Werner Enterprises Inc (WERN) 2019 Q2 法說會逐字稿

Good afternoon, and welcome to the Werner Enterprises' Second Quarter 2019 Earnings Conference Call.

(Operator Instructions) Earlier this afternoon, the company issued an earnings release for its second quarter 2019 financial results and posted a slide presentation to accompany today's discussion.

These materials are available on the Investor Relations section of the company's website at werner.com.

Today's webcast is being recorded and will be available for replay beginning later this evening, along with the supporting slides.

Before we begin, please direct your attention to the disclosure statement on Slide 2 of the presentation as well as the disclaimers included in the press 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.

This disclaimer is a brief summary of the company's statutory forward-looking statements disclaimer, which is included in the company's filings with the SEC.

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 in the earnings release and at the appendix in the slide presentation.

And I would now like to turn the conference over to Mr. Derek Leathers, President and CEO.

Mr. Leathers, please go ahead with your presentation.

Thank you, and good afternoon, everyone.

On the call today with me is our CFO, John Steele, and we're excited to speak with you about the Werner second quarter 2019 earnings results.

I'll start by providing a brief overview of the company and our current positioning, followed by the financial highlights for the quarter.

John will then provide additional detail on our financials.

I'll finish by reviewing our business and capital allocation strategies and review our updated 2019 financial guidance, and then we'll address your questions.

Now turning to Slide 4. For those of you who may be new to Werner, we've included a company snapshot.

In 2018, 77% of revenue was generated in our truckload transportation services segment, with the remainder coming from our Werner Logistics segment.

Our customer base is focused on the consumer.

For our revenue by vertical, just over half is in retail, 18% is in food and beverage, 18% is in manufacturing and industrial, with the remaining 12% in logistics and other.

Within our largest industry vertical, we focus on serving discount retailers that sell more necessity-based products that tend to be less economically sensitive.

We have a diversified customer base, with less than half of revenue coming from our top 10 customers and 74% spread across our top 50.

On Slide 5 is a time line of key events, highlighting execution over the last 5 years to position Werner as a best-in-class trucking and logistics provider.

Our truck and trailer fleet are new and where we want it.

This enables us to produce high-quality service and attract high-quality drivers.

By design, our net CapEx in 2019 is lower than 2018 and has returned to normalized levels.

Our revenue portfolio remains relatively balanced between dedicated, one-way truckload, and logistics.

This positions Werner to increase the consistency of our financial results.

Also, during second quarter we executed our capital allocation strategy, which I'll discuss in more detail in a few moments.

Next let's move to Slide 6 for a brief overview of our second quarter and year-to-date financial performance.

For the quarter, revenues grew 1% to $628 million.

On an adjusted basis, EPS increased 3% to $0.63 per share.

This was a strong second quarter performance considering the below-average freight market this quarter compared to an unusually strong freight market in second quarter of '18.

Our second quarter '19 adjusted EPS growth of 3% was on top of a 90% adjusted EPS increase in the second quarter of 2018.

Adjusted operating income this quarter increased 1%, and our total company adjusted operating margin declined slightly by 10 basis points to 9.4%.

Results reflect freight demand that was lower than average from a seasonal standpoint and well below what we saw in the second quarter of last year.

In the challenging transactional freight market, we continued our focus on maintaining a relatively low spot market exposure to maximize our trucking operating margin.

As a reminder, approximately 10% of our one-way truckload miles are spot, or only 5% of our total miles.

Last year, the very robust freight market produced several project and surge freight opportunities.

For second quarter '18, these events added over 2 percentage points to our rate per loaded mile in one-way truckload, and also contributed $0.04 a share to second quarter '18 earnings.

Freight demand this quarter was lower than average, with no meaningful project or surge opportunities, resulting in a tough rate and earnings comp.

Despite this dynamic, we improved our second quarter '19 adjusted EPS by 3% year-over-year and by 20% sequentially.

Year-to-date revenues increased 4%.

Adjusted EPS increased 16%, and adjusted operating income increased 16% versus the same period last year.

We expanded our operating margin by 100 basis points year-over-year through our focus on execution and cost management in a tougher freight environment.

I'd like to sincerely thank all hardworking Werner associates for their continued efforts.

Reflecting our investment in a best-in-class fleet, we ended the second quarter with 7,935 total tractors within our truckload transportation services, or TTS segment, an increase of 235 trucks year-over-year and down 10 sequentially.

Now I'll turn the call over to John to discuss our financial results in more detail.

John?

Thank you, Derek, and good afternoon, everyone.

We appreciate you joining us today.

Beginning on Slide 8, we provide some additional financial performance drivers in second quarter 2019 versus second quarter last year.

Our revenue per truck per week declined 1% net of fuel, and we increased the average number of trucks by 5.2%.

In our logistics segment, revenues declined 2%.

Adjusted operating income grew 1%, and adjusted TTS operating margin declined 70 basis points.

Our logistics operating margin declined by 20 basis points.

Driver pay increases moderated to nearly 5% in second quarter '19 compared to nearly 9% in first quarter '19 as we began to lap larger driver pay increases from the first half of 2018.

Moving to adjusted EPS, the 3% year-over-year increase was due to flat net income and 3% fewer diluted shares outstanding due primarily to share repurchases.

We achieved meaningful operational improvements in the performance of our driver training schools and generated equipment leasing growth, which, on a combined basis, contributed $0.03 a share of EPS improvement.

We believe most of these improvements are sustainable, going forward.

