So taking a little bit of a break from LTL land, to go over to TL land. And next up, we have, Werner Enterprises, and very happy to have with us, CEO, Derek Leathers, CFO, Chris Wikoff, and, IR, Chris Neal. Gentlemen, thanks so much for joining us. Yeah, thanks for having us. Good to be here. So Derek, you are a long time attendee of the Laguna Conference, so you sort of know the drill. Would love to kick off with your views on what the world looks like. Obviously, it's been a bit of an up and down year. Looks like we are sort of at the down, waiting for the up, so would love to get a sense of where you see the cycle as we stand. Yeah, sure. First off, thanks for having us. We appreciate being here, and certainly the location. But with that said, where are we at? You know, I think there's been some themes playing out as we came out of COVID, and we know that there was a significant amount of capacity that came into the market during COVID, and found ourselves pretty quickly in an overcapacity marketplace with a... coupled with overstocked inventories, kind of as a national trend. You add the third leg to that stool, which was the consumer kind of having a more dramatic shift from products to services than I think even the most bullish people had expected, and it resulted in what we've seen, kind of a falling knife spot market situation, where rates just didn't seem to be able to find a bottom. And although capacity has been trading out of the industry, we, you know, since September, call it, of last year, we're only now starting to really find some sense of balance in the market. If you look at inventory, I think the de-stocking is largely behind us, that's encouraging, especially with people that are winning in their space. Some of those leading retailers, et cetera, have really gotten through that and have more optimistic views as they go forward relative to replenishment. If you look at capacity attrition, and although it's been happening consistently for 50-plus weeks, it happens still at a lower volume level than we would have expected, and we really reconcile that with the fact that we underestimated how much cash they brought into this down cycle and how long it was gonna take them to burn through that cash. I think that cash burn is behind us as well, just like inventory, the stocking is behind us, and so we expect some accelerated departures in the industry as we look to the back half of the year. We think normal replenishment starts to take place. I think a normalization of services to products is more likely than not. Mm-hmm. And the consumer has held up, relatively speaking, in a resilient way. And so we're fairly optimistic as we look forward, but we're certainly still, you know, in a day-to-day fight, as we sit here today. Got it. So, what are your biggest customers telling you from an inventory perspective, and where are they right now? When do you think they'd be comfortable pushing the button to try and start restocking? So I think our biggest customers, and you know, those that are, again, the winners in their respective areas, that de-stocking, they feel good with their inventory levels today. Mm-hmm. They don't feel like they've got more that they've got to burn off. They feel like the inventory levels are in relatively good shape. I think more importantly, they feel good about what is in that inventory number. Mm-hmm. There was a long time where they might have looked either a little heavier or normalized inventory, but they had the wrong stuff- Mm-hmm in there, and the consumer shifted their buying habits and bought different products. So it took them even longer than expected to get to the right mix, and more than, you know, the majority of them feel that mix is right, that level is right. I do think they're gonna be conservative, though, as it relates to restocking and betting on the peak season, you know, because that pain is too recent- Sure ... that over-inventory pain. So I think we'll see conservative replenishment going on through the remainder of the year- Mm-hmm which gives opportunity for improvement from where we're at, but not necessarily opportunity for the sort of sudden up and to the right movement in terms of volumes. Is there a case to be made that the longer the downturn or this air pocket or whatever it is we are in right now lasts, the more that's kind of water building on the other side of the dam and kind of sets up for a more powerful upcycle or, or restock when it comes? I think that's excellent. That's exactly right. I mean, if spot drags along the bottom and continues to sort of bump and just even marginally move up into the right, I think what happens is you have a dam-breaking moment at some point where the movement, when it does take place, is much more sudden, much more significant in its slope. But we've talked about this for a few years. As transparency has increased in the industry, as technology has gotten better and better, it's always been our belief that what you're going to see is the waves, if you will, if you think about a cycle, the waves are gonna be closer together and steeper in pitch because technology really brings these pivot points upon you in a hurry when they happen. I think we're really close to the end of this one and on the upcycle- Mm-hmm but not quite there yet. Got it. I'm gonna come back to the technology question in a second, but, just to round out this discussion here, peak season, like, you should be kind of seeing signs of it. If it's gonna be there, kind of, do you have a sense of what that looks like over a year-over-year or, or versus