Werner Enterprises Inc Q4 FY2022 Earnings Call

Good afternoon, and welcome to the Werner Enterprises Fourth Quarter and Annual 2022 Earnings Conference Call. All participants will be in listen-only mode. The speakers for today will be Derek Leathers, Chairman, President and CEO; John Steele, CFO; and Chris Neil, Senior Vice President of Pricing and Strategic Planning. Please note, this event is being recorded. I would now like to turn the call over to Chris Neil. Please go ahead.

Earlier today, we issued our earnings release with our fourth quarter and annual results. The release and a supplemental presentation are available on the Investors section of our website at werner.com. Today's webcast is being recorded and will be available for replay later this evening. Please see 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. The company reports results using non-GAAP measures, which we believe 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 would like to turn the conference over to Derek.

Thank you, Chris, and good afternoon. 2022 was another successful year at Werner. Revenues excluding fuel grew by double-digit percentages in both TTS and logistics, and we also set a new record for adjusted earnings per share. My sincere thanks go out to the talented Werner team who remain resolutely committed to our values by providing superior safety and service to our customers. As we look back on the fourth quarter, freight in our large Dedicated fleet was steady and performed well. One-Way Truckload and logistics were challenged by a seasonally weaker-than-normal freight market in contrast to the very strong conditions a year ago. We expect that the 2023 freight market will be challenging in the first half and then gradually begin to show improvement in the second half as capacity exits the market and retail inventory resets to normalized levels. Over the last several years, we intentionally built a powerful business model that performs well in both strong and challenging freight markets. Our large and durable Dedicated fleet, our diversified One-Way Truckload fleet, and our growing Logistics segment provide us with a resilient portfolio of complementary services and industry verticals. This business model, coupled with our seasoned leadership team, who averages 26 years of Werner experience, gives us confidence in our ability to weather any economic environment and positions Werner for success. Now let's move to Slide 3. Werner is one of the nation's five largest truckload carriers, safely delivering over 3 million miles each business day with an experienced and increasingly diverse workforce of professional drivers. During 2022, we are proud to achieve the lowest DOT preventable accident rate per million miles in the last 10 years, a testament to our continued focus on improving safety and service across our fleet. During the quarter, our strong balance sheet provided the flexibility to add two stellar companies to the Werner family, Premier truckload carrier Baylor Trucking and the elite freight brokerage and dedicated carrier ReedTMS. Werner is a growing logistics provider with an annual revenue run rate exceeding $1 billion with a large and growing base of over 70,000 qualified carriers in a pool of 30,000 trailers. This large trailer pool in our growing domestic and cross-border Mexico power-only capabilities provide Werner customers with additional solutions and flexibility to effectively manage their supply chain in rapidly changing market conditions. Let's move to Slide 4 for a summary of our fourth quarter and full year financial highlights. In the fourth quarter, revenues increased 13% to $861 million. Adjusted EPS decreased 13% to $0.99. Adjusted TTS operating margin for the quarter was 15.8%. For the year, revenues increased 20% to $3.3 billion. Adjusted EPS rose 7% to a record $3.70. Adjusted TTS operating margin for the year was 15.1%. Dedicated freight demand in the fourth quarter was solid and steady. The normal seasonal freight spike for certain Dedicated retail customers didn't occur this year given the increasingly challenging macro environment and relatively muted consumer spending. Fourth quarter freight was seasonally soft in One-Way Truckload and Logistics with fewer project surge and peak opportunities compared to the record high levels a year ago. On October 1, we acquired Baylor, a high-performing truckload carrier based in Mylan, Indiana, with 200 trucks. Baylor is a 75-year-old company with outstanding leadership, elite drivers and impeccable customer service. The first week of November, we acquired ReedTMS Logistics, a rapidly growing Tampa-based trade broker and dedicated carrier with a skilled and knowledgeable leadership team. ReedTMS has a 26-year history of developing and expanding long-term customer relationships, supported by a large and growing carrier network with two-thirds of their revenue coming from the stable food and beverage verticals, including a heavy focus on temperature-controlled freight. We are very pleased to retain the strong management teams and talented associates of Baylor and ReedTMS. Both companies maintain a culture similar to ours, with an intense focus on superior safety and service. Our implementation team is rapidly integrating these businesses with ours to capitalize on the synergies and mutual learnings between our companies. Together, our durable dedicated fleet, which includes 63% of TTS trucks and our growing logistics business account for 69% of fourth quarter revenues and is expected to exceed 70% in 2023. Next on Slide 6, I would like to discuss Werner Drive. Last August, we introduced Drive, which is the next evolution of our business strategy that delivers our future. Drive incorporates sustainability, capital allocation and an outcome-oriented approach to operations, innovation, and a culture that supports and values our team members. Our intentionally designed durable portfolio of asset and asset life solutions serves a diversified client base of industry-leading customers with an emphasis on the transport of necessity-based goods. We remain relentlessly focused on our results with the company culture immersed in safety and service. Since 2019, we have received 27 unique customer Carrier of the Year awards. Werner has committed to innovation through our investment in technology and our Werner EDGE cloud-based platform, which is improving the experience of our customers, drivers, non-drivers, carriers, and suppliers. Our core values of safety, service, and integrity are based on an unwavering commitment to inclusion, community, innovation, and leadership. We embrace ESG and specifically our impact on the environment due to continuous exploration and development of alternative fuels and equipment, executing on our aggressive carbon reduction plan, and expanding partnerships through Werner Blue, our company-wide sustainability initiative. Next on Slide 7 is our revenue snapshot. For the year, revenues were $3.3 billion, with 74% in TTS and 24% in Logistics. Baylor and ReedTMS added $71 million of revenues to the fourth quarter and the year. Including these acquisitions, we forecast Logistics revenues in 2023 will grow to over 30% of the total. Three-quarters of our revenue base this past year came from retail and food and beverage with customers winning in their verticals. We intentionally focus on growing companies that ship recurring and repeatable consumer essential products who have rigorous on-time delivery requirements. We ended the quarter with 8,600 trucks, up 3% for the year or 260. In the fourth quarter, we held our TTS fleet size flat to adapt to the changing freight market. We intend to limit TTS fleet growth until we see signs of freight improvement, which we expect in the second half of the year. Turning to Slide 8 and the consolidated fourth quarter results. Revenues grew 13% due to 5% growth in average trucks, 1% higher revenues per truck, a $41 million increase in fuel surcharges, and logistics revenues growth of $29 million, which includes eight weeks of the acquired ReedTMS business. A seasonally soft freight market in the fourth quarter compared to a seasonally strong market a year ago was a significant headwind. Despite this freight challenge, strong dedicated performance limited the adjusted operating income decline to 11%. At this time, I would like to turn the presentation over to John, who will discuss our segment results.

