Werner Enterprises Inc Q2 FY2025 Earnings Call

Good afternoon, and welcome to the Werner Enterprises Second Quarter 2025 Earnings Conference Call. 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 second quarter results. The release and a supplemental 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 later today. 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 provides 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. On today's call with me are Derek Leathers, Chairman and CEO; and Chris Wikoff, Executive Vice President, Treasurer and CFO. I will now turn the call over to Derek.

Thank you, Chris, and good afternoon, everyone. We appreciate you joining us today. We generated solid results during the second quarter and are encouraged by the sequential improvement in financial performance relative to Q1. The freight market faces ongoing uncertainty related to shifting global trade policy and regulatory issues. We remain focused on providing superior and diversified solutions to our customers by investing in our future through technology and structurally improving our business with a commitment to delivering value. The key priorities we have been focusing on have started to bear fruit as evidenced by numerous positive operating metrics in the quarter, including year-over-year growth in revenue net of fuel surcharge for the first time in 6 quarters, a return to profitability driven by decisive action and execution and sequential growth in various forms, including revenue, TTS fleet, One-Way revenue per total mile, gains from sale of used equipment, TTS operating income and logistics gross margin. As a reminder, on Slide 5, there are 3 priorities that underpin our DRIVE strategy, which we execute day in and day out. First, driving growth in core business. In TTS, our fleet is up year-to-date. Our Dedicated solution is winning in the marketplace. One-Way rates are increasing, and we realized year-over-year growth in overall combined miles across our One-Way tractor assets and PowerLink trailer-only offering. Within logistics, we are back to mid-single-digit growth driven by truckload brokerage and intermodal volumes. Our customers are voting with their freight as we notched several new business awards with strategic customers across our portfolio. Second, driving operational excellence is a core competency. Our focus on creating and fostering a culture around safety never changes. Our DOT preventable accident per million miles continues to trend favorably as we hire quality professional drivers and invest in new technology-laden equipment. We are pleased the Texas Supreme Court has ruled on the accident that occurred in 2014, reversing the $90 million jury verdict from 2018. The court's decision provided much needed clarity in the state of Texas, but legal reform is still needed in many states across the country. We will continue to work at the state level and with others in and outside our industry for fairness and reasonableness regarding these types of claims and lawsuits. This marks the end of a decade-long and difficult chapter. While we are grateful for the clarity this decision brings, we will not lose sight of the tragic loss for the Blake family. Our focus on safety improvement is shown through our investments in technology, an increasing part of our operational strategy, and we are progressing on this front as well. Volume on our EDGE TMS platform is growing. Nearly two-thirds of One-Way trucking volume is now on Edge and over half of the dedicated volume. Logistics has largely been on EDGE TMS for several quarters, leading to 20% productivity improvement in brokerage loads per full-time employee. We are seeing more top and bottom line tech-enabled synergies such as growing no-touch fully automated load bookings and back-office efficiencies like carrier payment automation. We are driving efficiency by scaling the use of conversational AI calling and notifications for reminders and communication with new hires, associates and brokerage carriers. Our professional drivers have greater technology tools, improving their situational awareness while on the road and providing mobile ease of access to important information when off the road. I'm proud of the efforts of our technology team and the willingness of our associates to lead into change and transformation. These changes are benefiting all of our stakeholders, including our customers, while further securing our IT infrastructure and cloud environments. And finally, our reliability and commitment to excellence was recently recognized as Werner was named a 2025 Top 3PL and Cold Storage Provider for food logistics for the ninth consecutive year. Our final priority is driving capital efficiency. We are generating positive cash flow. And supporting this, we are maximizing value on the sale of used equipment, tightening our full year guide on equipment gains to the upper end of the prior range. Regarding CapEx, we will continue to invest in the 5 Ts, trucks, trailers, terminals, technology and talent. This year, however, we decided to moderate our equipment spend. With a modern and low-age fleet, we have assets in place to support growth through the rest of this year. With a strong balance sheet, inclusive of low leverage, we are focused on disciplined return-oriented investments. This quarter, we flexed our share repurchase authorization and bought back $55 million of shares at an exceptional value. When it comes to evaluating the impact of tariffs on our equipment cost, our strong balance sheet yields optionality. Let's turn to Slide 6 and discuss our second quarter results. During the quarter, revenues decreased 1% versus the prior year. Revenues net of fuel increased 1%. Adjusted EPS was $0.11, adjusted operating margin was 2.2% and adjusted TTS operating margin was 2.8% net of fuel surcharges. Results in the quarter benefited from a growing fleet size due to Dedicated start-ups and pop-up truck opportunities in One-Way. One-Way revenue per total mile growth, cost containment discipline and action, higher volumes in Truckload Logistics, particularly in brokerage at stable gross margins and increased gains on equipment both sequentially and year-over-year. In Dedicated, retention remains strong and shipper conversations are constructive as customers look for reliable and flexible transportation partners who offer creative solutions, high service and scale. The implementation of new Dedicated fleets signed last quarter is progressing well and continuing to ramp into Q3 as we hire drivers and build fleets to targeted levels. Additional fleets were awarded in the quarter, and the opportunity pipeline remains strong. Our Dedicated expertise is a competitive advantage that has and will continue to drive growth over the long run. In One-Way Truckload, revenue per total mile increased sequentially and was up year-over-year for the fourth consecutive quarter as recent contractual rate changes became effective and deadhead improved sequentially. Our One-Way fleet size increased sequentially, driven in part from engineered pop-up solutions in response to customer requests. This demonstrates our flexibility and adaptability in meeting customers' needs in an improving market, all while implementing new fleets in Dedicated and supporting brokerage growth in logistics. We are pleased with our Q2 trends in logistics, showing double-digit growth sequentially and mid-single-digit growth year-over-year. We expect continued growth driven by our track record and reputation with large shippers needing additional capacity. In addition to sequential and year-over-year top line growth, expenses were down and operating margin improved. Turning to Slide 7. Our comprehensive logistics portfolio is a key component of our diversified solution-focused strategy. Werner's mix of large complex shippers requires a combination of multimodal solutions that are coordinated, reliable and cost-effective. Our solution-oriented logistics service provides expertise that benefits larger customers while also expanding our reach to small and midsized shippers. Truckload brokerage complements our Truckload division, offering customers additional capacity and flexibility through creative and competitive solutions. We offer tailored solutions that are mode agnostic, combining the strengths of all Werner services to solve customer challenges. Our large trailer pools provide capacity, simplify shipper operations, improve efficiency and minimize the need for costly labor to live load and unload trailers. Brokerage also enables new customers to be introduced to Werner in a low-risk setting, often leading to expanded business relationships in One-Way Truckload or Dedicated. Our Intermodal business is a high-service product that provides lower cost options to customers. We have partnerships with all of the major railroads for nationwide rail access and capacity through a combination of private containers and rail-owned equipment to provide high service levels across the United States and Mexico cross-border. Finally, our Dedicated Final Mile division moves bulky goods nationwide directly to homes and B2B in verticals such as furniture, appliances, auto parts and healthcare. Our technological advancements are fueling logistics growth, including running on our EDGE TMS platform and other tools like Werner Bridge, which makes us a preferred user-friendly choice for third-party carriers and more automation in load booking and back-office processes, keeping us agile and cost-effective. Moving on to Slide 8 to summarize our market outlook for the remainder of the year. Although there could be fits and starts, we expect stable truckload fundamentals throughout the rest of the year. Supply and demand in our industry has continued to work towards equilibrium in recent years. As the current challenging environment lingers, we anticipate ongoing capacity attrition. Long-haul truckload employment is below the prior peak in 2019 and additional exits could accelerate with greater ELP and B-1 enforcement, Class 8 truck orders on the decline and lenders driving out capacity through growing repossessions given resale values are on the rise. Consumers have remained resilient as they search for value and trade down, resulting in relatively stable nondiscretionary spending. The One Big Beautiful Bill could stimulate consumer demand and industrial investment over time, both of which would benefit freight volumes. Tariff and interest rate impacts remain uncertain for both shippers and consumers. Retail inventories have mostly normalized. While some inventory was pulled forward from the tariff pause, nondiscretionary goods have had more consistent replenishment cycles. Volumes from our value and discount retailers were steady in Q2 and into July. Spot rates have weakened since the July 4th holiday, and we expect spot rates to follow normal seasonal patterns for the remainder of the year. Used truck and trailer values have accelerated since March, benefiting from tariff and other macro uncertainty. With that, I'll turn it over to Chris to discuss our second quarter results in more detail.

