Earnings Call Transcript - WERN Q4 2023

Operator, Operator

Good afternoon. And welcome to the Werner Enterprises Fourth Quarter and Full Year 2023 Earnings Conference Call. All participants will be in a listen-only mode. 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, SVP of Pricing and Strategic Planning. Please go ahead.

Chris Neil, SVP of Pricing and Strategic Planning

Good afternoon, everyone. Earlier today, we issued our earnings release with our fourth quarter and full year 2023 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 provide additional information for investors to help facilitate the comparison of past and present performance. A reconciliation to the most directly comparable GAAP measures is included in the tables attached to the earnings release and in the appendix of the slide presentation. On today’s call with me are Derek Leathers, Chairman and CEO; and Chris Wikoff, Executive Vice President, Treasurer, and CFO. Derek will provide an update on our 2023 accomplishments relative to our Drive strategy, highlights of our fourth quarter results, and a market outlook. Chris will cover our financial results in more detail, including the 2023 achievement of our cost savings program and provide 2024 guidance for key financial and operating metrics. I’ll now turn the call over to Derek.

Derek Leathers, Chairman and CEO

Thank you, Chris, and good afternoon, everyone. We appreciate all of you joining the call today. Clearly, 2023 was a prolonged and challenging operating environment. Our earnings were down and did not meet our expectations. However, we made structural improvements that will set us up for future success as normalization returns. Our Dedicated business proved to be durable and resilient. Our One-Way Trucking business rate per mile decline was more favorable than industry benchmarks, and our Logistics business generated full year volume and revenue growth. Despite the backdrop, our leadership team and nearly 14,000 talented Werner team members stayed the course, executing our strategy, upholding the Werner brand and reputation, making safety our top priority, and providing superior service to our highly valued customers. Let’s turn to slide five to highlight some of our accomplishments in 2023 that created optimism for 2024 and beyond. Our Drive strategy continues to help inform our decisions and lead to acceleration across our core businesses. In 2023, our Dedicated business performed as expected, showing durability and resiliency in one of the most challenging operating environments that I’ve witnessed in my 30-plus years in the industry. We grew Dedicated revenue per truck for the ninth year out of the last decade. And despite the market backdrop, Dedicated performed within our TTS operating margin target for the year, and we expect to see margin expansion when normalization returns. On our results, in addition to Logistics growth and operational excellence within One-Way to mitigate rate per mile decline, we executed on structural cost changes, realizing $43 million of savings. We also leaned into greater network optimization, engineering, and improved productivity, which helped to offset rate pressure, cost inflation, and declining resale values of equipment. Separately, operating cash flow margin remained solid and supported reinvestment in the business. We lowered the average age of our fleet, reduced debt, and returned capital to our shareholders through an 8% dividend increase in 2023. We made disciplined investments towards our continued pursuit and industry leadership of innovation. Our fleet remains modern, safe, reliable, and fuel-efficient. We also made significant advancements in our technology stack by transitioning Truckload Brokerage, including Reed and Intermodal business, to our new cloud-based EDGE TMS solution. In 2024, we are transitioning our One-Way business to the Werner EDGE platform. This continues to be a journey, but we remain excited about the long-term value. By channeling all freight through Werner EDGE, we are committed to a better customer experience and lower cost of execution through improved visibility and optimization across all of Werner. Our core values guide our decisions and behavior every day as we keep America moving. With integrity as our foundation, safety and service is ultimately what Werner stands for, built on the pillars of inclusion, community, innovation, and leadership. We are proud to be recognized in 2023 as one of America’s greatest workplaces for diversity, parents, and families. We realized a 19-year low in our preventable accident rate due to the hard work of our drivers, mechanics, and safety associates working together. As always, safety remains our top priority and is demonstrated by our team members every day, one mile at a time. Relative to ESG, notable milestones include naming a Lead Independent Director for our Board of Directors, increasing our Blue Brigade volunteer hours to over 3,300 hours, and doubling driver training hours to bring awareness to human trafficking. These and other accomplishments are described in more detail in our Third Corporate Social Responsibility Report released in November. Before we move on, I want to acknowledge the appointment of Nathan Meisgeier as the next President of Werner Enterprises. On January 5th, the Board unanimously approved, at my recommendation, the promotion of Nathan. I could not be more excited about this progression in our company’s history. Nathan has been our Chief Legal Officer and a transformative executive leader for nearly two decades at Werner. While his background is impressive, including being a Harvard Law School graduate, what stands out to me the most is Nathan’s integrity, servant leadership, vision, and embodiment of the Werner culture. And to be clear, I’m not going anywhere. I’m excited about our future and partnering more with Nathan going forward. Let’s move on to slide six and highlight our fourth quarter results. During the quarter, revenues and net of fuel surcharges decreased nearly 2% versus the prior year. Adjusted EPS was $0.39. Adjusted operating margin was 4.8%. Adjusted TTS operating margin was 7.5% net of fuel surcharges. Dedicated remained solid and resilient, delivering another quarter of strong customer retention and revenue per truck growth, a stable fleet in the second half of the year, and double-digit adjusted operating margins for all of 2023. As we anticipated heading into the quarter, One-Way Truckload remained challenged by ongoing pricing pressure. We remained focused on long-term pricing discipline and continued our positive utilization trend. Miles per truck increased by nearly 9% in the quarter, the third consecutive quarter of improvement as we further engineered the fleet. Within Logistics, fourth quarter volume was strong, and revenue grew over 6% year-over-year, extending the 13 straight quarters of year-over-year growth. In short, freight conditions remained challenging in the fourth quarter with lower rates despite stable customer demand and slightly better than expected peak volume. In spite of this, our results continue to reflect a business model that is durable, diversified, and resilient.