Thank you, Derek. On Slide 9 are the fourth quarter TTS results. TTS revenues increased 13% and adjusted operating income decreased 8%. Sequentially, TTS adjusted operating income increased 9% quarter-over-quarter. TTS adjusted operating margin declined 240 basis points year-over-year compared to last year's record fourth quarter operating margin. Our adjusted operating expenses per mile net of fuel increased 6.6% compared to our TTS rate per mile net of fuel of 3.5%. The largest per mile operating expense increases were supplies and maintenance at 18% and insurance and claims at 53%, while driver pay increased 4%. During the fourth quarter, we incurred $11 million higher insurance and claims expenses or an unusual charge of $0.13 a share and $8.5 million lower workers' compensation in salaries, wages, and benefits expense or an unusual benefit of $0.10 a share. For insurance and claims, a limited number of prior year incidents have developed beyond what we had expected. For workers' compensation, prior year claims are developing lower than what we previously experienced. Over the longer term, we expect our accident per million miles performance will improve our insurance and claims experience. While we can't ignore the increasing trend of nuclear verdicts and settlements, we expect our 2023 insurance and claims expense to moderate from 2022. In the fourth quarter, we sold more tractors and trailers at a lower average gain per unit. Gains on sales of revenue equipment were $22.5 million, and we had a gain on sale of property of $3.4 million. As we expect small carriers to exit in greater numbers in 2023, we anticipate the used truck and trailer market will weaken. We expect our gains on sales of equipment in 2023 will moderate from record highs in 2022. For 2023, we expect annual equipment gains in the range of $30 million to $50 million. In an effort to partially offset the headwind of lower equipment gains in a more challenging freight market, we are implementing company-wide measures to reduce controllable expenses. Now let's move to fourth quarter TTS fleet metrics for Dedicated and One-Way Truckload on Slide 10. Dedicated revenues net of fuel increased 9%. Average trucks increased 4%. Revenue per truck increased 5%. One-way Truckload revenues net of fuel increased 2% as average trucks increased 7% from the Baylor acquisition. Miles per truck declined 5% and rate per mile increased slightly despite far fewer peak and transactional pricing opportunities. We expect One-way Truckload miles per truck will flatten out on a year-over-year basis in 2023, and we expect a gradually improving pricing environment during the second half. Moving to Werner Logistics on Slide 11. In the fourth quarter, Logistics revenues grew 15% due to eight weeks of ReedTMS, offset by fewer peak and transactional freight opportunities. Truckload Logistics revenues, including ReedTMS, increased 20%, driven by a 34% increase in shipments, partially offset by an 11% decrease in revenues per shipment caused by fewer premium pricing opportunities. Despite the challenging freight market, Logistics shipments, excluding ReedTMS, were flat year-over-year and down 5% sequentially. Contract shipments increased 89% year-over-year and 62% sequentially with the addition of ReedTMS. Transactional shipments were up 2%. Contractual mix versus transactional was 55% in the fourth quarter. Intermodal revenues declined 23%, supported by a 3% increase in revenues per shipment, offset by a 25% decline in shipments. And Final Mile revenues increased $14 million. In total, Logistics achieved adjusted operating income of $8 million with a 3.8% adjusted operating margin, down $3.9 million year-over-year and an improvement from the third quarter of $2.4 million or an 80 basis point sequential increase. Next, on Slide 12, let me spend a moment on our innovation. Our IT team accomplished a great deal this past year as we continue to adapt to a dynamic supply chain through our enterprise-wide technology transformation. A few of the notable achievements include: we completed the first phase of our Cloud-First, Cloud-Now implementation of mastery in December with the conversion of our Werner Truckload Logistics brokerage business to our EDGE TMS platform. We successfully expanded the deployment of Workday across human capital management and accounting applications. We strengthened our data and system security with Zero Trust security practices. And we continue to invest in and pilot new technologies to reduce our carbon footprint, including hydrogen fuel cells and EVs. We continue to live and build on our values in 2022. I'm on Slide 13. As evidence of our commitment to safety, in 2022, we achieved the lowest DOT preventable accident rate per million miles in the last 10 years and the lowest work injury rate in the last 17 years. Over the last two years, we significantly strengthened and diversified the leadership of our Board as we carefully selected five new board members with unique backgrounds and skill sets. This has resulted in a more diverse board that bolsters our expertise in transportation and logistics, finance, and sustainability, leading to a wider variety of perspectives. On Slide 14, we continue to make progress and receive recognition on our ESG journey. In 2022, we were recognized as the top Company for Women to work for by Women and Trucking, a top food chain provider by Food Chain Digest, and a top green fleet by heavy-duty trucking. We are focused on creating a safe and inclusive culture for our associates while operating efficiently to reduce our impact on the environment. On Slide 15, we ended the year at a strong financial position with net debt of $587 million and equity of over $1.4 billion. Approximately one-third of our debt is fixed rate and two-thirds is variable rate. In December, we finalized a new $1.075 billion five-year unsecured syndicated credit facility with six banks to expand our credit capacity and extend most of our debt maturities out to 2027. Following the acquisitions of Baylor and ReedTMS, our net debt-to-EBITDA ended the year at 1, within our long-term range goal of 0.5 to 1. On Slide 16 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 significant free cash flow generation. In 2022, we had net CapEx of $318 million and generated free cash flow of $131 million. Turning to Slide 17 and our capital allocation framework. Our first capital priority continues to be reinvesting in our fleet. We are investing in the latest fleet and equipment technology, and we are growing and modernizing our terminal and driver school network. In 2023, we expect to slightly lower the average age of our truck fleet. Turning to acquisitions. We will remain disciplined in our approach by evaluating candidates against our strategic filters. In 2023, our focus is the integration, synergy implementation, and cross-selling opportunities for our recent acquisitions. We will also continue to enhance shareholder value through dividends and share repurchases while maintaining a strong and flexible financial position. That concludes my remarks. I will now turn it back over to Derek.