Thank you, Derek. Let's continue on Slide 10. All performance comparisons here are year-over-year unless otherwise noted. Second quarter revenues totaled $753 million, down 1%. Adjusted operating income was $16.6 million and adjusted operating margin was 2.2%. Adjusted EPS of $0.11 was down $0.06. We are pleased with the improved adjusted results in the core business. We also benefited from a handful of non-GAAP adjustments during the quarter. First, the Texas Supreme Court's ruling in Werner's favor reversing and dismissing the landmark $90 million truck accident verdict from 2018. This ruling led to the reversal of a $45.7 million net liability, including interest and benefiting GAAP operating income. Our consolidated insurance and claims expense for the quarter, excluding this benefit, was $38.9 million. In addition, our acquisition of Baylor Trucking in October 2022 included an earn-out provision based on a range of outcomes. During the quarter, we settled on a final payout, resulting in the reversal of $7.9 million from previously accrued amounts. Although the accrued earn-out has been included in GAAP results since the date of the acquisition, the reversal was classified as a non-GAAP adjustment in the quarter due to the large one-time nature of the reversal. This benefit was included in other expense. Last, severance expense of $1.3 million from recent cost actions was also treated as a non-GAAP adjustment. Severance is included in the salaries, wages and benefits. Turning to Slide 11. Truckload Transportation Services total revenue for the quarter was $518 million, down 4%. Revenues net of fuel surcharges decreased 1% to $462 million. TTS adjusted operating income was $12.8 million. Adjusted operating margin net of fuel was 2.8%, a decrease of 220 basis points, of which 150 basis points of the decrease is attributed to higher insurance and claims expense, excluding the $45.7 million reversal. During the quarter, consolidated gains on sale of property and equipment totaled $5.9 million. Let's turn to Slide 12 to review our fleet metrics. TTS average trucks were 7,489 during the quarter. The TTS fleet ended the quarter up 1% year-over-year and up over 100 trucks or 1.4% sequentially. TTS revenue per truck per week net of fuel increased 0.3%, primarily due to higher One-Way revenue per total mile mitigated by lower One-Way miles. Within TTS, Dedicated revenue net of fuel was $287 million, down 0.7%. Dedicated represented 64% of TTS trucking revenues, up from 63% a year ago. Dedicated average trucks decreased 0.9% year-over-year, but increased sequentially by 1.6% to 4,855 trucks. At quarter end, the Dedicated fleet was up 50 trucks or 1% from year-end and represented 65% of the TTS fleet. Dedicated revenue per truck per week grew 0.2% and has increased 28 of the last 30 quarters. It often takes 90 days or more before new fleets meet targeted utility as drivers are hired and integrated into the fleet, equipment is positioned and routes are optimized. Lower utility in the start-up fleets negatively impacted revenue per truck per week by 60 basis points in the quarter. Higher insurance costs versus the prior year period on an adjusted basis, excluding the Texas Supreme Court reversal, was nearly a 200 basis point drag on operating income. Start-up costs for new Dedicated fleets was a headwind as well, totaling approximately $1 million. We expect some additional start-up costs to linger into the third quarter. Excluding the elevated insurance and claims costs, Dedicated operating income margin improved 50 basis points. In our One-Way business for the second quarter, trucking revenue net of fuel was $164 million, a decrease of 3%. Average truck count of 2,634 declined 3.5% year-over-year, but grew slightly on a sequential basis. Revenue per truck per week increased 0.4% due to 2.7% higher rates, mitigated by a 2.3% lower miles per truck per week. Revenue per loaded mile increased 3.7% year-over-year. Deadhead improved sequentially but was still elevated year-over-year, resulting in a 2.7% increase in revenue per total mile. One-Way freight conditions were steady throughout the quarter. We experienced tighter conditions around Roadcheck week in May and stable volumes throughout June, which have largely continued into the early stages of the third quarter. We were able to flex the fleet and provide One-Way capacity for select customers who had temporary needs. This work is ongoing. The total One-Way miles decreased 6% versus the prior year with 3.5% fewer average trucks. However, increased miles in PowerLink offset the decline in One-Way Truckload miles, ultimately resulting in combined miles that increased 1%. Now turning to Logistics on Slide 13. In the second quarter, Logistics revenue was $221 million, representing 30% of total second quarter revenues. Revenues increased 6% year-over-year and 13% sequentially. Revenue in Truckload Logistics increased 9% and shipments increased 7% with gross margin expansion. Revenue from our PowerLink offering was up 17%, while traditional brokerage recorded mid-single-digit revenue growth. Higher volume was the driving