Werner Enterprises, Inc. (WERN) Q1 2022 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Werner Enterprises First Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to John Steele, Warner's CFO. Please go ahead.

Earlier this afternoon, we issued our earnings release with our first quarter results. The release, along with the slide presentation are available in the Investors section of our website at werner.com. Today's webcast is being recorded and will be available for replay beginning later this evening. Before we begin, please direct your attention to the disclosure statement on Slide 2 of the presentation as well as the disclaimers in our earnings release related to forward-looking statements. Today's remarks contain forward-looking statements that may involve risks, uncertainties and other factors that could cause actual results to differ materially. 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 tables attached to the earnings release and in the appendix of the slide presentation. Now, I will turn the conference over to Derek Leathers, our Chairman, President and CEO.

Thank you, John, and good afternoon. We appreciate you joining our call today. I'm excited to share another quarter of excellent financial results. I'm very proud of our Werner team for achieving strong top and bottom line growth in the first quarter for both our Truckload and Logistics segments. First, let's move to Slide 4 to level set our business. Truckload Transportation Services, or TTS has over 8,200 trucks with a fleet mix of 63% dedicated and 37% One-way Truckload. Werner has a consumer-oriented freight base with over 3/4 of our revenues in the retail and food and beverage verticals. Within the nearly 60% of our business, that is retail, Warner focuses on discount retailers and home improvement with name-brand customers that have extremely high on-time delivery expectations. These winning customers are growing their market share and Warner continues to grow with them. Three of our top 5 customers are discount retailers that perform well in economic markets when consumers place even higher priorities for value. The other 2 customers in our top 5 are industry-leading home improvement and beverage companies. 5 of our top 11 customers are in discount retail or food and beverage, and they ship consumer nondurable goods with repeatable freight that is less sensitive to changes in the business cycle compared to durable goods. As validation of our superior service performance during the last year, Warner was honored to receive carrier the Year awards from 4 of our top 5 customers in 7 of our top 15. Let's move to Slide 5 for a summary of our financial performance. For first quarter, revenues increased 24% to $765 million. Adjusted EPS grew 40% to $0.96 a share. And adjusted operating income rose 37% to $86.2 million. For the seventh consecutive quarter, we achieved record quarterly adjusted EPS. A Dedicated is our largest business unit within TTS. Dedicated has nearly 5,200 trucks and achieved 5% truck growth year-over-year. Dedicated continues to thrive and grow with strong demand from our long-term core customers. We consistently deliver high service and engineered solutions to meet their complex shipping requirements. And we continue to have a good pipeline of dedicated bid activity with new and existing customers. One-way Truckload has roughly 3,000 trucks and grew its fleet by 7% year-over-year. One-way Truckload experienced strong freight demand in January and February, which then moderated a bit in March, but still ranks very good relative to our historical March freight trends. Morne Logistics continues to execute on its strategic plans and produced another strong quarter with significant growth in revenues and operating income. Economic uncertainties are increasing with inflation, interest rate tightening and the effects of the Warn Ukraine, including higher fuel prices. Our business model is well positioned to adapt, perform and even prosper in disruptive markets. During the first quarter, procuring new trucks and trailers has been challenging, and we were not able to receive our full allotment. We are having frequent discussions with the OEMs to plan and coordinate our new truck deliveries based on the very difficult challenges they are dealing with for semiconductor chips, component parts, labor and other issues. We are ensuring we get our full allotment of new trucks to minimize the impact on maintenance, production service and improve driver satisfaction. In first quarter, the used equipment pricing market remained very strong, and our fleet sales team performed well. We sold fewer trucks and trailers than we did a year ago due to the OEM challenges. Equipment gains were $20.5 million in first quarter compared to $21.2 million in fourth quarter and $10.5 million in the first quarter a year ago. On the cost side, inflationary pressures are challenging, particularly for driver and nondriver compensation, equipment maintenance and insurance and claims. We are effectively managing these costs without compromising the highest level of safety and service for our customers. Now, I'd like to turn the call over to John to discuss our financial results in more detail. John?