normal basis? Yeah, I mean, I would say conversations about peak this year are certainly more widespread than they were a year ago. Okay. That's the good news. The bad news is we had a couple secular projects that were unique to us last year that may or may not be repeated this year- Mm-hmm Because that particular, you know, the underlying demand for that project isn't probably in the cards this year at that particular customer. So we'll have a more widespread basis for peak, but I think from a comp perspective, you know, roughly the same as a year ago, and that's just a unique situation that we're going through within our customer base. Got it. You're a little bit different from your peers in that you have this bedrock of a dedicated business that's out there, and that's been one of the bigger areas of growth during the pandemic. Maybe a structural growth area as shippers look for more visibility and certainty in their supply chains.... Have you seen that same level of drop-off in dedicated? Has that surprised you in the last kind of 12-18 months? And also, how does that, again, transition to the, do the up cycle happen, will you see it in the one-way business first? Well, I think the dedicated business has been nearly as resilient as we had expected it to be coming into this down cycle. Okay. It's held up very, very well. We've seen virtually no fleets that have gone away. Our retention rate has been strong, our pipeline has remained fairly robust. But the pain in dedicated has really been seen within contractual language. So every fleet we have, we- you have to provide some ability for that customer to flex up and flex down- Okay -for a reason. And if you have 150+ fleets like we do, and every one of them goes down by 3-5 trucks, it's a meaningful drop in your dedicated exposure. But yet our truck count in dedicated did not drop by the kind of numbers I'm talking about because of new business that came in. That's net a positive for us, 'cause as we look into next year and we know that things normalize, and we start adding back the 3s and 5s that are already kind of inherently baked into the cake, and put in new business on top of it, we can get back to a growth rate and see that 63% dedicated exposure expand to 65% or 66% or some number that's still, at this point, yet to be determined until we know where we're at in the cycle. Got it. But are you seeing that ask from customers? Do you feel like the market is structurally gravitating towards dedicated? Or do you feel like shippers kind of maybe had what were kind of really averse to spot in the upcycle, but now in the down cycle, they're more open to kind of one -way and spot business? Yeah, I think spot and dedicated are two lines that just never intertwine. I mean, to be perfectly blunt, I mean, if you can move freight, if you're even capable of moving freight in the spot market, then that freight is inherently not dedicated. Not dedicated, yep. And so it's really, I don't want to confuse anybody about that. Those two things have nothing to do with one another. I think what drives dedicated long term is the consumer ultimately wanting more and more transparency, more and more accuracy on the ability to receive goods when they want them, in the quantity they want them, with no exception, only inherently, structurally pushes more towards dedicated over time. And that's what... And when I'm saying that, I'm referring to true dedicated. Yep. That is the only kind of dedicated we have our eyes set on. Not continuous move dedicated, not structural, kind of engineered, dedicated, but rather, this truck is dedicated to this customer all of the time to haul freight at a 99% on time or better, with absolute visibility and transparency. Got it. And on the one-way side, I think your guidance is for down 4%-7%. Do you think there's still hope or kind of a possibility that if spot rates and select here are kind of going into peak season, that you can get to the high end of that range? Yeah, it's probably going to be challenging at this point. I mean, we're all, you know, we only have two weeks left in the quarter. Yeah. Spot has not changed much as Derek just said, it's been relatively stable throughout the quarter so far. So we might get a little bit of lift here at the end, but unfortunately, spot's not going to help a lot in the quarter. Hopefully, we can decrease our exposure to spot in our one-way side, which is less than mid-teens right now. It's come off a few percent from where we said it was in our Q2 call. Mm-hmm. So that's been some improvement. Got it. What was that number historically? I kind of, it felt like that was, it used to be a lot lower than that. Yeah. Historically, it's been 10% ±. Yep. We did exert what we thought was good pricing discipline this year, and as a result, we ended up with a little bit more exposure to the spot market than what we've had historically as we, you know, held the line with some of our one-way pricing. Okay. We would expect that to come down a little bit more throughout the rest of the year, assuming we see some seasonal activity. Maybe just to add to that, we are happy with the result, at least relative to our peers, in terms of that volatility in one way. We don't want to have that volatility. Obviously, we would prefer for the rate per mile to not be where it's at, but you know, given the backdrop of the market in comparison to our peers, we feel like you know, that is a good metric in our ability to mitigate as much volatility as possible. Got it. Derek, to your comments on kind of you expect to see the pain on smaller carriers to