, you find a bottom quicker and a renewal of the next level of tightness that comes along this cycle. I’ve said a couple of calls in a row that I think these cycles are faster and the bounce back is quicker than they used to be with the advent of all of this new technology and information. We think this one will play out that way very aggressively. But in the meantime, our portfolio sets us up extremely well to perform with strong results in the interim.

Got it. Thanks.

The next question is from Brandon Oglenski with Barclays.

I guess following up on that, Derek, and this is maybe semantics, but you guys characterized the market as being very good now versus strong previously. I mean, both those sound great to me. So can you maybe quantify that change in language?

Well, yes, I think what gets underappreciated is that at the end of the day, our network is 60% retail within that retail network. It's predominantly discount retail. The balance of some of the largest customers that aren't discount retail or home improvement that are doing extremely well. We've recently looked out at our top 20 customers; 16 of them, I believe, are publicly traded with an average revenue growth year-over-year of 17%. They're doing very well. That population of our customers are winning in their space, and that's why we work very aggressively to develop relationships with them. So I think the strong demand we have today is actually healthy. It's hard to really articulate at least on a call like this. But there is a point by which demand can be so strong that all it really results in is disruption and inefficiencies in your network as you're continually chasing your tail to cover freight and meet service expectations, whereby strong demand, consistent strong demand in a balanced network allows you to start unlocking advantages in utilization, productivity overall, driver satisfaction. And honestly, just the way we manage the business in a more normalized market that is still strong. So, I don't deny that there are carriers out there that may be suffering from a lack of demand if they were chasing load boards and spot market, but that's not the world or the pond that we fish in. Where we're at, things still look pretty strong. And our conversations with our customers, especially as it relates to Q2 and things like back-to-school and normalized projects that, frankly, during COVID didn't exist much that are now coming back online is encouraging to us.

I appreciate that. I know you guys were highlighting the more defensive characteristics of your business. I mean, can you talk about the volatility of dedicated rates and how that contract cycle works?

Yes. So the contract cycle in our dedicated contracts ranges traditionally from 3 to 5 years with annual rate adjustments or rate mechanisms in place. Those customers, above all else, value service and really place a premium on the need to have a mature provider with complex modeling capabilities and an absolute conviction around on-time service. So with that batch of customers, as you work with them and talk to them, rate per mile or revenue per truck per week might be increasing, but we might also be becoming more efficient with that fleet. And we often do year-over-year, quarter-over-quarter, which mitigates the actual cost impact of them but allows us on a per basis to improve our results. We're going to continue down that path. We're going to continue to get deeper and deeper embedded with these customers. We think it's in their best interest. So we actually believe and we can show metrics that support their financial self-interest in doing so. But at the same time, it allows us to become more efficient with more reps. That’s why we commented earlier on four of the five top customers in Dedicated have been in the top five for 10 straight years because that’s how integrated we are in their networks.

The next question is from Bascome Majors with Susquehanna.

As we think about where this is going, some of your competitors have been willing to talk about what the downside looks like in a deep recession or at least deep freight recession scenario. Can you talk about your modeling maybe above and beyond just the margin ranges that you've given us historically?

Yes, that's a great question, Bascome. We've created a five-year outlook and set some ambitious growth targets, taking into account both down and up market scenarios. We anticipate a certain level of slowdown moving forward, all things being equal. Despite this modeling, we have increased our margin guidance. When we raised our margin guidance for TTS, we considered where we stand in the cycle and our expectations for the midpoint going forward. Over the last 12 months, we've averaged a 16.4% margin, which is at the high end of our new range, while the low end is 12%. We do not foresee hitting that low point, even considering the various scenarios we've analyzed during the downturn. Although I’m not adjusting the overall range at this time, we feel quite confident that we can steer clear of the worst-case scenario, which would imply a decline of about 25%. We believe that scenario is unlikely due to the more defensive nature of our portfolio today, which is significantly more resilient than in past cycles. This applies not only to Dedicated but also to one-way truckload, where over one-third of our network is now under long-term agreements that we've spent a lot of time establishing. We believe these agreements are fair and beneficial for both parties and provide us with a level of protection as we move ahead.