Thank you, Derek, and good afternoon. Beginning on Slide 7. First quarter revenues increased $148 million to $765 million, with 6% truck growth, higher freight rates, increased steel surcharges and strong logistics revenue growth. TTS revenues per truck per week increased 8.8%. The -- adjusted operating income increased 37% to $86.2 million as a result of 24% revenue growth and 110 basis points of margin expansion. By segment, our adjusted operating income grew 33% in TTS and 158% in logistics. In first quarter, we grew adjusted EPS by 40%. Here on Slide 8 are the results for our TTS segment. TTS revenues increased by 21% due to 15% higher rates and $32 million of increased fuel surcharges, partially offset by 5% lower miles per truck. The miles per truck change was due to a lower length of haul resulting from our ECM regional fleet acquisition in July, higher driver turnover, fewer team drivers and the January impact of macro PTS improved its adjusted operating ratio net of fuel by 220 basis points to an 83.6%. Now, let's turn to TTS fleet metrics for Dedicated and One-Way Truckload on Slide 9. Dedicated revenues net of fuel increased 13%, average trucks increased 5% from growth with existing and new customers. Revenue per truck per week increased 7.3% due to rate increases to support driver pay and other cost increases. One-way Truckload revenues net of fuel increased 19%. Average trucks increased 7%. Revenue per truck per week rose 11% due to a 20.8% increase in rate per mile, partially offset by an 8.1% decline in miles per truck for the reasons previously discussed. Spot freight is a small portion of our one-way network is about 90% of our One-Way Truckload freight is committed contract business with our customers. Contract rate increases so far this year are averaging in the low double-digit percentages. As the one-way freight market moderated in March from the hugely overbooked to significantly overbooked, our truck mileage productivity began to improve with a less disruptive and smoother flowing network. Driver pay per company mile in the first quarter increased 15% year-over-year, a reduction from the fourth quarter year-over-year increase of 22%. During the month of March, the price of diesel took a roller coaster ride and ended the month about $0.80 a gallon higher than it started. Our surcharge programs effectively mitigated most of these volatile fuel price trends. During the month of April, diesel increased by another $0.75 [ph]. Moving to Slide 10. Here is more information to better understand our dedicated fleet. In dedicated, we provide trucks, trailers and drivers exclusively for a specific customer, typically for a retail distribution center or a manufacturing plant. Werner is one of the 4 largest dedicated fleets in the U.S. Water Dedicated serves customers with extremely high service and safety requirements, typically executing shorter length of haul shipments in local and regional markets. The superior consistency and reliability of our dedicated on-time service provides our customers with high predictability for their inventory to help them avoid out-of-stock surprises for their customers. Our dedicated drivers have more predictable routes in narrower geographic markets, which increases their satisfaction with a higher frequency of home time. Many of our dedicated customers require specialized driver training, multistop deliveries and driver assistance with the unloading process. We are generally paid for all miles and dedicated with steady and stable revenue streams through weekly adjustments based on truck productivity. Our dedicated fleet has steadily grown over the last 13 years with a customer retention rate of over 95%. 4 of our 5 largest customers have been in the top 5 every year for the last 10, highlighting the long-term relationship nature of our business. Werner office associates and professional drivers developed strong relationships with our customers and create solutions to become deeply integrated into our customers, transportation and logistics networks, resulting in a supply chain strategy that creates a competitive advantage. Two of our dedicated business is retail distribution center to store and 2/3 of that business is discount retail. Historically, these discount retailers performed better than the competition and slower growth economies when their customers have less discretionary income to spend and as they look to trade down for value for their nondurable goods purchases. Dedicated revenue per truck per week has grown each of the last 5 years, demonstrating the high stability and durability of our service product and customer base. As a result of these factors, Werner Dedicated operates with more attractive and less variable operating margins in all economic conditions. If we experience a moderation of freight market trends, the size, strength and customer base of Werner Dedicated places us in a strong competitive position. Let's compare our superior relative financial performance in the last freight moderation period of 2019 against the strong freight market of 2018, Warner was only one of a few truckload carriers that produced earnings per share growth in 2019 versus 2018. Moving to Slide 11 is a deeper dive for our premium truck and trailer fleet. We expect and buy our tracks with advanced safety and comfort features to assist our drivers and provide for superior resale value when our experienced fleet sales team remarkets our equipment. We've been in the business of selling our premium-spec used trucks and trailers in the aftermarket for 30 years. We typically sell our trucks at an age of 4 to 4.5 years in an industry with an average truck age of 5.6 years in climbing. Our experienced fleet sales team have a clear understanding of the market and the needs of our customers. The used truck and trailer market achieved high pricing levels in recent quarters due to record freight demand and limited new equipment availability. Despite selling fewer trucks and trailers and planned in 2021, we realized equipment gains of 19% of adjusted operating income ahead of our 20-year average of 10%. Although it is difficult to predict the timing of when the supply and demand for used trucks and trailers moves back into balance. We expect equipment gains per unit will decline from current levels and return to more normalized levels based on our games history. When this occurs, we expect to increase the number of trucks and trailers we sell to a more normalized run rate. We expect less pressure on the maintenance expense line, and we anticipate improved driver satisfaction and retention with a newer fleet. Moving to Werner Logistics on Slide 12. In first quarter, total logistics revenues in the quarter grew 37% to $189 million. Truckload Logistics revenues increased 46%, driven by a 24% increase in revenues per shipment and a 19% increase in shipments. Power only and project business continued to generate strong revenue growth to support our customers in a capacity-constrained market and grew revenues and shipments by 76% and 48%, respectively. Intermodal revenues grew 29%, supported by a 37% increase in revenues per shipment and a 6% decrease in shipments. Warner Final Mile revenues increased $18.1 million, primarily due to our November Final Mile acquisition of Nets. Werner Logistics produced $5.6 million or 158% improvement of adjusted operating income to $9.2 million, resulting from strong revenue growth and 230 basis points of adjusted operating margin expansion. On Slide 13 is a summary of our cash flow from operations, net capital expenditures and free cash flow over the past 5 years. expanded operating margins and less variable net CapEx resulted in higher free cash flow during the last 4 years. We expect to continue to generate meaningful free cash flow going forward. We reduced our net CapEx guidance for 2022 by $25 million on the top and bottom end of the range due to our expectations for lower new truck deliveries. On Slide 14 is a summary of our disciplined strategy for capital allocation. Our first priority for capital continues to be reinvesting in our fleet with newer trucks and trailers with the latest safety, driver-friendly and fuel-efficient technologies. During first quarter, we purchased $36.2 million of our stock or 1.3% of diluted shares. We remain committed to maintaining a strong and flexible financial position. In March, we expanded our debt capacity with our existing bank group from $600 million to $800 million to provide us more flexibility when the right capital allocation opportunity presents itself. Our long-term leverage goal is a net debt to annual EBITDA ratio of 0.5x to 1x. We ended the quarter with a net debt-to-EBITDA ratio of 0.5x. That concludes my remarks, and I'll now turn it back over to Derek for his remaining comments.