Beginning on Slide 9, let's look at our second quarter results for our TTS segment in more detail.

TTS revenue grew 2% to $480 million year-over-year primarily caused by 5% fleet growth, $5.5 million of lower fuel surcharge revenues due to lower fuel prices, and a 1% decline in revenue per truck per week.

Adjusted operating income declined 4% to $52.4 million due to a 70 basis point reduction in adjusted operating margin.

Despite the below-average freight market in second quarter '19, we achieved a solid 10.9% operating margin, including fuel.

Our adjusted TTS operating ratio net of fuel was a strong 87.4.

Now on Slide 10, let's look at our second quarter dedicated and one-way truckload metrics.

For dedicated, we grew trucking revenues net of fuel by 12% to $227 million.

Dedicated average tractors grew 8%, or up 339 year-over-year.

Dedicated revenue per truck per week increased 4.1%.

One-way truckload trucking revenues net of fuel decreased 5% to $184 million.

One-way truckload average tractors increased 2%.

Revenue per truck per week decreased 6% for the quarter due to 3.4% lower miles per truck and 2.7% lower revenues per total mile.

The miles per truck decline was due to a lower than average seasonal freight market in second quarter '19 compared to a robust freight market in second quarter '18, fewer team driver trucks this quarter, and government-imposed delays at the southern border, which were more challenging early in the quarter and less disruptive as the quarter progressed.

Moving to the Werner Logistics results on Slide 11, in the second quarter, logistics revenue declined slightly at 2% to $130.9 million primarily due to fewer project freight opportunities, transactional spot pricing declines of over 20%, and lower volumes when compared to second quarter '18.

Gross margins in logistics expanded 40 basis points as the early benefits of our new pricing analytics tools enabled more informed decisions and improved capacity generation across our brokerage network.

Our logistics operating income percentage declined 4%, down 20 basis points year-over-year.

We are gaining efficiencies and productivity with our latest software enhancements.

However, the operating costs of these technology investments are impacting operating margins in the short-term as associates adopt these new tools and more fully realize their intended benefits.

The rollout across all of our brokerage offices will occur throughout the third quarter as users become more proficient, the benefits of the investment in digital transformation will continue to grow.

I want to highlight that each new application is carefully tested and then piloted to ensure it is both effective and generates improved performance prior to widespread adoption.

We're excited about what we're seeing so far, and Derek will discuss this further in a few minutes.

I would now like to turn to the final portion of our prepared remarks back over to Derek, who will cover our execution against our strategy, capital allocation developments, and updated 2019 outlook.

Derek?

Thank you, John.

Moving to Slide 13, I would like to update you on our 5T strategy.

During our prior earnings calls, I explained the steps we are taking to position Werner as a best-in-class organization focused on enhancing our portfolio, increasing our level of service, and delivering quality earnings to our shareholders across economic cycles.

We are creating structural and sustainable improvements.

With our modern and more efficient fleet, combined with high-quality professional drivers and strong management execution, we expect to be able to adapt quickly to changing market conditions and generate more consistent financial results.

Our truck and trailer fleets remain new, with an average age of 1.8 and 4.1 years respectively.

Despite an extremely competitive driver market, we remain committed to quality over quantity with our professional driver force.

This is critical to delivering on our brand promise to our customers day in and day out.

We upgraded and expanded our terminal network to better support our customers, drivers, and lower our maintenance costs.

This investment provides our drivers with the facilities and infrastructure they need and deserve as we continue to raise our service expectations.

Since 2016, we've nearly tripled our annual IT investment as part of our 5T strategy, improving service to our customers and professional drivers alike.

During the second quarter, freight volumes were below average and below our expectations.

Also the speed of service bar was once again raised for retail companies by competitive forces.

These changes, as they evolve, make on-time every-time freight deliveries even more critical.

Our team is relentlessly focused on flawless execution.

We have been raising the bar for Werner on-time service the last several years.

To that end, our 2019 on-time service percentage is the highest in the past 5 years.

Critical to being a customer-centric organization, we held our 36th annual Werner Transportation Forum in Omaha last week, with record-high customer and supplier attendance.

Every year at the Transportation Forum, we facilitate connections, knowledge sharing, and feedback between customers, suppliers, and drivers, allowing us to stay current on opportunities, concerns, and the freight economy from different perspectives.

Leadership in our company and our industry is 1 of the 4 pillars of our Werner core values.

Our annual Transportation Forum is a visible example of our commitment to leadership with our customers and suppliers.

We thank them for, once again, setting a new all-time attendance record this year.

Turning to Slide 14, Werner has one of the newest truck and trailer fleets in the industry.

A Werner truck is less than a third as old as the industry average.

All our trucks are equipped with the latest safety and training features.

Our Werner fleet sales operation maximizes the remarketing value of our trucks and trailers when they are ready for sale.

Our late-model equipment with attractive features provide significant value to repeat customers who appreciate the long-term reputation and integrity of Werner Fleet Sales.

Now, I would like to turn to Slide 15.

The labor market continues to be extremely difficult, and the market for professional truck drivers remains challenging.

Werner offers numerous competitive advantages to the professional driver.

Attractive pay, a new fleet, better home time, leading industry driver training, a strong military recruiting program, and becoming the employer of choice for female drivers are all essential to our success.

In addition, our driver recruiting and retention advantages enable us to be more selective with the drivers we retain by addressing those that do not meet our stringent performance standards.

Even in the difficult driver market, there's a continued expectation at Werner for driver excellence.

All of this leads us to our most important success factor - our culture.