Thank you, John. Moving to Slide 18. Here, you see that over the last 18 months, we executed on four additive and accretive acquisitions, ECM, Nets, Baylor, and ReedTMS. All four strengthened the durability of the Werner portfolio and expanded our capabilities. Our growing and diverse business provides additional solutions for the increasingly complex needs of our customers. Today, we have been successfully integrating these companies into the Werner portfolio, and our synergy implementation process is running ahead of schedule. Next on Slide 19 is a review of our performance compared to our 2022 guidance as well as the introduction of our 2023 guidance metrics. For the year, our truck fleet increased 3%, primarily in Dedicated. For 2023, we plan to keep the fleet flattish in the first half with plans in the second half to grow primarily in Dedicated in the range of 1% to 4%. In 2023, we are planning net CapEx of $350 million to $400 million. For revenue equipment, most of this CapEx is to refresh our existing fleet with a small share to fund fleet growth in the second half. Dedicated revenue per truck increased 5% in the fourth quarter as we had far fewer projects and surge opportunities this year compared to last. For the year, Dedicated revenue per truck increased 7.6%. Noting the freight market outlook and tougher comparisons, in 2023, we expect Dedicated revenue per truck to increase in a range of 0% to 3%. One-way Truckload revenues per total mile for the fourth quarter increased slightly, just above our guidance range. In the first half of 2023 in a challenging freight market with more difficult comparisons, we expect one-way rates to decline year-over-year in the range of 3% to 6%. Our full year income tax rate was 24.4%. In 2023, we expect our tax rate to be in the range of 24% to 25%. The average age of our truck and trailer fleet in the fourth quarter was 2.3 and 5.0, respectively. For 2023, with increased capital expenditures, we expect to slightly lower the age of our truck fleet. One-way Truckload freight demand in January was softer than the strong freight market a year ago. Next, let's move to Slide 20 and discuss our view of the market this year and our modeling assumptions. Over the last several years, we carefully designed and prepared our business to outperform in a slowing economy. The last two quarters, we've adapted to the retail inventory rightsizing as consumer demand moderated and supply chain bottlenecks began to ease. Over 60% of our trucks are in our durable dedicated fleet, and one-third of that business is with large and successful discount retailers that are gaining share as consumers are becoming more value-conscious for their household spending. With the acquisition of ReedTMS, our mix of revenues increased for contractual food and beverage shipments, which complements the seasonality of our existing logistics business. For our TTS segment, spot rate is less than 5% of our revenues. Small truckload carriers are being whipsawed by 35% lower spot rates while also dealing with much higher operating costs for drivers, equipment, fuel, maintenance, and capital. As the year plays out and there's a large shortfall between spot rates and carrier operating costs, we expect carrier failures will increase. This trend has already started. FMCSA data shows that truck deactivations exceeded truck activations for every one of the last 19 weeks, with net deactivations of 53,000 trucks over this period. We expect interest expense this year will be $20 million higher than last year, due principally to the higher interest rates as well as maintaining a higher debt level. We anticipate that OEM new truck and trailer production will show modest improvements in 2023. Before opening up for Q&A, I want to give a brief update on two executive transitions. First, as of December 31, Marty Norlen stepped down as COO to assume a new role focused on fostering and developing strong relationships with some of our largest customers. Eric Downing became COO in January following his outstanding leadership of our Dedicated fleet since 2016. During the last seven years, Eric and his team grew our Dedicated fleet by 50%, while nearly doubling revenue. I want to thank Marty for his continued hard work and loyalty at Werner, and I'm excited to work alongside Eric to grow our business. Second, as you know, John Steele will be retiring as CFO and has been flexible with his end date as we continue our search for his successor. The search process is going well, and we look forward to providing an update when appropriate. With that, I'll turn the call over to our operator to begin the Q&A.