Derek, could you clarify the 25%-ish decline you just referenced? Were you talking to earnings there or something else?

Yes, I can jump in. That was based on our last 12 months TTS margin running at 16.4%. So if you took it all the way down to the 12% level, which we don't think it will go that low, that would be a 27% decline in TTS margin from the current level. We think we'll do better than 12% going forward. So that's the estimate of roughly a 25% reduction.

Could you share insights on your largest customers considering in-sourcing some of their supply chain? Can you discuss how you’re navigating this contracting period and the potential risks to your share of that market moving forward?

Yes. We are actively engaged in discussions with our customers, particularly our largest ones, and it is a collaborative process. There are situations where it makes more sense for them to bring certain aspects of their network in-house, while in other cases, we are better positioned to help them. These discussions are not stressful for us at all. In fact, one of the positive outcomes of this collaboration is that customers gain a better understanding of issues like OEM disruptions and labor market challenges when they experience them firsthand. They appreciate these factors even more when they see the impact directly. The efforts we are making continue to make sense for them in some applications, particularly with customers we already have significant exposure to. They have strong growth targets, as do we, but we aim to be strategic in how we grow, balancing that with where it may be more advantageous for them to expand.

The next question is from Scott Group with Wolfe Research.

Derek, are you noticing any impact on contractual negotiations and the moderation in spot rates? Also, while I know you have provided guidance for rate per mile in the second quarter, could you share any expectations for the second half of the year?

Yes. Sure, Scott. So first, I'll level set by telling you, we've accomplished about 45% of our rate negotiations in Q1. There's roughly 25% of those that are ongoing in Q2, some of which are in the final stages. At this point, no, we have not, would be the short answer, seen really any inflection at all relative to what happens in the spot versus our contractual conversations. I mean 90% of the spot data and the data that people really have their eyes toward is kind of load boards and that type of freight, that live load, live unload you call we haul kind of freight. That's not indicative of the kind of freight that even we haul within that 10% spot that we do participate in. So it really is a market within a market. I don't think it's surprising personally that you've seen the kind of decline in that market. If you have 180,000-plus or whatever the number is of new registrants, all generally speaking, with 1 or 2 trucks chasing an elevated spot market and arriving at the party at the very time that things start to return to more normalized levels, you're going to end up in a situation where both things happen. Shippers have aggressively moved freight out of the spot market into contractual markets with carriers like Werner, so the spot population of freight has decreased right at the time all these new arrivals showed up. So that's a risky game to play, and that's why we don't participate heavily in that market and specific to the load bard market, we don't participate at all. So can it enter the conversation later in the year? Perhaps. We know that in general it doesn't at the type of freight we haul for anywhere from 3 to 6 months, and then it takes another 3 to 6 months to see some level of impact. By the time you get there in our estimation, you will have already seen pretty significant washout from these carriers that have got themselves overexposed on the cost side and overexposed in spot. And so we think the bounce back could happen much more quickly. And after these two years of extreme volatility, the last thought I'll leave you with is shippers have, I'd say, more than past cycles really looked for stability, and they need to count on some anchored stores, so to speak, within their network that they know will deliver as expected. We'll be there every day, and we'll invest back in the fleet. And they might push the envelope around other edges, but we’re not seeing that in the types of dialogues we’re having at this point.

Okay. And then just a follow-up. Any sort of directional thoughts on margin progression out to that 83.6% in trucking in Q1? And if you’re not willing to go on margins, just totally separate? Any update on power only?

Yes. I'll begin with the easier question. Power-only is a significant highlight for our network at the moment, and we are enthusiastic about its future. We saw a 76% increase in power-only revenue this quarter, and I believe that growth will continue as we move forward. We are gaining momentum and adding features to the program to enhance its appeal within the power-only community at Werner. We are treating our carriers well, which is leading to more repeat business in this area. I genuinely believe that there is a great opportunity for growth in this market as carriers are starting to realize that the load board market with its inflated rates may not be sustainable. They can find stability within a network like ours. Customers appreciate large trailer fleets and are not keen on reverting to the outdated mixed fleets of the past. We are very optimistic about power-only. Regarding the transition from Q1 to Q2, we won’t provide specific estimates, but we typically see progress during this period, and I expect this year to be no different as we continue to implement our strategy.

