Fresh off strong third quarter earnings, Werner Enterprises, Inc. (NASDAQ: WERN) CEO Derek Leathers was optimistic about the company's future moving into peak season and beyond during a fireside chat presentation at Baird 2018 Global Industrial Conference in Chicago, Illinois.
"It has been a unique year. It really started all the way back in the hurricanes of 2017, which built a bridge right into peak season, which caused disruption that lasted well into the first quarter," Leathers said. "As the year marched on, we continued to see strong, strong demand. That set us up for a rate environment we haven't seen in a long time, and in our company, for instance, in the third quarter, we were up an all-time high year-over-year."
While Hurricanes Harvey and Irma spurred what Leathers described as a "chaotic" peak season last year, he said this year's more organized approach is not indicative of weakness, especially in the current rate environment.
"You come into peak in a more normalized environment, but the demand is there, and the demand is strong, even as it compares to last year," he said.
Peak season wasn't the only thing Leathers had a positive outlook on, though. Despite reports of "pull forward" ahead of the next round of U.S. tariffs expected to hit Chinese goods in January, he believes perceptions may be exaggerated and the retail sector seems to have maintained control.
"As we sit here today, we're 50 percent retail, so we're very in-tune with what is happening in retail America, and we talk to them all the time, and a common answer is that although there's concerns and worries about what these tariffs' implications may be, generally speaking, their supply chains are set," Leathers said. "They've got pretty tight inventory controls in place, so we're hearing less about a significant pull forward than people may believe. I still think it's happening, but not to any great degree."
Werner significantly increased its dedicated unit in size in 2018, and it now makes up 57 percent of the company's truckload fleet. Leathers said he hopes to grow the dedicated unit to 60 percent of the truckload fleet in 2019.
"Our fleet growth is honestly going to be driven and determined by our success with our dedicated pipeline. Our dedicated pipeline right now is very robust. We have a lot of opportunities we're looking at," he said. "The hurdle rate is very high for us to onboard those opportunities in the driver market that's as constrained as this one. I can only bring on low single digits worth of trucks in the best case scenario, so we've got to be extremely diligent about how those trucks may be applied. We think dedicated is the best placement of those trucks. It's better driver lifestyle and better driver pay, and it's hard to replace business, so in the event that a market turn was to take place sometime in 2020 or beyond, we believe it put us in a much more defensive position."
When it comes to that constrained driver force, Leathers does not believe pay is the primary barrier to entry into the trucking industry now, citing jobs in Werner's network that pay north of $70,000 each year in some cases. Instead, he thinks attention needs to shift to creating a better lifestyle for driver, including more home time and better equipment.
"Driver wages have been going up around two to three times inflation over the last couple of years, and I anticipate you'll see driver wages outpace inflation again next year," he said. "I think the rate of growth will slow over what we've seen, for instance in 2018, because driver wages are up significantly and wage is not the primary obstacle."
Leathers noted that Werner is uniquely positioned on the recruiting side, with the largest driving school network in America. He said the company hires just under 50 percent of those graduates into our own company. The company also has a longstanding partnership with the U.S. military. Over one in five of Werner's drivers, and just shy of one in five of its total associates, are former military, according to Leathers.
Werner also employs a higher-than-average number of women drivers.
"The other source for us is female drivers. We're over double the national average of female drivers," Leathers said. "They've done a great job for us, and we've been able to provide a home that they seem to like."
Werner has stepped up its investments in technology over the last couple of years, which Leathers accredited for freeing up significant brain power at the company and expanding margins, particularly in the logistics business.
"Truckers are really good at understanding why they have to buy trucks and why they have to buy trailers and why they have to fix up terminals. We weren't as good at understanding that technology had to have a seat at the table, had to stay on the same cadence, had to have the same kind of investment and be seen with the same kind of magnitude," he said. "We've been putting a lot of money in tech over the last couple years, it's showing up in our logistics margin expansion, but also in thinking we can do more with less with internal labor on the truck side. We're using more and more AI, more and more machine learning, more and more bots to be able to do mundane, non-value-added work that not too long ago we would have had people doing. Now they can focus on running our business better."
Leathers expects logistics revenue to grow 20 percent in 2019, while improving margins.
Leathers also spoke to Werner's new final mile service, saying he was not yet ready to give guidance on where it is headed, but system programming is basically finished and headwinds from the investment are mostly in the rearview mirror, with revenue starting to flow through.
"What we're trying to do first-off is make sure we build something that solves a problem people actually have. We know there is a final mile need. We know everybody is trying to race to a solution, and we know that every shipper is still trying to figure it out," he said. "Nobody has really cracked that code, so we're working with our shippers, trying to understand what the problems look like and build a solution for it. The solution we think is most relevant is one that aggregates existing capacity and existing expertise under one technology platform with full supply chain visibility and the ability to automate as much of the process as possible."
He said officials at Werner feel good about the service's evolution and the ability to grow it without it becoming any significant headwind.
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