Werner Enterprises, Inc. (WERN) Q3 2021 Earnings Report, Transcript and Summary

Thank you and good afternoon everyone. With me today is our CFO, John Steele. I’m pleased to report that Werner delivered record third quarter earnings, our fifth consecutive record setting quarter. During third quarter freight demand remained strong and the driver market remained very challenging. Our strategic investments in driver sourcing and driver pay in a competitive labor market enabled us to grow our fleet sequentially by 75 trucks. In addition, we grew another 500 trucks with the ECM truckload acquisition that closed at the beginning of the third quarter. We were very pleased with ECM’s performance during our first four months of ownership. ECM service and safety record is excellent. Their driver turnover post acquisition remains low, their financial performance of stellar and our integration is going well and tracking on scheduled. Employment in the trucking industry remains 1% below pre-COVID levels, while the cast truckload freight index is 16% higher. Strong consumer demand combined with extraordinary supply chain bottlenecks are keeping retail inventory to sales ratios at historically low levels, which were boost inventory replenishment for multiple quarters going forward. At the same time, truckload industry capacity is significantly constrained by an ultra competitive driver market and shortfalls in new truck bills. We expect a strong freight market through the balance of this year and well into 2022. Despite a very difficult driver market, we were able to organically grow 75 trucks in TTS from second quarter to third. Our driver sourcing costs were higher in third quarter due to startup costs for our new and planned driving school locations. Increased training pay for drivers hired from schools, driver hiring incentives and driver lodging. In other words, we made investments in driver sourcing that precede the benefits we expect to realize going forward. Werner continues to be well positioned to achieve strong financial results as we benefit from our consumer oriented freight base with winning retailers, driver preferred dedicated fleets. Industry leading cross border Mexico business engineered lanes in our one way truckload segment, our recent ECM acquisition and our comprehensive capacity solutions in Werner Logistics. Moving to Slide 4, here is an updated snapshot of Werner. Our truck fleet grew 6.6% year-over-year to over 8200 trucks with just over 5100 and dedicated and 3100 in one way truckload. Werner continues to have a consumer centric rate base with 75% of third quarter revenues in retail and food and beverage. About half our revenues are with our top 10 customers and 78% from our top 50. Werner has a long standing and growing relationships with winning companies in their industries. Let’s move to Slide 5 for a summary of our third quarter financial performance. For the quarter, revenues increased 19% to 703 million, adjusted EPS grew 14% to $0.79 per share. Adjusted operating income increased 15% To 73.9 million while our TTS adjusted operating margin net fuel declined 150 basis points to 14%. Our operating income growth was primarily due to rate per mile increases fleet growth and strong logistics results. Our operating margin declined due to lower miles per truck and some higher than normal cost increases which John will explain further in his comments. Dedicated freight demand remains strong in third quarter. As our customer base and discount retail, home improvement retail and food and beverage continues to generate strong sales. Dedicated average trucks grew over 10% year-over-year and 2% sequentially. To fund that truck growth we incurred startup costs for driver pay and pay guarantees that increased expenses during a period in which our dedicated miles per truck were 8% lower. One way truckload freight demand also remained strong in third quarter. ECM financial results are included in one way truck load, and ECM represents 17% of the trucks in this fleet. We achieved significantly improved results in our logistic segment in third quarter, with a 35% increase in revenues and 8.5 million of operating income growth. During the third quarter, we received fewer new trucks and trailers than planned as OEMs are increasingly challenged to meet current demand levels with shortages of semiconductor chips, raw materials, components, parts and labor. We expect this industry trend will continue well into 2022. To enable us to organically grow our fleet and continue to meet our freight commitments with our customers, we reduced the number of trucks and trailers we sold in the quarter. Significantly higher used truck and trailer pricing per unit and strong execution of our fleet sales team produce 15.3 million of equipment gains in the quarter. In third quarter, the market value of our equity investments in two simple declined while the market value of our equity investment and mastery increased. The net effect of these market value changes during the quarter was a $16.1 million unrealized gain or $0.18 a share, which increased our net operating income and third quarter. We adjusted for these items in our third quarter non-GAAP EPS. At this point I will turn the call over to John to discuss our third quarter financial results in more detail. John.