factor with modest rate improvement. Intermodal revenues, which make up approximately 13% of Logistics revenue, increased 3% due to 7% more shipments, partially offset by a 4% decrease in revenue per shipment. Q2 was our highest operating income quarter in 2 years for Intermodal. Final Mile revenues decreased 10% year-over-year, but increased 7% sequentially. Logistics adjusted operating margin of 2.7% improved 190 basis points, driven by volume growth and a double-digit percent reduction in operating expenses. Moving to Slide 14 and our cost savings program. As we execute our cost savings strategy, we are slightly increasing our 2025 savings target to greater than $45 million from our prior $40 million estimate. In the first half of the year, we achieved $20 million savings towards that goal. Actions to achieve the full $45 million have largely already been taken, giving high assurance of achieving the remaining $25 million in the second half of the year. The majority of our cost savings actions are structural and should result in enhanced operating leverage as demand returns. Let's review our cash flow and liquidity on Slide 15. Operating cash flow was $46 million for the quarter or 6% of total revenue. Net CapEx was $66 million or nearly 9% of revenue. Year-to-date net CapEx is 4% of revenue. Free cash flow year-to-date is $17.3 million or 1.2% of total revenues. We ended the quarter with $725 million of debt. Our net debt to adjusted EBITDA as of June 30th was 1.7x. We have a strong balance sheet, access to capital, relatively low leverage and no near-term maturities in our debt structure. Total liquidity at quarter end was $695 million, including $51 million of cash on hand and $644 million of combined availability on our revolver and receivable securitization facility, which we closed in the first quarter. Let's turn to Slide 16. While we have been focused on cost discipline, strategic reinvestment in the business to support future growth remains a top priority, ranging from trucks to technology. When it comes to broad capital allocation decisions, we will remain balanced over the long term, strategically reinvesting in the business, returning capital to shareholders, maintaining appropriate leverage and remaining disciplined and opportunistic with share repurchase and M&A. During the second quarter, we deployed $55 million of capital to repurchase more than 2.1 million shares at an average price of $26.05, including fees, providing accretive value to shareholders in the future as earnings improve. We have 1.8 million shares remaining under our Board-approved share repurchase authorization. Let's review our guidance for the year on Slide 17. We are narrowing our full year fleet guidance range from up 1% to 5% to up 1% to 4%. The TTS fleet is up 1.1% year-to-date. Implementations of new fleets in Dedicated remain ongoing. And over the course of the year, as new Dedicated fleets are seeded, growth is expected to be driven more by Dedicated versus One-Way. We are adjusting our full year net CapEx guidance from a range of $185 million to $235 million to a range of $145 million to $185 million. Given our strong balance sheet and proactive fleet management, we entered the year with a higher-than-normal inventory of new trucks ready to support growth. CapEx for this year is below our historical range given lower in-year needs and a deliberate shift to a more asset-light mix. Dedicated revenue per truck per week increased 0.2% year-over-year but is down 0.1% for the first 6 months of the year versus the prior year. New fleet start-ups were a limiting factor this quarter in revenue per truck. Excluding inefficiencies from startups, this metric would have been up by 80 basis points instead of 20 basis points. We expect this metric to remain within our full year guidance range of 0% to 3%. One-Way Truckload revenue per total mile increased 2.7%, near the upper end of our flat to up 3% guidance range for the second quarter. We are reissuing the same revenue per total mile guide of flat to up 3% for the third quarter compared to the prior year period. Our effective tax rate was 26.2% in the second quarter. Our 2025 guidance range of 25% to 26% remains unchanged, and we expect a lower effective tax rate in future quarters. The average age of our truck and trailer fleet at the end of the second quarter was 2.4 and 5.5 years, respectively. Regarding other modeling assumptions. After decreasing on a year-over-year basis for 9 straight quarters, equipment gains more than doubled sequentially and year-over-year to $5.9 million in the second quarter despite the number of units sold being less than half compared to the prior year. Used tractor values have been elevated largely due to trade policy. We are adjusting our full year guidance range for equipment gains from a range of $8 million to $18 million to a range of $12 million to $18 million. In the first half of the year, net interest expense increased $600,000 year-over-year. We expect the inverse in the second half and for net interest expense to be down year-over-year. With that, I'll turn it back to Derek.

