Werner Enterprises Inc Q4 FY2024 Earnings Call

Good afternoon. And welcome to the Werner Enterprises, Inc. Fourth Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Chris Neil, Senior Vice President of Pricing and Strategic Planning. Please go ahead. Good afternoon, everyone.

Earlier today, we issued our earnings release with our fourth quarter and full year 2024 results. The release and a supplemental presentation are available in the Investor section of our website at werner.com. Today's webcast is being recorded and will be available for replay later today. Please see the disclosure statement on slide two 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 provides additional information for investors to help facilitate the comparison. 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. On today's call with me are Derek Leathers, Chairman and CEO, and Chris Wikoff, Executive Vice President, Treasurer, and CFO. I'll now turn the call over to Derek.

Thank you, Chris, and good afternoon, everyone. We appreciate you joining us today. There's a saying that everyone has a plan until they get punched in the mouth. In 2024, it's pretty clear that the whole industry took it on the chin as everyone continued to fight through what many have stated is the worst freight recession in their careers. The challenging operating environment of 2023 persisted into and throughout 2024 as supply and demand imbalances resulted in a second consecutive year of depressed rate levels. This was coupled with ongoing inflationary cost pressures and lower resale values of used equipment. While capacity has continued to exit the market, the pace has been slow. However, positive signs began to emerge throughout the year, which we believe point to the early stages of an improving environment. One-way rates turned favorable in the second half, and West Coast imports remained strong. Peak season was better than expected with higher rates and double the peak volume versus last year. Post-peak season has seen additional green shoots that fuel optimism such as rejection rates that remain seasonally elevated. Spot rates are off the bottom and at a two-year high. Customer sentiment remains positive while consumers remain resilient. And while our previously negotiated rates with our customers remain effective throughout the first quarter, we are also seeing clear opportunities and early wins to positively influence rate. As a result, as 2025 gets underway, we anticipate a challenging but improving environment. During this downturn, we have focused on controlling what we can by investing in ourselves and making strategic decisions that position us to excel in the future. Our portfolio of solutions is more diversified now than at any time in our history. We have invested in maintaining a modern fleet, made operational improvements for a leaner, more nimble organization through discipline around cost, operational innovation, and M&A integration. We've advanced our technology roadmap, leading to improved decision-making, better visibility, and operational efficiencies. We improved one-way miles per truck, which increased 8% year over year. We grew our paralegal product within logistics, adding more scale and flexibility. We invested in our driver school network to ensure a shift of focus towards building talent within the industry. Thanks to the discipline, grit, and commitment of Werner's nearly thirteen thousand talented team members, Werner has never been better positioned for long-term value creation as the market improves. Let's turn to slide five and highlight our fourth quarter results. During the quarter, revenues were 8% lower compared to the prior year. Adjusted EPS was $0.08, adjusted operating margin was 1.6%, and adjusted TTS operating margin was 3.1% net of fuel surcharges. During the quarter, we had a higher than normal insurance expense that included $19 million from unfavorable development on prior period claims. This resulted in a $0.22 negative impact on adjusted EPS. In contrast, our focus on safety continues to drive a near twenty-year record low in DOT preventable accidents per million miles. Safety is a high priority and a core value for Werner. This is demonstrated through our continued safety investments and initiatives such as investing in equipment with the latest collision mitigation systems, leveraging new side-view camera technology, implementing in-cab and desktop technologies aimed at improving weather alerts, rerouting, and enhancing situational awareness for our professional drivers and fleet managers when it matters most. Collaborating with our vendors and other market participants to bring forth reforms and future safety innovations is also a key part of our approach. Despite the uptick in insurance and claims expense in the quarter, our dedicated segment continued to demonstrate resiliency and durability as revenue per truck per week increased year over year. Average fleet size grew sequentially, and our customer retention rate remained strong at over 90%. Our dedicated offering excels when reliability matters most among large enterprise shippers, and our commitment to quality and service was recognized as we received numerous Carrier of the Year awards in 2024 from dedicated customers. One-way truckload remains more pressured relative to dedicated; however, we continue to focus on operational excellence and are pleased to report another quarter of improved production. For the second quarter in a row, revenue per total mile has been positive year over year. Our pricing discipline, combined with better freight options and execution, led to a revenue per truck per week that increased 5.1% in the quarter and 6.4% for the year. Our logistics division reported adjusted operating income that improved sequentially, representing the best quarter of the year. Gross margins were steady while volumes improved sequentially in truckload logistics and intermodal. Our logistics business continues to represent a key component of our strategy as it complements one-way trucking, provides a greater portfolio of solutions to our larger customers, and expands our reach to small and midsize customers. Moving to slide six, our plan to generate earnings power and drive value creation remains unchanged and is centered around three priorities. First is driving growth in our core business, which comprises expanding TTS and logistics operating income margins, increasing one-way rates, and growing our dedicated fleet given a strong pipeline. On TTS margins, while we cannot predict the timing of a return to our long-term range, we are encouraged by the modest incremental expansion we've seen over the past few quarters. This was particularly true in the fourth quarter absent the impact of insurance reserve adjustments. Second is driving operational excellence as a core competency. We will deliver on this by maintaining a resolute focus on safety, continuing to advance our technology roadmap through the transition of our one-way business to our Edge TMS platform, providing industry-leading reliability solutions and service to our customers, and continuing to control costs. Our focus to improve efficiency, along with rate improvement, steady volume, and growth with existing and new customers is essential. I'm proud of team blue for their continued dedication to operational excellence. Our safety metrics are near record lows, more volume is transitioned to our future tech platform, our customers are recognizing our superior reliability and high scale, and we are controlling costs where we can. The final priority is driving capital efficiency, which includes maintaining strong operating cash flow through working capital optimization, remaining disciplined in capital allocation, and maximizing equipment fleet sales. We have proven our ability to generate earnings power as demand accelerates. 2025 will be a year of growth and improvement from 2024. We will provide you with updates on our progress to achieve our 2025 priorities as the year progresses. Moving to slide seven to highlight our current view of the market. We expect truckload fundamentals to gradually improve throughout 2025. While we are not placing bets on the specific pace and timing of a market turn, we are confident that rates will continue to trend in a positive direction. Carriers continue to exit the market, while demand continues to improve. We expect consumers to show ongoing resilience resulting in non-discretionary spending holding up while discretionary spending picks up. Retail inventory levels have mostly normalized and should no longer be a headwind to freight volumes. The pace at which inventories are replenished will likely be influenced by factors such as trends in consumer demand and how the new administration ultimately decides to implement its policy initiatives. Spot rates that have already moved higher are expected to improve throughout the year as supply and demand continues to rebalance. As a result of an improving operating environment and upcoming regulations such as EPA 27, we expect used equipment demand and pricing to improve in the second half of 2025 as carriers look to upgrade their fleets in anticipation of the upcoming mandates. Potential tariff policy continues to be a moving target. Implementation of tariffs on goods imported from China, Mexico, and Canada is expected to impact supply chains, although it is difficult to comment specifically on depth and duration as information evolves in real-time. Regardless of the tariff impacts, we are prepared for supply chain disruptions and ready to meet our customers' needs with agile solutions. With that, I'll turn it over to Chris to discuss our fourth quarter results in more detail.