Thank you, John. Moving to Slide 16. During first quarter, the age of our newer truck and trailer fleet increased slightly. It continues to be more challenging to receive new trucks and trailers, and we have intentionally reduced the number of trucks and trailers we sell to enable us to meet our freight commitments with our customers. Since last quarter, we made good progress expanding our targeted driver school network by 3 more locations, bringing our total to 22. Our schools continue to perform well and produce highly trained graduates in the competitive driver market. These drivers have been able to further develop their skills with a certified and experienced Warner leader. Throughout the first quarter, technology enhancements continue to drive better communication processes and results for our drivers, customers, carriers and non-driver associates. Our Drive Warner Pro app is improving our drivers' experience by providing them with a single portal to view all the information they need to be safe and successful. With the ongoing improvements to our digital load board, Warner Edge for carriers, we provide alliance carriers with 24/7 access to freight, and we experienced 380% load growth compared to the same quarter a year ago. We continued the rollout of our WonerEdge TMS platform across our logistics network and are now live in all logistics offices in the U.S. and Canada. Looking ahead, investments in emerging cloud technology, including cybersecurity, predictive maintenance, safety and sustainability remain a top priority. Finally, during first quarter, we completed the new Warner Edge Innovation Center at our Omaha headquarters. Now moving to Slide 17. Here are the ESG developments for the quarter. Last month, we launched a commercial pilot with autonomous truck company, Aurora innovation, to test their technology in a freight line between Fort Worth and El Paso. During first quarter, we launched our Warner Blue task force with senior leadership associates and members of our Board to expand our ESG program. We established a pilot program with 3 large suppliers to use analytics for predictive maintenance and improving our fuel MPG. And we took significant proactive steps to further strengthen our cybersecurity and compliance. Now let's move to Slide 18 and a review of our performance versus our 2022 guidance metrics. During first quarter, our TTS fleet declined by 115 trucks sequentially from year-end, in line with typical fourth quarter to first quarter seasonal matters. -- higher driver turnover and the impact of the Omicron variant in January were also contributing factors. For the year, our 2% to 5% fleet growth guidance remains unchanged. Net capital expenditures in the first quarter were $37 million. We anticipate a full year net CapEx range of $250 million to $300 million. Dedicated revenue per truck per week increased 7.3% in the first quarter, ahead of our expectations due to customer rate increases to offset inflationary cost pressures. For the year, we expect this metric will grow in the 4% to 6% range. One-way Truckload revenues per total mile for the first quarter increased 20.8% above our first half guidance due to a strong freight market and customer support to keep up with inflation. For second quarter, we expect our One-way Truckload revenues per total model increased in the range of 14% to 17% over the same period last year. In April, freight demand trends in our One-Way Truckload unit were similar to March and are very good based on our historical April freight history. Our income tax rate in first quarter was 24.1%. For the full year, we are reaffirming our effective tax rate of 24.5% to 25.5%, and we expect the average age of our truck and trailer fleet at year-end to be 2.2 and 4.8 years, respectively. Truckload freight has moderated from extremely high levels to very good levels in the past several weeks within our One-Way Truckload fleet while dedicated customer demand remains strong. We expect the supply side to remain tight due to a competitive driver market and ongoing OEM challenges for the production of new trucks and trailers. Retail inventory levels began to increase in recent months. However, inventory to sales ratios remain at historically low levels. There is a significant amount of retail inventory in transit on ships or stuck in warehouses due to ongoing supply chain bottlenecks. In addition, we expect the last 5 weeks of COVID-related shutdowns at the largest shipping port in the world is about to begin to impact freight with a potential big splash whenever that faucet gets turned back on. In recent weeks, there are growing concerns about the direction of the economy and the freight market. And while freight demand has begun to moderate from high levels, our freight demand remains strong and dedicated in this very good in one-way truckload. Industry capacity continues to be limited by ongoing new truck production delays in a very competitive driver market. We are very confident in our positioning with the stability of our dedicated One-Way Truckload freight base and our growing logistics segment. The proven resilience of our durable business model and the superior value we provide to our customers. At this time, I'd like to turn the call over to our operator to begin our Q&A.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Brian Ossenbeck with JPMorgan.

Maybe just sticking with you. You mentioned the impact of China and when the faucet gets turned back on in your words, do you think that actually has a negative impact here in the near future as things just don't arrive in the same cadence that we were seeing. So I guess in a way it gets -- it perhaps gets a little bit worse before it gets better. What are you expecting as that part of the supply chain still is a bit of a whiplash effect here?

Yes, I think it's a bit of -- I think the way I would think about it, Brian, is it's really part of the story of what we're already seeing in the marketplace today, meaning there's a bit of a bubble that's taken place that explains at least partly some of the slowdown in freight overall. I think though, when you look at it and you think about normal seasonality and what's about to take place as we get deeper into Q2 and the uptick in freight that's happened year in and year out, it's going to simply double down on that uptick. -- especially if these ports were to clear or the restrictions were to clear and you would start to see these vessels in route. There's been a lot of conversations about things like ports clearing up and decongesting I would argue that's much more related to the lack of inbound than it is to any kind of productivity gains that have taken place. There's been conversations about the West Coast not being as strong as it was earlier in the year, and it's hard to be as strong when you've got 500-ish vessels depending on which data source you look at that are anchored or offshore in China. At some point, that will move. Our best prediction would be late June arrival on the West Coast at this point. It could be extended further if the restrictions last longer. But in the event that were to take place that would coincide exactly with the ILWU labor negotiations. And we've seen time and time again that best case that translates to a slowdown in work productivity at the port worst case at actual stoppage. So we just think that as you look out, there's a lot of disruptive material out there to think about as we try to analyze what Q2 and into Q3 could look like. And I think the takeaway is that we feel very well structured and set up as that plays out to be able to serve our customers and our shareholders alike.