Thank you, Chris. In summary, our strategy is working as proven by our second quarter growth. That said, more work remains, and we'll continue to take near-term decisive action to position Werner for success. We are a large-scale, award-winning, reliable partner with diverse and agile solutions to support customers' transportation and logistics needs. We've been making considerable operational improvements and building a leaner, but more powerful organization. Our nearly 13,000 hard-working talented team members are committed to moving this company forward. And while our hard work has started to pay off, we have a line of sight to accelerated earnings power. As the trucking environment shows signs of improving, we've got tailwinds forming at a macro level and specific to Werner. Our fleet is new and modern due to the investments made in the last few years. We're progressing through our transformational technology journey and our balance sheet is strong, enabling flexibility in our capital allocation strategy. As the economy grows and transportation helps deliver that growth, we expect our earnings to improve, leverage to decrease and our investments to begin showcasing their value. With that, let's open it up for questions.

Our first question today is from Eric Morgan with Barclays.

Derek, I wanted to ask for your thoughts on the current cycle. You mentioned expectations for stable fundamentals and a normal cadence of spot rates in the second half of the year, along with some positive trends in capacity. It seems like demand is steady but there is some uncertainty regarding tariffs. I'm curious about what the up cycle might look like when it finally arrives. If we don't see substantial improvement in demand and if supply trends remain unchanged, how would the up cycle take shape and what implications would that have for your TTS margins?

Yes, Eric, thank you for that question. This cycle has indeed been longer and more challenging than any we've experienced before, so I'm hesitant to make predictions about the future. However, considering our current situation and looking at the ongoing attrition, as well as BLS data showing numbers dropping back to or below pre-COVID levels, we continue to observe attrition due to fleet downsizing and bankruptcies. For instance, there was recently a 400-truck carrier that ceased operations in the Southeast. I believe we will keep seeing such occurrences given the difficult rate environment that everyone is facing. We've always stated that we expect this to be more of a supply-driven up cycle rather than a demand-driven one. That said, when I take a step back and assess the consumer landscape, including the impact of tariffs and other challenges they face, yet still recognizing their resilience, it seems that our business, which focuses more on nondiscretionary goods and discount retail, is positioned well for consumers who may choose to be more cautious in the coming quarters, as well as for those who are already behaving in this way. We have ongoing discussions with our customers and recently held our annual forum, which brings together over $1 billion in revenue for a multi-day event, allowing for valuable conversations about their outlooks. With some of the tariff concerns calming down, many of their outlooks appear positive. We are not counting on a significant rise in demand but believe the supply situation will continue to unfold. Our demand expectations are centered around stability, and peak season should remain consistent, reflecting a return to normal seasonality over the last couple of years. Assuming these trends continue, it sets the stage for an up cycle resembling historical trends rather than the COVID-impacted cycles. Finally, from an OEM perspective, considering how orders have been curtailed and remain below replacement levels, and the actions being taken at the OEM level that are difficult to reverse as demand rebounds, I think we may face capacity constraints for several quarters, likely extending through 2026 as capacity is rebuilt. This situation could further extend and enhance the up cycle.

I appreciate that. I was hoping you could clarify the temporary increased demand from certain customers. Would you say that's indicative of trends to come during the traditional peak period, or is it primarily due to a spike in imports that we shouldn't expect to continue in the second half of the year?

Yes, I think it's a bit of both. The biggest sign it represents to me is a flight to quality at this point in the inflection. When customers experience a surge in imports or sudden demand or any external factor, they look for support. At this inflection point, they tend to seek help from well-capitalized, quality diverse portfolio companies that can respond effectively. Most of this activity has been in our One-Way network, where we provided engineered solutions on a short-term basis, which can sometimes lead to long-term relationships. Currently, many short-term activities are ongoing, with some expected to wind down in Q3 and others possibly extending into Q4. It's too early to determine how this will unfold. I'm particularly excited that these situations show customers choosing quality providers, and we're pleased to meet their needs in that regard.

The next question is from Brian Ossenbeck with JPMorgan.

I just wanted to ask you a little bit more on the capacity side now that we're, I guess, a month or so into ELP, I call it greater enforcement, at least the standardization and focus on it and non-domicile drivers focused there on as well. So I know you've made some comments on that in the past, and you've got a cross-border business who might see some of these impacts, maybe not on your fleet, but others. So if you can give a little bit of color what you're seeing and how you expect this to progress throughout the rest of the year?

Yes, Brian, I'll do my best. To start, you're correct that we don't anticipate any impact on our fleet. We have consistently maintained our English language proficiency test even when it wasn’t enforced. We believe it's crucial for safety as we onboard drivers. This has always been a priority for us. Regarding enforcement, a month or a month and a half in government terms feels like just a brief moment for everyone else, meaning the process tends to move slower than we'd prefer. We are starting to see an increase in enforcement, although it's happening differently across various states. Currently, there have been over 1,500 out-of-service violations where the ELP issue was a determining factor for those violations. While that number continues to grow, it’s at a slower pace than we would have hoped. I believe enforcement will gain more traction moving forward, but it is still too early to determine the level of enforcement uniformly across the states. It’s also important to note that the enforcement date is just one aspect of the situation. As enforcement increases, some may choose to avoid it, which could push non-compliant individuals out of the industry or back into other jobs. We don’t have specific numbers on this yet, but over time, we expect to gain a clearer understanding.