Thanks, Derek. Let's continue on slide nine. Fourth quarter revenues totaled $755 million, down 8% versus the prior year. Adjusted operating income was $12.2 million and adjusted operating margin was 1.6%, a decrease of 69% and 320 basis points respectively. Adjusted EPS of $0.08 was down $0.31. As Derek noted, this includes a $0.22 headwind during the quarter from increased insurance costs due to unfavorable development on prior period larger dollar claims. The remainder of the change stems from a softer used equipment market and lower gains, higher interest expenses, and lower operating margin in logistics. Turning to slide ten, Truckload Transportation Services total revenue for the quarter was $527 million, down 9%. Revenues net of fuel surcharges declined 5% to $470 million. TTS adjusted operating income was $14.6 million, 61% lower compared to the prior year. Adjusted operating margin net of fuel was 3.1%, a decrease of 440 basis points, of which over 400 basis points was due to higher insurance and claims referenced earlier. As a result of intentional steps taken throughout the year, TTS adjusted operating income margins net of fuel improved sequentially over the last two quarters. That streak would have extended into the fourth quarter if not for the impact of higher insurance and claims. During the quarter, consolidated gains on sale of property and equipment totaled $6.5 million, which included a $5.1 million gain on the sale of real estate. Total gains—including real estate—were up $3.4 million compared to last year. Net fuel surcharges and insurance gains TTS operating expenses declined 5% year over year. We are focused on producing higher operating margins and over time returning to double-digit TTS operating margins. The building blocks to bridge the gap remain unchanged. They include first, rate improvement in one way; second, incremental growth for existing fleets in dedicated; a higher contribution margin as we return to normalized volume; third, normalization in the used equipment market; and fourth, structural improvements through technology and our cost-saving initiatives.