Thank you, Derek and good afternoon. Beginning on Slide 7, total third quarter revenues increased 113 million to 703 million. Our TTS revenues per truck per week increased 3.2% due to a 15% year-over-year improvement in revenues for total mile offset by a 10% decline in miles per truck. The competitive driver market, the acquisition of the shorter haul ECM fleet which has lower miles per truck, and other factors were the primary drivers of a 5% sequential decrease in TTS miles per truck from second quarter, the third quarter. The other significant factors that contributed to lower our miles per truck and third quarter included truck and driver downtime due to delays caused by severe truck and trailer parts shortages, and more drivers weren’t available to work due to COVID quarantine protocols. In addition, parts shortages caused our weekly minimum driver pay guarantees to occur more frequently in the quarter due to increase truck downtime. Adjusted operating income increased 15% year-over-year in third quarter on top of 19% adjusted operating income growth in the same quarter a year ago. Adjusted TTS operating income increased slightly. In logistics our revenues continued to strengthen with 35% growth year-over-year, logistics had a strong quarter was significant operating income improvements. Stronger financial performance from our driver training school network and other factors increased corporate and other operating income by nearly one million, despite the fact that the school network is incurring higher startup costs for adding new locations. Adjusted earnings per share in third quarter was $0.79, up 14% year-over-year, on top of 21% adjusted earnings per share growth and third quarter a year ago. Beginning on Slide 8, let’s review results for our Truckload Transportation Services segment. In third quarter TTS revenues increased to 15% due to the higher rates, increased fuel surcharges for trucks and partially offset by the decline in miles per truck. Adjusted operating income was 65.4 million. And although our TTS adjusted operating ratio increased to 150 basis points, we produced a solid 86 operating ratio. Turning the TTS fleet metrics on Slide 9. For dedicated we added 484 trucks year-over-year, and dedicated revenues net fuel increased by 11% 271 million. Dedicated revenues per truck per week increased slightly, which was below our expectations is 9% higher rates were offset by 8% lower miles per truck. Dedicated miles per truck were lower due to the parts shortages. COVID impacts, less driver’s seniority due to fleet growth, and the addition of 16 new dedicated fleets in the last year with a lower miles per truck profile. We expect to gradually improve our dedicated miles per truck and our revenue per truck per week over the next few quarters. Our dedicated customer pipeline remains very strong. One way truckload revenues net of fuel increased 10% to 190 million, average trucks increased 2%. Revenues per truck per week increased 7.8% as a result of a 21.8% increase in rate for total mile, our one way truckload miles per truck declined 11.4%. The addition of the shorter haul lower mileage ECM fleet and third quarter had an expected favorable impact to the year-over-year one way truckload rate for total mile and an expected unfavorable impact on miles per truck, with an overall minimal impact on revenue per truck per week. Driver pay costs were higher in third quarter 2021 due to driver pay per mile increases incentive recruiting bonuses and minimum pay guarantees with lower than expected miles per truck. Drivers who had their mileage impacted due to parts shortages were compensated. Our TTS driver pay for company mile increased 20%, which we expect will begin to moderate going forward as our mileage productivity improves. Insurance and claims expense increased 4.4 million year-over-year and third quarter and seven million sequentially from second quarter. The primary factors were less favorable claims development increases in insurance premiums for liability insurance above our claim retention levels and less favorable claims experienced. Health insurance expense increased 4.6 million year-over-year and third quarter due to increase claim frequency and severity. Health insurance expense increased 6.2 million sequentially from second quarter to third quarter, primarily due to a higher cost per claim, in part due to multiple high cost medical claims, including for claims paid in third quarter that reached our annual stop loss insurance level per member. The combined effect of higher insurance claims expense and higher health insurance expense reduce adjusted third quarter 2021 earnings per share by $0.10 year-over-year, and by $0.15 sequentially from second quarter. Moving to Werner Logistics on Slide 10. In third quarter logistics revenues of 158 million grew 35%, excluding Werner Global Logistics which we sold in first quarter, revenues grew 50%. Truckload logistics revenues increased 63% driven by a 33% increase in revenues per shipment and a 23% increase in shipments. Power only and project business continued to generate strong revenue growth, increasing over 175% from third quarter a year ago and mobile revenues grew 19% supported by a 25% increase in revenues per shipment, while shipments declined 5%. Intermodal volumes were off due primarily to a decline in rail velocity chassis shortages, and increased well throughout the rail and customer networks. Logistics produced strong operating income improvement of 8.5 million in an excellent freight market. We continue to expect our logistic segment to achieve strong growth through this capacity constraint period. And Slide 11 is a summary of our cash flow from operations, net capital expenditures and free cash flow over the past five years. Expanded operating margins and less variable net CapEx resulted in higher free cash flow during the last four years. We expect to continue to generate meaningful free cash flow going forward. We lowered our net CapEx guidance for the full year of 2021 by 25 million. Based on recent discussions with our OEMs we expect to receive fewer new trucks and trailers this year than originally planned. The higher sales prices we are achieving for us trucks and trailers are also contributing to lower net CapEx. On Slide 12, is a summary of our discipline strategy for capital allocation. Our unwavering priority for capital continues to be investing in our fleet, with feature rich trucks and trailers with the latest safety, driver friendly and fuel efficient capabilities. In July, we opened a new driver and maintenance facility which is strategically located in Lehigh Valley, Pennsylvania, and replaced the smaller leased facility. In subsequent slide Derek will discuss the progress we are making with our Werner Edge technology initiatives. We see intrinsic value in our stock based on our long-term growth expectations, and we purchased over 1 million shares this quarter at an average price per share of 45.52. On July 1st, we completed the acquisition of 80% of the equity of the elite regional truckload carriers of the ECM transport group based in Cheswick, Pennsylvania. ECM performed very well in third quarter and exceeded our expectations for driver retention, fleet growth and profitability. We implemented several buying power cost saving synergies with ECM during the quarter and are excited about how our companies are working together. We are committed to maintaining a strong and flexible financial position. Our long-term leverage goal is a net debt to annual EBITDA ratio of 0.5 to one times with the acquisition of ECM and our stock repurchases during third quarter, we ended the quarter with a net debt to EBITDA ratio of 0.5. I will now turn the final portion of our prepared remarks back to Derek. Derek.