Chris Wikoff, Executive Vice President, Treasurer, and CFO

Thank you, Derek. Let’s continue on slide nine. Fourth quarter total revenue was $822 million, down 5% versus the prior year. Net of fuel surcharges, total revenue was down by 2%. Adjusted operating income was $39.2 million, and the adjusted operating margin was 4.8%, a decrease of 56% and 560 basis points versus the prior year. Adjusted EPS of $0.39 was down $0.60 year-over-year, with over 90% of the variance driven by lower equipment gains and the macro freight environment weighing down rate per mile in One-Way and margin pressure in Logistics. Turning to slide 10. Truckload Transportation Services' total revenue for the fourth quarter was $580 million, down 9%. Revenues net of fuel surcharges fell 6% to $495 million. TTS adjusted operating income was $37.2 million and adjusted operating margin was 7.5%, a year-over-year decrease of 55% or 830 basis points, driven by compressed pricing in One-Way and lower equipment gains. During the quarter, consolidated gains on sale of equipment totaled $3.1 million, a decline of 22.8 million or 88% versus the prior year. While we sold 11% fewer tractors and over 60% more trailers compared to the prior year period, average price and gains were significantly lower. Net of fuel surcharges and equipment gains, TTS adjusted operating expenses declined modestly but were more than offset by TTS trucking revenue rate per mile decline during the quarter of 5% and a smaller fleet size. One-Way rate per total mile during the quarter decreased 8.6% year-over-year, combined with a smaller fleet, but benefiting from nearly 9% improvement in miles per truck. This marks the third consecutive quarter of production improvement. One-Way rate per total mile was flat from Q3 to Q4. We saw improvements in the quarter in various TTS expense categories offset with year-over-year inflation in other categories. For example, insurance and claims were down 24% versus the prior year, and full year was down 7%. Operating supplies and maintenance expense continued a favorable trend and was down versus the prior year. Driver pay continues to moderate and was down slightly year-over-year, with now two consecutive quarters of a year-over-year decrease, excluding fringe benefits. Benefit expense in the quarter was up over $9 million versus the prior year, driven from favorable workers’ comp reserve adjustments in the fourth quarter of 2022. In summary, given the unique and challenging operating environment, TTS operating margin for the year was below our long-range target of 12% to 17%, largely driven by One-Way. Dedicated remained steady and durable, generating double-digit operating margins. We are encouraged to see sequential improvement in core Dedicated operating income, excluding fuel and equipment gains, for each of the last three quarters in 2023. We remain confident in returning to our target TTS operating margin towards the end of the year. Now turning to slide 11 to review our fleet metrics. TTS average truck count was 8,168 during the quarter, down just over 6% versus prior year. We ended the quarter with the TTS fleet down 1% sequentially and down 70% year-over-year. Our TTS segment revenue per truck per week net of fuel grew during the quarter by 0.2% and has grown year-over-year 19 of the last 24 quarters. These results further emphasize the resiliency of this business and our position in the marketplace. Within TTS for the fourth quarter, Dedicated revenue was $309 million, down 2%. Dedicated represented 64% of segment revenue net of fuel, compared to 62% at the end of 2022. Dedicated average truck count decreased 3% to 5,239 trucks. At quarter end, Dedicated represented 66% of the TTS fleet. Dedicated revenue per truck per week increased 0.9% year-over-year during the quarter and 1.5% for the year, achieving growth for seven straight years and nine out of the last 10 years, growing steadily across all economic conditions.

Derek Leathers, Chairman and CEO

In our One-Way business for the fourth quarter, trucking revenue was $178 million, a decrease of 12% versus the prior year. Average truck count was down 11% to 2,929 trucks. Revenue per truck per week was down less than 1% year-over-year. Turning now to our Logistics segment on slide 12. In the fourth quarter, Logistics segment revenue was up more than $13 million or 6%, representing 28% of total fourth quarter Werner revenues. Truckload Logistics continued to lead with double-digit year-over-year revenue and volume growth in the quarter. Shipments declined sequentially as we worked to improve revenue quality. Our Power Only solution represented a growing portion of the Truckload Logistics volume during the quarter. Intermodal revenues, which make up approximately 12% of segment revenue, declined year-over-year due to a decrease in both shipments and revenue per shipment. Intermodal volumes have been up sequentially for three consecutive quarters. Final Mile continued to show strong growth, reporting a 6% year-over-year revenue increase during the quarter, despite a softer market for discretionary spending on big and bulky products. Fourth quarter Logistics adjusted operating income was $3 million and adjusted operating margin was 1.3%, down 250 basis points year-over-year and down 10 basis points sequentially, driven by rate and gross margin compression. We remain encouraged about the mid- and long-term benefits of our Logistics business. Given a strong customer portfolio and growing contract business, particularly in food and beverage, our growing Power Only solution, progress towards advancing our technology strategy, and long-term opportunity for growing Final Mile and Intermodal. We expect Brokerage margins will remain challenged in the near-term while expanding operating margin later in the year from cost savings and integration. On slide 13, we provide an update on our cost savings program. In 2023, we achieved $43 million of in-year savings as an offset to rate and inflationary pressures and low equipment gains. The majority of the 2023 savings were structural and sustainable. Cost savings will be key to expanding margin and earnings in 2024, given a freight market that will continue to be challenging in the near-term, combined with further year-over-year decline in equipment gains. We are laser-focused on a 2024 program totaling over $40 million in incremental in-year savings. Less than 15% of the 2024 program is carryover from 2023 to get to a full-year run rate on initiatives that we actioned during the year. Over 85% of the 2024 program are new initiatives that are, again, largely structural and sustainable. Let’s look at our cash flow on slide 14. We ended the year with $62 million in cash and cash equivalents. Operating cash flow remained strong at $118 million for the quarter or 14% of total revenue. Full-year operating cash flow was also 14% of revenue, and a company record at $474 million, a year-over-year increase of 26 million or 6%, and 80 basis points of margin improvement, driven largely by DSO reduction during the year. Net CapEx in the fourth quarter was $34.5 million and totaled $409 million for the year, up 29%. Free cash flow was $84 million for the fourth quarter and $66 million for the year or 2% of total revenues, down 50% versus the prior year and reflecting an elevated level of net capex. Our total liquidity at quarter end was strong at $526 million, including cash and availability on our revolver.