Chris, our focus and intentionality to influence rate lift is showing as one-way rate improved over 300 basis points year over year and sequentially during the quarter. Rate improvement will be the biggest boost to TTS margin going forward. The pipeline of dedicated opportunities remains strong, with a good mix of new customers. While still competitive, customers are now more engaged in real bids, seeking capacity rather than merely pricing the market. We've seen an early increase in select pop-up needs that could materialize into wider opportunities. Let's turn to slide eleven to review our fleet metrics. TTS average trucks grew to 7,495 during the quarter. We ended the fourth quarter with the TTS fleet up five trucks sequentially and down 7% year over year. TTS revenue per truck per week net of fuel increased 2.5% year over year during the quarter and has increased year over year for 23 of the last 28 quarters. Within TTS, for the fourth quarter, dedicated revenue net of fuel was $289 million, down 7% year over year. Dedicated represented 63% of TTS trucking revenues consistent with a year ago. Dedicated average trucks increased sequentially by 0.6% to 4,836 trucks, which is a decrease of 7.7% year over year. At quarter end, dedicated represented 65% of the TTS fleet. Dedicated revenue per truck per week increased 1.1%, growing for 27 of the last 28 quarters. In our one-way business for the fourth quarter, trucking revenue net of fuel was $170 million, a decrease of 5% versus the prior year. Average truck count increased sequentially by 2% to 2,659 trucks, but declined 9.2% year over year. Revenue per truck per week was up 5.1% year over year. One-way freight conditions in the quarter were seasonally better than expected and peak revenue outpaced the prior year. After multiple quarters of double-digit or high single-digit year-over-year gains in one-way miles per truck, the positive trend continued but at a more modest increase of 2%. Total miles decreased 8% compared to the prior year with 9% fewer average trucks. Our PowerLink offering within logistics continues to grow. Increased miles in PowerLink offset the majority of the decline in one-way truckload miles, ultimately resulting in combined miles that were down less than 2% year over year.

Let's turn to logistics on slide twelve. In the fourth quarter, logistics revenue was $213 million, representing 28% of total fourth-quarter revenues. Revenues were down 6% year over year but grew 3% sequentially. Revenue in truckload logistics declined 6% and shipments decreased 2%. However, shipments increased 2% sequentially as volumes from the existing customer base remained steady. Intermodal revenues, which account for approximately 13% of logistics revenue, increased 2% year over year due to 13% more shipments, partially offset by a 10% decrease in revenue per shipment. Final mile revenues decreased 12% year over year and 1% sequentially. Our fourth quarter was our best top and bottom line performance of the year for logistics. Adjusted operating margin of 1.1% was down 20 basis points year over year but up 70 basis points sequentially, driven by further cost control actions during the quarter, including headcount reductions. Moving to slide thirteen to discuss our cost savings program. In 2024, we achieved over $50 million of in-year savings to offset rate and inflationary pressures and low equipment gains. This, combined with our 2023 savings, amounted to close to $100 million in total cost reductions over the two-year period, the majority of which were structural and sustainable. We are laser-focused on a 2025 program totaling $25 million in incremental in-year savings. Approximately 35% of the 2025 program carries over from 2024 to get to a full-year run rate related to initiatives that we actioned last year. The remainder consists of new initiatives for 2025 that are also largely structural and sustainable.

Let's review our cash flow on slide fourteen. We ended the year with $41 million in cash and cash equivalents. Operating cash flow was $71 million for the quarter and $330 million for the full year. As expected, net CapEx continues to trend down as we maintain a modern fleet and continue to reinvest strategically. Fourth-quarter CapEx was $29 million, and the full-year total was $235 million, representing less than 8% of revenue compared to over 12% in the prior year. Net CapEx for the year was down $174 million or 43%. As a result, free cash flow for the full year was $95 million, representing 3% of total revenues, up $29 million or 44%, and up 110 basis points as a percentage of revenue. Total liquidity at quarter end was $460 million, including cash and availability on a revolver.