Thank you John. During third quarter, the average age of our new truck and trailer fleet inched up slightly as a result of the OEM build challenges. Every Werner truck is equipped with advanced Collision Mitigation safety systems, industry leading emissions and fuel mileage technology, automated manual transmissions for facing cameras, and an untethered tablet based telematics solution. The driver market is competitive and dynamic. In addition to implementing market based driver pay increases, we are expanding and leveraging the strategic advantage of our industry leading driver training school network and our inherently strong culture. So far this year, we increased our school locations from 13 to 17 and at five more planned openings to be completed by the first quarter of 2022. These new school locations were selected and cities with strong driver demographics that align with our freight network. The financial investments we are making these news driving schools are proving successful. As we have already increased the number of school graduates who have decided to join Werner. Each of these driver graduates then develops further driver proficiency through our proprietary program with certified and experienced Werner leaders. The investments we have made in driver sourcing and hiring are working. From the end of the second quarter to the end of third quarter our drivers increased by 3.3%, not including the addition of ECM. On the technology front, our Werner EDGE team continues to work on our cloud first, Cloud Now strategy by developing innovative products that are integrated via API’s with third party SaaS solutions. We are building the tech stack that will improve process efficiencies and help drive operational excellence. Our rollout of mastermind which began with our logistics division is on track with transactional volume increasing daily at all domestic U.S. brokerage offices. This is the first of multiple phases that will continue over the next three years. We continue to deliver on our commitment to create products and solutions that empower our drivers, shippers, carriers and associates. For our drivers, we have delivered enhancements to our in cab device that has resulted in 250 hours of daily time savings across our fleet. We provided our drivers with new ETA software engine that has improved the arrival time accuracy. We digitized our DOT inspection process which improved efficiency in contributed towards Werner’s commitment to sustainability. When it comes to quick and accurate shipper bids, we have implemented new software to streamline the bulk bid process and improve our response time to our customers. We have strengthen our carrier platform by delivering tools to streamline rate negotiation, and help identify best matches for loads and this process utilizes machine learning to improve matching and increase overall transactional efficiency. On Slide 15, you can see the results of our 5T’s plus S estimation is low truckload and logistics. In August, we were once again named to 2021 quest for quality award winner by Logistics Management in both the dry freight truckload in logistics categories. This 38 annual shipper survey is widely regarded as the most important measure of customer satisfaction and performance excellence in transportation and logistics. 4,100 shippers participated in the survey. Werner received the second highest carrier rating of all public company dry freight truckload carriers. And Werner’s one of only two of these carriers that received this award each of the last five years. Next, on Slide 16, we continue to make significant progress in our ESG program. In July, we published our inaugural corporate social responsibility report following the recognized standards from the United Nations Sustainable Development Goals and the Sustainability Accounting Standards Board. You can now find Werner as a reporting company under this FASB framework on their website. We launched Werner book, our branded sustainability endeavor, we set new ESG goals and milestones with four of the nine goals targeted for completion in 2022. These goals will continue to drive accountability for our ESG efforts across our company and increase engagement by our associates. The four goals are, create an advancement and retention plan to increase and elevate women and diverse talent in our management team. Increase employee engagement with the expansion of our associate volunteer program by adding a volunteer hours option that will support employee involvement with qualifying charities of their choice. We created a standalone ESG board committee that commences in 2022 and we will form a task force with senior leadership associates and board members to further the goals of Werner Blue, our branded sustainability program. During the quarter, we added three new associate resource groups. For the year we have introduced eight new ARGs. This week, Werner was awarded the 2021 SmartWay Excellence Award for Outstanding environmental performance for the seventh time in the last eight years. This is the highest recognition in our industry given by the United States Environmental Protection Agency. Next on Slide 17, I would like to spend a moment discussing our durable business model. Here is a history of our annual TTS adjusted operating margin percentage net of fuel since 2008. The bars show the percentage of our TTS fleet that is dedicated, and the line chart shows our annual TTS operating margin percentage. During the last five years while we successfully implemented our 5T strategy, and as we grew our dedicated fleet, we achieve meaningful TTS operating margin improvement. A year ago, we established a long-term annual adjusted operating margin goal range from 10% to 16%. After calibrating and carefully modeling our TTS margin performance, we are increasing our TTS annual adjusted operating margin goal to a range of 12% to 17%. We have increased confidence in our ability to perform and less attractive markets, which allows us to raise the bottom end of the range by 200 basis points. And the structural improvements we have made give us confidence in our ability to perform better in stronger grade markets, which allows us to raise the top end of the range by 100 basis points. Our carefully constructed and optimized fleet mix is designed to generate strong adjusted operating margin performance in good freight markets, as evidenced by the 15.9% TTS margin we achieved over the last 12 months. At the same time, we are increasingly confident we will perform very well in tougher freight markets due to our resilient dedicated fleet and strengthened one way truckload fleets with specialization in Mexico cross border expedited engineered fleets, Tim controlled, and ECM. Let’s now move to Slide 18, and a review of our 2021 guidance framework how we are progressing against this guidance and updates to our outlook. During third quarter we increased our truck count by 575 trucks sequentially, including the 500 trucks we acquired from ECM. Our end of period trucks are up 5% year-to-date, and we expect our fleet to remain flat or decline slightly in fourth quarter as a result of normal seasonal holiday activity. For the full year 2021, we expect our fleet to increase from 3% to 5%. Pricing in the used truck and trailer sales market was better than expected in third quarter on anticipated lower unit sales, resulting in higher than expected equipment gains of 15.3 million, up slightly from 13.5 million in second quarter. For the fourth quarter, we expect continued strong pricing with fewer units sold in third quarter, resulting in expected gains in a range of 10 million to 12 million. Net capital expenditures were 163 million for the first nine months of 2021. We now expect CapEx to be 25 million lower for the full year and to come in at a range of 250 million to 275 million based on fewer new truck and trailer deliveries. Dedicated revenue per truck per week increased slightly in the third quarter. The shortfall relative to our guidance was due to the factors that lowered our miles per truck. For fourth quarter, we expect to begin to make progress restoring our dedicated revenue per truck per week growth in the 1% to 2% range. One way truckload revenues for total mile from the third quarter increased to 21.8% for fourth quarter we expect our one way truckload revenues per total mile to increase 17% to 19% above fourth quarter a year ago. In the first four weeks of October, freight demand trends in our one way truckload unit have remained strong. We are reaffirming our effective tax rate of 24.5% to 25.5% and expect the average age of our truck fleet to be 2.2 years and the average age of trailers to be 4.4 years at year-end. Werner remains well positioned with a superior team and an active talent pipeline that will continue to yield strong and sustainable results. At this time, I would like to turn the call over to our operator to begin our Q&A.

Thank you. Before we begin our question-and-answer session. We would like to let everyone know that earlier this afternoon. The company issued an earnings release for its third quarter 2021 results and posted a slide presentation. These materials are available at the Company’s website at werner.com Today’s webcast is being recorded and will be available for replay beginning later this evening. Before we begin Q&A, please direct your attention to the disclosure statement on Slide 2 of the presentation as well as the disclaimers and our earnings release related to the forward-looking statements. Today’s remarks may contain forward-looking statements that may involve risks, uncertainties and other factors that could cause actual results to differ materially. Additionally, the company reports results using non-GAAP measures, which it believes provide additional information for investors to help facilitate the comparison of past and present performance. A reconciliation to the most directly comparable GAAP measures is included in the table attached to the earnings release and the appendix of the slide presentation. We will now begin the question-and-answer session. [Operator Instructions] Also, the call will end at 5 p.m. Central time following the Company’s closing remarks. And our first question will come from Chris Wetherbee with Citi.