Our first question is from Chris Wetherbee with Citigroup.

Thanks, guys. Good afternoon. I guess I wanted to start maybe on some thoughts around the sort of way to think about earnings power as we go into 2023. So I think your guideline, both the gains as well as insurance potentially providing somewhat meaningful headwind to EPS. And I wanted to maybe get a sense of how you think you can offset that with core results. Obviously, the Dedicated business looks like it's more stable. One-Way Truckload is going to be more volatile. So I just want to get a sense of as you start to think about some of those headwinds that you've outlined to EPS, what you think you can do with the core business to potentially offset?

Yes, Chris, this is Derek. Thanks for the question. And good afternoon. Yes, you're right. There are some headwinds as we start and go into the year; we wanted to be clear about them, and that's why we included them in the opening remarks. When you think about the gain at the midrange, it's a $40 million type headwind at the midpoint of the range. We know interest expense is going to be more significant. At the same time, we've got the benefit of the integration that's ongoing with both Reed and Baylor. Those integrations are going well. We feel good about that. We believe that the very successful trends that have been going on within our DOT accident preventable frequency is going to lead to an opportunity to at least moderate insurance and then take some of the noise out of that line. We've also been pretty clear internally on the need for us to go out and not just look for synergies relative to the integration efforts but also around the building. And so we've launched an internal effort several months ago, actually, to prep for what we knew was coming, and we're going to continue to chip away at trying to neutralize those headwinds. It's going to be a work in progress. We also obviously have pretty clearly signaled we think it's a year that's going to be made up of two halves. And the second half has opportunity to for us to continue to improve those results. Lastly, I'll just tell you that one of the upsides, I know people don't like increased CapEx ranges. But as we've seen OEMs start to kind of be able to get through some of the bottlenecks they've been faced with, we're encouraged by early returns in terms of equipment receipts as well as the quality of that equipment and specifically the impact we think it can have on the maintenance line.

Thank you for the information. I appreciate it. For a follow-up, you've provided some insight into the company's sequential earnings potential. This fourth quarter has been unique with less project business than usual. What are your thoughts on the typical seasonality as we move into the first quarter? Should we expect the usual decline in earnings power, or could it be less pronounced due to the issues encountered in the fourth quarter?

It's difficult to pinpoint exactly. The fourth quarter was indeed subdued, primarily due to the comparison with significantly high figures from the previous years influenced by COVID and supply chain issues. We did experience some activity in the fourth quarter related to the Pecan project, but it was nowhere near what we would have anticipated in a typical year. This might lead to a slightly reduced change. However, the current market remains challenging. One-Way is performing better than I had expected based on where we were two months ago, but we shouldn't underestimate the difficulties out there. Historically, the decline from the fourth quarter to the first quarter has been about 24%. This year, our goal is to reduce that, but I still expect it to be in the 20% range or higher.

Your next question is from Jason Seidl with Cowen. Please go ahead.

Afternoon, gentlemen. I wanted to touch a little bit on your outlook. You seem to think the market is going to moderate a little bit and then gradually recover. Can you put some meat on that and talk a little bit about what your retail customers are telling you about inventories and how long they expect to work through?