really kind of accelerate through the end of the year. Are you surprised that you haven't seen that kind of more of that just yet? You know, you said something about you probably underestimated the amount of cash they sort of brought in. But do you feel like you're seeing in the data or anecdotal kind of feedback that you get that that pain point is here? I do, I do believe that pain point is here. I mean, I think there was a few things going on, right? They had, fuel was not hurting like it is now... Yep ... in the first half of the year. They had this cash influx during COVID that carried the day, and carried them longer than we thought. Lender leniency was greater than we believed that it would be. You put all those things together, and I think more of them have kind of hung in there. I also think, you know, they probably like us maybe mispredicted a bit when we thought this turn would happen. We thought the bottom, when we came into the year, we had some conviction that the bottom would happen right around that July time frame. Mm-hmm. It feels a little more like that's happening now. Mm-hmm. But that, and that may not seem like a big gap, but if you're sitting there March, April, and you're bleeding pretty badly, but you think the turn's coming in July, I think a lot of them hung on- Yep ... until they couldn't any longer. Mm-hmm. I think you're going to start to see that wash increase from here. Got it. Let's just talk about logistics. Kind of, obviously, it's a tough environment for the asset-heavy business. It may actually even be tougher for logistics, but obviously, you guys have deployed a bunch of technology tools. But before we get there, how do we think about the kind of, the sort of dead spot market, if you will, kind of what that means for the logistics business in 3Q and 4Q? Yeah, I mean, I think the opportunity, if we're right on all of the things we've been talking about up until now, logistics could have more pressure before it gets relief, because you're going to see buy, buy rates starting to move quicker than you're going to be able to move sell rates for a quarter or two. I think that's going to put it under some duress. Understand, though, that within our logistics book, the fastest growing portion of that book is power only. Mm-hmm. That freight isn't spot freight, that's actually contract freight that we're doing business with under both buy and sell, kind of, longer term agreements. Mm-hmm. And so we think that gives us some insulation, and you've seen that in some of our results. Although the margins are compressed, they're not as compressed as many in the marketplace. Furthermore, we've held in on the volume and actually grown volume year-over-year in a very slow market because the product is gaining steam, it's gaining acceptance, it's doing what we said it could do. So we're pretty excited. We love the Reed acquisition and, Yep ... the capabilities and leadership capabilities that came with that acquisition. Some strong talent in that organization that we think makes us better. So we're just excited both about our, our legacy, organic logistics, as well as the Reed business, and those are now integrating and coming together finally in the back half, in a way that we believe sets us up for some productivity gains, and some cost enhancements as well. I was just going to ask you about that. Can you talk about the integration there? Kind of, is that something that gets done by the end of the year, or kind of what stage are you in right now? Yes. So Reed is ironically the last of the four acquisitions, but it's the first on the tech integration roadmap because of the size and scale of it and the complexity of what we do in logistics and brokerage. And so, we're full steam ahead right now on the integration of Reed into our new Werner, you know, EDGE TMS system. Mm-hmm. Whereas some of the asset acquisitions that are still operating up more on a standalone basis with centralized purchasing and procurement will be later in the roadmap. And so Reed should be predominantly integrated by the end of the year. That's the current goal, and we are on schedule. Got it. One of your five pieces of technology obviously, probably shows up in logistics more than any other business. Do you feel like you have all the tech tools, kind of, you need for where the logistics business is going from a technology standpoint? Do you feel like there's more you need to acquire, you need to build? And kind of, what does that mean for, kind of, growth and profitability of that business over time? Yeah, I mean, so first off, just back to the start of the question, I don't want to underestimate the amount of tech spend that we're doing as part of this global integration to one TMS. Yep. So both the asset side and the non-asset side, we have significant investment going on. We're going to work to be more transparent on that in the next call, but we've got some analysis that we want to complete first and make sure that we've checked our, you know, our numbers and have better conviction to when that spend starts to tail off a little bit. And more importantly, to your point, when does that productivity enhancement start to take hold? Right now, we're about halfway through a multi-year tech journey. We're kind of at the abyss of it at the moment, meaning the part where spend is at its peak, productivity impacts are sort of at their least. And the reason for that is because in many cases, at the frontline level, we've got folks operating in more than one system, having to do work that's actually more difficult, not less difficult, because