WERNER ENTERPRISES INC Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Market and Performance: Third quarter had challenges in One-Way trucking but positives in Logistics and Dedicated. Logistics continued double-digit growth with lower operating costs. One-Way trucking had revenue per total mile increase for the fifth consecutive quarter. Dedicated revenue grew sequentially and year-over-year with momentum from new business awards.
• Strategic Priorities: Focus on driving growth in core business (Dedicated fleet growing, Logistics divisions with top-line growth), operational excellence (culture of safety, service, cost reduction, tech transformation), and capital efficiencies (solid operating cash flow, maximizing value on used equipment sales).
• Challenges: Logistics experienced margin pressure from mix changes; One-Way saw decreased miles per truck; Dedicated had elevated startup costs.

Segment Performance

• Logistics: Revenue was $233 million, representing 30% of total third quarter revenues. Revenues increased 12% year-over-year and 5% sequentially. Intermodal revenues increased 23%, final mile decreased 1% year-over-year but increased 4% sequentially.
• Truckload Transportation Services (TTS): Total revenue for the quarter was $520 million, down 1%. Revenues, net of fuel, surcharges, were flat year-over-year at $460 million. Dedicated revenue, net of fuel, was $292 million, up 2.5%, representing 65% of TTS trucking revenues. One-Way trucking revenue, net of fuel, was $160 million, a decrease of 3%.

Guidance

• Adjusted full year fleet guidance range changed from up 1%-4% to down 2%-flat.
• Net CapEx guidance tightened from $145M-$185M to $155M-$175M.
• Dedicated revenue per truck per week guidance tightened to flat to up 1.5%.
• One-Way Truckload revenue per total mile guidance for Q4: down 1% to up 1%.
• Equipment gains guidance narrowed from $12M-$18M to $14M-$16M.

Risks

• Regulatory enforcement impacts on capacity, including English language proficiency, nondomiciled CDLs, B-1 visas leading to potential capacity attrition.
• Insurance company scrutiny of carrier risks related to regulatory issues.
• Market uncertainty and potential softness in certain segments like Logistics.

Question and Answer

Q: Given some of your comments in the fourth quarter so far on spot picking up, maybe demand a little better, productivity, some of the startup costs dropping off, is there a way you could maybe frame up how to think about hopefully improvement in TTS operating ratio?

A: Chris Wikoff mentioned Q4 would be seasonally softer with revenue softness in Logistics, but upside in TTS with Dedicated startup expenses dropping off.

Q: Your next question today will come from Bruce Chan with Stifel. Matthew Milask: This is Matt Milask on for Bruce. To start, I believe you said that the pace of capacity reduction related to regulatory enforcement appears to be accelerating. One of your competitors pointed to potentially larger impact there than what ELDs had several years back. We're curious if you could comment on the magnitude of reduction you might ultimately expect here, maybe what the timing might be, and any color or early signs that you're seeing across the business or within the customer conversations that you've had around this.

A: Derek Leathers discussed the pace of enforcement, including English language proficiency and nondomiciled CDLs, projecting significant capacity reduction with ongoing momentum.

Q: Jason Seidl: Listen, I'm sure that's the case. And on the insurance side, do you think that's something that we could see quickly accelerate, putting more capacity out of the marketplace?

A: Derek Leathers spoke about ongoing conversations between insurers and carriers regarding increased scrutiny and vetting.

Q: Thomas Wadewitz: Wanted to ask you on the, I guess, the popular topic on the call here. So you mentioned, Derek, that the numerator and denominator are important in figuring out this potential regulatory impact on supply in the market. What do you think the denominator is? Do you think it's like third-party for-hire truckload that you would say, hey, it's like 1 million drivers. Is it 2 million? How do you allocate the exit in terms of estimating a percent impact, whatever you think that numerator is?

A: Derek Leathers discussed the denominator as related to Class 8 over-the-road one-way driver base, estimating less than 1 million drivers and significant potential reduction from regulatory enforcement.

Q: Jason Seidl: Listen, I'm sure that's the case. And on the insurance side, do you think that's something that we could see quickly accelerate, putting more capacity out of the marketplace?

A: Derek Leathers spoke about ongoing conversations between insurers and carriers regarding increased scrutiny and vetting.