Yes, thank you for the question, Jason. Retail inventories are challenging because there are still issues in the market and businesses are adjusting their inventories. However, we are very selective about our business partnerships. We've emphasized a targeted approach in seeking new business and prioritizing relationships with those who we believe will grow. More successful retailers, particularly in the discount sector, have largely moved past the worst. As we engage with these businesses, they are nearing the end of this adjustment period. While the overall network is not fully there yet, it is certainly progressing towards the later stages. We see a positive opportunity for inventory levels to stabilize. Additionally, we have confidence in the trends we observe regarding deactivations. In a recent 19-week period, we noted about 53,000 net deactivations, which is significant and continues to trend upwards. This has been a consistent trend over several weeks, and I expect it will further accelerate in the future. All of this occurs against a backdrop of a relatively subdued economic environment in our models, as we are not anticipating a sudden economic rebound. We believe the latter half of the year will allow for inventory replenishment and peak freight movements, which will benefit our portfolio in line with the nature of our business and partnerships.

Thank you. Good afternoon, everyone. Derek, I've noticed that the length of haul has decreased by nearly 30% compared to a couple of years ago, while deadheads have increased by a couple of hundred basis points. Is this change primarily due to the mix of acquisitions, or are there other factors at play? Ultimately, I'm trying to understand how this affects your rate per mile and utilization, and whether this shift is beneficial or detrimental to margins and earnings.

Yes, Scott, that's a great question. I’ll try to clarify as much as possible. I believe it’s a combination of several factors. Acquisitions certainly contribute; in most cases, the acquired companies were focused on a more regional area with shorter hauls. As we integrate these, it will reduce overall length of haul. The ongoing forward deployment of inventories and the growth of the smaller regional distribution center model will continue to influence this trend. Additionally, while it's less significant now, there are still conversion opportunities for intermodal transport where longer hauls are increasingly done by train. A relevant factor for Werner specifically is our extensive operations in Mexico. During the COVID pandemic, cross-border freight was negatively impacted due to differing government responses, leading to frequent openings and closures. This affected long-haul freight moving in the opposite direction. Looking ahead, we believe the majority of the decline in haul length is behind us, and expect it to stabilize. I'm not ready to say it will extend again, but we’ve seen positive early results in Mexico recently. The initial phases of nearshoring are evident, with net direct investment reportedly increasing by $30 billion last year, and we expect that figure to keep rising. These loads tend to have longer haul characteristics. Consequently, we anticipate a varied landscape in our network, with some expedited cross-border services from Mexico becoming increasingly longer and a continued emphasis on regional operations, as we strive to provide more home time and lifestyle jobs for drivers while maintaining high service standards.

Scott, I'll add one thing to that. Consistent with our expectation that our One-Way Truckload length of haul will begin to flatten out, we also think that our miles per truck in One-way Truckload will flatten out going forward as well.

Okay. So this has been a headwind to utilization probably a tailwind to rates, I guess. The second question, you talked about insurance and maintenance. Any way to just sort of put some numbers around how big of a tailwind that could be this year? And then what does that mean with puts and takes for the operating ratio? Do we think we stay within the long-term guidance on operating ratio?

I'll take the guidance one and then John probably waiting with some specifics. But yes, the answer is yes. We've established that guidance. I want to encourage everybody to remember that, that's annual guidance. And so we believe as we look into 2023 with all the puts and takes, we can stay within that guidance as we go forward. Insurance is moderating. We believe we're very encouraged by the most important thing, which is having less accidents and especially having less serious ones. With new trucks coming in, we think there's opportunities and parts availability, I would actually probably put in front of new trucks coming in for maintenance to be less disruptive. And I'll turn it over to John for any specifics he might want to add.

Yes. So for insurance and claims, it was a $44 million insurance and claims quarter, $11 million of that was the year-end charge as we went through the actuarial process at the end of the year. So adjusting for that, that puts it down to $33 million. While we'd like to be back at that $25 million quarter level we were in the past, that's probably unlikely with the growth in the fleet and with the environment that we operate in. But we'd like to be closer to the $30 million quarterly range depending on how our experience on severity of claims plays out. On the maintenance side, our maintenance costs were up 18%. That has been gradually coming down on a year-over-year basis as the supply chain improves. We expect that as we move throughout the year, those increases in maintenance costs will move into the single digits.

Okay. Great. Good afternoon and thank you for taking my question. So I guess, Derek, you referenced stable Dedicated demand in the fourth quarter. Would just be curious if maybe you could talk about the Dedicated pipeline more broadly as you go into 2023? And are you seeing some of your Dedicated customers looking to either push trucks back or want more trucks kind of in a one-off or onesie, twosie kind of way? Just any kind of color around that and the broader pipeline would be helpful.