Chris Wikoff, Executive Vice President, Treasurer, and CFO

As shown on slide 15, our net CapEx for 2023 of $409 million was below our most recent guidance range. Certain deliveries expected in the fourth quarter were moved to the first quarter of 2024 and are now reflected in this year’s guidance. 2023 was an elevated CapEx year, reflecting lower year-over-year gains and a greater pace of reinvestment in the business. Our 2024 CapEx guidance is a range of $260 million to $310 million. This is within historical ranges in dollar terms, although expected to be lower as a percent of revenue as growth in our asset-light business continues to outpace truckload growth. Moving to slide 16, we ended the quarter with $649 million in debt, down $45 million or 6% compared to a year earlier. Our debt structure is primarily long-term and provides ample credit capacity for growth, with 86% not maturing until the end of 2027. As of year-end, 57% of our debt is effectively fixed. We remain pleased with our low leverage, healthy balance sheet, and long-term access to capital to fund growth and investments to expand earnings.

Derek Leathers, Chairman and CEO

On slide 17, let’s recap our capital allocation priorities. We will continue to prioritize strategic reinvestment in the business, remain disciplined in returning capital to shareholders, and seek opportunities outside of Werner that will drive long-term shareholder value. A strong balance sheet and low leverage provide us with financial flexibility to achieve our capital deployment goals. Let’s turn to slide 18 for an introduction to our 2024 guidance. Our truck fleet guidance for the full year is a range of down 3% to flat year-over-year, with the potential for growth in Dedicated in the second half. Net CapEx guidance is a range of $260 million to $310 million. 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 down 6% to down 3%. For the used truck market, we expect continued low demand with moderating pricing and equipment gains through the first half of 2024. We reached $42.4 million in equipment gains for 2023, and 2024 gains are expected between $10 million and $30 million. We expect net interest expense this year will be flat to $10 million higher than 2023, driven by repricing our term loan that is maturing in the second quarter, interest rate swaps that are expiring, and uncertainty on the timing of Fed easing, offset with debt reduction during the year. Our effective tax rate for full year 2023 was 24%. The guidance range for 2024 is 24.5% to 25.5%. The average age of our truck and trailer fleet at year-end 2023 was 2.1 years and 4.9 years, compared to 2.3 years and five years, respectively, at the end of 2022. We anticipate staying near two years and five years through 2024. I’ll now turn it back to Derek. Thank you, Chris. 2023 was a very challenging year for Werner, but we took measured steps to improve our operations, lower the average age of our fleet, improve safety, reduce costs, and reduce debt. As we strategized for 2024 and met with the senior leaders across the company, we identified three primary pillars to generate earnings power and drive value creation this year. First is driving growth in core businesses, which is comprised of returning our TTS adjusted operating income margin to within our long-term range, growing Dedicated fleet and total revenue on a year-over-year basis in the back half of the year, expanding One-Way utility, Power Only, and Mexico cross-border, and continuing to generate double-digit revenue growth in Logistics while getting back to mid-single-digit operating margin percentage entering 2025. Second is operational excellence as a core competency, which we will deliver through maintaining resolute focus on safety, our number one priority at Werner, advancing our technology roadmap through the transition of our One-Way businesses to our cloud-based EDGE TMS, and executing on our 2024 cost savings program. Lastly, is focusing on driving capital efficiency through process optimization. This includes streamlining business processes, maintaining strong operating cash flow, and optimizing working capital, and expanding free cash flow generation and margin through disciplined CapEx and equipment fleet sales. We are 100% committed to executing on these objectives and believe with high conviction that they are the right actions to generate margin and earnings improvement during the year. We have proven our ability to generate earnings power as demand accelerates. This roadmap of our commitment, combined with the resiliency and dedication of all of our associates, will confirm that history does indeed repeat itself. We look forward to providing you with updates on our progress against our 2024 pillars as the year progresses. With that, let us open it up for questions.

Operator, Operator

This call will end at 5 p.m. Central following the company's prepared remarks. The first question today comes from Bruce Chan with Stifel. Please go ahead.

