Good afternoon, and welcome to the Werner Enterprises Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Chris Neil, Senior Vice President of Pricing and Strategic Planning. Please go ahead.

Good afternoon, everyone. Earlier today, we issued our earnings release with our second quarter results. The release and a supplemental presentation are available in the Investors section of our website at werner.com. Today's webcast is being recorded and will be available for replay later today. Please see the disclosure statement on Slide 2 of the presentation as well as the disclaimers in our earnings release related to forward-looking statements. Today's remarks contain forward-looking statements that may involve risks, uncertainties and other factors that could cause actual results to differ materially. The company reports results using non-GAAP measures, which we believe provides additional information for investors to help facilitate the comparison of past and present performance. A reconciliation to the most directly comparable GAAP measures is included in the tables attached to the earnings release and in the appendix of the slide presentation. On today's call with me are Derek Leathers, Chairman and CEO; and Chris Wikoff, Executive Vice President, Treasurer and CFO. I will now turn the call over to Derek.

Thank you, Chris, and good afternoon, everyone. We appreciate you joining us today. We generated solid results during the second quarter and are encouraged by the sequential improvement in financial performance relative to Q1. The freight market faces ongoing uncertainty related to shifting global trade policy and regulatory issues. We remain focused on providing superior and diversified solutions to our customers by investing in our future through technology and structurally improving our business with a commitment to delivering value. The key priorities we have been focusing on have started to bear fruit as evidenced by numerous positive operating metrics in the quarter, including year-over-year growth in revenue net of fuel surcharge for the first time in 6 quarters, a return to profitability driven by decisive action and execution and sequential growth in various forms, including revenue, TTS fleet, One-Way revenue per total mile, gains from sale of used equipment, TTS operating income and logistics gross margin. As a reminder, on Slide 5, there are 3 priorities that underpin our DRIVE strategy, which we execute day in and day out. First, driving growth in core business. In TTS, our fleet is up year-to-date. Our Dedicated solution is winning in the marketplace. One-Way rates are increasing, and we realized year-over-year growth in overall combined miles across our One-Way tractor assets and PowerLink trailer-only offering. Within logistics, we are back to mid-single-digit growth driven by truckload brokerage and intermodal volumes. Our customers are voting with their freight as we notched several new business awards with strategic customers across our portfolio. Second, driving operational excellence is a core competency. Our focus on creating and fostering a culture around safety never changes. Our DOT preventable accident per million miles continues to trend favorably as we hire quality professional drivers and invest in new technology latent…

Thank you, Derek. Let's continue on Slide 10. All performance comparisons here are year-over-year unless otherwise noted. Second quarter revenues totaled $753 million, down 1%. Adjusted operating income was $16.6 million and adjusted operating margin was 2.2%. Adjusted EPS of $0.11 was down $0.06. We are pleased with the improved adjusted results in the core business. We also benefited from a handful of non-GAAP adjustments during the quarter. First, the Texas Supreme Court's ruling in Werner's favor reversing and dismissing the landmark $90 million truck accident verdict from 2018. This ruling led to the reversal of a $45.7 million net liability, including interest and benefiting GAAP operating income. Our consolidated insurance and claims expense for the quarter, excluding this benefit, was $38.9 million. In addition, our acquisition of Baylor Trucking in October 2022 included an earn-out provision based on a range of outcomes. During the quarter, we settled on a final payout, resulting in the reversal of $7.9 million from previously accrued amounts. Although the accrued earn-out has been included in GAAP results since the date of the acquisition, the reversal was classified as a non-GAAP adjustment in the quarter due to the large onetime nature of the reversal. This benefit was included in other expense. Last, severance expense of $1.3 million from recent cost actions was also treated as a non-GAAP adjustment. Severance is included in the salaries, wages and benefits. Turning to Slide 11. Truckload Transportation Services total revenue for the quarter was $518 million, down 4%. Revenues net of fuel surcharges decreased 1% to $462 million. TTS adjusted operating income was $12.8 million. Adjusted operating margin net of fuel was 2.8%, a decrease of 220 basis points, of which 150 basis points of the decrease is attributed to higher insurance and claims expense, excluding the $45.7 million…

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

[Operator Instructions] Our first question today is from Eric Morgan with Barclays.