Understood. Thanks for all the clarification there, Derek. Just in terms of the broader market, obviously, we've seen a lot of choppiness and uncertainty, and that's probably set to continue for at least a little while longer. What are you hearing from some of your customers as you gave some commentary on peak season, but just broadly speaking, bigger shift to Dedicated, pulling away from Dedicated. I know there's probably a mix of different outcomes and opinions you're hearing. But are you seeing any shift between moving back into Dedicated, moving more into One-Way, moving more into brokerage? Like what's the general sense in terms of how they're going about procuring or at least thinking about getting more capacity into the end of this year and into next?

Yes, Brian, that's a great question. We're at an inflection point, and we often hear about the flight to quality. Part of that flight to quality involves moving from One-Way to Dedicated services, but we want to ensure that any Dedicated business we take on is genuinely dedicated. If it's merely a capacity solution, that falls into the commoditized end of Dedicated, which we generally avoid. We will support that customer with a One-Way solution or an engineered solution, but that won't be counted in our Dedicated figures because we want those numbers to reflect true Dedicated services. We are observing some of this shift, but what we notice more recently is customers seeking a portfolio approach. After our recent forum, I've had encouraging conversations with customers who are excited to partner with Werner for their One-Way needs. They can also collaborate with us on truckload brokerage, especially our PowerLink solution. Many have intermodal requirements, and we're ready to meet those needs, providing diversity in their solutions. Overall, this is the trend we're seeing. Regarding their Dedicated needs, there's a noticeable decrease in interest for private fleet growth compared to the COVID years. That period was a defensive strategy for many, as they sought to manage their own capacity. Now that they've been in the trucking business longer, they recognize that even when they have the best freight and can work through their networks, it's more challenging than they anticipated. Consequently, there aren't many discussions about significantly expanding their private fleets, and in some cases, they may even look to shrink or exit. This position benefits our Dedicated pipeline. I've covered a lot, but I hope that addresses your question.

The next question is from Ravi Shanker with Morgan Stanley.

Congratulations on the case reversals. I know it’s something you have been advocating for a while. Do you think this marks the beginning of positive developments for tort reform and potentially stabilizing insurance numbers in the industry?

Yes, Ravi, while I would love to believe that this is the beginning of a significant shift in similar decisions, I think that might be a bit optimistic at this time. We do believe it was the right decision, and the Supreme Court of Texas affirmed the facts of the case as we presented them, which is that we were struck head-on while in our own lane by a vehicle that lost control and crossed into oncoming traffic before hitting us. We see this as a financial win and a strong affirmation for our drivers from the Supreme Court. However, there is still considerable work to be done in our industry and as a company regarding tort reform, which we need to tackle on a state-by-state basis. This is challenging work, but it's necessary. We're just seeking a level playing field without any special advantages. We have always maintained that if we make a mistake, we will own up to it, learn from it, and strive to improve. However, egregious verdicts only contribute to cost inflation, ultimately affecting consumers negatively. There are ways to address this, such as taking a more active role in states where judges are elected rather than appointed, ensuring we stay vigilant in these matters. The priority is to reduce our accident rate, and we are dedicated to that goal. We have been on a multiyear trend of lowering our DOT reportable accidents, which are the more serious incidents, and that is what really counts. On the injury front, we are focusing on enhancing injury prevention, improving driver training, and providing better post-injury care to facilitate quicker returns to driving. We are taking a comprehensive approach to this. Ideally, our industry will succeed in moving certain issues from state courts to federal courts, as we believe that is where they belong, though it will be a long battle worth fighting. Regarding insurance, predicting outcomes is difficult because you are always one day away from a trial, and the results are uncertain. We expect to eventually stabilize that curve and we are making progress, but we are still concerned about the high percentage of insurance costs relative to our revenue at this time.

Understood. That's really helpful. And maybe as a follow-up, you did note your high consumer nondiscretionary exposure. But I think there has been some view that in this cycle, it's nondiscretionary that's under pressure more. I think you've seen some of the CPG companies say that, and UPS sort of hinted that in their call this morning. Do you feel like you guys have been a little more pressured macro-wise from a demand perspective? And does that potentially give you a little more upside when the up cycle comes?

Look, I think the consumer has been more frugal perhaps than they have in prior cycles. And what I mean by that, especially since you mentioned CPG companies, I'll stay away from names. But we know that private label, white label type products have become more in vogue and people are willing not just to trade down in what store they shop at, but trade down the product mix within that store. But in both of those types of cases, the places that we work and who we haul for, they play in those arenas. And so we have not seen that kind of duress within our customer mix. As a matter of fact, several of our customers, as indicated by some of these pop-up kind of opportunities and project opportunities that we commented on, are actually seeing some increased volumes that needed a special solution to be able to solve for. Now that doesn't mean I can predict that that's what it looks like 2 quarters out or even into the fall. But right now, it appears as though that discount retail nondiscretionary arena is holding up pretty well overall, and we're heavily exposed in that part. And we do a really good job and a very unique job for those customers. So that would be the other part of it. I would just remind everybody of is that the work we do for them is not as much just that commoditized you call we haul type end of the spectrum. It's more dedicated, it's more engineered. It's a lot of cross-border. And as they benefit through this upside and as they attract customers, what we've seen in prior cycles is they tend to hold on to them pretty well. Customers are exposed to a product mix that maybe they didn't realize was as strong as it was. And that's where we see them usually take a step up in store growth, in same-store sales, and we're along for the ride with them supporting them in every way.

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

Derek and Chris, just utilization seems to be improving, deadhead improved sequentially. Is that better asset focus on your part? Is that selling more equipment and a sign of excess capacity coming out? I guess just maybe positioning that into your thoughts on what's normal for TTS margin gain from 2Q to 3Q?