Werner was founded by a driver and managed with the driver in mind.

Top quality drivers produce top quality results.

At Werner, no matter who you are or where you fit in our company, there is an expectation of excellence, a commitment to put team above self.

It manifests itself in the desire to engage within the communities where we work, it's built on a foundation of integrity, and it supports an unwavering dedication to safety and service above all else.

When you hire the right people, give them the right tools and training to do their jobs, and set expectations around safely providing a premium service, earnings and growth will follow.

On Slide 16 is a visual representation of how the 5 Ts are centered around supporting our customers and shareholders alike.

To deliver superior customer service, we are focused on upgrading our infrastructure, improving processes, and enhancing our systems while unlocking the power of data analytics to ultimately eliminate defects, improve efficiencies, and lower our overall costs.

On Slide 17, I'd like to focus this quarter on 1 of the 5 Ts that we haven't covered in-depth in our previous calls, and that's technology.

As part of our 5T strategy, Werner is committed to a continued investment in technology and innovation to further strengthen our customer experience, our driver experience, and market leadership.

Our investment includes a focus on upgrading our infrastructure, investing in digitalization to improve process and systems with smart automation, and leveraging innovative machine learning technologies to provide real-time data to optimize decision-making.

To accomplish this, we're already leveraging innovative technologies such as IOT, automation, and machine learning to ensure we capitalize on emerging supply chain trends and changing customer needs.

We continue to strengthen our core IT and IS services, including network upgrades and unified communications solutions to support our transformation efforts and our existing technologies.

Werner's digital transformation spans enterprise-wide across TTS, logistics, human resources, and accounting and finance.

Our technology investment has already driven the following new solutions: freight matching, capacity generation, final mile platform enhancements, driver-facing apps, and safety management solutions.

Here are 2 examples.

In our freight brokerage business, we internally developed capacity generation tools using machine learning technology.

We combined them with public and proprietary data and aligned them with real-time pricing support so that we can now intelligently match carrier capacity with customer freight.

The combination of these innovations has enabled significant employee productivity gains by simplifying the process and has led to higher customer and carrier satisfaction, which has translated into more return bookings from our customers and carriers.

This year alone, we've seen the number of single-booking carriers with Werner Logistics decline, and our bookings per carrier are up over 15%.

We believe our investments have the potential to continue building loyalty to the Werner brand and return productivity gains to our shareholders.

Another example we just launched is a new Werner-developed safety management workflow system that consolidates 4 disparate truck critical event reporting systems.

This solution streamlines real-time critical event and forward-facing video review.

This enables our safety specialists to quickly receive and identify relevant versus nonrelevant records and videos so that we can monitor, assess and address these events real-time with our drivers.

We expect this leading-edge safety monitoring system will increase efficiencies, including reducing time spent on following up on false alarms and ultimately help improve our management of safety to further mitigate our risks.

Let's now shift to CapEx and cash flow on Slide 18.

From 2015 to 2018, we were in a heightened investment period, focusing on strategically improving our fleet and strengthening our organization.

With the significant investment in our fleet and terminals largely behind us, we are targeting net CapEx to be more consistently within the range of 11% to 13% of gross revenues over the long-term.

We also continue to expect to generate significant free cash flow of $100 million or more in 2019.

With increased cash generation, our capital allocation priorities on Slide 19 are as follows: our first and highest priority is to continue to reinvest in our business.

We remain committed to our drivers, customers, and associates to maintain a best-in-class fleet, network, and technology platform.

We will continue to invest in IT, operational and commercial initiatives as well as our logistics technology across our company.

Our fleet age is where we want it.

We are no longer spending a higher than normal amount of CapEx to lower the fleet age.

We expect net CapEx to be in the lower end of our $275 million to $300 million range.

We will continue to thoughtfully monitor and prioritize CapEx based on a goal of high return on investment and the current market environment.

Next, we will continue to return cash to shareholders.

Werner has a long history of paying consistent, regular quarterly dividends across economic cycles as well as utilizing share repurchases and special dividends to return excess cash.

During the quarter, we declared a regular quarterly cash dividend of $0.09 per share and repurchased 700,000 shares for $21.8 million.

In mid-May, following the extensive research and analysis of our capital structure, we announced actions consistent with our capital allocation strategy.

First, we announced a $3.75 per share special dividend, or $261 million, which was paid on June 7th.

We also announced a new 5 million share repurchase authorization.

Both of these initiatives are designed to enhance return to our shareholders.

In addition, we entered into a new expanded credit [facilities] totaling $500 million with 2 of our existing lead banks.

These facilities extend our bank credit through May of 2024 with attractive pricing terms and covenants.

In the past, we maintained virtually no debt, which resulted in a more expensive weighted average cost of capital.

By revising our long-term goal from no debt to a modest and manageable range of debt in the 0.5X EBITDA to 1.0X EBITDA range, we expect to lower our weighted average cost of capital.

In early July, we took advantage of historically attractive low interest rates and fixed the interest rate for $150 million of our debt at slightly above 2.3% through May of 2024.

We're committed to maintaining a stronger, more flexible balance sheet.

Following the June special dividend, we have over $1 billion of stockholder's equity and an appropriate and still-conservative net debt to EBITDA ratio of 0.7X.

Next, on Slide 20, I'd like to discuss our 2019 updated guidance.

For our guidance assumptions, we expect to maintain our modern fleet at age levels that are near 1.8 for trucks and 4.1 for trailers.

We expect our effective tax rate to be in the range of 25% to 26% for the year.