of where we're at in the evolution. So we want to frame that, and we're to, to put some work and color on that in the next call. But as we look forward, I'll take it one by one. On the logistics side, going into next year, we love the opportunity. We're already seeing it now for seat level productivity enhancements, and so we're getting those as we speak, and we think we can grow and, and expand on those, in the back half and into 2024. On the asset side, we're going to be entering that canyon for a few couple of quarters here, where we've got some difficult work to do from an integration work, and that will carry through 2024, but with enhancements coming along the way. Then you asked me about a menu of services or kind of where we at there. I love where we're at on the logistics side, especially as we get full integration going forward. I don't feel we have a competitive disadvantage in really any part of that tech stack. Mm-hmm. It's about now reaping the benefit of all of the investment we've been making. And on the asset side, we've got a lot more work to build out the future state based on what our network looks like today, which, let's be frank, as we go forward, we're predominantly a dedicated carrier with one-way assets that support our ability to surge and grow dedicated with three major pillars in one-way, which is cross-border Mexico, team expedited, and engineered lanes. All of that takes development work to make sure our future state tech is designed to support that specifically, and we're working very aggressively to do so. Got it. So sounds like you're saying middle of 2024 is when you really have a transition, a handoff between investments you're making and the productivity coming through? I think that's a good estimate. There will still be ongoing investments really through all of 2024. Mm-hmm. But the bulk of the pain, if you will, and when we really start to feel better about the productivity enhancements offsetting some of those investments, is certainly in the first half of 2024, culminating, you know, in the back half. Got it. I think the last 10 years in particular, there's been a real debate in the industry as to what's the right ratio between asset heavy, asset light. Mm-hmm. So especially with these opportunities, with these tech tools you have in both asset heavy and logistics, kind of, where do you think that ratio is? Like, what's, what's Werner's kind of revenue split going to be like in five years between logistics and asset? Well, I think at this point, it's highly likely you're going to see logistics growing at a more rapid rate year in and year out than you will on the asset side. But we're very bullish on dedicated, and the resiliency of Dedicated has only reaffirmed our bullishness during this downturn. So as we've seen this downturn play out, and it was more severe than we maybe originally expected, Dedicated has proven to us that that's where we want to be. That's the kind of sophisticated work we want to do, so that will also grow. I think one-way will not be a growth engine as we look forward, but will always be a part of the portfolio because it's what supports our ability to do the things we do in Dedicated. It's sort of, it's the farm system where you get to know customers on a more transactional level. It's where drivers get to cut their teeth and get really to hone their skills. There's so many reasons to have one way. And probably the most important one is. It's the surge fleet, it's the reserves, if you will, that you bring into the battle when you need to provide that 99.5% type on-time service in dedicated that our customers have come to expect. Got it. So let's use a segue to a fleet question. What do you think the fleet growth looks like over the next 12 months? Obviously, with constraints and capacity continuing at the OEM level, but easing up a little bit. Kind of, I think some carriers are saying that they're getting the trucks that they need right now. At the same time, do you think the used truck market goes through a little bit of an existential crisis, especially if some Yellow capacity goes into there? Yeah, the used truck market is certainly under duress, and that's certainly going to play a role. It won't be the primary factor in how we think about our fleet growth, but it will be under duress, we think, for, you know, a few quarters here. But, Yellow, less of a factor. If you think about the trucks we sell, we're talking low mileage, late models, sleeper cabs. Very little of Yellow's fleet is in that category. So it's going to have impacts, but not necessarily on the category we sell. But the broader used truck market is certainly weakening. When we think about fleet growth, it's too early for us to give estimates for next year. Dedicated will be the driver of that growth, so we got to see how this 3-5 truck growth or, you know, back into our standard fleet size on all these fleets we have. That will determine a lot what fleet growth looks like. Mm-hmm. Because we know what that new business pipeline looks, looks like. It's less certain exactly when these other fleets all return back to their normalized level. Got it. Just to give a little bit, I think one of our largest customers, I think your largest customer, kind of is making some changes in the way they're sourcing and kind of using truck capacity and such. Mm-hmm. What does that mean to Werner? I think you said on the last call that it's going to... That it could even be some opportunities there. Can you just unpack that a little bit and tell us kind of how do you think that, that relationship evolves