Thanks, good afternoon guys. Maybe just want to start on the on the TTS side. And maybe if we can get a better or maybe more of a breakdown of what was going on from a cost perspective in the quarter. So it sounds like there was two dynamics that impacted the profitability there was the lack of miles per tractor. And then there was also some cost dynamics. So maybe if you can split the two of those apart and get a sense of sort of what the impact of each one of those was made a better sense of what maybe kind of ongoing profitability might look like in the segment?

This is Derek and thanks for the question. I will start and then John will jump in with more detail on sure. But so you in a word miles were a major problem in the quarter. We suffered throughout the quarter from ongoing parts issues and parts availability problems. I think we were impacted greater than others that maybe or don’t have the same decentralized, dedicated kind of footprint, much of our infrastructure, if you will, relies on dealers and dealer networks, to be able to support these dedicated footprints. And given the service expectations of those fleets, we had to do quite a bit of repositioning and really incurred some incremental costs, that if mileage productivity would start to resume to normalize levels, which it has been doing as of late. We will see a lot of that pressure go away. On the cost line we talked a lot about we had some significant increases in both health insurance and liability insurance. Interestingly, the bulk of those were sort of out of period developments, if you will, that took place in both cases that we need to do address in the quarter and we chose to do so. Parts and some of the OEM disruptions that we went through, impacted us across a few other items as well like driver like lodging, driver layover pay, and also tolls were up in the quarter, what I would refer to as a material amount as we had to work through some of those issues. We have taken several steps to address them, and have made considerable progress on those issues. And the most important one of which is we have started to see just improvement in the overall supply of many of those parts that were causing that. On the driver pay side, we saw a significant increase in driver pay. A lot of that is where guaranteed minimum pay really started to come into effect and leak into the P&L. Because those are designed as truly kind of a failsafe, not something intended to come into play on a weekend week out basis in any broad format. But based on the structure that we have put in place, it came into play more than we had anticipated. We have done a couple of things there one an eye toward productivity, which will obviously prevent that from happening. But secondarily, looked in evolved some of those plans to better reflect or better protect and have a look more shared risk as those situations may arise. So as we look forward, it is going to be about return to normalcy from a productivity perspective, both in dedicated and in one way. As well as having evolved a few of the pay packages and pay programs to better reflect the market put us in a position to hire - to attract hire and retain but have basically that risk profile shared just a little bit better than it was at times during Q3. I don’t know if that fully answers or John if you have any color you would like to add.

Yes, just a couple of things, Chris. So clearly, the health insurance and insurance and claims were higher than normal. There was a $0.15 a share sequential impact due to those two items and a $0.10 per share impact on a year-over-year basis. Then the other part of it is that we were able to begin getting back our truck growth and in the quarter. So from second to third quarter on an average truck basis, we were up over 100 trucks most of that and dedicated and that excludes the ECM 500 trucks that we added in the quarter. So we are one of the few carriers that was able to invest in drivers and get some growth back this quarter. So the hiring incentives, driver lodging was about a $0.05 per share impact on a year-over-year basis. And then the minimum pay and layover pay were about $0.05 a share as well, on a year-over-year basis. Sequentially, the hiring incentives and lodging was about $0.03, a share sequentially and minimum pay and a layover pay were about a $0.01 a share sequentially from second quarter. So hopefully that gives you some more information to clarify.

Yes, that is really helpful colors. I appreciate all the detail there. I guess the follow-up question would just be as you think about 4Q and maybe 1Q to 2Q first half of next year. Sounds like there is progress being made there based on your comments maybe about productivity, being able to pick back up. But also just given some of the dynamics of the supply chain would also sound like some of the cost headwinds might still be around for the next few quarters. So you can sort of give us a little bit of help in terms of understanding how quickly this process clears or do we need to think about this really as being a major issue in 4Q, maybe getting better in the first half?

Yes, I will start there. So clearly, some of it is confined to the quarter things we are on top of the parts, issue, parts shortage, we are working more closely with these dealers, we have even started to work to supply them with parts that we had better availability to then they were able to on their own behalf. We have clearly become more aggressive on where we will go service ourselves versus rely on others to do so. Those things have cleared, minimum pay will come much less into play as productivity has already started to increase and really taken it out of play. So that one is predominantly behind us. It is tougher on health insurance and liability, because obviously, we are in the quarter. And it is difficult to predict. But at this time, those would not appear to be trending as we saw in the third quarter and we don’t have reason to believe that that won’t have an opportunity to return to closer to normalize levels. Now, we did take a pretty significant increase in which we disclosed, I believe, the last quarter in our health insurance premiums. And that obviously is here to stay. But a lot of it is behind lodging. We had several dedicated accounts that went into effect at the beginning of this quarter that you simply can’t miss implement on those. And so there was a chunk of this, the costs are reflected in the third quarter. But as you look in the fourth quarter, you now at least start to offset that with revenues and yield. Driver pay line itself the actual pay line itself, that is more ongoing. So what I’m referring to there is salary increases and the impact of salary changes that took place. And again, that is with an eye toward the most robust, dedicated pipeline we have had in a long time. And our need to deliver on the close to business that we have coming down the pipe. That new business has been priced with this new reality in mind. But the cost to get it ramped up and be prepared for it was born in the quarter.

So Chris, I would add that the 20% increase in driver pay per company mile that is higher than it should trend going forward. Because our miles were down 10% and we expect to get the miles back. So on a per mile basis, we think that percentage increase will come down. It is trended from up 7% year-over-year in first quarter to 11% in the second quarter to 20% in third quarter, but we think it will moderate as we start into fourth quarter and into the next year.

Okay. That is really helpful color guys. Thanks so much. Very good job. Take care.

Thank you.

And the next question will be from Scott Group with Wolfe Research. Please go ahead.

Hey thanks, good afternoon guys. So, Derek, I know you don’t typically answer this question, but just given the third quarter operating ratio and just people trying to understand how sustainable this is or not. Any thoughts on fourth quarter operating ratio and if it can improve or not?