Next, we expect our TTS truck growth from year-end 2018 to year-end 2019 to be in the low end of our 3% to 5% truck growth range, with most of that growth coming in dedicated and the remaining amount occurring in the third quarter.

In the first half of the year, we added 115 trucks.

We currently expect to add about 100 more trucks in third quarter '19 with no planned truck growth in fourth quarter '19.

On the freight side so far, in the first 3-1/2 weeks of July, freight demand in our one-way truckload unit has remained lower than average for a typical July.

Gains on sales of equipment during second quarter were $4.5 million compared to $5.9 million in the first quarter and $5.1 million in the second quarter of '18.

We have begun to see some moderation in the used truck and trailer pricing market as the freight market has been sluggish.

Year-to-date, we realized equipment gains of $10.4 million.

We continue to expect gains on sales of equipment for the full year of 2019 of $18 million to $20 million and currently expect to be in the low end of this range.

For net CapEx, our guidance range remains $275 million to $300 million, and we expect to be in the low end of the range.

Now, let's discuss the 2019 guidance we are changing.

Revenue per total mile for the 42% of our trucks in our one-way truckload fleet, for the full year 2019 compared to 2018, is now expected to be in the range of flat to negative 3%.

While year-to-date 2019 contract pricing increases are approximately 4% on average, with recent contracts renewed in the flat to low single-digit range, the lackluster 2019 freight market has provided few project and surge freight opportunities, significantly lower spot rates, and higher empty miles.

As such, we are assuming the current freight trend will continue into the third quarter, with an expectation that there will be a normal seasonal pickup in freight and rates during the fourth quarter holiday shipping season.

Third and fourth quarter one-way truckload revenue per total mile is expected to be lower than the same quarters in 2018 due to significant rate increases in project activity that occurred in the last 2 quarters last year.

Finally, we expect our interest expense to increase to a quarterly run rate in third quarter '19 of approximately $2.7 million based on our current debt level and interest rates.

As the freight and rate markets moderated the last several months, we accelerated our cost management initiatives company-wide to lower our cost structure.

To date, we've identified over $10 million in annualized spend savings in multiple cost categories.

We expect these cost savings to continue to grow, moving forward.

In summary, Werner is well positioned to navigate a less robust freight market with nearly 60% of our fleet in dedicated, a more stable and predictable business, over 20% of our revenue from our logistics segment, and less exposure to the one-way truckload market than many in our industry, and a continued focus on operational and digital excellence.

We are positioned to successfully operate in whatever economic environment comes our way.

We have a new fleet.

We have an energized and engaged team.

And we are producing increasingly high-quality service to our customers.

At this time, I would like to turn the call over to the operator to begin our Q&A.

(Operator Instructions) Our first question today will come from Tom Wadewitz of UBS.

Thanks for the presentation and all the detail.

Wanted to see, Derek, if you could offer a view on the cycle.

I guess the most recent cycle we'd look at in terms of downturn would be 2015 and '16.

So wanted to just see if you could offer some perspective on whether you think this cycle and this downturn would be pretty similar to that, or are there reasons that it might be more narrow, kind of quicker down and maybe quicker recovery.

So just some thoughts to start with maybe on the cycle.

Thanks for the question.

So I do think there's some differences that are important to note.

If you think about '19 as compared to '18, we've had a lot more, for lack of a better term, sort of white noise, or external influences on the market this year between tariff and trade talks, some of the extended winter weather, the delayed produce season, things that are not sort of macroeconomic in nature or cycle-oriented, per se, but more fits and starts within the larger economy that I think is very different from what we saw in some of the prior cycles, where it was true sort of widespread slowdown and overcapacity at times.

This time, I think we had a ramp-up in '18.

Obviously, freight rates took a pretty sudden and pretty explosive growth rate over the course of the year, followed by some capacity addition specifically at the small to mid-size carriers, followed by a really, for lack of a better term, a strong economy framed with economic uncertainty nonetheless because of trade and tariff.

So we saw the correction happen faster a year ago in terms of the market tightening.

We saw some loosening earlier in the year that I think was caused by sort of a snowballing of several external factors.

But the underlying economy, by and large, still is chugging along.

And so yes, we do believe capacity's leaving the market.

If you look at order rates falling as fast as they are, if you look at cancellations of current builds taking place, and frankly, even bankruptcy trends that are out there, especially at some, I would say, more meaningfully-sized carriers, the opportunity for this to turn around is before us and I think could be just -- it could be quicker than what we've seen in prior cycles.

Okay.

So potentially instead of a two-year downturn, like '15 and '16, maybe it happens a bit more quickly than that.

Yes.

I believe so.

I believe so.

We still have peak season ahead of us.

We've said throughout that our goal is to operate well in down-markets as well as strong ones.

And as I think about the quarter, if I was going to kind of summarize it, I really think we've delivered on that commitment that we've made.

We're going to weather this, and we're going to continue to weather it and continue to use the defensibility of our portfolio and dedicated to our advantage.

That is performing well, and we have tailwinds behind us there as it relates to some truck growth coming on in the third quarter.

And so we like our positioning.

And just for the quick follow-up, how do we think about the dedicated pricing impact?

Your revenue per truck up 4% was a pretty strong number in the quarter against a weak freight backdrop in dedicated.

Is it something that it's a matter of a lag in the pricing effect there?

Or would you simply expect it to be more insulated, that you just wouldn't see that much of a decline in revenue per truck per week, or whatever kind of pricing-related metric you want to refer to in dedicated?

Yes.