in the next few years? Yeah, we've been hand in hand with that customer throughout this transition. We work with them very, very closely on their strategic plan. We will continue to do so as they go forward. Our dedicated fleet with them is solid. We have in fact grown with them recently, and we talked about it on the last call. We had fleets that we're implementing at the time of the call, and we will continue to look for new opportunities to do so. They are going to grow their private fleet, we understand that, but so is their store count going to grow. Mm-hmm. And if you look at a retailer, since it's, we all know what we're talking about, that adds 1,000 stores a year, Werner alone can't grow and support that entire store count. And I think what the read-through is, in my mind, it shows how hard it is for them to source what we do really anywhere other than us. We do quality work for them. Others struggle to replicate what we do. We can't support 1,000 stores of that growth at the level and quality that we've come to expect, and I don't want any one customer to be over leveraged in our portfolio, and so we work in conjunction. We know where their fleet's growing and why. We know what buildings we look at. We have to earn that business every day, and we take that very seriously, but it's not the existential threat that people think it is. Are you kind of even helping them grow their own business in that kind of... If, if there's an issue with them doing their own thing, like, do you think they might come back to you and say, "Hey, this is not working for us. Can you take this business? Those dialogues happen all the time, both ways, to be fair. I mean, they are... They're a quality operator. Well, you know, we think highly of them, but there are absolutely times where we'll look at a building. Well, there's multiple buildings where the split in the building is us and them in the same building. Hmm. So we're operating side by side, we're benchmarking, we're finding best practices, we're working together. We run some of their driver training programs through our driver school network. It's a collaborative effort, and it's one that, yes, we have our eyes wide open on the fact they're growing their private fleet, but we're comfortable with how we're working with them on a go-forward basis. Sounds good. Any question from the audience? It hasn't really been brought up quite yet, but I want to ask a little bit about the intermodal side of the business. Yeah. You've had some announcements with some pretty key partners. Just curious what, you know, what you guys are seeing there, and what the kind of the growth strategy is going forward. Yeah, so our intermodal business is not nearly as large as some of our competitors. If you think about philosophically, what does Werner do? What do we stand for? We, you know, we stand for working with customers on the hardest to do, most difficult part, most defensible portions of their supply chain. That's not, by definition, intermodal. Intermodal is a little more of a commoditized portion of their spend. We do intermodal for customers that want us to do to be, to play in that space. We have a competitive product that we believe makes sense in certain applications, but it's not a large-scale portion of our portfolio. If you look at it broader and you zoom out for a second, it's my contention that with what's happening with overall supply chain design across America, higher and higher service expectations, shorter and shorter length of haul, that the opportunity for growth in that space is not. That's not where I want to place my chips. I'd rather us place our chips in dedicated e-commerce, final mile, and places that are more the growth engine than an area that's going to have certain headwinds that are structural in nature. Length of haul continues to shrink. Forward-deployed inventory is a reality. It's not going away, it's only going to increase. All of that works against intermodal. And so we're proud of our intermodal offering. I'm not going to, we're not looking to shun that in any way, but it is not part of the growth engine plan of Werner as we go forward. Any other questions? Derek, you've obviously been one of the most active in the space on M&A. What is the outlook out there right now? Do you think sellers are waiting for the market to improve before they sell? Do you think, you know, there's opportunities to pick up good deals at the bottom of the cycle? And also, you've been, you've been active in both the asset-heavy and the asset-light side of the business. Kind of, where do you think you might overindex on the M&A side going forward? ... Yeah, well, first and foremost, we're going to always think about capital expenditures or capital deployment as organic or, you know, first. I mean, we want to grow our business, invest in our business, and that's going to be our first priority. Yes, we've had four acquisitions in the last, call it two years, which shows an openness and willingness to do them if we think they make sense. At this point in the cycle, on the asset side, the struggle is always that valuations may be more in check right now than they would have been during COVID, but the quality of the underlying asset, the equipment maintenance, the care of the business in order to have survived how difficult these last several quarters have been, is often underinvested. So that creates some cautionary tales that we want to be careful with. We've got work to do on the four we've already bought. Integration is underway and on plan, but we've still got a lot more work to do, so