Moving to slide fifteen. We entered the quarter with $650 million in debt, down $40 million sequentially and up less than 1% from a year earlier. Net debt increased $22 million or 4% year over year. We continue to maintain a strong balance sheet, access to capital, relatively low leverage, and no near-term maturities in our debt structure. On slide sixteen, let's recap our strategic priorities relative to capital allocation.

We continue to prioritize strategic reinvestment in the business while also balancing our long-term approach between returning capital to shareholders, and funding M&A. For the full year, $235 million was reinvested in our fleet, terminals, technology, and school network of used equipment sales. $35 million was returned to shareholders through our quarterly dividend, and $67 million was allocated toward share repurchases. We have 3.9 million shares remaining under our board-approved authorization. Although it's been two years since our last acquisition, and despite a challenging market, our acquisitions are showing value. For example, in 2024, ECM Professional Drivers moved nearly 30,000 loads for legacy Werner customers. With ECM, we have greater density and capabilities in the northeast, enabling us to better serve new and longstanding shippers of Werner. These Northeast fleets continue to receive accolades and high marks from our customers. Baylor Trucking, our other truckload acquisition, recently earned TAPA two certification and is one of eight carriers in the US certified for good distribution practice or GDP. These elite certifications allow Baylor to participate with international customers seeking secure supply chain transportation for first to final mile deliveries. GDP certification specifically states that a company meets critical standards for storing and transporting pharmaceutical products, which enhances our standing in a vertical where capability matters with highly selective shippers. In the Final Mile segment, we were also recognized during the year with another Carrier of the Year award, similar to our achievements in Dedicated. These are just a few examples of the value we are seeing from our acquisitions. We anticipate further upside as we look toward a better market. On slide seventeen, we are introducing our 2025 guidance. Our truck fleet guidance for the full year is a range of up 1% to 5%, with more weight placed on the second half. Our full-year net CapEx guidance range is between $185 million and $235 million, lower than historical ranges as our portfolio evolves to be more asset-light. Our track record shows consistency in reinvesting back into the business, maintaining a low mile modern fleet, and extending our solutions and capabilities, all of which remains a focus.

Dedicated revenue per truck per week full-year guidance range is flat to positive 3%. One-way truckload revenue per total mile guidance for the first half of the year is positive 1% to 4%. Our effective tax rate was 7% in the fourth quarter net of 2023 return to provision adjustments and other discrete items. The effective tax rate for the full year was 21%. Our 2025 guidance range is between 25% and 26%. The average age of our truck and trailer fleet at year-end was 2.1 and 5.3 years respectively, compared to 2.1 and 4.9 years at the end of 2023. Regarding several modeling assumptions, we expect net interest expense this year will be flat year over year but higher in the first half, then lower by a similar amount in the second half. We anticipate stable used equipment demand and pricing during the first half of 2025, with moderate improvement expected in the latter half. We expect to sell fewer tractors and trailers throughout the year. Excluding real estate gains, gains on the sale of used equipment are expected to be in a range of $8 million to $18 million. Relative to the first quarter, while freight volume and market conditions are stronger than expected at this point in the quarter, expect year-over-year headwinds from interest expense, lower gains on used equipment, and one less business day. As a result, the encouraging market momentum is expected to have less of a positive impact on our bottom line in the first quarter compared to later in the year. With that, I'll turn it back to Derek. Thank you, Chris. As we kick off 2025, our continuous improvement mindset remains at the forefront. The work we have completed over the last several years to further strengthen and expand our core offering, combined with improvements in our cost base, positions Werner well to capitalize with agility and speed on growth opportunities as the market inflects. The worst is behind us and incremental improvements are being seen across the industry, but other challenges remain. As a result, we remain focused on controlling the controllables. In closing, we are a cycle-tested team, and our historical results demonstrate our ability to generate earnings. Let us open it up for questions.

Before pressing the keys to withdraw your question, please press star then two. Our first question today comes from Bruce Chan with Stifel. Please go ahead.

Hey, good afternoon, team. This is Andrew Cox on for Bruce. Just wanted to start with some questions about Mexico. It's been a wild week or a few days there with tariff threats and then pulls. Just wanted to understand, what kind of action you are seeing, what kind of conversations you are having with your customers, what are they saying regarding the changes, in regard to the postponement, and their expectations for eventual outcomes.