Bruce Chan, Analyst

Yeah. Thank you, Operator, and good afternoon, everyone. Let me just start off by leaning into the cost savings a bit. You gave us some good color on where those savings are filtering in from. Is there any overlap between the savings and Werner Bridge or is Bridge more of an opportunity to add revenue and a market recovery on your existing cost base?

Derek Leathers, Chairman and CEO

Yeah. Bruce, thanks for the question. I’ll start on the Werner Bridge part, and then Chris may have some color he wants to add. But, Werner Bridge is our digital platform. We’re very excited about what that future looks like, but we’ve got a long ways to go as we continue to develop that out. More specifically, relative to the tech stack, it’s really the transition we’ve already made and worked hard at throughout 2023 relative to getting both Reed, Werner Logistics, or Werner Brokerage, I should say, as well as Intermodal on the EDGE TMS platform. That’s sort of the first major milestone in a longer journey that ultimately includes this year focusing on getting One-Way largely on the platform by the end of the year. As we start to do that, we begin to see opportunities for real savings with expanded visibility and better collaboration to freight across the various sides of the organization. But those are not actually in those cost savings numbers at this point because it’s early innings. What we’re talking about here are tangible programs of diligent cost cutting up and down the P&L through the building in ways that I believe do not impact our ability to respond as the market turns. That’s probably the most important thing. We’re late enough in the cycle that what we don’t want to do is cut for cutting’s sake and then end up bringing all of those costs right back on board. That’s why we think they’re structural, they’re sustainable. It just puts us in a better position. The cost culture here has been one that we’ve needed to address for some time. We’ve worked on it aggressively over the last year. I think we’re finally finding a rhythm and stride toward top to bottom ownership of better cost controls. And I think a crisis like this over the last year’s freight backdrop really puts us in a better position to even execute better moving forward.

Bruce Chan, Analyst

Okay. That’s super helpful. And then maybe just to follow up on some of your commentary around being late enough in the cycle. We’ve heard from a few carriers now that data and expectations are pointing toward the second half inflection. I imagine your customers are looking at similar outlooks. So just, given that consideration, can you maybe share how your early conversations have been going in terms of renewals? Are we still tracking negative or are we starting to see some firming based on expectations for that recovery?

Derek Leathers, Chairman and CEO

Sure. I’d like to point out that we are still seeing a low number of closed renewals, and it’s early in the bidding season. Some customers are trying to negotiate last-minute deals. There’s definite pressure, particularly on the One-Way side of the network. Our position is to maintain discipline. This earnings season has made it clear that carriers cannot achieve a re-investable return at the current rate levels, which will create challenges. We have already signaled our willingness to reduce fleet size if necessary, as demonstrated in 2023. The positive aspect is that we have strong stability in the Dedicated segment of our portfolio, which continues to handle challenging work that is hard to move away from. We are confident in those relationships. On the One-Way side, we will continue focusing on improving our network for better productivity, particularly in our established routes in Mexico. We plan to keep excelling in what we do best, which positions us more favorably in terms of pricing.

Operator, Operator

The next question comes from Jon Chappell with Evercore ISI. Please go ahead.

Jon Chappell, Analyst

Thank you. Good afternoon. Derek, I just want to talk about the fleet for a second as we look at the guide. Zero percent to 3% decline in the truck count. Is this just a continued glide down of One-Way until you see that inflection, and is there still going to be growth in the Dedicated fleet, or are you actually pausing the Dedicated fleet as well, considering both of them as being relatively static to slightly down again until you see a more favorable backdrop?

Derek Leathers, Chairman and CEO

Dedicated performed very well throughout the year, and we are not intentionally trying to reduce the Dedicated fleet. However, the competitive landscape means we need to remain price disciplined and focused on returns. We anticipate some fleet turnover in Dedicated during the first half of the year. We have a strong pipeline in Dedicated and are currently pricing several opportunities. Overall, we expect the fleet to be flat or slightly up by the end of the first half, with growth planned for the latter half of the year. In contrast, the One-Way side is not viable for reinvestment right now. We will not be increasing the number of trucks in One-Way until we observe a positive change. Consequently, total TTS fleet numbers are expected to decrease, at least in the first half, which aligns with our guidance.

Jon Chappell, Analyst

Thank you, Chris. I noticed that insurance and claims are down, as you mentioned in both the fourth quarter and for the full year, which seems somewhat contrary to what we’ve heard across most of the industry. Is this mainly due to a distorted comparison to 2022, and should we anticipate some level of renewed inflation in that area for 2024? Or is there something fundamentally different about your operations? I know you’re running a safer overall network, but is there a structural reason that would suggest Werner's insurance and claims will grow at a lower rate compared to the rest of the peer group in 2024?

Chris Wikoff, Executive Vice President, Treasurer, and CFO

Hey, Jon. Yes, safety is our top priority. To address your question, the fourth quarter of last year had a peak of $44 million in insurance and claims, but it's not just about comparing it to previous years. Others in the industry have reported significant reserve adjustments and our numbers are elevated compared to the last couple of years. The notable increase began in the first half of 2022, but we’ve recently noticed a decline. It's not just this quarter, which saw a 23% drop, but the second half of 2023 also decreased by 17%. While it may be early to fully assess the trend, it is promising and aligns with our strong safety metrics. Our accident rate is declining, reaching a 19-year record low, and we believe these improvements are connected.

Operator, Operator

The next question comes from Brian Ossenbeck with JPMorgan. Please go ahead.