Okay. Derek, maybe one follow-up on the capacity side. You mentioned driver turnover is increasing a little bit. Maybe you can maybe elaborate on the reasons for that. And just overall sort of your cost of marginal capacity, especially in the one-way trucking side. And where do you think that is for carriers who are obviously facing higher equipment costs, higher fuel, higher maintenance, all the other things that we’ve seen. So I guess where do you think the breakeven point or the tipping point where maybe we start to see some of that capacity exit the market as most of those carriers are more tight to spot?

Yes, I think it's a great question. Yes, we did see a slight uptick in Q1. I think Omicron is a part of that and some of the pressures that's created, I think, in general, there's the ongoing desire for people to continue to search out and find local and lifestyle jobs that are more conducive to the lifestyle they want to lead. We're building those jobs every day as we continue to expand dedicated. So it's not meant to be a call out of an ongoing uptick or concern. We've already actually seen progress on that front, but it certainly impacted a little bit in Q1. When you think about the overall operational cost, I would point more towards the industry as a total that I would get into specifics here. Only in that -- over the last couple of years, we've seen an absolute explosion of single-vehicle registrants as new entities as they chase the spot market opportunities and especially when it was inflated as high as it was. And what they all have in common is they overpaid for equipment. They've paid up to get drivers or to source -- if they were to have more than one truck to source the drivers for those additional trucks. They're bearing the brunt of overexposure to a spot market that has seen deflationary pressures over the last 90 days. And in many cases, they're all-in rates with fuel included, while fuel was increasing dramatically. So, I think the washout will be severe. And I think the conversation about whether there is or isn’t going to be a blood bath. It’s hard to ignore the fact that 90% of the industry is 20 trucks are less, and there’s going to be blood in the water at that level. But that has very little to do or bearing on what we do for a living. We’re a large, well-capitalized fleet with much better cost controls. We didn’t go out and buy dramatically more expensive used equipment in a market and chase spot rates with that equipment. We stay true to who we are. We’re more dedicated today than we were the last time we spoke. We’re more contractual today than we were the last time we spoke, we’re more defensible. And so we think what happens in all of this is that in the event that spot market continues to erode, you have a faster and deeper cleansing of that small carrier capacity than we’ve seen in prior cycles. And thus, you find a bottom quicker and a renewal of the next level of tightness that comes along this cycle. I’ve said a couple of calls in a row that I think these cycles are faster and the bounce back is quicker than they used to be with the advent of all of this new technology and information. We think this one will play out that way very aggressively. But in the meantime, our portfolio sets us up extremely well to perform with strong results in the interim.

Got it. Thanks.

The next question is from Brandon Oglenski with Barclays.

I guess following up on that, Derek, and this is maybe semantics, but you guys characterized the market as being very good now versus strong previously. I mean, both those sound great to me. So can you maybe quantify that change in language?

Well, yes, I think what gets under appreciated is that at the end of the day, our network is 60% retail within that retail network. It's predominantly discount retail. The balance of some of the largest customers that aren't discount retail or home improvement that are doing extremely well. We've recently looked out at our top 20 customers, 16 of them, I believe, are publicly traded. -- with an average revenue growth year-over-year of 17%. They're doing very well. That population of our customers are winning in their space, and that's why we worked very aggressively develop relationships with them. So I think the strong demand we have today is actually healthy. It's hard to really articulate at least on a call like this. But there is a point by which demand can be so strong that all it really results in is disruption and inefficiencies in your network as you're continuously chasing your tail to cover freight and meet service expectations, whereby strong demand, consistent strong demand in a balanced network allows you to start unlocking advantages in utilization, productivity overall, driver satisfaction. And honestly, just the com by which we manage the business in a more normalized market that is still strong. So, I don't deny that there are carriers out there that may be suffering from a lack of demand if they were chasing load boards and spot market, but that's not the world or the pond that we fish in. Where we're at, things still look pretty strong. And our conversations with our customers, especially as it relates to Q2 and things like back-to-school and normalized projects that, frankly, during COVID didn't exist much that are now coming back online is encouraging to us.

I appreciate that. I know you guys were highlighting the more defensive characteristics of your business. I mean, can you talk about volatility of dedicated rates and how that contract cycle works?

Yes. So the contract cycle in our dedicated contracts ranges traditionally from 3 to 5 years with annual rate adjustments or rate mechanisms in place. Those customers above all else, value service and really place a premium on the need to have a mature provider with complex modeling capabilities and an absolute conviction around on-time service. So with that batch of customers, as you work with them and talk to them, rate per mile or revenue per truck per week might be increasing, but we might also becoming more efficient with that fleet. And we often do year-over-year, quarter-over-quarter, which mitigates the actual cost impact of them, but allows us on a per basis to improve our results. We're going to continue down that path. We're going to continue to get deeper and deeper embedded with these customers. We think it's in their best interest. So, we actually believe and we can show metrics that support their financial self-interest in doing so. But at the same time, it allows us to become more efficient with more reps. That’s why we commented earlier on 4 of the 5 top customers in Dedicated have been in the top 5 for 10 straight years because that’s how integrated we are in their networks.

The next question is from Bascome Majors with Susquehanna.

As we think about where this is going, some of your competitors have been willing to talk about what the downside looks like in a deep recession or at least deep freight recession scenario. Can you talk about your modeling maybe above and beyond just the margin ranges that you've given us historically?