I think the way to think about it is, first off, you had said weak freight demand in dedicated, and we really can't connect those thoughts.

What's happening in the one-way market, and what's happening in demand and one-way is one thing.

And separate from that completely is customers that need high service expectation, on-time every-time freight delivered with sort of premium reporting and service built around it.

And that's a different animal.

And so in good markets and bad, we've said for years that dedicated will hold up better.

Where it shows itself is in our expectation of what that means that we'll on-board.

So we started the year with a 3% to 5% truck growth range.

We've guided now to the lower end of the range because what we're not going to allow is to provide that premium service with all of the expectations that come with it and not have a fair value for it in terms of the price.

And so we're confident with where we're at in the range.

We have line of sight to where growth is coming from.

But it is difficult to do dedicated well, and we think we do it very well, and we're going to price accordingly.

And it shows through in what you commented on with the rates year-over-year.

Our next question comes from Ben Hartford of Baird.

This is Andy on for Ben.

I wanted to get some additional perspective on your comment about continued difficulty finding drivers.

It seems that the market for drivers has loosened up a bit over the past couple quarters, particularly for the larger carriers.

Are there any specific regions where you're finding it still particularly challenging to find drivers?

Thanks.

Thanks, Andy, for the question.

So I guess my comment is framed in a larger backdrop than a quarter.

The driver market and how you think about drivers isn't quarter to quarter, and if it is, I think you'll find yourself in real trouble in a hurry.

We're committed to our drivers over a much longer term than a quarter.

And so what I'm really referring to is the market for qualified professional drivers is tight, and remains tight.

But more importantly, as you look forward and you think about drug and alcohol clearinghouse, you think about the possibility of hair follicle testing coming into play in 2020.

We just don't want to ever lose sight of the reality that we need to leverage our driver training schools, leverage our brand, leverage the investments we're making in all of the 5 Ts to continue to raise the bar on our expectations.

So I specifically commented on that because I don't want people to believe that, suddenly, just because you have lots of applications means you have lots of drivers you would hire.

There's a very big difference between the two.

We're going to continue to push the envelope and expect excellence.

And in that market, it's still tight.

Our next question comes from Amit Mehrotra of Deutsche Bank.

Derek, I just wanted to ask a question on the truck counts and the mix between dedicated and one-way.

Obviously, 60% of the tractors sit in dedicated.

That's up from kind of 50-50 not that long ago.

Shouldn't we, or should we, continue to see that mix continue to shift, just given the opportunities in dedicated, the resiliency, the visibility of that business, and why not maybe make a more aggressive move there, given the volatility and lack of visibility in the one-way truckload market?

So a couple of thoughts on that, Amit.

The first one, so we're at 58% today but moving towards 60%, as we've talked about.

We believe the pipeline is full enough, and our opportunities in front of us are strong enough to get us there.

As we think about the overall freight market and where we're at on the one-way side, we're going to continue to focus on building out our strengths, which is Mexico and team expedited.

We don't want to abandon those 2 key franchises to what we -- and we think we can do that well.

And as we think about looking forward, there is nothing magic about 60%.

It could creep further than that.

But that will really be dependent on what happens overall within the one-way market and our ability to continue to focus our efforts within one-way on the least commoditized end of the spectrum, which is that team expedited just-in-time world, or the cross-border Mexico world that we currently are the largest provider in already, and we believe we can continue to extend that lead.

One thing I would add, Amit, just a quick thing.

For our dedicated fleets, there are times when we need to surge with our customers, to help them during busier times of year, and so we use our one-way truckload fleet at times to help with that surge capacity need.

And just a follow-up, John.

If we think about salaries, wages and benefits, the line item on your cost structure, the growth in that expense moderated on a year-over-year basis, but it actually increased as a percentage of sales ex-fuel.

I assume that has to do with obviously the mix of more dedicated, even less reliance on PT, but hoping you can just give us some sense on how should we think about salaries, wages and benefits expense trending on a year-over-year basis in 3Q and 4Q, just given the outlook for yields.

To start with this quarter, we increased $10 million from $196 million to $206 million.

And about 80% of that was due to drivers.

And of that roughly $8 million increase in driver pay, about $5 million of it was due to the 5% higher rate per company mile, and then the other $3 million was due to the fact that we had 4.8 million more in company miles.

The balance of the increase in that line is the fringe benefits side.

With higher pay comes higher FICA and unemployment taxes, work comp, 401(k), and then medical drugs.

Fringes are up about 7% year-over-year, and that's the balance of the increase.

As we look at the biggest element of that line, which is driver pay, going forward, you can see that our increases have moderated from nearly 9% in first quarter to nearly 5% in second quarter.

I would expect that we'll be up somewhere in the 3% to 4% range in third quarter, and up in the 2% to 3% range in fourth quarter on a year-over-year basis because we're beginning to lap some of the larger increases we did last year.

That assumes the freight market and the driver market remain fairly consistent with where they are today.

That's helpful.

Something tells me you were anticipating that question.

I appreciate the color.

Our next question comes from Jack Atkins of Stephens.

Derek, if I could go back to something you were commenting on a moment ago, which is sort of these upcoming regulatory changes over the next, call it 2 to 3 quarters, whether it's AOBRD to ELD conversion late this year, or the national drug and alcohol clearinghouse, hair follicle testing, if you could just sort of expand on your thoughts in terms of what that could mean to industry capacity, call it over the next 12 months, would be curious to get your take on what all that means for the broader market.

Thanks for the question.