And one thing I’d add to that, Scott, as we look at first quarter to second quarter, and clearly, we had an abnormally strong first quarter freight environment. It was nearly as good as fourth quarter was, and we do have a moderating spot market. We had a mild winter in first quarter and accelerating inflation. So the progression from first quarter to second quarter may not be as much as normal, but we do think that there will be improvement. The wildcard is what happens with the strength of beverage and produce and the timing of the China rebound.

The next question is from Allison Poliniak with Wells Fargo.

Just want to ask about dedicated. You mentioned longer duration of contracts. Is there any color you can give us as to where average duration of those contracts stands today in dedicated versus prior peak? And then I guess more importantly, as you're renewing contracts today has the duration of those contracts changed at all? Any color there?

Yes. I mean I would say, in general terms, they've always been longer-term agreements, and it's something that we've always aspired for because of the complexity of implementing a true dedicated fleet. I point you to the reality that we've always worked diligently to avoid designated fleets or fleets that were really just looking for safe haven from a spot market, but instead chased fleets that were very complex, high service requirements and with a growing winning customer. Around the edges, they're a little longer today than they would have been five years ago because we tend to realize that with this complexity and the relationship building that's required, we'd like to be in it for longer and to fulfill the full opportunity for both the customer and for us. So with greater than 95% retention, most of these linger well beyond the first contract and enter into many, many contracts thereafter. And so it's something we're proud of. But slightly longer than previous cycles, perhaps, but I wouldn't say that that's a huge movement to point.

Got it. And then the 5% reduction in miles per truck, I think, John, you had mentioned ECM as a headwind there. Any way to quantify what that headwind was? Or just trying to understand what's transitory and what sort of an underlying continuation to Q2?

Yes. So as it relates to the 5%, which is TTS in total, which is the 8,200 trucks, ECM is around $500. So it has less than a percentage point out of that 5% would be due to ECM. We have a shorter length of haul as we grow our dedicated mix and Dedicated gets bigger. That reduces miles per truck. We have a more challenging team driver environment this year than last and a little bit higher turnover. So all those factors contribute to it. But as you can tell on the rate side, we achieved, outside of the guidance range, north of 20%. So where miles are running a little bit lower due to the nature of the freight and the nature of the business, rates are trending a little bit higher than we anticipated.

The other thing I'd add to that is that as you think about and you look at Q4 across all of the large public carriers, they've averaged about a double-digit decline in miles per truck year-over-year. I think that gets overlooked a lot when we think about capacity. We tend to focus on truck builds or truck counts and overlook the reality that on a per truck basis, or simply the focus on more driver time at home means less miles. The focus on shorter length of haul as customers want product closer, I should say, shippers want products closer to the consumer means lower miles per truck. As COVID abated and people return to the roadways, it has negative implications for production. And so all of that is really a net positive as it relates to capacity availability overall. And I think that trend is more of a systemic kind of underpinning in terms of the fact that there is a different marketplace year-over-year as we let the all gets shorter, lifestyle gets more important and congestion increases. And with the infrastructure bill finally happening and at some point, actual work and shovels hitting the ground, I think you'll see additional headwinds there that will be at another headwind against capacity growth.

The next question is from Tom Wadewitz with UBS.

I wanted to see if you could talk a little bit about the progression on a monthly basis in the pre-book number that you talked about, John, that's a helpful kind of read, I guess, on what you're seeing in the market, prebooks in one way. And then also, I don't know if you have a full year comment on gain on sale, just ballpark what we might think of for modeling.

I’ll cover the prebook, and John, feel free to discuss the gain on sale. The prebook situation is noteworthy because I want to remind everyone that January was significantly affected by Omicron. This meant trucks were offline, resulting in an inflated prebook number that reached record levels throughout the month, marking the highest in our history. In February, we saw some moderation in prebooks, largely due to trucks returning to service and drivers getting back to work. The market in February was exceptionally strong. As March progressed, there was a bit more moderation in prebooks, but they remained consistently oversold throughout the month. Yes, there’s moderation, but it’s all relative. Starting from the disruptive conditions in January, which were highly oversold due to Omicron, to where we ended up in March, which was also oversold but more balanced with improved fluidity in our network. If March could serve as a model for the next nine months, it would indicate a very promising period, as that's when the network typically performs at its best.