Yes, that's a great question, Ken. I want to start by highlighting that the gains we are seeing in utilization, particularly within the One-Way network, stem from engineered efforts. We're implementing structural and strategic changes that allow us to maximize asset efficiency, which is quite exciting for us. At this moment, the increased mileage doesn’t provide much leverage upward until rates begin to rise. However, when they do, there will be significant earning potential associated with those additional miles. Interestingly, in Q2, our utilization was slightly down, but that primarily reflects some notable successes in our Dedicated segment, where we needed to reallocate some high-quality One-Way drivers to fulfill those engineered solutions. This caused a temporary utilization impact due to our own accomplishments in Dedicated. We anticipate that as we continue to experience growth in Dedicated—though perhaps not as uneven as what we saw in Q2—coming into Q3, we will have the chance to better manage the One-Way network, where we believe there are further productivity gains to be realized. If we look back just a couple of years, the miles per truck have improved significantly, now showing double-digit gains compared to our previous benchmarks. This is part of what has driven the highest revenue per truck per week we've ever recorded in One-Way, despite a challenging market with still pressured rates. Moving forward, we need to keep a close eye on our cost management, a focus we've maintained diligently, as this will position us well for expanding margins as rates improve, allowing us to work towards achieving double-digit operating margins in TTS.

And I'm sorry, your thoughts on what that means for kind of normal seasonality for third quarter operating margin in TTS? Is that a Chris question? I don't know, Derek, do you want to take it?

Yes, I can provide some insight on that. Overall, it has been a strong start to the third quarter. Revenue is looking good, and the outlook remains positive, indicating a sequential improvement in revenue, partly due to Dedicated within TTS. We will continue to scale up our new fleets and benefit from the recent successes we had last quarter. While your question was specifically about TTS, it’s worth mentioning that we are also seeing positive momentum in logistics from Q2 to Q3, and we anticipate that will carry on. From a TTS standpoint, we foresee ongoing improvement in operating income. As Derek noted, we remain confident in our path back to achieving double-digit margins.

Okay. But I guess you're not discussing a historical average or anything regarding a change from the second quarter, like a 130 basis point or any kind of typical improvement from the second quarter? Sorry for repeating, but I'm just trying to...

I think the challenge here, Ken, is that while we can look at the averages, they don’t really tell a complete story since operating income increases about half the time from Q2 to Q3 and decreases the other half. It really varies depending on the year. Chris' comments suggest we anticipate some incremental gains from Q2 to Q3, but we’re not expecting anything dramatic. It will require ongoing effort to achieve small incremental improvements as we work our way up because unfortunately, we are starting from a very low point as we entered Q2, and we’re beginning a gradual ascent.

Totally understand. Can I just squeeze one more in on the age of the fleet? You went up to 2.4 years, Derek. Is that anything on moderating, you mentioned moderating equipment spend. Is that a trade-off of buying back the stock versus a deliberate move to age the fleet? I just want to understand if there was a signal there.

It definitely wasn't a trade-off to buy back stock. Our balance sheet is strong enough that we could have done both. This decision reflects the ongoing uncertainty around tariffs and some issues with the EPA that are still happening in D.C. We feel confident in our position. Additionally, as our fleet becomes more engineered, with 65% of the trucks in Dedicated and 35% in One-Way, it challenges some assumptions about the ideal fleet age. While I'm not suggesting that we've concluded that 2.4 years is perfect, it doesn't concern me compared to our recent range, which was a bit lower. We believe we are better positioned and still have options with our OEM partners, which could lead to slight changes in fleet age as we move forward this year. We plan to be flexible and opportunistic regarding fleet age. We feel very positive about the utilization in our terminals for on-site maintenance versus over-the-road maintenance, along with the capability to allocate trucks appropriately based on their age, ensuring they can perform their work without affecting service or drivers.

The next question is from Tom Wadewitz with UBS.

How should I think about your underlying inflation and the rate you need? It seems like you're seeing some improvement in revenue per tractor excluding fuel and progress in rate on One-Way, along with various positive factors in Dedicated. However, a 2% or 3% increase in revenue per truck per week doesn't seem sufficient. Do you believe inflation will decrease in the next couple of quarters, or are you more pessimistic about that? To make margin progress, do you think you need a 5%, 6%, or 7% rate? I'm curious about your thoughts on this broader situation and how much of a rate increase you consider necessary. Also, do you think inflation might decline if we look out to 2026 or in a few quarters?

Yes, Tom, this is Chris. So yes, we certainly need rate recovery in One-Way. I mean, as you know, we've had multiple years of significant rate reduction. I think we've held in well relative to the overall industry. But broadly, it's been a couple of years of rate reduction, while other expense items have been on an inflationary trend, as you said. So we certainly need more in the range of mid-single-digit improvement in rate, but it's not only about particularly One-Way rates, really to get back to the low double-digit TTS kind of mid-cycle adjusted OI margins that we've talked about. It's rate, but also continued growth in Dedicated in addition to ongoing cost discipline, leveraging our technology investments and a sustained recovery in the used equipment market. Those are really the levers that we've talked about. We continue to pressure test within our own walls here of those levers. And it continues to give us confidence that those in combination is the pathway back to low double digits, 10% to 12% or more. The good news is, in the second quarter, all of those areas and levers are progressing positively for the first time in 2 years. So we have a ways to go, but we're encouraged with the recent momentum, and we remain confident in our gradual progression.