So the expectation in Q4 would be to see operating ratio improvement from Q3. We have just talked about several costs that are transitory. Although some are more structural. Those transitory ones are being addressed as we speak and many have already. We have already changed course, or made adjustments to see improvement on them. As we think about - the question, we also never answer, but it is going to come up so I would like to talk about it now is Q3 to Q4 sequential improvement. That will come up at some point. So let’s take that head on. If you look at our five and 10 year history of Q3 to Q4, sequential improvement, I believe the five year sequential history of improvements about 20%. At this point with the changes in those portions of the cost that were transitory in nature. We believe that is a number we are comfortable with making that type of improvement as we look into Q4. And if we can make further progress on some of the headwinds in particular as it relates to miles as impacted by parts, availability, and some of the ramped up incentives hiring that we had to do to meet contractual obligations that there could be some upside to that.

Okay. And then I want to ask on the vaccine, how you guys are thinking about this and what is the latest you are hearing on carve out or not and what you are doing to prepare for it?

Yes, so there is a lot there. But I will start with, we know we have a contingency of our fleet that is, at this point unvaccinated. It is tough to pin that down to an exact number, because within that contingency, there is a group that chooses to not declare, despite how much we may be asking or pushing. We are certainly pro vaccine and we were setting up onsite vaccination clinics and doing a variety of things to get our vaccination rate up. But I would tell you that I think we are not dissimilar from the industry, which is probably in that 50% unvaccinated range potentially even a little higher than that. We are preparing and thinking about and modeling, what it would look like to route and test, those costs are very prohibitive. If that was to be the route that was taken, we feel encouraged that the dialogue has been ongoing, relative to a potential carve out for transportation similar to what they did in Canada. I think it makes all the sense in the world. These are remote workers that don’t interact with the general public and clearly don’t come near the great danger test that this entire vaccine mandate was based on the nature of their work. But we are also going to continue to prepare for worst case scenario. I don’t see a world Scott to be honest, were at a time when the supply chain is under the level of duress, it is on already that we could risk a 20% to 25% exodus industry wide, that is not a Werner number. I’m just saying industry wide. And nor do I see a justification to possibly defend the 100 employee count in an industry as fragmented as ours that also is daily tasked with hauling, delivering and making available, the very PPE vaccine, and other medical supplies that are absolutely critical at this time. So where it will go from here, I don’t know, we do expect to hear something inside, the next call it two to five days. And we are going to be standing by on there ready to react as well, everybody else. But it is a concern, but one that is at this point a bit out of our control until we get more detail.

Okay that is helpful. Thank you guys.

Thanks Scott.

The next question will be from Jack Atkins with Stephens Inc. Please go ahead.

Okay, great. thank you for taking my questions. So I guess Derek, maybe to pivot a little bit, maybe look forward some more to next year. Obviously, with strong demand trends, we have got visibility into that, at least into the first half of next year. It is very difficult for carriers to add capacity, both on the driver side of the equipment side. I guess, would you care to maybe update the market in terms of how you are thinking about the potential for contractual rate increases in 2022, on the one way truck side. Any sort of kind of parameters, you want to maybe think about that, or just what to put out there for the market. And then within that kind of broader framework, do you think it is realistic to expect margin expansion in 2022 for Werner, if you can kind of think about that force that would be helpful. Thank you.

Sure. So I will start with this. We have made our move on driver pay early, we felt it was important to be fully staffed and ready prior to peak and then to set ourselves up for the dedicated pipeline that is ahead of us. That is either landed or near closed. And so that is important as it relates to whatever happens with rate because at this point, I feel more confident than ever, that we have got a variety of packages and/or safety nets for our drivers that position us very well to continue the trend we have seen as of late for both organic growth and then of course, with ECM acquisition, demonstrated ability to add capacity inorganically as well. With all of that said, there are inflationary pressures across the P&L, and we are going to be asking our customers to support us as we support them through this week and beyond. Early in the year, you have got lapping effects of some contracts that maybe didn’t get the full effect of what needed to be done last year when they were negotiated call it late 2020 with implementation dates in early 2021. Well, we are now at that stage today. So then those scenarios, we are certainly in the double-digits and above type range, and in some cases, higher than that. As you get into next year, we haven’t really given firm guidance, but I think the thoughts of that sort of mid-single-digit are no longer prevalent at all, it is got to be north of that and I think it is a lot more rational to think about it in a double-digit format as we think about rate renewals. That doesn’t mean the whole network moves by that amount, because clearly, we have, certain longer term agreements and other things in place. But those longer term agreements also are generally coupled with lower turnover fleets with lower pressures on some of the lines across the P&L. So margin expansion is possible. That is got a lot to do with why we changed our long-term guidance range. Yes, it is a quarter that didn’t meet everybody’s expectations, and most importantly, our internal ones. But at the same time, we took several strategic decisions this quarter and spent money to invest in what we believe is a longer story that runs through the cycle, even though this cycle we think has longer legs with each passing month.

Okay that is very helpful Derek. Thank you for that. I guess, maybe a bigger picture question. This has been such an unusual freight cycle in so many ways. And I think everyone expects us to continue on for some time into the future. Now, I would just be curious to get your take on the feedback you are getting from your shipper customers, are they looking for ways to maybe more closely partner with carriers like Werner, who can provide high levels of service and capacity to them consistently through cycle, it just feel like we kind of go through the manual bid process. And one party’s trying to get something from the other almost every other year. I’m curious Derek for your thoughts on effect can potentially change prospectively moving forward. Just given how unusual and how strong this free cycle has been, and the pressure is put on your shipper customers.