Do you have a comment on April, Derek?

Yes. So far, April has been quite similar to March. We'll see how May unfolds. As I mentioned earlier, we believe there is a good chance that June will return to the levels we saw before the COVID pandemic. Historically, June was an opportunity for a significant end-of-quarter push with strong booking levels, which have been somewhat subdued over the past two years due to consistent strength throughout each month. I anticipate we will see more of that this year. Additionally, back-to-school activities and some initiatives that haven't been as actively engaged in over the past couple of years will contribute positively in June.

And to answer your question on gains, Tom, we've had difficulty getting all the new equipment, trucks and trailers that we want. And so we've reduced how many trucks and trailers we sell in the current market, but the used truck pricing market and trailer pricing market have been extremely strong in the first quarter. So far, that trend is pretty much continuing here in the second quarter. As you know, we stopped giving guidance on gain on sales last quarter because of the difficulty in predicting changes in the market and the peaks and valleys of pricing. So we haven't given guidance this quarter. The current market trends are similar right now to what we saw, but predicting out for the rest of the year is really, really difficult. I don't want to put a number out for the rest of the year. But one thing that sometimes gets overlooked when you think about gains on sales of equipment is number one, the reason we have it is because we have conservative depreciation policies. And at the same time that the average age of the fleet is increasing a little bit because we're getting fewer new trucks than we would like that raises costs in other areas. Our maintenance costs were up 24% year-over-year. It impacts our production with a little bit older fleet. Driver satisfaction is not as high when the fleet is a little bit older, and turnover is a little bit higher. So when gains begin to moderate as the new truck production builds and we're able to bring our average age down back to 2 years from the 2.3 years it is currently. That will reduce our gains, but it will put us in a better position to produce in other areas on the cost side as our operations run more smoothly.

So do you think 2Q may be similar to 1Q and then second half, it falls off a bit? Is that...

Based on our current understanding, it may change in the next month or two. However, from what we've observed so far in April, the trend has been similar to that of the first quarter.

I believe it is still too early to predict a decline later in the year. We will continue to monitor the situation. However, unless the OEMs can enhance the fluidity of their networks and introduce a larger number of new trucks, I do not foresee any significant changes in the gains numbers or the used truck market on the horizon.

Even with lighter spot rates, you still think a used truck is strong in the second half?

Well, I started by saying I'm not predicting second half. I'm just giving things that I think factor into what ultimately drives the used market south, which is an influx of large scale of new equipment, which is not happening. Clearly, as carriers come under duress, and I'm talking about the smaller carriers that have overpaid for used equipment, you could see some of those carriers wash out. But in many cases, they started their career in trucking as independent truckers with a truck that had 500,000 miles on it and have ran that truck now for a year or two. And so those trucks are really getting close to the end of their useful life. So we will have to see how it plays out. I think it's a new territory for all of us. We are cautious as it relates to the back half, but I think it's too early to predict the demise of the used truck market.

The next question is from Ken Hoexter with Bank of America.

John and Derek. Just trying to reconcile a little bit of what you threw out here. So the market, Derek, you mentioned is placing a bloodbath of some of the smaller capacity, the speed that you kind of mentioned you're seeing it get cleaned out or potentially gets cleaned out. Your customers focused on quality access to capacity. So are we already seeing that the ability to see tractors get easier? What drivers you mentioned, driver pay is up or 15%, which is down sequentially? So are we seeing that washout already occur? Or are we on the cusp of that? Maybe just talk about the timing of that?