Derek, I guess I just wanted to ask for some thoughts on the cycle. You're calling for stable fundamentals and normal spot rate cadence in the back half. And you listed some favorable trends for capacity. It sounds like maybe demand kind of stable with some tariff uncertainty. So I guess just wondering, when you think about the shape of the up cycle when it eventually arrives, can we get something resembling kind of a normal -- "normal" up cycle if we don't really get much demand help? Like if supply just -- if we see more of the same trends on capacity and no real demand help to note, what does the shape of the up cycle look like? And what does that mean for your TTS margins?

Yes, Eric, thanks for that question. Obviously, this cycle has been longer and more painful than any prior cycle than any of us have been through. So I'm a little hesitant to try to predict the future here. But as we think about where we're at and you look at sort of the ongoing attrition, you look at BLS data now back to pre-COVID or even below pre-COVID levels, you look at ongoing attrition, both in downsizing of fleets, but also just bankruptcies. Even today, there was an announcement about a 400-truck carrier going under or closing their doors down in the Southeast. I think we're going to continue to see that given the tough rate environment that everybody is living in. We've said all along, we think it's going to be supply-driven up cycle, if you will, more than demand. But with that said, if I take a step back and look at the consumer and think about the tariff noise and everything else they've been kind of dealt and they've been dealing with and yet their ongoing resiliency, if I compare that to our book of business, which is heavily discretionary -- nondiscretionary, I should say, nondiscretionary goods and discount retail, we think the backdrop sets up pretty well for where that consumer will migrate to if they are looking to be a little more cautious over the -- in the coming quarters as well as those consumers that are already in that bucket kind of hanging in there and staying resilient and really living in that more nondiscretionary kind of ordering pattern. With all that, we have ongoing customer conversations. We just came through our annual customer forum where we bring in well over $1 billion of revenue under one roof for a multi-day event, gives me…

Appreciate that. And I was also just hoping you could elaborate a bit on the temporary elevated demand from certain customers. I think you called it. Is that would you say that's a thing of -- or a sign of things to come like later and when you traditionally see peak? Or was that a function of some of the surge in imports and something that we shouldn't really expect to see in the back half?

Yes. I mean I think it's a little bit of both, to be frank. But I think the biggest sign that it represents to me is -- and we see this often at this point in the inflection where there's a flight to quality. And so when a customer has, whether it's driven by a surge of imports or it's driven by a sudden increase in demand or any other reason, any other external factor, the question is where do they go for that support? And where we find them going to for that support when you're closer to this sort of inflection point and you're kind of at that equilibrium level is to quality diverse portfolio companies that are well capitalized and able to respond. And so we think that's really the indication. Most of that activity took place in our One-Way network where we were able to step up and engineer solutions on a short-term basis, but that short-term can often extend into a long-term extended relationship. So right now, many of those sort of short-term activities continue as we sit here today. Some will wind down throughout Q3. Others may extend well into Q4. It's really too early to tell. I'm most excited about the fact that these are great examples where customers vote with their freight. They look for quality, and they tend to aggregate their attention around that quality provider, and we're happy to serve them in that capacity.

The next question is from Brian Ossenbeck with JPMorgan.