Brian Ossenbeck, Analyst

Hey, afternoon. Thanks for taking the questions here. So, Derek, maybe I just wanted to get your thoughts just going back to capacity. If we hear yourselves and other big fleets who are presumably the low cost carriers in the market backing away. Is it just inevitable that the smaller fleets and other capacity is going to exit as well? Is there something that maybe we’re all missing in terms of just how the freight’s flowing? They have more contract exposure than before. They paid down equipment. I just wanted to see if you think that this is really sort of the beginning of the end of the capacity cliff that’s been here for some time.

Derek Leathers, Chairman and CEO

Yeah. Brian, great question. I promised myself I wasn’t going to try to predict a turn on this call, so I’m going to try to steer clear of that. But we’re at week 71 with net deactivations being negative, so more carriers leaving the industry than coming in. Over the last, call it four to five weeks, it’s been very interesting because new activations have finally fallen off the cliff. With net deactivations kind of continuing, or I should say, deactivations continuing their trend that we’ve seen for now over a year straight. So we think momentum is gaining and we’re going to see more of that going forward. When it turns, exactly, I don’t know. What I do know is that large, well-capitalized, well-run fleets like Werner are focused like never before on lowering our cost to execute, making sure that we’re grinding through the controllables while not spending too much time trying to speculate on the uncontrollable. I’m excited about the team’s focus right now. The fact that we’ve identified going into the year $40 million of cost initiatives, and we believe we’ll have great success in getting those implemented early and often as we kick off this year is exciting.

Brian Ossenbeck, Analyst

Thanks for that. So, just to follow up on the cost savings, and you mentioned earlier that you were confident that you’re not cutting too much too late in the cycle, but I also just wanted to hear a little bit more. I think you can give us some details in terms of what those different buckets are, how they’ve changed into this year and from the previous year. There’s a little bit of carryover, but I really just wanted to hear what was on the horizon and understand that a little bit more. Thanks.

Chris Wikoff, Executive Vice President, Treasurer, and CFO

Sure. This is Chris. We are implementing a program exceeding $40 million, with less than 15% related to carryover. The majority consists of new actions and initiatives. A significant portion of the budget is allocated to salaries and wages, which includes impacts from driver turnover, various pay changes, benefits adjustments, and work comp insurance. Within salaries and wages, we have multiple strategies. Additionally, we have summarized several other categories in our materials, such as supplies and maintenance. Overall, these new initiatives are primarily structural and sustainable, allowing us to avoid deep cuts while effectively addressing inflationary pressures and anticipated challenges from lower equipment gains, particularly in the first half of the year. We believe these strategies position us well to take advantage of an improved market, especially beyond 2024.

Operator, Operator

The next question comes from Ken Hoexter with Bank of America. Please go ahead.

Ken Hoexter, Analyst

Hey. Great. Good afternoon. Derek, you noted miles per truck growth at 9% at One-Way in the second quarter. Is that due to company-specific moves in reshaping the network? If it’s economic, how should we think about the historical trend during a turnaround?

Derek Leathers, Chairman and CEO

Yeah. Good afternoon, Ken. The production gains that we’re seeing in One-Way is very much the result of disciplined engineering within our fleet design. As rates got as low as they've been pressed, it’s really knowing what we can do efficiently, doing more of that, and walking away from business that we feel like no longer fits our network or doesn’t allow us to build the kind of efficiencies it takes to operate at these rate levels. And so I think it’s largely structural and internal to us. But clearly, the consumers held up probably a little better than most of us thought, despite rising interest rates, inflation, and sort of other headwinds they’ve been faced with. To answer your question, it’s part of controlling the controllable that we’re trying to work on all the time. And then leaning into, and this is certainly a part of it, but we’ve talked several times about our Mexico cross-border franchise and really trying to lean more heavily into that. It’s a longer length of haul. It’s more efficient freight. It’s hard to do, especially on the Mexico side of the border, but it’s something we’re very good at.

Ken Hoexter, Analyst

And the trend to look for is what goes first? Is it utilization or the price? What turns first?

Derek Leathers, Chairman and CEO

Yeah. I think in this case, the utilization gains aren’t necessarily a leading indicator of suddenly the market getting much better. It’s just us getting better at where we allocate our trucks, just to kind of reiterate that point. I think what I’m looking for, or looking at as it relates to what goes first or what is moving is anecdotal things. Yes, there were winter storms across the U.S. Yes, that played a role in what we saw with spot market and other pricing opportunities in January. It also had a very negative impact on production for sure. But the reality is, in the darkest days of this freight recession, there were hurricanes that hit with almost little to no impact on spot market pricing or project opportunities or anything else. The other thing I would look at is our comments that we talked about in the opening. But fourth quarter, peak volumes like project opportunity volumes were up over 20% year-over-year; that’s encouraging. Now the problem is the market rate wasn’t there to support those volumes being nearly as lucrative as they would have been in prior years. But in order to get back in that game and show customers what we’re capable of and our execution qualities, we moved a lot of peak freight this fall and so that was encouraging. I think it’s very encouraging early conversations with customers in terms of the quality of the product that we’re putting on the table. Because right now, when price is such a predominant topic, it’s really more important than ever to be able to differentiate the quality of your service, the commitment that we’re putting out there, and the investment we’re making back into the fleet, which we clearly showed in 2023 a willingness to do with an outsized CapEx year. Now that fleet’s where we want it; we’re ready to launch, and as this inflection kind of continues to play out, I like our positioning.

Operator, Operator

The next question comes from Scott Group with Wolfe Research. Please go ahead.