Yeah. Thanks for the question. We are in conversation. Obviously, Mexico is an important part of our portfolio. We've had multiple discussions with our shippers in-country. I think the consensus going into some of the tariff rhetoric was that it would play out similarly to how it has so far, meaning there would be some strong rhetoric early, hopefully some action on the other side, and that would lead to an opportunity for a postponement or even perhaps avoidance altogether. What we haven't seen is a lot of fundamental change in shipping patterns or people attempting any dramatic tariff avoidance techniques. Rather, it's been a more common steady approach from a shipper perspective. What I find most encouraging is that our portfolio is set up well in Mexico; not only are we a large-scale provider of cross-border services, but with our ability to utilize our crosstalk in the radio and our power-only solutions off the border, we can move things in temperature-controlled, van, and intermodal formats. We've got optionality for our customers. We're going to stay in touch with them, obviously. I think we both know this could change anytime, any day, any hour regarding the tariff situation. But regardless, whatever the path takes, our position in optionality and our relationship with our customers puts us in a really good spot.

Great. Thank you. And if I could follow up, you know, looking back at previous 10-Ks, you have Mexico disaggregated with revenues at $159 million last year. I just wanted to understand, does that properly reflect the cross-border opportunity at Werner? Or can you help us give some goalposts on what the cross-border opportunity is relative to the size of the business?

It's difficult to quantify that. Obviously, we have pieces and parts of our Mexico business that roll up and report through its appropriate divisions. So, no, that does not represent the totality of the business we do with Mexico. What we've talked about on previous calls is that if you think about Mexico and its pieces and parts, it's around or a little north of 10% of revenues. That’s probably a better way of thinking about it.

The only takeaway on dedicated is that the pipeline is robust. We're starting to see more consistent and more widespread add backs taking place. That's something we've talked about for several quarters: when things get tight, some of the best dedicated growth comes from simply adding incremental trucks to existing fleets. The margin contribution from those trucks is better than the core fleet, as your fixed costs are largely already in place. So that's exciting and something that we look for as we move forward.

Hey guys. This is Joe Enderlin on for Daniel. Thanks for taking the question. I wanted to ask about dedicated. Is that gradually becoming more attractive with shippers looking to lock in rates?

Obviously, when we look at dedicated right now, I mean, I'll start at the macro. The pipeline for opportunities is very robust. It's as strong as it's been in some time, but it has also become more attractive from the provider side. So there's more competition. In 2024 specifically, there were many exercises and bids out there, but we are selective in what we undertake. You know, we're looking for true dedicated models—those that cannot be replicated by one-way models. It doesn't go away when capacity becomes looser; it leads to north of 90% retention rates, which we've had for our entire history in dedicated. As capacity tightens and as folks look for safe havens, dedicated will become more popular, and we've seen the pipeline get much more active. Our job is to sort through it and find the true dedicated opportunities that are stickier, harder to serve, and more defensive. They will be with us not just for the cycle, but hopefully for ten or twenty years into the future, which is generally the case with most of our fleets. It's an exciting time, but we have to be careful and cautious.

That's helpful. Thank you. Just one follow-up on pricing. It sounds like that continues to trend favorably. Could you just give some color on the pace of rate increases so far, how that's trending relative to expectations?

After two consecutive years of lower rates and margin compression, significant rate increases are clearly necessary, especially in the one-way area that has been more compressed and challenged than dedicated. We have already started to see improvement in one-way rates. We reported a year-over-year increase of just over 3%. That's the second consecutive quarter we’ve had a year-over-year increase. So, that's encouraging to us. It's also important to recognize that last year we were able to improve miles per truck as well, and that rate per mile improvement along with the miles improvement led to over a five-hire one-way trucking rate per or revenue per truck per week for the quarter. We expect that as rates improve with the miles we've been able to improve, or the production we've realized along with that rate that those will help return one way to better levels of profitability next year. In terms of the one-way bid season, it's still in the very early stages. We have only had a few large bids that have closed and finalized. So, we are not generating any significant consensus yet, but early results are consistent with our expectation of low single-digit to mid-single-digit type rate increases. Importantly, customer sentiment is improving—we feel like we are having more conversations about capability and capacity solutions, and customers are generally more receptive to rate adjustments knowing that we’ve been in this elongated downturn for nearly three years now.

Got it. That's all for us. Thanks, guys.

Thank you. The next question is from Ken Hoexter with Bank of America. Please go ahead.