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

Yes, Brian, I'll give it my best shot. Starting with this, you're right, we don't expect any impact on our fleet. We've always kept our English language proficiency test in place throughout the time that it wasn't being enforced. We continue to do that as we bring drivers into our fleet. We think it's important from a safety perspective. And so it's something we've never taken our eye off the ball. On the enforcement side, 1 month, 1.5 months in government time is like 1.5 minutes in everybody else's life, meaning it just goes slower than we'd like to see. We have seen enforcement starting to ramp up. It's kind of a state-by-state thing, and it's certainly being enforced differently in different states. I think as we sit here today, we've seen over 1,500 out-of-service violations where not just that ELP was an issue, but it was actually resulted in an out-of-service violation. That number does continue to ramp, but obviously, at a slower rate than we would have expected or that maybe we would have wished for. I think that enforcement will only continue to gain traction from here. It's just too early to tell what level across all states, ultimately, we will see it enforced by. I'd also call everyone's attention to the reality that the enforcement date is only one part of the equation because what we do know relative to scales, inspections and general enforcement over the road and trucking is as enforcement elevates, people deviate or they move out of the -- altogether or they simply avoid enforcement points. So those bad actors that may be out there that may not be in compliance may, in fact, be exiting. They may, in fact, be returning to other occupations. It's hard to know any numbers around that. But I think over time, we'll be able to get a better view on that.

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

Yes, Brian, it's a great question. Again, we're at this sort of inflection point or close to it, what we hear a lot of is, again, that flight to quality. So part of that flight to quality is One-Way to Dedicated, but we don't want to bring Dedicated into our business that isn't truly Dedicated. So if it's just a capacity solution, that's really the commoditized end of Dedicated, and we try to -- we're pretty averse to that. We'll support that same customer with a One-Way solution, an engineered solution, but that won't reside within our Dedicated numbers because we want pure-play Dedicated in those numbers. But we see some of that. What I would tell you, we see probably more of as of late is customers looking for that sort of portfolio approach. So coming out of our recent forum, the conversations I've had with customers is sort of a higher level of excitement that they can come to somebody like Werner and they can work with us on their One-Way needs. They can -- in that same relationship, work across truckload brokerage and specifically PowerLink, which is our power-only solution. They often have intermodal needs, and we're able to step up and meet those needs and give them some diversity in their solution set. So across all of that, I think that's really kind of the movement that we're seeing. As it relates to their overall Dedicated needs, one thing I would say is a bit of a theme is a lot less enthusiasm for private fleet growth than what we saw during sort of the COVID years. I think a lot of that was a defensive play on their part because absent other capacity solutions, they went out and kind of tried to address it themselves. I think now that they've been in this trucking business for a while, they also realize that even when they have the pick of the freight and they can work it through their own network, it's a little harder than they might have forecasted. So not a lot of conversations going on about them growing their private fleet in any significant way and in some cases, even shrinking or exiting. So that sets up well for our Dedicated pipeline. So I covered a lot of ground there, but hopefully, that answers the bulk of your question.

The next question is from Ravi Shanker with Morgan Stanley.

So I guess congratulations on the case reversals. I know it's something that's been -- that you guys have been pushing for a while. Do you think that this is the start, the light of the beginning of the tunnel, if you will, for kind of tort reform and kind of maybe insurance numbers coming back in check for the industry?

Yes, Ravi, I'd love to believe that it's a start of a tidal wave of similar decisions, but I think that would be a bit optimistic at this point. What we do believe is it was the right decision. We do believe that the Supreme Court of Texas affirmed irrefutably the facts of the case as we had stated them all along, which is we were hit head on in our own lane of travel by a vehicle that lost control across the median and traveled across lanes of traffic prior to even impacting us in our own lane of travel. We think it's a great win for us financially. We also think it's great for our drivers to kind of affirmatively be supported by the Supreme Court. We think we've got a lot of work to do still as an industry and as a company on tort reform. We got to do that at a state-by-state level. It's difficult work, but work that needs to be done. All we're looking for is an even and equitable playing field. We're not looking for any special advantages or anything else. We've always stood by the reality that if we have a mistake, we're going to stand up to it, learn from it, try to improve and try to do what's right. But with that said, egregious verdicts like this do nothing but leak into cost inflation, ultimately into real inflation at the consumer level, and it's not ultimately good for the U.S. consumer. There's some remedies out there, as you indicated from the tort side, I think playing a more active role relative to states where judges are elected versus appointed, and making sure that we're not asleep at the wheel on that is important. Ultimately, the most important thing is…