Scott Group, Analyst

Hey. Thanks. Good afternoon. So you guys exited the year trucking at a 7.5% margin. I think you said the goal is to get back to 12% by the end of this year. Just help us think about the cadence of that through the year. Do we take one more step back in Q1 and then build from there? And what ultimately, what needs to happen to get that 4 points or 5 points of margin improvement?

Derek Leathers, Chairman and CEO

Yeah. Scott, this is Derek. I mean, clearly Q4 to Q1 has historically over the last decade been a step back quarter just because of the reality of what happens in the first quarter, the combination of weather plus lower shipping volumes coming out of the holiday season, etc. I don’t expect that to be any different this year in terms of the fact that there will be those structural headwinds. But in terms of getting back to that range, it’s several things, and I don’t want to get too granular here, but it’s a back half goal, let’s be clear. It’s really an end-of-year goal, to be even more clear. And it takes our ability to continue to move further down this engineered path and inside of One-Way to continue a further shift into that more stable, durable, Dedicated business that has proven itself to be resilient in both good and bad markets and from a margin perspective. And then executing on all of these identified cost savings that we’ve laid out. And then the wild cards are things like the used equipment market. How does that play out over the course of the year? That’s going to be difficult. But our base case, I think, is conservative and one that we believe is achievable. If we can be at the higher end of that range, then obviously it accelerates our ability to get there. There’s a lot of work ahead of us, but again, I’ll hit the theme one more time, but it’s about controlling the controllable. It’s been way too long with everybody waiting for something external to change, and it’s about the moment is upon us now that we’ve got to change internally, and we’re laser-focused on doing exactly that.

Scott Group, Analyst

And then my next question, we’ve all seen all your fourth quarters, they’ve been tough for everybody and your point about we’re at a place where it’s not re-investable. One thing I’m just struggling with, like, we’re still seeing pretty elevated truck orders, truck bills. I’m struggling with why that’s happening. Do you have a thought on that and where we go from here?

Derek Leathers, Chairman and CEO

Yeah. I mean, my predominant thought on that, Scott, would be I think a lot of folks, it’s a matter of when you make your move. I mean, if you think about a racing analogy, it’s when do you pit versus your competitors, and we clearly pitted in 2023. We spent a lot of money, had a lot of orders, and a lot of builds to get our fleet where we wanted it. There are several others that haven’t made that pit yet, and they’re doing so, I believe, as 2024 plays out. It’s a big thing that we like about our positioning currently because doing all of that fleet rotation is time-consuming. It costs money, it costs miles, it costs driver downtime. So I like our positioning. But I think that’s what a lot of those orders are. Very few carriers in America are happy with their fleet make-up right now coming out of the COVID years. And I think you’re seeing pent-up demand. I also think it will be interesting to see how that order board plays out relative to builds because orders are one thing, but builds are something entirely different, and I just think as the year plays out, that number may come into more clarity for everyone.

Operator, Operator

The next question comes from Allison Poliniak with Wells Fargo. Please go ahead.

James Monigan, Analyst

Hey, everyone. This is James Monigan filling in for Allison. I wanted to ask about the factors that might drive improvement in the second half. Is there a specific event you anticipate, or do you think it's more about a better balance and an improved market outlook compared to the first half of the year?

Derek Leathers, Chairman and CEO

Yeah. I think it’s really built on the ongoing attrition that we’re seeing across the industry. I mean, I saw a stat just last week, we’re up to 56,000 registered carriers that have gone out of business completely. That’s a big number. 700,000 less CDL drivers that are sort of in circulation from where we were when this whole ramp started. There’s just a lot more momentum behind where we’re at from an equilibrium perspective. I mentioned the storms recently being an interesting indicator that, yes, it was widespread. Yes, that was a severe storm. I’m not trying to minimize that. But kind of the immediate impact of what it did to the network shows that we’re closer to balance than we’ve been in a while. I don’t think there’s one catalyst, and certainly, we’re not banking on it being a GDP-driven rebound. Our base case assumption is very neutral kind of GDP growth this year, but rather a supply-side story as it continues to exit. And obviously keeping very close eyes on replenishment of inventories because it’s one thing to get to just a one-for-one replenishment level. But I don’t think we’ve seen supply chains really since COVID that have simultaneously been dealing with issues in the Suez Canal, issues in the Panama Canal, and the ongoing and sort of ever-present questions around West Coast ports and productivity issues there. I think it’s really causing some pause in the retailers of America to decide whether they want to be just in case or just in time or maybe somewhere in the middle. And if they go to the middle, even, there’s going to need to be outsized replenishment as the year plays out, and we believe that plays into this as well.

James Monigan, Analyst

Got it. You mentioned the improvement in revenue per truck per week in Dedicated and noted that margins are in the double digits. Were you able to implement price increases that kept pace with the cost inflation you experienced, and have you managed to achieve margin expansion over time through cost savings or other strategies over the past year?

Derek Leathers, Chairman and CEO

We have consistently explained our Dedicated segment, which has demonstrated resilience during this downturn. However, there has still been some margin compression, albeit to a lesser extent. We have received strong support from our customers due to the quality and complexity of our work, although we are still facing inflationary pressures. This makes our cost-cutting measures essential, as we need to counteract some of these underlying inflationary effects by reducing costs in other areas. The majority of the impact on our long-term TTS margin range was caused by the One-Way segment, and the results from this quarter have shown just how much pressure that part of our portfolio is under.