Yes, it's a great question, Bascome. We have certainly modeled as we talked about on the last call a 5-year outlook and some more aggressive growth goals. We've modeled for both down markets and upmarkets. We do assume that you're going to continue to see some degree of slowdown at least all things being equal as we look forward. But what we also have done is raised our margin guidance despite that modeling. And so when we chose to raise our model our guidance on margins for TTS, we did that with an eye towards where we were at in the cycle and what we believed we would be at in the midpoint as we look forward. Right now, the last -- the trailing 12 months, we've averaged a 16.4% margin, which is at the high end of the new range. The low end of that range is 12%. And frankly, we don't have an eye right now toward a 12% in our future, even with the various cases that we've modeled out through the down cycle. So I'm not changing the overall range at this point, but we feel pretty confident that we can avoid that worst-case scenario. And that work site scenario would be, call it, a 25%-ish type decline. And we don't think that's in the cards based on the more defensive nature of the portfolio today. It's much more durable than it was in any prior cycle. Not just in Dedicated, but even on the one-way truckload side, we now have at the right point in the cycle, we now have over 1/3 of that network under long-term agreements that we've spent many, many quarters to set up and accomplish -- and we think they're fair and equitable for both sides, both the customer and us, but they do give us a degree of insulation as we look forward.

Derek, you just clarify the 25%-ish decline you just referenced? Were you talking to earnings there or something else?

Yes, I can jump in. That was based on our last 12 months TTS margin running at 16.4%. So if you took it all the way down to the 12% level, which we don't think it will go that low, that would be a 27% decline in TTS margin from the current level. We think we'll do better than 12% going forward. So that's the estimate of roughly 25% reduction.

And just one more, if you'll let me the -- your largest customers talk some about in-sourcing some of their supply chain -- you talk about getting through this contracting period and where that stands? And any risk to your share of that wallet going forward?

Yes. We’re heavily involved with those conversations with our customers, especially our largest customers, and honestly, it’s a collaborative effort. There’s places where it makes more sense for them to in-source pieces and parts of their network and whereby there’s places that we are going to be better served to be positioned. So these are collaborative discussions. We don’t view them as stress at all. As a matter of fact, it’s one of the very encouraging outcomes of some of that work has been -- it’s easy to talk or tell people it’s raining outside, but it’s a lot easier for them to understand it when they get wet a little. So they have a much greater appreciation for OEM disruptions driver availability, the overall labor market when they go and they do some of those efforts, the efforts still makes sense for them in certain applications. But most of those are indications of customers where we have a fairly large scale exposure to already. They have strong growth goals as do we, but we want to be very strategic on where we grow versus where it might be more beneficial for them to grow.

The next question is from Scott Group with Wolfe Research.

Derek, are you seeing any impact at all on contractual negotiations at all and with the moderation in spot? And maybe -- I know you guys have guidance for rate per mile in the second quarter, but any just directional thoughts on how you would maybe anticipate that would look like in the back half of the year.

Yes. Sure, Scott. So first, I'll level set by telling you, we've accomplished about 45% of our rate negotiations in Q1. There's roughly 25% of those that are ongoing in Q2, some of which are in the final. They've either closed already or imminent to close. At this point, no, we have not, would be the short answer, seeing really any inflection at all relative to what happens in the spot versus our contractual conversations. I mean 90% of the spot data and the data that people really have their eyes towards is kind of load boards and that type of freight, that live load, live unload you call we haul kind of freight. That's not indicative of the kind of freight that even we haul within that 10% spot that we do participate in. So it really is a market within a market. I don't think it's surprising personally that you've seen the kind of decline in that market. If you have 180,000-plus or whatever the number is of new registrants, all generally speaking, with 1 or 2 trucks chasing an elevated spot market and arriving at the party at the very time that things start to return to more normalized levels you're going to end up in a situation where both 2 things happen. -- shippers have aggressively moved freight out of the spot market into contractual markets with carriers like Werner so the spot population of freight has decreased right at the time all these new arrivals showed up. So that's a risky game to play, and that's why we don't participate heavily in that market and specific to the load bard market, we don't participate at all. So can it enter the conversation later in the year, perhaps. We know that in general, it doesn't at the type of freight we haul for anywhere from 3 to 6 months, and then it takes another 3 to 6 months to see some level of impact. By the time you get there in our estimation, you will have already seen pretty significant washout from these carriers that have got themselves overexposed on the cost side and overexposed in spot. And so we think the bounce back could have much more -- happen much more quickly. And after these 2 years of extreme volatility, the last thought I'll leave you with the shippers have, I'd say, more than past cycles really looked for stability, and they need to count on some anchor stores, so to speak, within their network that they know will deliver as expected. We'll be there every day that we'll invest back in the fleet. And they might push the envelope around other edges, but we're not seeing that in the types of dialogues we're having at this point.

Okay. And then just a follow-up. Any sort of directional thoughts on margin progression out to that 83.6% in trucking in Q1? And if you’re not willing to go on margins, just totally separate? Any update on power only?

Yes. Well, I'll start on the easier one. Power only is very -- it's something that's a real bright spot in our network right now. We're excited about where that's headed. We talked about power only revenue growth of 76% in the quarter. I think that number will continue to have legs as we go forward. We're gaining traction and adding amenities to that program and structure to make it more beneficial to be in that power only community at Werner. We're treating those carriers well. And I think we're seeing more and more repeat business in that power-only environment. And I honestly think the market to add in that environment is really right ahead of us for all the reasons I previously outlined as carriers are waking up to the reality that the load board world of dramatically inflated rates is maybe not as sustainable as they thought it was the opportunity to find a safe haven and inside of a network like Warner's is there. I think customers really appreciate large-scale trailer fleets, and they do not desire to kind of reinvent the rainbow fleets of the past. And so very encouraged by power only. As it relates to Q1 to Q2 progression, we're not going to give estimates, but we do generally have progression from Q1 to Q2. I'd expect this year to be no different as it relates to our ability to continue to execute on our plan.