The year-over-year performance in VAS has significantly improved, with cost reductions positively impacting operating income. Is the current run rate around $6 million in operating income per quarter in VAS, assuming there are no major changes in the truckload market? How do you view the future run rate? It seems like this improvement could be sustained for the next three quarters as you build on it. I would appreciate any additional insights on the progress in VAS operating income.

Yes, Tom. First off, I'll congratulate you for wearing your throwback analyst jacket today by calling it VAS. We're logistics now, but our model has been in use for a long time, sorry. But yes, so the structural improvements made there are reflective of some of these tech investments we've been talking about. We're very excited about the ongoing integration that is now basically complete between ReedTMS and Werner Logistics. That team has really found its stride structurally. We believe that, yes, on the horizon, we need to all realize that at some point with this inflection comes by rate pressure, and that pressure will be managed as well here as anywhere. At the same time, that will come with our ability to reset sell rates with our customers, but there's always a timing issue. So absent of that timing issue, as you stated in your question, yes, we do believe that we have a structurally different logistics group now. They're operating at a high level of performance. We're proud of the Q2 performance. And as we look forward, we've got momentum into Q3 that continues to give us optimism. So I don't know if that fully answers, but I'm not going to guide you to an actual number, obviously, but now I'm doing it. Werner Logistics is on the right path, and it's really the output of what's been a very arduous integration effort as well as the output of the one place where we have Werner EDGE fully integrated and fully committed minus the small final mile piece of the business.

The next question is from Scott Group with Wolfe Research.

Just to follow up on one of the earlier questions about Q3, right? If I just look Q1 to Q2, trucking margins got about 2 points better. Is that sort of like the magnitude of improvement we can continue to expect sequentially? Or is it, hey, gains on sale got better, Q1 was really bad, and so maybe that's too much improvement to expect on a quarter-to-quarter basis? Any thoughts?

I won't provide specific guidance on numbers, Scott, but I agree with your observation that Q1 was quite poor. Some of the improvement we're seeing is just a result of that starting point. Gains on a per unit basis have substantially improved and are actually at the highest levels in two years. The main consideration now is how many units we can move and what those gains will look like. It's important to view this as affecting various areas of the profit and loss statement, including ongoing cost reductions and the improvements we’ve been making related to One-Way. As we look ahead from Q2 to Q3, we expect small incremental gains. We need to focus on executing these plans. I'm optimistic because our pipeline appears strong for both Dedicated and One-Way. Our business implementation initiatives are robust for this time of year and are already in the final stages of implementation and launch. While launching a new Dedicated fleet does present some challenges, we believe the hardest parts of those challenges are mostly behind us, although there are still a few implementations to finalize. As we don’t provide quarterly or annual guidance, I will refrain from doing so for now, but I hope this gives you some insight on how to think about the situation.

And Scott, maybe just to add to that. The cost savings program, we've been very focused on that. Part of that goal is holding the line as much as we can, particularly on the fixed cost and even some of the variable as we continue to see more volume, particularly on the Dedicated side, where as we're adding trucks to existing fleets, that comes with a higher contribution margin. And as we're turning on and it takes a while to ramp up these new fleets, we did experience some start-up cost as well as some headwind just in kind of the efficiency on a revenue per truck per week basis in Dedicated. Some of that will continue into Q3. But when we get past kind of the maturity stage of these new fleets, the contribution margin really starts to take effect, and we see the benefit, not only the technology that Derek mentioned, but also just becoming a more agile and lean organization.

That's helpful. And then maybe just a big picture question. It's a big day in the broad transport landscape with the UP NS merger. I'm just curious, Derek, if you've had a chance to think about what this means for your business? Is this good for Intermodal, I don't know, channel partners with rails? And does this have any impact in any way, do you think on your trucking business with the transcon merger? Just big picture thoughts.

Yes, Scott, I'll be a bit careful here about getting too much into the weeds with their respective companies. But I will just tell you this, from our viewpoint today, as we are digesting and continuing to do so, good news for us is our 2 partners right now, predominant partners in the West and the East are UP and NS, respectively. We've seen outsized growth in Intermodal, although from a smaller base than some of the major players, but continue to grow and make headroads. We think this does create a more competitive product. As it relates to threatening the truckload business that we currently are in, if you look at our length of haul and if you look at what our One-Way business looks like and how it's sort of divided between engineered lanes, cross-border Mexico and expedited freight, those are in each way for different reasons, much tougher to tackle and much tougher to convert. I'm not naive enough not to believe that there won't be some freight out there that's convertible, and that's why we have an intermodal product, and that's why we've had some good success converting it ourselves. So all things being equal, if there was going to be a merger West and East from our point of view, we like this particular option. We think it bodes well for Werner. And we think our 65% Dedicated exposure, as an example, is completely insulated from any kind of rail merger. And then within our One-Way, the predominance of what we do is nowhere near in the crosshairs of what the kind of work that would be rail convertible. It doesn't mean there isn't opportunities around the edges, and we're constantly already working with our customers on some of those opportunities because if it's going to go Intermodal, I'd rather go Intermodal here than somewhere else.

The next question is from Richa Harnain with Deutsche Bank.

So Chris, you and I have talked a lot about this. Can you hear me?

Yes, we can. Good afternoon, Richa.

So yes, Chris, you and I have talked a lot about how like the gains on sale, just the trend that's out there right now as maybe a double positive, and that obviously provides a nice uplift to earnings, but it also means that the secondary market is improving and maybe the banks, therefore, have more options when they repossess assets from carriers that are delinquent, they would be more inclined to do that because they can go on and sell those fleets. So maybe you can talk about kind of the other side of the coin, which is not just what's impacting your financials, but just how this is impacting the supply side of the equation? And if we should expect into 2026, these gains on sales to be a continued feature of earnings? Or if you could give us any guidance as far as like the longevity of this trend?