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

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

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

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

Yes. Great question, Ken, and it's interesting because -- so I'll start with this. The utilization gains we've been making, especially across the One-Way network is really engineered in nature. It's structural and strategic changes that we're making to be able to sweat the assets more, and we're pretty excited about it, especially because right now, those increased miles don't really give you much leverage to the upside until you start to see rate move. But when it does, it's a real earning opportunity with those excess miles. Actually, in Q2, what's interesting is they were down slightly, but that's more reflective of some of the outsized Dedicated wins that we had and our need to move some of those high-quality One-Way drivers in some of those engineered solutions over to Dedicated, reseat those trucks in One-Way. And so we had a bit of a utilization impact from our own success, if you will, in Dedicated. So that passes here shortly. Like as we continue to see Dedicated growth but maybe not quite as lumpy as what it's been in Q2 and then that's coming into Q3, we'll have an opportunity to kind of get our arms back around that network on the One-Way side, and we think there's gains to be made from a productivity perspective. But if -- you only have to go back a couple of years to see a miles per truck gain from a couple of years ago that's double-digit higher today than where we used to reside, and that's part of what led to in a very tough market with rates that are still pressured the highest revenue per truck per week we've seen in One-Way in our history. Now what we need to do is continue to focus on the cost side of the equation, which we've been diligent about and very methodical about, and we're going to continue to do that so that, that then translates as rates start to improve to expanded margins, which is the first step toward that march back to double-digit operating margins in TTS.

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

Yes, sure, Ken. I can give you some insight on that. Overall, it's been a good start to Q3. Revenue is positive, the outlook is positive and I think points to a sequential improvement in revenue, in part from Dedicated within TTS, where we'll continue to ramp up with new fleets and continue to benefit from the streak of wins that we signed last quarter. I know your question was specifically on TTS. But broadly, Q2 to Q3, we're also seeing very positive momentum in logistics, and we expect that to continue. So from a TTS perspective, we expect some ongoing improvement in operating income. And we can -- as Derek mentioned, we continue to be confident in the pathway back to double-digit margins.

Okay. But there's no -- I guess you're not talking a historical average or anything moving from a 2Q, I don't know if there's a 130 basis point or any kind of a normal improvement from 2Q? Sorry, just to keep reiterating on it. But just trying to...

I think the difficult thing there is, Ken, is we could look at the averages, but they wouldn't tell much of a story because about half the time from Q2 to Q3, operating income increases and about half the time it decreases. So it's really dependent on the year you're in. I think Chris' comments give you a decent direction that we think we're going to see some incremental gains from Q2 to Q3. We're not talking about monumental gains. It's kind of -- we're going to have to continue to plug away and work at the work we're doing today to see some small incremental gains as we continue to climb this mountain because the starting point, unfortunately, for us is at the base of the mountain, which is where we found ourselves entering into Q2, and we're going to start that slow climb out.

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

Yes, it definitely wasn't a trade-off in order to buy back stock. Our balance sheet is strong enough. We could have done both. It's more reflective of the ongoing uncertainty around tariffs and a little bit of the uncertainty that was wrapped up in some of the EPA things that are still going on right now in D.C. We feel like we're in a really good position. It's a little bit also, just to be frank, a reflection of as our fleet gets more and more engineered, as our fleet gets -- it's 65% of the trucks in Dedicated, 35% in One-Way, challenging kind of some assumptions as to what is the right fleet age. So I'm not saying long term, we've determined 2.4 years is perfect, but 2.4 years doesn't worry me a whole lot compared to our more recent range that was a little lower than that. And we think we're better positioned and still have the optionality if we can get some things done with some of our OEM partners that fleet age could go slightly up or slightly down from here as we look forward through the remainder of the year. But we're going to be flexible but opportunistic as it relates to the fleet age, but we feel very good about the utilization in our terminals to do on-site maintenance versus over the road and the ability to expand that even further as well as the ability to allocate these trucks in the right fleets dependent on their age to be able to still do the work perfectly fine with no impact on service or the driver.

The next question is from Tom Wadewitz with UBS.