Operator, Operator

The next question comes from Ravi Shanker with Morgan Stanley. Please go ahead.

Ravi Shanker, Analyst

Thanks. Good afternoon, gentlemen. To follow up on that, the tone of this call and the message seem a bit different from what you’ve heard from some peers who claim there’s no further room to adjust pricing due to cost inflation and that prices need to be increased. However, your pricing outlook appears more cautious than we anticipated, and perhaps even more so than others have suggested. Is this reflective of a lower starting point on costs for you, giving you more leeway to cut, or is it a strategy aimed at capturing market share, perhaps indicating that you have more flexibility on rates? I'm trying to understand the difference in messaging.

Derek Leathers, Chairman and CEO

Well, I’ll start with the obvious, Ravi, which is I concur with everybody who’s made this statement. There’s no more room to give, but that doesn’t mean that we don’t have prior year comps to deal with and things that we’ve already digested or ingested into the network over the course of 2023 that’s going to come to roost in the first half of 2024. So some of it has to do with prior year comps. Some of it has to do with making sort of intelligent decisions on places that we still want to have a foothold and we still want to kind of live to fight another day. And some of it is just trying to predict when, in fact, does this inflection take place. You know that we tend to be careful and thoughtful with what we say, and I believe that’s a range that we’re comfortable giving at this point. If we can exceed that range, I can assure you we’ll be doing everything we can to do so. And then the last piece, which you already mentioned inside of your question, is we were a bit of a positive outlier on price in 2023, and that might cause more pressure on us as customers try to take a second bite of the apple. But we’re going to stay disciplined and focused as we go through this midseason because, frankly, at some of the opportunities being put forth, it is not re-investable, therefore not worth doing.

Ravi Shanker, Analyst

Very helpful. Thanks for the clarification. Maybe as a follow-up on the Logistics side of the house. We’ve seen some interesting announcements, obviously, a very large digital broker shut down a few months ago. You’ve seen one of your peers examine strategic options for their digital brokerage business. The kind of big player in the space is now talking about the business potentially being more cyclical than it has been before with operating leverage. Do you think the Brokerage business has structurally changed with what it used to be? Given the investment that you guys are making yourselves, kind of what’s the outlook there, kind of and both the short-term and the cycle comes back, but also the medium- and long-term?

Derek Leathers, Chairman and CEO

There’s a lot to consider here. First of all, relying solely on a digital brokerage model can be challenging. There’s still a significant demand for institutional knowledge, personalized service, and the ability to follow up with customers to meet or exceed their expectations, which is tough to achieve with a purely digital platform. While it is part of our strategy, it’s not our primary focus in this market. The role of Power Only in our Brokerage is primarily about enhancing efficiency for customers who choose it. Unlike a diverse fleet that may have incurred high labor costs for managing multiple trailers and the related complexities, we and others successfully implementing Power Only have shown that there’s a better alternative. Although it’s a bit different, it’s similar to why we prefer Dedicated over One-Way; it’s more complex and defensible. The same applies to the growing Power Only solutions in our Brokerage group. These are significant network partnerships with major clients who require smooth support in their Brokerage environment. Offering a mix of services including Power Only, Dedicated, and if necessary, Intermodal and Final Mile simplifies their operations, which is putting pressure on those only focused on one aspect of the market. We intend to keep applying that pressure whenever possible.

Operator, Operator

The next question comes from Bascome Majors with Susquehanna. Please go ahead.

Bascome Majors, Analyst

Yeah. Thank you for taking my question. As we look into the opportunity to grow Dedicated long-term, can you talk a little bit about how the competition in that has changed at all through this cycle? And if you think your niche has evolved at any point as more and more people have leaned further into that from the large carrier base and further away from One-Way? Thank you.

Derek Leathers, Chairman and CEO

Thank you, Bascome, for your question. There has certainly been new competition in the Dedicated sector, as well as new players seeking opportunities in this area. Entering the market and effectively managing operations are quite different. Our long-established expertise in Dedicated has not only helped us attract new clients but also retain them. We anticipate facing more price competition from new entrants in Dedicated, but we prefer to partner with successful businesses that see the supply chain as a strategic advantage rather than just a cost. They seek to collaborate with experienced professionals. We are confident in our capabilities and will continue to focus on this area. I am enthusiastic about our current pipeline, though we recognize that our win rate may decrease over the next few months due to competitive pressures. Hence, we aim to increase our prospective opportunities to ensure we achieve our targets. We just returned from our annual sales meeting, and I can assure you we have a clear understanding of our objectives and the approach we will take. Our team is actively engaged in this work as we speak.

Operator, Operator

The next question comes from Chris Wetherbee with Citigroup. Please go ahead.

Chris Wetherbee, Analyst

Hey. Thanks. Good afternoon. I guess I just wanted to pick back up on sort of the Dedicated versus One-Way Truckload kind of relationship, I guess. We heard from other carriers that there were maybe even some instances of breakeven or losing money on the Truckload side. And I guess what you think about your sort of mix of business. I don’t know that you’ve gone that far to suggest that the One-Way Truckload side is actually not making money in this environment. But I’m kind of curious your thoughts on that relative profitability. And then what that implies about Dedicated margins and the ability for sort of them to turn up as we go through the next year. I guess we’re trying to understand what the sort of margin opportunity looks like on the Dedicated side. If it’s in the hundreds of basis points, meaning several hundreds of basis points, or something a little bit smaller than that. So I’m just kind of curious how you think about that and can it come back as quickly as maybe, obviously, Truckload goes fairly quickly. But how do you think about the timing of that margin expansion as you go through the year?