Yes, from a supply perspective, your point is entirely valid. Bankruptcies are increasing, and with the rise in resale values, lenders have more options compared to the past 18 months, during which they have been more accommodating as smaller fleets faced pressure. Having options allows lenders to push some additional capacity into the market, along with other factors such as the ELP and B-1 enforcement, which also affect capacity. For us in the second quarter, we saw nearly $6 million, which is over double compared to the prior year; this represents the best gains on used equipment we've experienced in six quarters, with resale values being central to this. Our unit sales did decrease slightly quarter-over-quarter, which can fluctuate, mainly due to the significantly high resale values that are at more than two-year highs. The sustainability of this situation depends on the supply of used equipment, tariffs, and OEM demand. Therefore, it's too early for us to definitively state how sustainable this trend will be. However, due to our strong performance in Q2, we've adjusted our gain projection for the full year to the upper range of our initial guidance from the beginning of the year. We anticipate Q3 to be slightly lower than Q2, but overall, the outlook for the year remains positive.

Okay. And if I can ask one more clarification one. You talked about the impact from some of these Dedicated and the startup costs on revenue per truck per week. Can you talk about the impact on margins? I'm just trying to understand maybe what's a clean margin as we sort of work through the start-up costs, what you're delivering today versus what the potential is on the current book of business.

Yes, Richa, I'll begin and then Chris may add some more details. When we initiate Dedicated accounts, especially those in new verticals that we have strategically chosen to pursue, there are additional complexities involved. However, we believe there is significant potential for upside over time. As we start these accounts, we do see an impact on fleet utilization until drivers get accustomed to their roles and the routes. Additionally, there is an effect related to the training and development necessary to meet our customers' expectations. This brings challenges from both a margin perspective and the time required to execute these initiatives. When entering new verticals, it is crucial to achieve successful outcomes at a high standard, which we are striving for since it allows for ongoing growth. These accounts have unique characteristics, and we are mostly past the initial challenges with those we have launched so far. We do anticipate more challenges ahead as we continue to implement additional accounts. However, with these implementations also comes the opportunity for fleet expansions within existing Dedicated accounts, which tends to be more efficient, simpler, and offers higher contribution margins. Therefore, all of these factors support our fleet growth guidance and the understanding that much of this growth will be in Dedicated accounts as we move into the latter half of the year.

Yes, Richa, I want to provide some details about the startup costs for the new fleets. We're expecting around $1 million in expenses this quarter related to repositioning, travel, and hiring. This is purely an incremental expense. Additionally, we foresee a negative impact on revenue per truck per week. While we reported an increase of about 20 basis points, we believe it will be closer to 80 basis points, meaning it will be 60 basis points higher once the fleets become settled, mature, and start meeting our revenue expectations per truck per week. Ultimately, if we look ahead to that point, we would expect an increase of around 80 basis points, which also translates to more than $1 million in revenue, net of fuel and TTS. Taking everything into account, including the additional incremental costs and revenue inefficiencies, we estimate a headwind of around 40 basis points on the TTS adjusted operating income margin.

And the final question today is from Chris Wetherbee with Wells Fargo.

I guess I wanted to hit on the tractor age and just get a sense of how you think about what sort of optimal is. I guess it sounds like maybe the opportunity to age this up a little bit. Not sure if I'm reading that correctly. I just want to get a sense of how you think about optimal tractor age and what you have from an equipment perspective right now.

Yes, Chris. This is Derek. If the circumstances were different, optimal might look different, to be honest. However, we feel confident about the tractor age we have today. We believe we can allocate those assets well due to the nature of the work they do and their ability to navigate to and through a terminal for our support. We don’t see ourselves facing any kind of equipment debt that would require a sudden shift. At the same time, regardless of what optimal may be, we are concerned about unanticipated pricing fluctuations or the risk of overpaying for equipment, especially with the ongoing regulatory changes in D.C. regarding the EPA. So, I think we are making the right choice by being patient, purchasing wisely, and keeping our fleet appropriately modern to serve our customers effectively without affecting service levels. We want our drivers to be proud of their equipment. Overall, we feel good about our position and think we can manage within a small range from where we are today. We will remain flexible and responsive as issues like tariffs evolve.

Okay. That's helpful. And then just one follow-up. Chris, I just wanted to make sure I was following kind of what you were saying about the impact of the startups on the operating income margin, I think in 2Q, can you just give a sense of what that is, maybe what the clean run rate is in your opinion as we enter the third quarter?

Yes, sure. The run rate on TTS adjusted OI, Chris, overall?

Yes, please. Yes.

Net of fuel adjusted operating income was 2.8%. Considering the estimated $1 million in startup costs and an additional $1 million negative impact on revenue, this amounts to roughly 40 basis points. The net effect of fuel was also significant this quarter, estimated at about 70 basis points on TTS adjusted operating income. This figure represents the difference between our fuel revenue surcharges and fuel expenses compared year-over-year. In total, these factors would bring us closer to 4%, approximately 3.9% when all calculations are taken into account for what would have been more typical.

Thank you, Gary. I just want to thank everybody for taking the time to be with us today. While the macro environment has some uncertainty related to the tariffs, the health of the consumer and ongoing capacity attrition, we remain committed to our self-help path towards increased profitability and controlling the controllables. The structural improvements to our cost structure, combined with increased focus on operational productivity measures put us in a solid footing to leverage the upside as the market comes further into balance. We have a resilient and diverse portfolio to support our customers' transportation and logistics needs, and our pipeline of recent wins demonstrates the value they see in Werner. I'll close by thanking our customers and our nearly 13,000 associates for their dedication as we keep America moving. Thanks for your time today, everyone.

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