And one thing I’d add to that, Scott, as we look at first quarter to second quarter, and clearly, we had an abnormally strong first quarter freight environment. It was nearly as good as fourth quarter was -- and we do have a moderating spot market. We had a mild winter in first quarter and accelerating inflation. So the progression from first quarter to second quarter may not be as much as normal, but we do think that there will be improvement. The wildcard is what happens with the strength of beverage and produce and the timing of the China rebound.

The next question is from Allison Poliniak with Wells Fargo.

Just want to ask about dedicated. You mentioned longer duration of contracts. Is there any color you can give us as to where average duration of those contracts stands today and dedicated versus prior peak? And then I guess more importantly, as you're renewing contracts today has the duration of those contracts changed at all? Any color there?

Yes. I mean I would say, in general terms, they've always been longer-term agreements, and it's something that we've always aspired for because of the complexity of implementing a true dedicated fleet. I point you to the reality that we've always worked diligently to avoid designated fleets or fleets that were really just looking for safe haven from a spot market, but instead chased fleets that were very complex, high service requirements and with a growing winning customer. Around the edges, they're a little longer today than they would have been 5 years ago because we tend to realize that with this complexity and the relationship building that's required, we'd like to be in it for longer and to fulfill the full opportunity for both the customer and for us. So with greater than 95% retention, most of these linger well beyond the first contract and enter into many, many contracts thereafter. And so it's something we're proud of. But slightly longer than previous cycles, perhaps, but I wouldn't say that that's a huge movement to point.

Got it. And then the 5% reduction in miles per truck, I think, John, you had mentioned ECM as a headwind there. Any way to quantify what that headwind was? Or just trying to understand what's transitory and what sort of an underlying continuation to Q2?

Yes. So as it relates to the 5%, which is TTS in total, which is the 8,200 trucks, ECM is around $500. So it has less than a percentage point out of that 5% would be due to ECM. We have a shorter length of haul as we grow our dedicated mix and Dedicated gets bigger. That reduces miles per truck. We have more challenging team driver environment this year than last and a little bit higher turnover. So all those factors contribute to it. But as you can tell on the rate side, we achieved outside of the guidance range north of 20%. So where miles are running a little bit lower due to the nature of the freight and the nature of the business, rates are trending a little bit higher than we anticipated.

The other thing I'd add to that is that as you think about and you look at Q4 across all of the large public carriers, and they averaged to about a double-digit decline in miles per truck year-over-year. I think that gets overlooked a lot when we think about capacity. We tend to focus on truck builds or truck counts and overlook the reality that on a per truck basis or simply the focus on more driver time at home means less miles. The focus on shorter length of haul as customers want product closer in, I should say, shippers want products closer to the consumer means lower miles per truck. As Covenas abated and people return to the roadways, it has negative implications for production. And so all of that is really a net positive as it relates to capacity availability overall. And I think that trend is more of a systemic kind of underpinning in terms of the fact that there is a different marketplace year-over-year as we let the all gets shorter, lifestyle gets more important and congestion increases. And with infrastructure bill finally happening and at some point, actual work and shovels hitting the ground, I think you'll see additional headwinds there that will be at another headwind against capacity growth.

The next question is from Tom Wadewitz with UBS.

I wanted to see if you could talk a little bit about the progression on a monthly basis in the pre-book number that you talked about, John, that's a helpful kind of read, I guess, on what you're seeing in the market, prebooks in one way. And then also, I don't know if you have a full year comment on gain on sale, just ballpark what we might think of for modeling.

I’ll take the prebook and John, why don’t you jump in on the gain on sale. So the prebook thing is interesting because I want to remind everybody, January for us. And as you’ve heard on many other calls thus far was heavily impacted by Omicron. And what that really means is trucks off-line. So the prebook number in January was heavily inflated. It was at record levels pretty much throughout the entire month. And I mean, at any point in history type record levels. In February, it moderated some, mostly not -- almost exclusively due to trucks coming back online and drivers being back in the seat. And you saw what I would call a very, very strong market in February. As we got into March, we saw a little further moderation in the prebooks but still consistently oversold throughout the entire month with no exception. And so yes, there’s moderation, but it’s all a relative point of view. -- from where we started, which was highly disruptive in January, highly oversold and the headwinds of Omicron to where we ended up in March, which was an oversold but more balanced and with more fluidity returning into the network, honestly, if you could hold -- if March was representative of a month -- over the next 9 months, it would be a very exciting time because that’s really when the network performs its best.

As -- sorry, do you have a comment on April, Derek?

Yes. Thus far, April has looked very similar to March. And we'll see how we -- how May plays out. And as I previously indicated, we think there's a fairly strong possibility that June ends up returning to pre-COVID Junes, which was an opportunity for an end-of-quarter push with very strong booking levels that really were muted somewhat in the last 2 years because every month was so strong, you didn't see the sudden or noticeable uptick in June that used to exist for many, many years. I think you'll see more of that. I also think the back-to-school and some of the pushes that people have not been participating in as much in the last couple of years, we'll add some fuel to that fire in June.

And to answer your question on gains, Tom, we've had difficulty getting all the new equipment, trucks and trailers that we want. And so we've reduced how many trucks and trailers we sell in the current market, but the used truck pricing market and trailer pricing market have been extremely strong in first quarter. So far, that trend is pretty much continuing here in second quarter. As you know, we stopped giving guidance on gain on sales last quarter because of the difficulty of predicting changes in the market. And peaks and valleys of pricing. So we haven't given guidance this quarter. The current market trends are similar right now to what we saw, but predicting out for the rest of the year is really, really difficult. I don't want to put a number out for the rest of the year. But one thing that sometimes gets overlooked when you think about gains on sales of equipment. Number one, the reason we have it is because we have conservative depreciation policies. And at the same time that the average age of the fleet is increasing a little bit because we're getting fewer new trucks than we would like; that raises costs in other areas. Our maintenance costs were up 24% year-over-year. It impacts our production with a little bit older fleet. -- driver satisfaction is not as high when the fleet is a little bit older, and turnover is a little bit higher. So when gains begin to moderate as the new truck production builds and we're able to bring our average age down back to 2 years from the 2.3% it is currently. That will reduce our gains, but it will put us in a better position to produce in other areas on the cost side as our operations run more smoothly.