Chris Wikoff, Executive Vice President, Treasurer, and CFO

Certainly, Dedicated has remained steady and durable, consistently achieving double-digit margins. This shifts our focus to One-Way, which has experienced more volatility. We aren't disclosing specific operating income figures between Dedicated and One-Way in our TTS segment, but One-Way is indeed more volatile, showing low single-digit operating income percentages for the full year. This is mainly due to softer demand and the overall market conditions, as well as a decline in rates per mile. However, we believe we are performing better than the industry averages thanks to our pricing discipline and various strategies. The major factors affecting TTS margins include lower equipment gains, which have been difficult and will likely continue to be so this year. As for the outlook, with some improvements expected in the second half of the year—such as restocking and ongoing structural changes along with cost savings—we aim to return to our targeted operating margin for TTS by year-end.

Derek Leathers, Chairman and CEO

Yeah. And I would add a couple of thoughts to that. One thing that’s underappreciated about Dedicated is that throughout this downturn, although we had great fleet retention and have continued to even add new logos into the mix, the reason you haven’t seen as much in truck growth is it’s very common that across multiple fleets, really across the entire network, they may be down two trucks, three trucks, five trucks, just based on customer volumes, and that had mostly to do with inventory levels and the lack of replenishment. As we get to a more normalized run rate and we look forward, the upside leverage to adding three to four trucks across 100-plus Dedicated fleets can become very compelling because your fixed costs are essentially still what they are. You’re not adding a lot of incremental other costs other than the variable cost of running that equipment, and so that’s exciting. And so Dedicated has more upside potential than people realize as the market strengthens. And then in One-Way, I don’t want to underestimate the fact that even with only 2,700 trucks, and over time that number will be smaller, the percentage of those trucks that are available for hire and nimble and can be moved right now is high. Now, I don’t necessarily love that because it means it’s not tied up with long-term valued customers under the type of arrangements that we prefer. But the good news is they’re available and they’re free agents that can be moved around as appropriate as this market turns, and they will be moved, because we’re not going to continue to run a network in One-Way at the return levels that we’re seeing today, and we owe it to our shareholders and others to make sure that isn’t the case. We’ll be able to respond, as you mentioned, to the One-Way market that more quickly turns, and we’ll be nimble there.

Operator, Operator

The last question today comes from Tom Wadewitz with UBS. Please go ahead.

Tom Wadewitz, Analyst

Good afternoon. Could you share your thoughts on the future of the One-Way fleet count? It appears to be decreasing, and it seems like there are more trucks than usual in the spot market for One-Way. Will this trend continue downwards? From a strategic standpoint, is there a purpose for maintaining a couple thousand trucks in One-Way, or will you gradually transition them into Dedicated as that segment grows? It seems challenging to define what exactly is needed for One-Way.

Derek Leathers, Chairman and CEO

Yeah, Tom, this is Derek. We need a One-Way fleet for several reasons beyond just returns. It serves as a great way to engage with customers and introduce them to Werner, showcasing our brand, culture, service levels, and safety commitment. It also supports our Mexico cross-border franchise, which has been performing well, and we need to capitalize on near-shoring opportunities. We've significantly increased the utility of the One-Way fleet, allowing us to do more with fewer trucks. Additionally, Power Only operates in a similar freight environment to One-Way, facilitating seamless freight movement. Looking at the bigger picture, our goal is to continue growing Dedicated. The One-Way fleet acts as an entry point for drivers to learn about Werner and our culture while building relationships with customers. At this stage in the cycle, I don’t want the One-Way fleet to be too small to take advantage of upcoming opportunities, especially as we anticipate inflections in pricing in both the spot and contract markets. I’m not providing specific numbers right now, but there’s nothing on our agenda that suggests we want to expand One-Way. Instead, I want to ensure we can utilize One-Way assets flexibly as market conditions change. It should remain a starting point for new drivers and serve as a foundation for production enhancements, always prioritizing safety. As opportunities arise in cross-border operations with Mexico, we want to be ready to respond. Our investments at the southern border and in Laredo position us to capitalize on the near-shoring trend, which is just beginning, and we believe we are well-prepared for future opportunities.

Operator, Operator

I’ll now turn the call over to Mr. Derek Leathers, who will provide closing comments. Please go ahead, sir.

Derek Leathers, Chairman and CEO

Yeah. Thank you. I just want to thank everybody for joining us today on our fourth-quarter call. I know the quarter represented a further extension of what’s been a very challenging freight environment, but we do believe capacity rightsizing is gaining momentum, and inventory levels are in line, and replenishment early innings have begun. We enter this year, and we’re focused on operational discipline and controlling the controllable. We’ll continue to identify and implement cost savings without sacrificing our ability to respond as the market improves. Dedicated remains the core of this portfolio, and logistics share gains allow us to be more creative than ever with how our customers’ needs are going to be addressed. Power Only, cross-border Mexico, and then further engineering of our One-Way lanes show promising opportunities for both top- and bottom-line improvements as the year plays out. Finally, we’re committed to being good stewards of capital as we go forward this year and like the positioning of our fleet to kick off 2024. With that, I just want to thank you all for joining our call today and spending your time with us.

Operator, Operator

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