How -- Derek, how do I think about -- or Chris, I guess, your kind of underlying inflation and kind of how much rate you need? Because it does seem like you're getting some traction in revenue per tractor ex-fuel and traction in rate on One-Way and then a variety of factors in Dedicated, that's moving in a favorable way, but it's like 2% or 3% gain in, say, revenue per truck per week is not enough to get you there. I guess, would you think that it's -- is inflation going to come down as you look maybe out -- beyond a couple of quarters? Do you think we are more optimistic about that? Or do you say, look, what we've got today continues and we just really to make margin progress, we really need like 5%, 6%, 7% rate. I don't know if you have any thoughts on that broader equation. I know you've had some number of questions related, but I don't know, how much rate do you need? Or is inflation likely to come down if you look out into '26 or out a couple of quarters?

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

And on VAS, it's a lot better year-over-year, cost takeout supportive for that operating income. Is that kind of the rate -- run rate, assuming you don't have big shifts in truckload market backdrop that you're kind of $6 million a quarter operating income in VAS? Or how do you think about the run rate there? Because it's a pretty big improvement. And it sounds like if it's cost driven that maybe you can kind of keep that going for the next 3 quarters before you lap it. Just any more thoughts on the kind of VAS operating income that showed good improvement.

Yes, Tom. First off, I'll congratulate you for wearing your throwback analyst jacket today by calling it VAS. We're logistics now, but...

Yes, sorry about that, I don't know. We -- our model has been in use for a long time, sorry.

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

Okay. Well, it's good to see the improvement in Logistics, so thank you.

The next question is from Scott Group with Wolfe Research.

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

Yes, I'm not going to guide to a number, Scott, but I will obviously restate what you just stated, which is Q1 was that bad. And so some of the improvement is just based on the starting point. We need to be -- we need to recognize that. Gains on a per unit basis have been much improved and really at 2-year highs. It does come down to what's the number of units that we're going to be able to move and what's those -- that gain line is going to look like. I would just think about it as it's up and down the P&L. It's the ongoing -- it's the increase in the cost takeout. It's the execution that we've been talking about relative to One-Way and One-Way improvements, all of that in the soup, and we're going to see sort of small incremental gains from Q2 to Q3 would be our expectation. Now we've got to go and execute on that. But things that make that optimism kind of resonate with me is the pipeline looks strong, both Dedicated and One-Way. The stuff in what we refer to as BI, business implementation is strong, especially for this time of year. So that's already secured and going through the final implementation stages and launch. With the Dedicated side, that does include headwinds still that come with launching a new Dedicated fleet. But the bigger part of those headwinds is behind us. We still have some to come with some of the implementations still yet to be finalized. So it's hard to -- we don't guide quarterly, we don't guide annually. So I want to stick to that for now. But hopefully, that gives you some color or some way to think about it.

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

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

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

The next question is from Richa Harnain with Deutsche Bank.

So Chris, you and I have talked a lot about -- can you hear me?

Yes, we can. Good afternoon, Richa.

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

Yes, sure. Richa, from a supply side standpoint, yes, your point is 100% valid. Bankruptcies are up and lenders -- with the rise in resale values, lenders just have more options besides what they've been doing more so over, call it, the last 18 months or so of just being more accommodative as smaller fleets continue to be under pressure. So lenders having options can drive out some additional capacity in addition to other things like the ELP and the B-1 enforcement and other things that would drive out capacity. From a gain standpoint overall for us, second quarter, great to see nearly $6 million over 2x prior year, really the best gains on used equipment that we've had in 6 quarters and resale values really being at the core of that. Actually, our unit sales were down a little bit in terms of the actual units that we're selling from one quarter to the next, it can vary. And so a lot of that -- well, primarily all of that driven from just higher resale values that are at more than 2-year highs. In terms of its sustainability, obviously, it depends on the supply of used equipment, tariffs and OEM demand. So I think it's a bit early to -- for us to go out on a limb and say how sustainable this is. But we have -- as a result of Q2, we've moved our guide on gains for the full year to the upper end of where we originally started that guide first of the year. We are expecting Q3 to be a bit lower than Q2. But overall for the year, it still looks like we're heading in the right direction.