Hey, great. Good afternoon, Derek. I think that's the fastest I've ever heard you and Chris talk. Chris, thanks for the views on the first quarter and the seasonal softness, your thinking and then maybe the catch-up thereafter. The events you mentioned. But try to understand the dedicated comments there. At the end of the period, tractors pulled back sequentially—but you noted a 90% renewal rate. Is there another like trend going on in terms of the tractors? Is it timing? Given the peak season, maybe some thoughts on that? And then you noted spot rates should improve. Derek, any thoughts here? We've seen they ran up at the start of the year, but recently have softened a little. I’m just wondering if that’s due to pre-shipping, port strikes, pre-shipping tariffs, and now stabilizing at a lower level, or are you seeing that underlying improvement you’re talking about?

Speaking of speaking fast, Ken, that might be the longest question I've had on a call. I'll attempt to dissect it. On the dedicated segment, I wouldn't read too much into the period truck count. There’s timing that takes place when you're going through Q4. We might add in trucks during the quarter that are known to be temporary and pop up in nature to support a fleet. So, there isn’t a lot of read-through there. The only takeaway on dedicated I would highlight is that the pipeline is very robust. We are starting to see more consistent and widespread add-backs taking place. When things get tight, some of the best dedicated growth comes from adding incremental trucks to existing fleets. The margin contribution on those trucks is usually better than the core fleet as your fixed costs are already in place. That’s exciting as we look forward. In terms of Spot rates, I might hold a more positive outlook than where you are based on your question. External drivers can influence the lift, but I would just remind folks that we can have those same external drivers with no impact on spot if we aren't close enough to equilibrium for it to show. We witnessed that for two years straight. Now, when you see any tick relative to external impacts, it shows through in the spot market quickly as we are in a tighter capacity, which is a new reality.

That was great. You hit on the spot. The Mexico exposure you mentioned earlier; was that cross-border or just intra-Mexico, the 10% that you broke out?

That represents exposure to and from Mexico, including both cross-border and intra-Mexico traffic.

Thanks. Outside of major tort reform, is there a fix on the insurance issue, and outside of that, how should we think about the margin trajectory from Q4 to Q1? What’s a realistic amount of margin improvement we could see this year?

Tort reform certainly is one of the initiatives. But honestly, it's a state-by-state battlefield. We are seeing ongoing progress made at state levels where we're getting rationality regarding liability treatment. We do not want to wake up with inflation affecting basic goods in our community. We're also coupling our efforts with investments in technology—improvements that get better for not just trucks but cars as well. Progress requires effort and focus.

Certainly. Just a couple more specifics on the insurance issue. As we indicated, this was a quarter where we reported an outlier level of $49 million–we had never seen that before in a single quarter. This was the first in eight quarters where we reported over $40 million. As mentioned, $19 million of that was negative development from past claims. It’s not something we can expect in the future. We view that as an outlier. Currently, our claims are trending down, and our DOT preventables per million miles are near twenty-year lows. It’s a cost per claim problem across the industry, rather than a frequency issue for Werner.

What thoughts do you have regarding operating ratio for the trucking business for Q1 and the year? Given that there's very few instances where you can have price improvement and utilization improvements at the same time. How sustainable is that, and how could that translate to margin improvements going forward?

It's hard to come by, you're right. It is also rare for operating income to show price and utilization improvements simultaneously, especially in a market that has not yet strengthened. I'm proud of the team's efforts in Q4. The comparisons will become tougher on the utilization front, but what matters is if we can hold the progress we've made in miles and connect that with rate. Those miles will have value. There are sustainable structural changes we have forked especially over the past eighteen months. With rates running closer to the cost of executing a trucking company in 2025, those miles are becoming invaluable. We have to keep a laser focus on rate improvement, and the foundation is superior service. We have received multiple Carrier of the Year awards for our service, which allows us to seek fair rates that match that service.

To add to that, we've witnessed a few quarters of margin improvement. The $19 million figures from the insurance reserve adjustment added to TTS; removing that impact, our adjusted OI for TTS would have exceeded 7%. Expectations for 2025 indicate continued expansion because of rate lift, increased production, dedicated volume management, cost controls, and overall improvements.

Do you expect the normalized rate of around 7% from Q4 to Q1?

Q1 is traditionally a tougher quarter, which we cannot deny. From Q4 to Q1, there’s typically a drop between 35% to 40% in operating income and EPS. While other market conditions seem to hold up better, Q1 has unique challenges. Q1 2023 will be a good reference point considering how much smaller the fleet is this year versus 2023. So, it’s applicable to say that Q1 2024’s result would be lower as the year progresses. We will continue to focus on execution while improving margins.