On AOBRD to ELD, I think there's more "there" there than people realize.

So we think, and we've done extensive testing and have moved our fleet, and continue to move our fleet to full implementation, and we'll be done with that this month.

Actually, we'll be done with that in August.

I apologize.

But as we've looked at that, for us it's less than 1%.

But we think for the industry, and there's a variety of factors that play into that thought process, it's between 1% and 3%.

There is more restrictions.

It is more stringent, and there are things that can trip folks up.

One of the things that's been lost in the news, if you will, is being ELD ready and actually ELD compliant are 2 different things.

So many fleets are ELD ready but have not yet flipped the switch.

We feel comfortable and confident that we're in front of that.

We'll be fully ready and implemented before peak season so as to stand true to our commitment to service.

And we've got over 20 years of experience on electronic logs in total and approaching 19 billion miles delivered.

So we like our chances there, and we think we have a competitive advantage.

Drug and alcohol clearinghouse is a bigger deal than folks may realize simply because, today, we have no system of record, no national database to point us to know that somebody's failed a drug test or alcohol test previously.

Having this go into effect in January, and I do have confidence that it will happen in January and have followed up extensively to confirm that, what it really does is allows us to shine a light on past failures and understand and know exactly who we're interviewing.

And so that line earlier I talked about, about driver applicants do not equal qualified professional drivers, will be even further delineated.

And so that has a capacity-limiting effect.

That one's a little tougher to know because we've never had the database, right?

So we just believe it will clean up and certainly take out some capacity.

Perhaps the biggest of the 3 would be hair follicle when that does, in fact, go live.

Obviously, the first phase of that is simply allowing us to use it as the test of record.

We've been hair follicle testing for over 4 years, and we will continue to do so going forward.

We'd like to, A, save the money and not do 2 tests, but B, we know that hair follicle testing has a roughly 10 times failure rate over urinalysis and is much, much more accurate.

If that is able to kind of gain a foothold, first, it's good for safety.

It's good for the industry.

It's the right thing to do.

That's the most important thing.

But it will have an effect on limiting capacity.

And I think when you combine it with drug and alcohol clearinghouse, the combined effect is far greater than even the original ELD impact or this upcoming one that's in front of us in December.

So just to sum it up, if I'm hearing you correctly, over the next 12 months, we could really see these regulatory changes have a pretty material impact on the underlying industry capacity.

I believe so.

Yes.

And then just for my follow-up if I could, Derek, if I could just kind of get you to talk about what you're hearing from your customers.

Obviously, it was a weaker-than-expected second quarter just from a seasonal perspective.

There's overhang from excess inventory levels.

What are your customers telling you about their peak season plans?

And then more broadly, what are they telling you about how they expect their business to perform over the next couple quarters and how that could translate to freight volumes?

Some of the white noise I talked about earlier obviously affects them every bit as much, or in some cases more than us, in terms of concerns about where the economy's headed, specifically to tariffs and trade.

But at the end of it, what we've done is executed a strategy over the last several years to really try to align ourselves with winners.

And so we've worked and scrubbed and kind of gone through a pretty stringent review of our customer list and tried to make sure that we're growing with those that are growing, that are financially strong.

And in particular, because of our retail-heavy focus, making sure we have a heavy focus on discount retailers that are less economically sensitive.

With all that said, the folks that we plan to work with this fall, to surge up with, to provide solutions to, they're in that winning category.

They're doing well.

Same-store sales look strong.

Inventories have been drawing down.

They've kind of chewed through what they brought in pre-tariff.

And so we feel pretty good about what we see in front of us relative to peak.

Now, we still have to balance that with the reality that we felt great a year ago.

Last year was a year that comes along once in a career, perhaps.

But as a core carrier providing premium service, when it comes to things like Black Friday and the service sensitivity around the holidays, carriers like Werner are going to be in high demand, and all of the conversations have led me to believe that's the case this year, as it was a year ago.

Our next question comes from Todd Fowler of KeyBanc Capital Markets.

Derek, in your prepared comments, you mentioned that, in the second quarter of '18, that the surge in the project business was about $0.04 and was 200 basis points of the improvement in revenue per mile.

Do you have similar numbers that you can share with us as to what that would have contributed in both the third and fourth quarter of '18?

No.

I don't have that information in front of me, Todd.

I can work to get it offline, but that may be something that we will need to update in our call next quarter.

John, maybe just from order of magnitude, I mean was the second quarter the biggest from a surge and project standpoint?

Or do you just have kind of a sense of how that trended in the back half of the year?

And obviously, what I'm getting at is just trying to think about the comparisons that you guys face in the second part of this year.

I would say third quarter was probably a little bit larger than second quarter from a project surge standpoint in terms of being an outlier in 2018.

Then, we had our normal pickup in project surge in fourth quarter due to the holiday season.

Okay.

Got it.

So fourth quarter was what you'd kind of expect from a more typical seasonality last year.

Yes.

Okay.

Great.

And then just to follow up, there were some comments, I think, Derek, that you made about cost-saving initiatives, and I think you said you had targeted $10 million.

Can you give us a sense of the timing of that?

Was that something that you've identified here in the second quarter that's going to start to flow through the numbers on the back half of the year?

Or is that something that's kind of been in process and you're seeing that in the numbers right now?

Thanks.

Yes.

I'm going to have John walk you through that because he's been very involved in this.

But go ahead, John.

Yes.

So where we're at through the end of second quarter, we're at about 80% implemented.

We expect to be about 90% implemented by the end of third quarter.