Q: Nancy Hipp: This is Nancy Hipp on for Ravi. It would be helpful to hear a couple more details on peak season and your thoughts towards the end of the year, especially with your nondiscretionary-focused consumer base with this recent extended government shutdown.

A: Derek Leathers discussed peak season looking similar to a year ago with discount retail holding up and opportunity sets comparable, but noting uncertainty from enforcement issues.

Q: Scott Group: So on the -- you've talked about regional tightness in a bunch of areas. We're hearing that from a lot of folks. I'm just curious, as you're seeing some areas get tighter, are other areas getting looser? Meaning is there some chance that these guys are leaving the states that it's being enforced and they're going to the states where it's not being enforced. And so the net impact is there's regions that get tight, but the net impact isn't as significant as maybe we'd think.

A: Derek Leathers discussed avoidance but believed regional tightness was significant with limited areas of enforcement avoidance.

Q: Eric Morgan: I wanted to ask on utilization. I think you mentioned some specific shifts or factors that drove the step lower in the quarter that was unrelated to the softness that you saw. So maybe you could just elaborate on that. And then I think you said it's improving in October. So should we just expect that to step back up in 4Q? And is that market-driven or something that you're taking action on?

A: Derek Leathers discussed factors like fleet seeding for Dedicated and team mix changes impacting utilization, with improvement expected in Q4.

Q: Reed Seay: I'm going to circle back to the capacity side. Not to harp on it too much, but I think one of the things that we've been looking into and other people have been concerned about is that you've had a lot of people come off the roads that could get on the roads with the news of the new enforcement that is expected to drive improvement in rates. So something like this would obviously impact the actual impact of rates. Is this something you're keeping an eye on? And how do you think about that as a potential governor to this upcycle?

A: Derek Leathers discussed monitoring potential return of drivers but believed capacity reduction from enforcement would be more significant than previous impacts.

Q: Reed Seay: And then if I could just ask on the technology side real quick. You focused on it a bit there in the prepared remarks, but can we get a little more color on exactly where that's being applied within the TTS segment and within the Logistics segment? It sounds like you've done a lot of work with that technology.

A: Derek Leathers and Chris Wikoff discussed technology application in Logistics nearly fully implemented with productivity gains, and in TTS at a different stage with automation and AI deployment across processes.

Q: Brian Ossenbeck: Derek, maybe just an industry-wide question for you. With the insurance costs, how they are and the claims trending in the direction they are, unfortunately, what do you think is needed to really get some progress on that, not just for Werner, but for the entire industry? Are we seeing any improvements on reform, anything you're excited about or states that are moving forward? Because ultimately, I'm just not sure if the shipper is going to pay for the higher insurance claim if they think that's more of a trucking industry problem and not theirs.

A: Derek Leathers discussed need for tort reform, state-by-state battles, and federal legislation to move accidents to federal jurisdiction for standardized playing rules.

Q: Brian Ossenbeck: I understand it's a pretty difficult road ahead, but it sounds like some progress. One other quick follow-up on another topic you're passionate about, Derek. Just the B-1 visa, the cabotage, I know there's some enforcement mechanisms for more ELP testing than nondomiciled issue. But is there any way to address and maybe get some tighter enforcement around the illegal uses of the B-1 as it relates to cabotage?

A: Derek Leathers discussed ongoing efforts and creative tech solutions for B-1 visa cabotage enforcement.

Q: Christian Wetherbee: Derek, in your prepared comments, you mentioned One-Way trucking demand through September improving and then so far in October. So I guess I just wanted to come all the way back to that. It sounds like what we've heard from some other folks was maybe a little bit different than that over the course of the last few days. So I want to maybe see if you could expand a little bit on what you're seeing, particularly in the month of October.

A: Derek Leathers discussed seasonally normal improvement in One-Way trucking demand through September and October, aligning with retail preparation for peak.

Q: Christian Wetherbee: Yes. I think in this environment seasonality is not necessarily a bad thing. And then maybe just quickly, the Dedicated pipeline, you guys mentioned that. I'm just curious, as you maybe just think not just 4Q but how you think about that into the first half of next year, it sounds like it's building.

A: Derek Leathers discussed robust Dedicated pipeline with precommitted business into Q1 next year and positive outlook for Q1 and beyond.