The easy part would be yes, shippers obviously in a market that is tied or aggressively looking to find and establish longer term kind of agreements, longer term arrangements, partnerships, whatever word you may want to use. The onus is on us to make sure that that happens and aligns with people that we think are Werner in the space that have longer term runway is to their own internal models and their own internal capabilities. As we do that, we want to make sure it is people that look to buy across the portfolio that have needs that fit, what we bring to the table size matters. And a lot of these things, our ability to give a more guaranteed rate of return over a longer period of time to our shareholders matters to us and we are pretty open about that. And so as we see the opportunity to get deeper into dedicated with shippers that also have needs, in intermodal and logistics and in one way, those are places that we are going to look to better align ourselves with long-term and we are setting expectations as we put capacity toward their needs as peak that are beyond the rate. So it is not just what the rate of opportunity may be on a particular project, but it is what happens after that once peak has come and gone and some level of normalcy returns to some of the bottlenecks in supply chain, we want to make sure that relationship has as runway left. So those conversations are going great, I had several of them here recently that are encouraging. And I think the kind of investments just as an example we made in Q3 to meet our commitments, once again, show that when we make those commitments, they matter. And we keep our word. They are expensive at times and in the short-term or even painful, over the long haul. I think they make the most business sense.

Okay. Thank you.

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

Yes. Thanks for taking my question. I wanted to go back and maybe with the hindsight of hearing some of your peers talk about their quarters and results. I mean, has anything stuck out to you, were you surprised at that some of the profitability of so many competitors who admittedly are maybe a little more one way levered, but even a big dedicated carrier, added 700 or so trucks sequentially, and it was fairly flat in operating income doing that, just anything that stuck out to you and any thoughts on, where you are on pay versus peers, at this point in that fleet as we look forward? Thank you.

Yes, Bascome great question. I mean, look, we would be remiss, and really somewhat derelict in our duties if we didn’t always challenge ourselves about our model versus other people’s, and how they may be performing versus us. But with that challenge, I can assure you, we don’t do it just on an individual quarter basis. We have talked for years about the fact that we want to return this organization to best-in-class service, mid-single-digit or better revenue growth, through the cycle, and double-digit earnings growth on an annual basis through the cycle. And to do that you have to have a portfolio that is structured in a way that is more diversified, that is more that customers can buy and we can meet them where their needs are. The one that can survive the ups and downs and cyclicality of the one way market and sure, there is no doubt in my mind that we could have made more money in Q3 at the expense of our long-term objectives. I mean, the best example that I can think of is, it is a very easy time to sell a bunch of trucks and trailers right now and make a lot of money in gains on sale. We chose not to do that we would rather hold that truck and trailer, especially given some of the supply chain disruptions and our diversified dedicated footprint. So we pay a higher price for our long-term strategy inside of one quarter, but I think it stands up over time and will continue to do so. With five consecutive quarters of new EPS records we have 11 of the last 15, the 12th one missed by one penny, two of the others were in the 2019, which was the - and we were the only carrier, those EPS went up from 18 to 19. So over the cycle, which is what we have talked about, we think this is a play that continues to hold its value and improve and enhance our returns and results for our shareholders, our customers. And really everybody involved with the Werner story. Occasionally, you pay the price. When you have got dedicated fleets that are coming in place and the timing is such that you have got large outlays at the end of the quarter and the benefits of such coming in the following quarter you don’t get to pick when they implement. Well, you pick, but you don’t choose based on a quarterly EPS, you choose based on the long-term relationship with that customer. And so we will work through this not have you could probably tell by the tone of my voice. But at the same time, I’m very proud of the ongoing story that we have developing here. And it is not yet written to its fullest extent.

Thank you for that answer. If I could just focus a little bit in on the driver pay portion and I realized that dedicated is very local and situational. So it is hard to paint a ball brush. But do you feel like what you did in 2Q and 3Q, got you back to market or do you feel like you have invested to get ahead of market and that is going to really give you some momentum going forward? Thank you.

Yes, great question. I think a couple of things. One, I think we are ahead of market in some of the new stuff we are doing. And in the short-term, we might have a little slightly higher cost profile on some of those. But it allows us in a tough market, not just to attract and retain drivers, but to attract and retain the highest quality ones that we need for the type of work we are going to be signed up for doing. So I think that is part of it. To be frank, I think there is also a few other packages in the quarter that were innovative in nature that have been now evolved quickly to better adapt to some circumstances that were really never foreseen. I mean if anybody had ever told me that we would have the magnitude of trucks, again, because of our dealer reliance, that were idled during the quarter. And thus the impact on some of the guarantees and some of the safety nets. I would have - it is just something we didn’t expect. What do you do you learn from it, you adapt to improve it. So we are still going to provide our drivers and guarantees and we still have opportunities for them to have strong, viable safety nets. But we have got to think through and improve upon some of our proactive planning around how to avoid those from coming into play. One of the things I told our team this morning is as frustrated as I may be with where we ended up. The fact that we are angered, frustrated, whatever the right word you may want to use about an 86 or I think is a telltale sign of where our standards are. It wasn’t long ago, that was something that we were striving to get to and it is something that many, many carriers still aspire to someday. And for us, it is simply unacceptable in this market condition and one that we will improve on.

Thank you Derek.

Thank you.

Next question will come from Tom Wadewitz with UBS. Please go ahead.

Hey guys, this is Mike Triano on for Tom. So I wanted to ask about drivers. With the minimum pay kick in for a lot of drivers and 3Q. Was that helpful from a retention perspective. And then on the increase in driver schools, how are you thinking about the impact on the one way fleet, and in particular, your ability to potentially grow the one way fleet in 2022? Thanks.

Yes so the first question first on the minimum pay it was definitely impactful and effective. We have seen a fairly, actually better than modeled benefit, if you will, from a retention perspective on some of the minimum guarantees we put in place. Now they come into play more often, as I said several times that we had expected or wanted and we got to fix that that is our job. That is not the driver not doing their part, it is us needing to make sure we put the miles on those crops and keep those trucks on the road and running. But overall directionally effective with some modifications that we need to take and improve upon. I apologize. You had a second part of your question.

Yes, the driver schools and the new locations, we really do think they are helping, we have been able to get back to sequential fleet growth this quarter where we haven’t been able to achieve that. The last few quarters, we added 75 trucks, excluding ECM. And we are up to 17 locations. Now we have five more planned in the next six months that we think will really help us train and develop drivers to be able to continue to have that sequential fully growth in a market where a significant competitive headwind for labor. And we are, I think, doing a good job of fighting that headwind with our driver school program.