Yes, Jack. Good afternoon. When we consider Dedicated, the pipeline is currently strong. However, we may see some decline in certain Dedicated fleets due to specific businesses facing challenges. Some industries are more affected by the economic situation than others, which may impact the pipeline’s results. We'll also maintain a disciplined approach, as Dedicated requires high service standards. We are aware of the costs involved and will remain firm on pricing. Our customers have been supportive so far, making it difficult to predict the fleet's direction in the next quarter or two. We anticipate flat results, acknowledging the ups and downs involved. Presently, I'm optimistic about our discussions and the fact that a third of our Dedicated business is based on indexed contracts, which means less variability in rates. This allows us to concentrate on the two-thirds that may experience more activity. Overall, I believe we are a top-tier dedicated service provider, delivering unmatched service to our customers, who are also facing pressures. This will lead to some important discussions ahead. In conclusion, I'm encouraged by the pipeline and the ongoing bidding activity in Dedicated. I'm particularly pleased that we've managed to test our model by not allowing designated fleets into our Dedicated services, preventing the significant losses we experienced in previous cycles when the dedicated framework wasn't properly established.

Okay. No, that's very helpful. I appreciate that. And then I guess maybe for a longer-term question, Derek, if I go back to, I think, last year in the fourth quarter call, you outlined a plan to grow Werner's revenue by 10% a year on a CAGR basis for the next five years. We're now a year into it. You had a good revenue year in 2022, partially driven by M&A. Could you maybe update us on that longer-term vision for the company? And do you feel like you're on schedule, ahead of schedule, as you sort of think about those longer-term plans?

Sure. At this point, we are ahead of schedule based on the timeline we've discussed over the past two years. We're optimistic about our revenue growth and we want to maintain our focus on profitability. It's important to grow while also being disciplined about margins and performance expectations. Currently, we are exceeding our planned schedule. We previously mentioned that there will be years where revenue growth might not reach the 10% mark; we have to be strategic and responsive to the market conditions. This year, expectations are positive, especially considering our recent acquisitions which have put us in a strong position to achieve that growth target. We're concentrating on cost management, synergies from integration, and enhancing our product and portfolio through these acquisitions. Our broader strategy is to create a stronger defense against economic fluctuations, and ultimately, what counts is our performance results. We have achieved many milestones, but I am eager to navigate through the current economic challenges to demonstrate the company's potential.

Good afternoon. Can you share your thoughts on acquisitions? Your leverage is at the upper end of your target, but typically in a downturn, it might be wise to explore more opportunities. You've recently made four acquisitions over the last two years. Will you be more aggressive in this market, or will you take a step back during a slowdown? Please discuss your perspective and how discussions are progressing.

Yes. There will certainly be many opportunities in the next 12 months, as numerous individuals are seeking exits, mostly driven by demographic factors. As we've mentioned in our prepared statements, our current focus is on the integration of the four acquisitions we've completed in the past 18 months, especially since early returns have been quite positive. We've learned valuable lessons from each case and improved our processes, positioning ourselves for future success. I want to see these entities functioning cohesively and ensuring our cross-selling capabilities are optimized. After participating in our annual sales meeting with all the sales teams from each organization, I believe we've made significant progress toward our future goals. However, there is still work ahead. In other words, nothing is off the table. We have the capacity within our credit facility to pursue more opportunities, and we remain open to exploring options as they arise. For now, our emphasis will be on integration, synergies, and execution.

Thanks, Derek. We've seen a lot of changes in contracts recently. Previously, contracts were typically for a year, but now retailers are discussing terms shorter than a year. What are your thoughts on how this affects pricing in the market, especially considering the mid-single-digit decline in One-Way and the slowdown in Dedicated? How does this shift impact market dynamics in this environment?

Yes, that's a great question. First, I want to emphasize that the guidance we provided for One-Way is intended for the first half of the year. We anticipate a distinction between the two halves, and we're not yet ready to discuss the second half. It's essential to note this. Regarding the trend of shorter bid durations, typically, in any cycle I can recall, we always prioritize network stability over short-term pricing. However, if someone is interested in short-term pricing right now, we are open to that discussion because we believe changes may occur sooner than expected. I would prefer not to commit to a 12-month price when a 6-month arrangement could suffice. We are willing to have those conversations and find a solution. We will also hold those accountable who held us to our commitments made during COVID, just as we expect the same from them now. If we have agreements in place, we expect them to be honored, and we will engage in those discussions. Lastly, I want to highlight that 63% of our business is in TTS, which operates primarily in a dedicated market with long-term contracts.

But you did talk about decelerating pricing even on the Dedicated write-down, I guess, flattish, right, in terms of your pricing now?

Yes. I mean, not to be cheeky, but look, it is raining out there. Dedicated is a very good raincoat, but it's still raining. So we're going to have to perform. We're going to have to execute in Dedicated, and we're going to have to ask for what we feel is fair and appropriate. But it's not going to be in the first half, the rate environment that we've seen over the last couple of years, and we hope to outperform that. But you know us, we're going to be conservative with our guidance, and we're going to try to make sure that what we put out there is achievable and exceed it where we can.