So do you think 2Q may be similar to 1Q and then second half, it falls off a bit? Is that…

Based on what we know now, we're not -- could change here in the next month or 2. But based on what we've seen thus far in April, it's been a similar trend to first quarter.

And I think it's still too early to predict that it falls off later in the year at this point. We obviously are going to keep an eye on it. But it's -- unless the OEMs are able to improve the fluidity in their networks, and you see an introduction of a higher volume of new trucks. I don't see anything on the horizon that causes me to believe you're going to see material changes in the gains number or in the market for used trucks, I should say.

Even with lighter spot rates, you still think a used truck is strong in second half?

Well, I started by saying I'm not predicting second half. I'm just giving things that I think factor into what ultimately drives the used market South, which is an influx of large scale of new equipment, which is not happening. Clearly, as carriers come under duress, and I'm talking about the smaller carriers that have overpaid for used equipment, you could see some of those carriers wash out. But in many cases, they started their career in trucking as an independent trucker with a truck that had 500,000 miles on it and have ran that truck now for a year or 2. And so those trucks are really getting close to the end of their useful life. So we'll have to see how it plays out. I think it's a new territory for all of us. We are cautious as it relates to the back half, but I think it's too early to predict the demise of the used truck market.

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

John and Derek. Just trying to reconcile a little bit of kind of what you threw out here. So the market, Derek, you mentioned is placing a blood bath of some of the smaller capacity, the speed that you kind of mentioned you're seeing it get cleaned out or potentially gets cleaned out. Your customers focused on quality access to capacity. So are we already seeing that the ability to see tractors get easier? What drivers you mentioned driver pays up or 15%, which is down sequentially. So are we seeing that washout already occur? Or are we on the cusp of that? Maybe just talk about the timing of that?

Yes. I think it's probably too early to say the washout is already happening, but I think the pain is very much present. We have seen an uptick in experience driver applications and a pretty consistent one over the last, call it, month to 6 weeks. I think you're going to see more of that as we go forward. We've seen an uptick in interest in power only and folks that maybe previously didn't want to do that. They'd rather try to chase freight on load boards that now are looking and desiring that could become part of a more stable network. So we're seeing the early inning signs of some of that from those smaller carriers as well as an uptick from customers, as I mentioned previously, looking for stability now more than ever and the ability for them, especially in retail with quality brands, the ability to predict in stock levels going into the fall. That's something that's going to become increasingly important. And carriers like Werner can kind of uniquely provide that stability for them.

And John, you mentioned the 0.5x leverage. It sounded like you were kind of saving capital for -- I don’t know if it was for a rainy day? Or are you focused more on increasing the buyback? Maybe just your thoughts on the finance side?

Yes. We purchased shares for the last 3 quarters, around 1 million shares a quarter. And those purchases occurred at higher prices than what we're trading at today. So we will continue to look at opportunities for share repurchase going forward. We re-upped our bank credit agreements with our 2 major banks to $800 million from $600 million, just to give us more flexibility in case the OEMs start to step up their production of trucks in case their stock repurchase opportunities that we like, and we continue to look at opportunities for truckload acquisitions, logistics acquisitions that are both accretive and additive to our business. So all those are on the table.

Does an acquisition become more likely given what’s retalking about in terms of some of the smaller carriers? Is that -- is more stuff already hitting your door? Is that -- maybe just talk about that flow?

I'd say frequency of opportunities is clearly increasing, but I don't know that I'd go to say that, that alone causes the likelihood to increase. We're going to stick to our knitting on I want things that are additive and accretive. I want our portfolio to be enhanced by it. We're looking for strong track records and companies that do things very well. I think we -- if you look at our sticking with the theory of the draft that just took place. If you look at our 2 traffics last year, we're very excited about both of them. In both cases, we've retained customers, we've retained the associates and we've retained the drivers and not only retained but actually have started to grow both those businesses. And we've got kind of a pattern of how we think about these things. It doesn't mean they'll all be that small, by the way. But it does mean they're always going to have an eye toward those sort of core principles. Culture has got to fit. They've got to be safety focused. It's got to make us better. And we have to believe that we have the ability to take something and grow it from where it's at today, not kind of go buy and dissolve like we've seen within this industry for some time. So as those opportunities present themselves, and we see the right one, we'll move. And that's no different answer from Werner, but it's one that we have confidence in and that confidence has only grown over the last year with the success of the 2 acquisitions that we've done thus far.

Great. And the insight is helpful.

The next question is from Bert Sipan with Stifel.

Derek, would you consider the dedicated market to be consolidated or fragmented? I asked because markets like intermodal, LTL, they get the valuation benefit of that consolidation. The dedicated -- it's a small portion of truckload that's actually quite different from the spot market but doesn't get treated the same way. So curious what your thoughts are.