Thanks guys. I appreciate it.

Thanks Mike.

The next question will be from Ken Hoexter from Bank of America Merrill Lynch. Please go ahead.

Great, good afternoon John and Derek. Can you clarify I guess, just real quick, the insurance claims, is that ongoing or was there a tax up in the quarter, and my question is, is the one way, revenue per tractor actually declined sequentially can you just delve into that a little bit to understand the mixed change or what is going on is that due to the massively lower miles just understand that the rate per mile. Thanks.

I will take the first part, the insurance and claims. If you look at the year-over-year increase which I believe was about 4.4 million. Not quite half of that was due to increases in excess insurance premiums for the part where we have coverage for catastrophic claims. And that is a reflection of the overall market conditions for that type of insurance. And the balance was due to increases in claims and claims development, this year compared to a year ago. We got a little bit more congestion on the roadways than we did last year at this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. . Our safety record is still strong, but a little bit higher claim development. You want to take the second part, Derek?

Yes, the one way revenue per truck per week, which I believe is what you would ask about it is essentially flat from Q2 to Q3. And that is driven almost exclusively by some of the mileage productivity issues that we were faced with during the quarter. And lot of that, again, is driven by some of the same issues we have been talking about. And that has already improved in starting to reverse that trend and looks much better as we go into Q4. We have got to make sure and keep that productivity gain and continue to see that moving up as we move forward, but at this time we have got a lot of work still ahead of us.

Thanks Derek and John. Derek maybe just your thoughts on the new dedicated business sounds like, we are running up with a lot of new business coming on at the end of quarter, as you said. I just want to understand the costs I thought, given your scale, the incremental costs coming on board wouldn’t have typically impacted you. So maybe just flush that out for us a little bit?

Sure. So you are right, it is not, it is certainly not exclusively related to that new dedicated business. But the difference on the dedicated businesses, when you are adding drivers, you want to add them all the time, when you are adding dedicated, you have to add them at a certain time. And so there was some incremental advertising costs and on-boarding, lodging, some training and development costs. And then the other thing within dedicated is uncertain fleets. The work we have to do from a finishing perspective, so training that you do after hiring them within the fleet is done either on the account or on a very similar account whereby you see no productivity, impact or enhancement, by having two drivers on that truck. And what you have is a significantly higher cost profile during that period. We met all those deadlines and met those launch dates and those launches all started in Q4, and have already all started and are now in place, but most of that hiring activity and a lot of a bounty bonus and instead of bonus and other things that were in place to place in Q3. By no means do I want to paint the picture that driver pay suddenly goes back to Q2 levels. That is not the case. But there is chunks of those cost items in Q3 that were unique, that will start to moderate both through higher mileage, as well as lower incentives and bounties, because we have met some very critical deadlines in our implementation plans.

So Derek can you clarify one thing on that just so we understand the pricing on your, I get the new business that is coming up, but your old dedicated contracts. What inflators - that I thought the whole point of the business, right, is that it protects you on up and down. Can you just talk through the timing to realign that with the cost that you are seeing?

That is a fabulous question. So first off, there is great deals of protection in the up and down, as you said, in most of our dedicated contracts, there are a couple of exceptions. So when you have absolutely down trucks, so the truck is down awaiting parts, or down because of hurricanes in the southeast, where you move them out of the region and then back into the region. Even then you have some baseline protections, but absolutely none, when they when it is a non-productive truck relative to any ability to add margin or operated any profits. And so there is impacts there that were unique to the quarter that we have seen already rebounding. As it relates to repricing dedicated we have had good success on incumbent business throughout the year of pricing in the new pay packages that we are referring to. So when we talk about driver pay on the base level, we can get that price back in. in the quarter some of the stuff that is not priced into that incumbent businesses, the sudden and fairly significant increase that we spend across some of those incentive valley advertising, lodging, and other incidentals associated to it.

Great, got you. I appreciate the time guys.

Thank you Ken.

The next question will be from Jeff Kauffman from Vertical Research Partners. Please go ahead.

Thank you very much. I’m going to apologize for re asking Ken’s question a different way. But when I looked at nonfuel revenue per vehicle per week in dedicated it was roughly flat with year ago levels. And I understand what you were just explaining with the new contracts and the new pricing and the pricing, but why haven’t we made more traction over the last 12-months in that area? Is there a mixed effect, is there something else going on that might not be obvious just looking at that statistic?

What stat are you looking at specifically, Jeff has revenue per truck per week net of fuel or?

Yes.

Okay, so that was 41.29 in third quarter this year 41.15 In third quarter last year, but we had 9%, I think it was 8%, I’m sorry, lower miles per truck. And so is the parts shortages and drivers out with COVID. And the new fleet startups that reduced our mileage productivity.

Yes, I will just add 16 to be very specific here. 16 of the 20 fleets we have added in dedicated in 2021, are by design, lower mileage fleets. So you have lower cost structures to those fleets as well. And that mix has a significant impact on what happens. Now that does not explain away the entirety of that mileage degradation that we are talking about. But it is a major component of it. So if you were to go back to the Q2 call, there was a question about revenue per truck per week and dedicated and I made the comment in Q2, something along the lines of we are struggling to find what the right metric is, as our fleet mix is changing fairly significantly. And it was both with those fleets that we had landed in mind as well as those we know knew or closed and about to implement. Because you can have, static revenue per driver, we can increase yield, if in fact, the mileage associated with that fleet is significantly lower by design, and we are seeing more of that as of late.

Okay, so maybe to paraphrase what I think John said in the opening comments, revenue per mile implies probably up in that 9% to 10% range, and then miles per truck down. And that is really the way to think about it.

Yes, it was up nine on rate and down 8% on miles and netted slightly higher.

Okay, great. that is my one. Thanks guys.

Thank you Jeff.

Thank you Jeff.

The next question will come from Brian Ossenbeck from JPMorgan. Please go ahead.