Yes. I think it's probably too early to say the washout is already happening, but I think the pain is very much present. We have seen an uptick in experienced driver applications and a pretty consistent one over the last, call it, month to six weeks. I think you're going to see more of that as we go forward. We've seen an uptick in interest in power-only and folks that maybe previously didn't want to do that. They'd rather try to chase freight on load boards that now are looking and desiring that could become part of a more stable network. So we're seeing the early inning signs of some of that from those smaller carriers as well as an uptick from customers, as I mentioned previously, looking for stability now more than ever and the ability for them, especially in retail with quality brands, the ability to predict in-stock levels going into the fall. That's something that's going to become increasingly important. And carriers like Werner can kind of uniquely provide that stability for them.

John, you mentioned the 0.5x leverage. It seems like you might be holding onto capital for uncertain times, or are you more focused on increasing the buyback? I’d like to hear your thoughts on the financial aspect.

Yes. We purchased shares for the last three quarters, around 1 million shares a quarter. And those purchases occurred at higher prices than what we're trading at today. So we will continue to look at opportunities for share repurchase going forward. We re-upped our bank credit agreements with our two major banks to $800 million from $600 million, just to give us more flexibility in case the OEMs start to step up their production of trucks in case their stock repurchase opportunities that we like, and we continue to look at opportunities for truckload acquisitions, logistics acquisitions that are both accretive and additive to our business. So all those are on the table.

Does an acquisition become more likely considering the discussions around some of the smaller carriers? Is more activity coming your way? Can you elaborate on that flow?

I'd say frequency of opportunities is clearly increasing, but I don't know that I'd go to say that that alone causes the likelihood to increase. We're going to stick to our knitting on I want things that are additive and accretive. I want our portfolio to be enhanced by it. We're looking for strong track records and companies that do things very well. If you look at our sticking with the theory around the draft that just took place. If you look at our two acquisitions last year, we're very excited about both of them. In both cases, we've retained customers, we've retained the associates and we've retained the drivers and not only retained but actually have started to grow both those businesses. And we've got kind of a pattern of how we think about these things. It doesn't mean they'll all be that small, by the way. But it does mean they're always going to have an eye toward those sort of core principles. Culture has got to fit. They've got to be safety focused. It's got to make us better. And we have to believe that we have the ability to take something and grow it from where it's at today, not kind of buy and dissolve like we've seen within this industry for some time. So as those opportunities present themselves, and we see the right one, we'll move. And that's no different answer from Werner, but it's one that we have confidence in and that confidence has only grown over the last year with the success of the two acquisitions that we've done thus far.

Derek, do you view the dedicated market as consolidated or fragmented? I'm asking because markets like intermodal and LTL benefit from consolidation in their valuations. The dedicated market is a small segment of truckload and is quite different from the spot market, but it doesn't get treated in the same way. I would like to hear your thoughts on this.

The dedicated market is significantly more consolidated than the overall truckload sector. When examining the dedicated space, there are definitional variations among different fleets that we need to keep in mind. However, they all share a commonality in that you can count the number of high-quality players in this area on one hand. These companies are capable of operating in a manner similar to a private fleet for customers, enhancing their supply chains and adding value through consistent, timely delivery. The number of providers that can deliver this level of service is limited. Size plays a crucial role in the dedicated market, as it impacts the ability to scale operations, invest, and manage start-up costs within long-term contracts. These factors restrict the number of competitors, making the market more consolidated. This is also true for a large portion of our one-way network, particularly in Mexico, where there are only a few strong providers operating. While there are other companies in the space, they represent a smaller segment of the truckload market. We consider ourselves leaders in this area and plan to continue to focus on it. Similar to the specialized fleets we've developed in our one-way network, others may handle the transport from point A to B, but few can design, engineer, and implement the advanced solutions we provide. This is part of the strength and sustainability of our portfolio, which gives us confidence in being less influenced by market cycles than historical patterns have shown. We hope the market will eventually recognize and reward our efforts accordingly.

So maybe just a follow-up to that. I mean, Derek, you’ve talked in the past about trying to work with customers that look at their supply chain as an asset. If you had to look across your business, how high would you say your exposure is to that sort of customer? And has that changed significantly from last cycle to this cycle? And does that give you sort of more confidence in your longer-term growth assumptions?