Yes. I think the dedicated market is much more consolidated than truckload overall. If you look out there across the dedicated arena, there's a few definitional differences probably from fleet to fleet, and we need to be cognizant of that. And -- but what they all have in common is you really can kind of count on about 2 hands the high-quality players in that space, people that can really go in and perform and operate the duties similar to a private fleet for a customer and actually enhance their supply chain and bring value to their product placement kind of on time, every time approach to their own businesses. And so there isn't very many people that can do it. Certainly, size matters and dedicated a lot the ability to ramp up and to invest the ability to absorb the start-up cost and kind of digest those as part of a longer-term agreement. There's a whole lot of things that limit the players, and it is a much more consolidated market. I'd also point even within the one-way side of our business. The same thing is true of a very large portion of our one-way network, which is Mexico. You don't need both hands to count the number of quality providers doing business to and from Mexico. There are others, and we respect them, but it is a much smaller subset of truckload that does that business and can do it well. And we view ourselves as a leader in that space, and we're going to continue to lean into that as well. Just like the engineered fleets we've built inside of our One-Way network Other people could probably haul the A to B part, but they wouldn't -- there's a very small subset that can design, engineer and then implement the type of engineering we're doing within our one-way network. So that's all part of this defensibility, the durability of the portfolio we're building, and it's what gives us the confidence as we think forward about being much less cycle driven than historic trends had look like. And hopefully, someday, the market will choose to reward it and recognize it for what it is.

So maybe just a follow-up to that. I mean, Derek, you’ve talked in the past about trying to work with customers that look at their supply chain as an asset. If you had to look across your business, how high would you say your exposure is to that sort of customer? And has that changed significantly from last cycle to this cycle? And does that give you sort of more confidence in your longer-term growth assumptions?

Yes. I mean I'll start with the easy part. It's higher than it's ever been. I can irrefutably tell you that it has never been a higher percentage of our overall business than it is as we sit here today. Now there's always shades of gray on the -- some of those customers are absolutely laser-focused and locked in on supply chain as a competitive advantage. That population is probably -- what certainly north of 1/3 of our book that's probably closer to a half. If you think of others that are viewed as a competitive advantage, but where they're at in their evolution isn't maybe as evolved as the best-in-class shipper might be. But that would probably get your total up into that 70%, 80% range. I mean it is basically what we do. We very strategically align ourselves with shippers after lots of due diligence to decide that we want to grow and expand our presence with them and their ability to win is a big part of that.

The next question is from Jon Chappell with Evercore ISI.

Derek, you mentioned earlier in one of your answers about as it related to capacity, the miles per tractor declining across the industry and getting worse in this post-covid phase. If we look at back at your numbers, we're in a multiyear trend here of declines. Does that continue to edge down? Is there a plateau at some point or given some of those bigger secular issues in the sector? Is it kind of a gradual annual decline for her, both in one way and Dedicated?

Yes. I can't predict at this point that I wouldn't want people to model or assume that it just sort of declines forever. But I think there are certain headwinds out there that are just real. They play to our strengths, by the way. But the reality that more forward deployed inventory is only going to continue to grow, that's going to continue as we look forward. The reality that we have to continue to build more and more lifestyle jobs, which means more time at home, which means more time that, that truck may not be as productive as it used to be in the past is going to be a continued pressure. The fact that we are engaging more and more in dedicated where often the miles per truck are simply dramatically lower because the activity that, that truck does for that customer goes well beyond just delivering long-haul truckload commoditized freight. Our drivers in many of those fleets are engaged well beyond the truck. And they understand that when they sign up for that job, and it's a trade-off forthmaking because of the lifestyle enhancements and time at home that comes with it. So I think you'll see it moderate. You can only go so short on length of haul at some point, there's diminishing returns. And so, I think you'll see that decline moderate. But our model and how we think about profitability is not built on utilization alone. There was a time where if you were a truckload player, utilization was the only metric or at least it was at the very top of the pecking order. And that we think about the world more relative to how much revenue per truck per day, which leads to revenue per truck per week, which ultimately leads to our ability to be profitable. And so we're not going to let that one metric to find what customers we bring on, who we grow with because it's only one of the dials on the dashboard.

That’s really helpful. And then just a quick follow-up, not to bring up old stuff. But in the third quarter, you highlighted a bunch of issues you’ve had with parts, maintenance, et cetera. I think the update in February was there been some improvements there, but not quite where you want to be. How do you stand with some of those carryforwards from the late part of last year. Do you feel like you’re in the right place as it relates to parts equipment, maintenance availability? Or is there still some work to do?

Yes. I mean there are still parts shortages issues in the supply chain that are challenging. We've definitely made progress internally on how we acquire and make available those parts to minimize the downtime. So we've made good progress there, but there's still challenges on the -- some of the driver cost issues that were a challenge in third quarter for hiring incentives and minimum pay and layover, we've made significant progress from third to fourth and now in the first quarter. So we're in a much better place there as it relates to those cost items.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Derek Leathers for any closing remarks.

Well, thank you. I just want to thank everybody again for spending time with us this afternoon. We appreciate your interest in the Werner story and we're proud of the record results in the quarter. But I'm more excited about the strategic positioning of our portfolio as we get deeper into the cycle. The portfolio continues to improve in service, safety and capabilities while achieving improved financial results. We've improved our weighting of dedicated and logistics sequentially and are further prepared for a variety of economic conditions that may materialize in the coming quarters. And as we move into 2022 and beyond, we are focused on building upon the great brand we have today and growing both our top and bottom line results for all of our stakeholders. And I feel that Q1 is a great kickoff a way to kick the year off -- while we may never change the outsized perception of this being a cyclical industry, here at Werner, we have built an incredibly durable portfolio that I'm proud of. The combination of COVID shutdowns across China, high cost structures of many of the new entrants into the marketplace and the pending ILWU contract negotiations lead me to have further conviction that supply chains will face ongoing disruptions as the year progresses, and we will be ready and able to provide needed support to our customers and attractive returns to our shareholders as that story plays out. And lastly, as always, I just want to thank all of the Werner associates for their ongoing achievements once again during these ever-changing times.

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