Good afternoon. I know you've talked a bit about rates, but I wanted to see if you could offer just a thought on what we end up with in terms of the bid season and truckload contract rates. It seems like the comment in the first half down 3% to 6% is maybe not exactly what you think the rates could be. I mean, I guess if you think of the timing being that the contracts get implemented and partially 2Q more in 3Q, do we also expect that the rates would be down more in the second half than that 3 to 6? So just, I guess, some commentary on kind of how to think about contract rates relative to the guidance?

Yes, sure. So first, let's talk about what that cadence looks like. You really got kind of 60% of the revenues are done in the first two quarters, then 20% and 20% thereafter in Q3 and Q4. We've got a decent feel for Q1 implementations, and those are progressing. At this point, even just this point in Q1, our mindset is already starting to shift relative to how we think about rating business based on when we believe the turn is happening and the recent acceleration of some of these the deactivations we've been speaking of. So, we're giving first half guidance. We think spot rates have gone about as low as they can go, and it's well below people's operating cost. We're fortunate that less than 5% of our revenues are in the spot market. But we think that flush happens quicker than maybe it has in past cycles. So I mean that's more color and context maybe than an exact answer. But certainly, I'm encouraged. Lastly, I'll just tell you the comps in the first half are significantly tougher than the comps in the second half just based on how 2022 played out.

And when we're talking about bid season, Tom, we're talking about the 39% of our revenues in TTS that's One-Way Truckload. The biggest share of it is in Dedicated, and we think that's going to be positive, up 0% to 3% in revenue per truck.

Thanks and good afternoon. Derek, John, Chris, there have been comments regarding costs, indicating both opportunities and challenges. Derek, can you share your thoughts on driver pay, which has significantly increased over the past couple of years? Will that moderate in 2023? Also, John mentioned that total operating expenses in the fourth quarter were up around 6%. What kind of run rate do you anticipate for 2023 across all categories?

Yes. So I'll have John take the second part of that. But on the driver pay question, yes, we think there's going to be moderation. That market is still going to be tough. We're still going to hold our expectations high and only hire the best of the best. That does come at a premium cost. But nonetheless, in that market, the pressure has moderated some. We also remind you, especially on the One-Way side, pay is a reflection of both pay rate and miles. And so as we've endured the last couple of years and some of the disruptions that were going on and you saw miles degrading, you had to make that up at times with the pay rate. As we start to stabilize miles and start to see some of that congestion or disruption, if you will, evaporate, it provides us an opportunity for our drivers to still be paid very well, still make a very good living, and actually have less disruption in their life as well. And so all those things factored in, yes, that's a line that we envision moderating this year compared to what you've seen over the past couple of years as we continue to focus on other items. Look holistically, there's still a lot of pressure. Trucks, trailers, tires, fuel, most likely, and a moderating driver wage, but still not going down, clearly, are all going to put pressures on the P&L. So our job is to go find every other line item in there that we think we can extract savings from and then execute on it. At the same time, it's going to be having those tough conversations with our customers about what we need to have sustainable pricing to be able to support their future growth and their needs. Those customers who aren't growing or are struggling, obviously, that conversation has a different tone. That's why we try to align ourselves with folks that at what they do.

Yes. So the year-over-year increase in driver pay has tracked from quarter to quarter throughout '22. First quarter was up 15%, second quarter up 15%. Third quarter up 9%. Fourth quarter, up 4%. So, the year-over-year increase is moderating, and the cost, while it's not flat, it's moving to lower single digits. We expect it will stay in the low single digits as we move forward in 2023.

I think in logistics, with kind of the change in the portfolio and the acquisitions, the margins in the last two years on a full-year basis have kind of been in the mid-single-digit range. Is that kind of the right longer-term range, not looking for 2023 guidance but just kind of a general range to think about the logistics margins at this point? Or is there something that makes the margin stronger or weaker for any reason? Sure. I mean, first off, I'll point out logistics is now greater than 30% of revenues, and we have eyes to growing that at an outsized pace over the more incumbent book of business and Dedicated in One-Way. So, I think you see that becoming a larger portion over time. We're super excited about how the integration is going ReedTMS and the opportunities that stand in front of us. That integration in particular, especially as it relates to the real productivity gains and system enhancements when you bring people together on one platform is a back half of '23 initiative. It takes a while to get there. We operate predominantly in different verticals today with different customer makeup. They do very well, but we are actively working toward that integration date. So, at this point, I'm not looking to change any kind of guidance on mid-single-digit logistics expectations. But we will certainly be updating as we get further along in that integration as to what we think that potential could look like when you get all the freight into one network with one central kind of visibility platform.

Good afternoon. Derek, you've made a lot of comments on the contract market, which I imagine you anticipated coming into this call. We've heard from some of your peers that the focus on trailer capacity is maybe changing the shape of the cycle with rates generally not falling as much for large carriers, at least those with large bases of trailers. How do you assess that with regards to your One-Way segment? Could the focus on trailer capacity help those asset-based discussions such that rates maybe don't fall as much as they otherwise would have?