Yes, I'll start with the straightforward part. It's at an all-time high. I can confidently say that it has never represented a larger share of our overall business than it does today. However, there are varying degrees to consider. Some of our customers are highly focused on using their supply chain as a competitive advantage, and that group likely makes up more than a third of our business, possibly closer to half. Other customers also view supply chain as a competitive advantage, but they may not be as advanced in their development as the top-tier shippers. Overall, that could bring the total to around 70% to 80%. Essentially, this is our core business. We purposefully align ourselves with shippers after extensive research to determine our commitment to growing and enhancing our collaboration with them, and their success is a significant factor in that decision.

The next question is from Jon Chappell with Evercore ISI.

Derek, you mentioned earlier in one of your answers about as it related to capacity, the miles per tractor declining across the industry and getting worse in this post-COVID phase. If we look back at your numbers, we're in a multi-year trend here of declines. Does that continue to edge down? Is there a plateau at some point or given some of those bigger secular issues in the sector? Is it kind of a gradual annual decline for both in one-way and dedicated?

Yes. I can't predict at this point that I wouldn't want people to model or assume that it just sort of declines forever. But I think there are certain headwinds out there that are just real. They play to our strengths, by the way. But the reality that more forward-deployed inventory is only going to continue to grow is going to continue as we look forward. The reality that we have to continue to build more and more lifestyle jobs, which means more time at home, which means more time that, that truck may not be as productive as it used to be in the past is going to be a continued pressure. The fact that we are engaging more and more in dedicated where often the miles per truck are simply dramatically lower because the activity that that truck does for that customer goes well beyond just delivering long-haul truckload commoditized freight. Our drivers in many of those fleets are engaged well beyond the truck. And they understand that when they sign up for that job, and it's a trade-off forthmaking because of the lifestyle enhancements and time at home that comes with it. So I think you'll see it moderate. You can only go so short on length of haul; at some point, there's diminishing returns. And so I think you'll see that decline moderate. But our model and how we think about profitability is not built on utilization alone. There was a time where if you were a truckload player, utilization was the only metric or at least it was at the very top of the pecking order. And that we think about the world more relative to how much revenue per truck per day, which leads to revenue per truck per week, which ultimately leads to our ability to be profitable. And so we're not going to let that one metric to define what customers we bring on, who we grow with because it's only one of the dials on the dashboard.

That’s really helpful. And then just a quick follow-up, not to bring up old stuff. But in the third quarter, you highlighted a bunch of issues you’ve had with parts, maintenance, et cetera. I think the update in February was there been some improvements there, but not quite where you want to be. How do you stand with some of those carry-forwards from the late part of last year? Do you feel like you’re in the right place as it relates to parts equipment, maintenance availability? Or is there still some work to do?

Yes. I mean, there are still parts shortages issues in the supply chain that are challenging. We've definitely made progress internally on how we acquire and make available those parts to minimize the downtime. So we've made good progress there, but there's still challenges on some of the driver cost issues that were a challenge in the third quarter for hiring incentives and minimum pay and layover; we've made significant progress from third to fourth and now in the first quarter. So we're in a much better place there as it relates to those cost items.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Derek Leathers for any closing remarks.

Well, thank you. I just want to thank everybody again for spending time with us this afternoon. We appreciate your interest in the Werner story, and we're proud of the record results in the quarter. But I'm more excited about the strategic positioning of our portfolio as we get deeper into the cycle. The portfolio continues to improve in service, safety and capabilities while achieving improved financial results. We've improved our weighting of dedicated and logistics sequentially and are further prepared for a variety of economic conditions that may materialize in the coming quarters. And as we move into 2022 and beyond, we are focused on building upon the great brand we have today and growing both our top and bottom-line results for all of our stakeholders. And I feel that Q1 is a great kickoff to a way to kick the year off. While we may never change the outsized perception of this being a cyclical industry, here at Werner, we have built an incredibly durable portfolio that I'm proud of. The combination of COVID shutdowns across China, high cost structures of many of the new entrants into the marketplace and the pending ILWU contract negotiations lead me to have further conviction that supply chains will face ongoing disruptions as the year progresses, and we will be ready and able to provide needed support to our customers and attractive returns to our shareholders as that story plays out. And lastly, as always, I just want to thank all of the Werner associates for their ongoing achievements once again during these ever-changing times.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.