So we're pretty far along in the process.

The initiative started, for the most part, with effective dates at the beginning of this year, and then have continued.

I think there's 70 different items on the list that we've initiated thus far, and we expect growth in that number both in volume and amount as we move forward.

And the only thing I would add is you know our nature.

We're conservative in nature.

And so the dollar figures we're talking about there is really on true cost control.

It doesn't take into account the progress we've made on maintenance.

And as you've seen year-over-year, the progress we're making in risk and insurance.

And the last one is kind of the [FX] and it working the way it was designed to work on nondriver salaries year-over-year, be it -- those are down considerably based on our incentive packages and the way we've structured pay-for-performance types of metrics.

So this is really a true kind of cost or spend control project, and we are ramping those totals, and continue to aggressive to look for further savings.

Our next question comes from Scott Group of Wolfe Research.

So sometimes we have third quarter better than second, sometimes worse than second from an earnings standpoint.

Maybe can you just walk us through the puts and takes as you see it for third?

And then Derek, your views about hopefully a shorter down cycle than normal, do you think we get back to positive pricing next year?

Yes.

So I'll start.

So the pricing dynamic obviously is going to be tied very closely to how much continuation, discipline and commitment folks have to their order rates, their build rates even because we've seen cancellations rising.

And then carrier health.

If you think about the majority of our industry, of the vast majority of our industry being under 50 trucks and spot pricing being down 20% year-over-year, nobody was making 20% or anything near that a year ago.

And so we know there's a lot of duress out there.

That portion of the marketplace, a portion we don't play in much but nonetheless that exists, is really having a rough go, and it's going to cleanse out any of your less efficient operators, and I think pretty quickly.

I really believe, and we've talked about this a lot internally, Scott, that this marketplace we're in today will react both up and down more rapidly than what we've seen in prior cycles.

And if you think about '17 into '18, and now what we saw in the first half of '19, that certainly has played out.

So that's kind of my thoughts on the pricing question.

I think '20 would then set up, if you follow that logic, it would certainly be my expectation, when you think about driver pay isn't going to go down, equipment comes increasingly with better and more advanced technologies, and those come at a price, oil, and thus diesel and the IMO hitting in 2020, there's no reason to believe diesel pricing isn't going up next year.

The question is by how much.

And so there's going to be activity in the pricing market, and we're going to go and ask to be paid our fair share.

We just got out of the all-time record attendance at our forum, and we put it in our comments because, in a time when the market is more loose, customers obviously have even more choice on whether they want to take valuable time to attend and spend time to understand where the market's headed and why, and what our views are on it.

And we had the record all-time attendance, so there's clearly an interest level.

And on the third quarter to second quarter question, we don't provide guidance.

It's difficult to predict how the freight market is going to trend from here, and that other factors like fuel and the used truck market, insurance claims, how they will develop.

And as we look forward, that makes it difficult to predict.

Over a long, long period of almost 20 years, typically second quarter and third quarter have averaged out to a fairly consistent level of earnings.

And we're going to work as hard as we can to produce at least as strong as earnings in third quarter as we did in second.

And then if I could just ask, the dedicated versus over-the-road breakout's really helpful.

We don't have a lot of history.

By any chance, can you share what the dedicated revenue per truck did in 2016?

I think it might be helpful just to understand how well that held up last cycle so we can think about it, going forward.

Dedicated revenue per truck in the 4 quarters of 2016, I just have the absolute numbers here.

First quarter was 3,500; second quarter was 3,445; third quarter was 3,435; fourth quarter was 3,445.

These are each quarter of 2016 revenue per truck per week average in dedicated.

And there's a history on our website of that data and other data that we've made available once we did the breakout the way we did it.

And so did you also -- on the website, do we have the year before so we can see the year-over-years?

I think '16 was the first year that we showed.

We've got '16, '17, '18, and now it's 2 quarters of '19 that are out there.

So you've got 14 quarters of data.

So do you know if the year-over-years were -- how much they were up or down?

I'm just -- I guess we're -- I'm -- it's sort of a follow-up to -- I guess it was Tom's question earlier, this understanding.

Clearly very good revenue per truck in dedicated right now.

We just want to understand if this is lagging the one way or if it's going to [finish strong].

So Scott, I would just say this.

Rather than us trying to calculate it on the call, it is on the website, so it's easily calculable.

But I will tell you that, if you think back to '16 and think about where we were at in our transition, and think about the fact that we were still in what I would call sort of an aggressive shift mode, meaning moving aggressively to get more trucks into dedicated versus where we're at today, which is basically where we want to be, plus roughly 100 trucks that we know and have guided to happening in the third quarter, our selectivity and our ability to be selective today post turnaround, post-revamping of the fleet, is higher than it was in '16.

So yes, there's some information to be gleaned.

And I haven't even done the calculation.

It may look very positive.

I'm just saying, the market is different.

The state of Werner today versus '16 is 2 fundamentally different things.

Our next question comes from David Ross of Stifel.

First question is on the comment you made about the spot exposure.

You said 10% of one-way, 5% of total in 2Q.

What was it in the year-ago quarter?

It would have been -- so I was just looking at that, actually, and a year ago for the quarter, it was roughly -- it fluctuated between 7 and 8, but it's always going to be somewhere in that neighborhood in the best of times because there's a portion of that you need to simply fill or rebalance your fleet no matter how much freight is out there, you don't want to make commitments on it.

You want to use it to be fluid with your fleet.

And so yes, it is up year-over-year, and it's something that actually is a major focus item of ours right now.