we've kind of consciously signaled a little bit of a timeout, but we're still open and looking at deals all the time. So if something came that was additive and accretive, that was doubling down on the strength of our portfolio or opening up our portfolio to new product lines that we believe are growth engines going forward, we'll be open-minded to it. But we're going to be careful for now, and we want to make sure and first and foremost, invest in the business. We want to get margins back in line with long-term expectations, and to do that, you need focus on execution, discipline, and best practices within, you know, within our building. So that's really where our headspace is right now. Got it. And just kind of, you know, on that topic, kind of how much of that spend is going to go into kind of proprietary technology investments and such? And second, kind of as you deploy that balance sheet, you were very clear over the last two years that you're going to be a lot more aggressive with that deployment, and I think you've seen that on the M&A side, you've seen that on the organic side. When do we see that on the cash return side as well? On the cash? The cash return to investors, like buybacks. You want to take that? Yeah. On the technology side, as Derek mentioned earlier, we've been investing in technology for some time now. We're kind of midway through that, and on the next quarterly call, our intention is to give a bit more color, make that a bit more tangible and specific in terms of what that non-recurring spend has been, when that goes away, and when the tech-enabled savings will start to be more tangible. So I think we'll give, you know, some more color around that. That will help. Yep. From a CapEx perspective, not sure this is really getting to the heart of your question, but from a CapEx perspective, that can include technology, other investments, you know, that's going to be an outlier this year. You know, largely reinvesting in the business in the fleet, but when we think about reinvesting in the business, it can also translate to continuing to invest in our competitive advantages, technology being one of those. Got it. In the past, kind of pretty close to the end of the cycle, you guys have considered a special dividend. Kind of, is that something that's on the cards that you're thinking of? When you think about the opportunity for us to set the table for this turn, we're clearly signaling just with our—we just recently increased our CapEx guidance. We think this is the time for us to invest in the fleet. Yep. We think this is the time for us to put our money where our mouth is. We believe that we are at the tail end of this cycle and, and entering into a new one, and I don't believe our plate has ever been better set for that than it is right now. Our logistics brand is over $1 billion strong and growing. If our dedicated business is 63% with a robust pipeline, our one way is more engineered and specific between Team Expedited, Mexico and engineered lanes than ever before. I love the opportunity as this thing turns for us to show what this portfolio can do. Got it. And just very last one on the technology side, kind of you were one of the first to actually have a dedicated EV lane for one of your customers, and so you have been making investments obviously on the autonomous side as well with kind of early technology plays on the asset side. Where are some of those investments going? Kind of do you still feel like you can convert you know on growing your fleet to be substantially EV or substantially autonomous over the next decade? So first of all, I'll start with this. I mean, we are very committed to our environmental footprint, our environmental stewardship. We're going to do everything we can to meet and exceed every goal we've placed out there, including the 55% reduction in our carbon footprint by 2035. But I am not yet sold that EV is the way that we're going to get there. I just don't think there are clearly applications that could be dedicated, regional, local, inter, dray, where EV will play a role, but the economics of long-haul EV are still very difficult to make work. I think it's a highly subsidized current environment that you must assume subsidies go away over time. I think it's questionable as to the environmental impact if you go from the mine to the tailpipe instead of just focusing on the tailpipe. Sure. I think there's a simple headwind that is nearly insurmountable in my view, relative to not just infrastructure, but grid capabilities and where we're headed as a country with overall production of electricity. Not to mention, as you throw all this additional demand on, what that electricity ends up costing, that has to be in your model and your thinking. My best answer to you would be to say that in 10 years, I guarantee you this, we will be significantly more environmentally forward- Mm-hmm ... in our application, but I am far from able to say that it's going to be electric as the predominant force. It could be, but we're going to stay mode agnostic or tech agnostic, and we're going to continue to test across hydrogen, dual fuel, electric, and renewable natural gas, and then look across the entire spectrum to put the best technology where it makes the most sense. Got it. That's really helpful, Derek. As you know, we are big champions of technology use in this space. Yeah. So I'm looking forward to your next conference call and that detail that you're going to share with us on that productivity curve. So thank you so much for joining us today, and we'll see you soon. Thank you. Thank you.