I appreciate the full-year guidance and how you're thinking about the growth here. It seems like dedicated is where you want to focus. Obviously, there is also growth in the one-way truckload segment for reasons apparent in the fourth quarter. As we look toward the start of 2025, how do you think about leaning into one-way truckload if activity is strong, given that the dedicated pipeline expectations are slower moving?

To think about it best, we will be nimble and responsive to market conditions. There are opportunities within our robust driver pipeline to adapt to market needs, which could include one-way. However, strategically, we are not focused on intentionally growing our one-way truckload fleet until we see a substantial improvement in rates. On the other hand, dedicated has a longer horizon, although we are well progressed in negotiations. That said, we have resources in both dedicated and PowerLink logistics, allowing us to engage with opportunities. The dedicated segment is crucial as we're identifying more potential. A look at competitive dynamics shows that some new entrants came in during the trough phase. They offered aggressive rates but did not perform well. Those bids are now coming up for renewal, leading to our chance to take market share. Additionally, private fleet growth has occurred throughout the covid years. Many companies may reassess their capital expenditures as those fleets age. This presents opportunities for dedicated market share as customers face decisions about operations moving forward.

Good evening. Thanks for taking the question, Chris. Can you talk a little about the cost savings opportunity? It sounds like it accelerated significantly going into 2025. What are the bigger initiatives you're focusing on?

We are focusing on our ongoing commitment to cost control, operational innovation, leveraging efficiency, and expense synergies related to M&A. That's the approach we will continue, yet we’re also attentive to support growth while maintaining high reliability and customer service. In 2025, we anticipate $25 million in additional in-year savings, 35% of which carries over from 2024. We are aware of our need for structural sustainability.

In the previous year, you increased miles per tractor across the fleet significantly. Is that still an opportunity for this year, or was that improvement largely realized last year?

We are going to keep looking for improvements, but most of that growth is already integrated into our operations. The focus now shifts to holding that line steady and pursuing incremental improvement rather than seeking the mid to upper single-digit metrics from the previous year. We will never stop looking for where we can elevate efficiency.

Your comments have a tone that seems more bullish than your guidance. Are you being conservative with this guidance due to uncertainty, or are we looking at a normal seasonality that could lead to better outcomes?

I will try to avoid giving a wide range of outcomes. The perception comes from operating in an environment where tariffs can change rapidly and unpredictably anytime. This adds difficulty in providing clarity. What I can affirm is that while there is excitement among customers, the discussions are gaining traction, but it is a multifaceted process to translate raised network rates into tangible earnings over multiple quarters.

Regarding insurance, is there anything you can do from a technology standpoint? You have taken early steps in implementing tech. Will that impact your approach towards autonomous vehicles?

We will keep investing in technology. We've always led advancements, but we also focus on collaboration with others. We are trying to make the roads safer, which involves benchmarking and mutual learning. Technology improvements at the vehicle level greatly enhance safety, especially as we teach drivers within our network. These developments aim to refine our safety posture. The real costs stem from a small number of large claims; we will keep fighting those, enhancing training, and looking for improvements in the tech and processes.

The last question today comes from Eric Morgan with Barclays. Please go ahead.

On the logistics side, can you help us understand how you're thinking about the cadence of gross margin if spot rates start moving up again this year? Last year, you mentioned that mid-single digits were possible; do you believe that could translate into better outcomes this time around?

There are positives in logistics related to our operating expenses. Our technology investments were substantial, and their return is promising. We implemented the Edge TMS platform fully, and we expect upward trends. Please note, however, that spot rate pressures may still impact us initially, but I believe by mid-year the increased productivity and efficiency will help offset that, leading us to a more favorable operational outcome in the second half of the year.

We are observing better performance in logistics, having seen our margins remain strong. It’s important to note that dedicated's margins have fared better during downturns. On the other hand, we can add trucks back and still explore potential market share gains in an upcycle. In conclusion, I want to thank everyone for their time today. As mentioned before, I believe the worst is behind us. The steps we have taken during this downturn to lower our cost structure and drive change in the company will serve us well when conditions normalize. We have a firm track record of maintaining performance under improved market conditions, and we look forward to showcasing this capability again. Thank you to our customers and our talented team for their commitment and support.

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