So 7% to 8% of one-way last year?

Yes.

Yes, of one-way.

And dedicated was a slightly smaller percentage, so I'd have to back into that math.

But it's 7 -- call it 7% to 8% a year ago versus 10% this year.

And if anybody's wondering how that is 5% of your miles with 58% of your fleet in dedicated, it's because dedicated is lower productivity and higher revenue per mile.

I get that.

And then just real quick on the used truck market, you said that pricing's moderating.

Approximately how much more or less is a truck selling for today than it was a year ago?

I don't dodge very many questions, but that one is a tough one to answer in the best of times because it seldom isn't so much what is price doing as it is just what are your -- if you think about us as a retail seller -- I should be clear here.

If I'm talking about our secular story that's different than many others.

It's really -- there are times when freight uncertainty takes hold, and shippers -- I'm sorry, carriers who are looking to buy trucks simply choose to take a time out.

So volume has been more depressed than it has been with the price.

And although you may think lowering the price would suddenly solve that, if a small to mid-size carrier's simply not in the market for a truck, they're not in the market for a truck.

As we look forward, that's why we wanted to guide to the low end of the range.

We feel comfortable doing so.

We've got some work ahead of us.

And then the last thing on that would just be to remind everyone that our trucks and trailers that we're selling, and in particular on the truck side, are pretty dramatically newer than the population at large, with more safety technology on it that has become much more in demand.

And they're now fully automated manual transmissions that are in our used truck inventory, and those are also in high demand.

So we'll weather that storm better than many.

We think our retail outlet is holding up well, but we are cautioning toward the low end of the range just based on current trends.

So it may just be an inventory issue rather than a pricing issue if you can hold the pricing firm, you'll [keep the] trucks on the lot and just wait till they sell.

Correct, correct.

We might see some inventory that rises between now and the end of year over the ideal level.

But I can assure you, we're not going to let it pile up, either.

Our next question comes from Jason Seidl of Cowen & Co.

You talked about reducing your fleet growth a little bit to the low end of the range.

How did you go about doing that?

Did you cancel the orders, or did you push the orders out into maybe 2019?

I'll probably steer clear of how our contracts and negotiations work with our OEMs, but I'll just say that, when we have that fleet go off range, it's safe to assume that also translates to a range of orders.

How they process those on their end is really somewhat unknown to me, meaning do they publish at the high end of the order range or the low end of the order range?

I'm not really sure.

We're very careful to be compliant with our truck partners and stay within the ranges that we've established with them for the year.

And so in real-time, what it means is that often there may be a midpoint that we agree on.

And if that was the case in this particular year, we might have to take something away from the midpoint depending on how the year plays out.

But at this point, we're comfortable with adding the 100 trucks we said exclusively in the third quarter.

Obviously, any time you're talking about dedicated, there could be some leakage into the fourth quarter, but by and large, we view it as a third quarter truck add.

And some -- and you could see more growth than that in dedicated with slight shrinkage in one way to further kind of diversify and set us up for the market in case that turn doesn't happen as quickly as we believe.

Derek, let me ask it a different way because I'm not coming at it from the OEM angle.

I'm actually coming at it from a truckload industry angle.

So the number of trucks you've taken it down by doesn't mean you're going up by that amount in 2020 necessarily.

That is correct.

Sorry, I didn't understand that was the angle you were looking for.

But yes, that's correct.

We will not be going up by that because we went down by X this year.

I guess I want to touch on dedicated for my follow-up.

You described a good pipeline, and that's been a great source of growth for you over the years.

Can you talk a little bit about sort of the ideal customer that you guys are landing in dedicated and what they look like?

Sure.

I mean so first and foremost, it's about starting with a winner.

So we do a lot of work and spend a lot of time trying to identify what we believe to be up and coming, sustainable stories, or sort of blue chip, long-term winners in their space.

Once we've done that, we want to make sure that it's dedicated through the cycle, meaning it is truly hard to service and high service sensitivity, 99.5% or better kind of service levels.

We want to make sure it's geographically layered over where our strength is in terms of driver domiciles and network.

And we, frankly, want to make sure that the economics work and that it's something that we can deliver upon.

So there is a tremendous amount of activity in the pipeline to get a much smaller amount out the other end.

But if we sign up for it, we want to make sure that we deliver what we said, kind of on-time every time.

It meets our economic return levels and our expectations.

And it fits our driver lifestyle issues that we're continuously trying to address with home nightly and weekly, good paying job in markets where we can hire.

I will now turn the call over to Mr. Derek Leathers, who will provide closing comments.

Thank you.

Before we conclude the call today, I wanted to leave you with some final thoughts, which are outlined on Slide 22.

We've spent the last 3 years strategically investing in and diversifying our company to perform better across various economic conditions.

Our heavy investments are behind us, and the resulting benefits to our free cash flow are ahead.

The high customer service levels that Werner provides are expected to strengthen with our new fleet, increasingly experienced team of associates and commitment to industry-leading technology.

Looking ahead, our long-term margin and return expectations are higher than what they've been in the past.

We've begun to implement changes to our capital allocation strategy to optimize our capital structure and deliver enhanced returns to our shareholders.

We're better positioned today than we have been in our recent past, and we're firmly committed to delivering superior shareholder value across the cycle.

So to close, I just want to thank everyone for participating in our earnings call today and for your interest in Werner.

If you have any follow-up questions at all, please don't hesitate to reach out to us.

The conference is now concluded.

Thank you for attending today's presentation.

You may now disconnect.