Yes. I certainly think that trailer pools and the efficiencies that are inherent with those that have large trailer pools and a robust power-only offering like we do are better positioned through downturns to be able to have more rational conversations because there's less folks that can replace you. You can't replace the efficiencies we bring with a blended solution of our assets in power-only, with a large trailer pool presence, with a non-asset broker. You can't really do it with somebody that's asset-only that doesn't have the ability to assign lanes based on differentiated strengths, meaning we'll take the stuff that works on our assets, the broker carrier that may be better at particular lanes takes those lanes. And so, trailer pools and the inherent efficiencies that come with them are a competitive advantage. Even within our power-only solution as an example, they predominantly play within the contract market. Very little of that is even done in the spot market. And so, it gives those partner carriers better opportunities to build the future around stable rate levels and stable experiences. So, I think both for the carriers that do business with us, the customers that participate in this product offering, and for our shareholders, it truly is a win. That is also relatively speaking, in the early innings. So, all early returns are positive. We're excited about it. We're growing it very rapidly. But I think there's a lot of runway ahead of us.

Yes, Bert. Excuse me, Bert. We've had five straight quarters of sequential growth in our power-only business, and that's during a period of time when the freight market is moderating. So, there's some real staying power with power-only.

Good afternoon. Thanks for taking my question guys. Maybe just two quick follow-ups on Dedicated. Looking at the revenue per truck per week and I said it's off a tough comp from last year, but 0% to 3% seems like it's going to be tough to exceed, inflation this year when you talk about driver pay as part of that. So maybe you can elaborate that a little bit. Is there ability to go back; it seems like you might be having some conversations to possibly move that up. Is this something we should look at more in a multiyear period, one strongly offset by a bit weaker one. Maybe you can offer some thoughts around that.

Yes, Brian. The multi-year approach is certainly an important perspective to consider. When reflecting on the comparisons from the past couple of years, we managed to adjust driver pay and other related factors at a rate aligned with market conditions, while also ensuring it was fair for our drivers. This particular line item is expected to stabilize as we enter 2023. Additionally, it's important to note that in our dedicated agreements, driver pay is treated as a separate item. If we experience pressure in this area due to tightened driver availability throughout the year, there is always the possibility to discuss adjustments in our Dedicated sector. While it’s not always straightforward to request and receive these changes, it will be guided by data-driven discussions. The projected growth rate of 0% to 3% is heavily influenced by last year’s performance, which included a significant amount of project-related work or additional trucks across many Dedicated accounts. This year, while we have a base contract, there may be some reduction in that same fleet due to changes in their shipping volumes. All of these factors need to be taken into account. The challenges posed by these comparisons make the anticipated growth of 0% to 3% less impressive than one might hope. Lastly, I'd like to highlight that Dedicated revenue per truck per week has increased in eight of the last nine years, reflecting the business's robustness despite market fluctuations. This stability hinges on our execution quality. We continuously emphasize the importance of being top-notch in our operations, and I believe we are. Reflecting on 2022, the entire fleet operating in Dedicated maintained an on-time performance exceeding 99% throughout the year. I want to express my gratitude to our team for making this achievement possible.

Thank you, Derek. John, I have a quick question for you regarding costs. You mentioned targeting some controllable costs. Could you provide more detail on that? It seems like maintenance is a key area, particularly with parts, which may be even more critical than acquiring new trucks, as that has implications for maintenance and other expenses. Can you clarify what controllable areas you have identified for the upcoming year that you're focusing on? Thank you.

Yes. Thank you, Brian. Yes, we definitely have a cost focus across the entire business, and we're realizing savings in several categories such as driver hiring and advertising, lower driver guaranteed pay synergies related to the acquisitions that we've done, actually, all four acquisitions. And then IT savings implement our Cloud-First Cloud-Now strategy that are helping with both efficiencies and productivity, and we're taking aggressive actions to improve our cost structure. We know we have a big headwind with the reduction in gains in '23 compared to '22, but we're confident that we can make a meaningful dent in that with the cost improvements that I just elaborated on.

This concludes our question-and-answer session. I'll now turn the call back over to Mr. Derek Leathers, who will provide closing comments. Please go ahead.

I just want to thank you for joining us today on the call. We're proud of our results in 2022 and encouraged by the durability of our business as we enter a weaker setup, at least in the first half of '23. Dedicated is going to remain the lead horse on our wagon, but One-Way and Logistics now surpassing $1 billion in freight with increased customer and industry diversity is exciting. I believe this year will be a story told in two halves. Our capacity is already exiting. Inventories are coming into balance. And while there remains macro uncertainties, the one thing I feel strongly about is this, strong well-capitalized carriers, focused on operational execution will have an opportunity to shine, and we look forward to that challenge. I want to thank you for spending your afternoon with us today.

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