Hey guys, good evening and thanks for taking the question. Derek, just wanted to dive back into the vaccine mandate a little bit more, since it sounds like something is rather imminent here. Can you can help us think through what happens next. Now, we are assuming that there is going to be a lawsuit maybe several that come out to challenge this, as we have seen with other ETS out of OSHA. So maybe you can talk about how you are preparing just to make us educate your fleet who might may not even want to see a mandate, even if it is something that is challenged in court. So do you think it will have an effect if it is challenged? And then secondly, it is a little unclear, to me at least, you know, what happens after the six months when this emergency temporary standard expires. So I don’t know if you have seen or heard anything on that front, because it seems like it could be certainly counterproductive to supply chain they are trying to fix, but it could also perhaps have some uncertainty after six months if and when it does get put into place. So any thoughts on all that would be helpful?

Yes Brian, I will attempt to weigh in. And I hope you can understand the sensitivity about any answer and relative to anything vaccine related but I will start with the obvious we are pro vaccine and we will continue to push and recommend and encourage and we are doing that actively as we speak. We will also continue to analyze all available options relative to testing and the routing implications of such tests. And those are extremely cost prohibitive at this point and we were working through that. It will have a significant impact on supply chain. And so I question the logic and trying to move forward with a group of remote workers that has no interaction with the general public to speak of and certainly falls far short of the great danger threshold that the entire emergency action is based on. With all of that said, at this point, we just don’t know we have had calls with OSHA, we have had calls with the Department of Labor, we have been part of other groups calls with both as well. And there are too many uncertainties to predict where this heads from here, and I’m hoping cooler heads will prevail. And somewhere in this mix, somebody will remember that these are the very men and women that worked every day during this entire pandemic, to make sure all of them were safe, and interestingly, kept themselves safe at far greater levels than the national average of infections. And I think it speaks to the very remote work, the very nature of the remote work that they do. So it is tough, it is worrisome, I understand the concern from the investment community. And all I can tell you is that we will stay as close to the forefront, be prepared to react. And the last thing I will say on this is I agree with your assessment that was buried in the question around, even if it were to come out and be challenged in court. Is there some risk of driver loss? Yes. And that has a lot to do with why we wanted to make sure we were fully staffed and fully equipped with drivers. And you saw, I believe that number 3.3% increase in driver count from Q2 to Q3. I’m sorry, year-over-year, exclusive of ECM and that is a little bit of a hedge as well. So those things come into cost. But I think we are in a good situation is we can be in very difficult times.

Understood. Thanks for all that Derek. I appreciate it.

Thank you.

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

Thanks very much and good evening guys. Derek just quickly on the ECM integration. You have had four months of it now. Was there anything surprising either the good or the bad in that first quarter, any of the impact on the total results, potentially from ECM cost integration. And then finally, has anything else kind of come across your desk, because you have integrated this business that looks attractive from a bolt-on or from entering another new market as you have done with ECM?

Great question. I would start with, in general terms we are very pleased with how the integration is going after four months. We were pretty diligent throughout the due diligence process, we had a plan in place and the team identified to handle the integration. And I would say it is on or ahead of schedule in every major category with one noticeable caveat, and that is some of the equipment synergies. Obviously, we would have liked to have had much more progress at this point on some of the buying and purchasing synergies than we have realized we have realized some, but not nearly what we would have liked to and that has everything to do with very OEM supply chain challenges that everybody’s well aware of. So that would be really at this point, the only downside. The upside stuff, driver retention has been better than expected. And we are very excited about where Morales sits in our fleet right now. Customer acceptance and service levels have been great. Their financial performance has been as expected or better when inclusive of some of the cost savings we thought we could bring to bear. But the big caveat, which by the way, is one of the biggest synergies is really on the purchasing and procurement side. And that is just because it is a constrained market right now. As it relates to pipeline the pipeline is - we do have pipelines we have, we are continuing to look at other opportunities that we think will be additive, and accretive and I put those in that order because ECM was truly additive to our portfolio. It brings to bear a set of capabilities and knowledge set, a reputation and brand that we think makes us better, makes our portfolio stronger. We are looking and continue to look through that pipeline for other such opportunities that are additive to the portfolio, accretive is important as well and this is playing out to be such. So we will look at both of those things as we go forward. And I do think there is an opportunity out there for future ECM like or other parts of the portfolio that follow a similar path relative to quality of operation and making us stronger in our respective areas of expertise, especially those where we think the market is headed in particular in that short haul kind of marketplace that ECM does so well.

Well great to hear. Thank you Derek.

Ladies and gentlemen, this concludes our question-and-answer session. I will now turn the call over to Mr. Derek Leathers who will provide closing comments. Please go ahead.

Thank you, everyone. I just want to thank you again for joining us today. We achieved record third quarter earnings despite missing our own and many of your expectations. But we are in this for the long game, we made multiple investments throughout the quarter that we believe are already paying dividends as we work our way through Q4 and beyond. Our best customers are winners and asked us their growth companies, and their number one question is how we can grow with them. We are leaning into that as we further position this company for the future. We will continue to focus on cost controls. And several of the period costs that impacted this quarter we have already taken measures to improve as we sequentially move into Q4. There are some necessary non-transitory costs, portions of the P&L that have been under pressure, those will be offset through pricing and we are working on that actively as we speak. We keep our promises and that is going to be true in good times and bad and it is rewarded though over time to the bid process. And we are seeing that reward as we get deeper into the year. Our dedicated model remains durable through the cycle. Just like we have stated all along growth has happened to be more expensive right now. But as long as it is in the right business, with the right customers with the right contract terms, I think it is a sensible and smart investment. Logistic growth has never been more important we didn’t talk about a lot today, but we are proud of the results they put up this quarter. The high capital requirements or trucking are only going to go higher as we look forward. And it is imperative for us to continue to balance our asset exposure with our non-asset growth. And in closing, peak is here, we are ready for it. And we are aligned with the right customers to mutually prosper. And we look forward to talking to you again next quarter. So thanks for being with us today.

And thank you, sir. The conference has now concluded. Thank you for attending today’s presentation. You may not disconnect.