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

Yes, Richa, I'll start and then Chris might follow up with some additional color. But when you startup Dedicated accounts, and especially, I think what's unique here that we need to explain is these are Dedicated accounts in new verticals that we have strategically decided to pursue. They have additional complexities to them, but we think there's also the appropriate upside over time. As such, as you start them, you have an impact on utilization in that fleet until drivers start to find their rhythm and understand the routes. You have impact as it relates to the training and development and sort of R&D that goes into making sure you perform at the level and expectations of the customers. And so there's a lot of just headwind noise, both from a margin perspective as well as just overall time -- mind share that it takes to pull one of these off. When you're in new verticals, you absolutely want to pull it off and you want to pull it off at the highest level, which we are doing because that then, of course, is the gift that keeps on giving and you continue to grow deeper into them. So these have some unique characteristics. We are largely through the headwinds on the ones we've implemented thus far. We do have additional headwinds coming as we look forward with further implementation. But along with those implementations comes fleet add-backs into existing Dedicated accounts, which is much more streamlined, much simpler and higher contribution margin. And so all of that -- all of the above allows us to sort of affirm some of the fleet growth guidance and affirm the reality that it will be largely in Dedicated as we go into the back half of the year.

And Richa, just to give you a little bit of size and scope on the startup costs for the new fleets. We're estimating around $1 million of expense in the quarter related to repositioning and travel and hiring. So just true incremental expense. In addition to that $1 million, we're also estimating that there was a headwind on revenue per truck per week. We reported that being up about 20 basis points, we think it would be closer to about 80 basis points, so 60 basis points higher once those fleets get into what we would consider to be settle in and get mature and more efficient and start hitting our expectations on revenue per truck per week, that overall, if we fast forward to that point that we would have seen more of an 80 basis point increase. That translates also to about another $1 million or over $1 million of revenue net of fuel and TTS. The sum of those, so the pure incremental cost as well as just some of the revenue inefficiency, I would say, would -- our estimate would be around 40 basis points of headwind to TTS adjusted OI margin.

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

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

Yes, Chris. This is Derek. I think if the backdrop was different, if we were in a different part of the cycle, optimal might take on a slightly different form, if I'm being frank. But we -- I'll answer it differently and say we feel good about the tractor age where we're at today. We feel good about our ability to allocate those assets appropriately because of the type of work and the line of work that they're in and their ability to get to and through a terminal for us to be able to support them. So we don't believe that we have any kind of equipment debt, if you will, that's just sort of pending in the background that we're going to have to make up for and make some sudden shift. At the same time, regardless of what optimal may or may not be, we don't feel good about pricing fluctuations or changes that were unanticipated or overpaying for a piece of equipment or worse buying into equipment that may or may not, in fact, be the standard post regulatory changes that are still ongoing in D.C. right now relative to the EPA. So it's a little -- so I do believe we're making the optimal decision right now to sit back, be patient, purchase appropriately, keep the fleet appropriately young to be able to do the work we do for our customers every day without any impact on service as well as put our drivers in a piece of equipment they can be proud of. So we like our positioning. I'd say get plus or minus [ 0.2 ] is a range that I think we can live within from where we're at today. And we'll continue to be nimble and agile as some of this tariff noise and other things play itself out.

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

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

Yes, please. Yes.

Yes. So net of fuel adjusted OI was 2.8%. And what we just went through of the approximately what we would estimate of $1 million in startup costs and then some of the additional headwind on the revenue side of an additional $1 million, that would get to about 40 basis points. The net fuel impact was also more meaningful in the quarter. We would estimate that, that was about 70 basis points of TTS adjusted OI impact. Just that net impact on fuel just being the simple math of our fuel -- revenue fuel surcharges minus the fuel expense and comparing that year-over-year. So that was an additional 70 basis points. All of that in total would get us closer to 4%, about 3.9% if you were to put all of that math together in terms of what would have been more normalized.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Derek Leathers, who will provide closing comments.

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

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