Werner Enterprises, Inc. (WERN) CEO Derek Leathers on Q4 2018 Results - Earnings Call Transcript

Werner Enterprises, Inc. (NASDAQ:WERN) Q4 2018 Earnings Conference Call February 6, 2019 5:00 PM ET

Company Participants

Derek Leathers - President and Chief Executive Officer

John Steele - Executive Vice President, Treasurer and Chief Financial Officer

Conference Call Participants

Brad Delco - Stephens Inc

Amit Mehrotra - Deutsche Bank

Ben Hartford - Robert W. Baird & Co.

Thomas Wadewitz - UBS Securities LLC

Todd Fowler - KeyBanc Capital Markets Inc.

Scott Group - Wolfe research

David Ross - Stifel Nicolaus

Bascome Majors - Susquehanna International Group, LLP

Operator

Good afternoon, and welcome to the Werner Enterprises Fourth Quarter and Full-Year 2018 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]

Earlier today, the company issued an earnings press release for its fourth quarter and full-year 2018 results, as well as 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. This webcast is being recorded and will be available for replay beginning later in the 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 please note that, today’s event is being recorded.

And I would now like to turn the conference over to Mr. Derek Leathers, President and CEO of Werner Enterprises. Please go ahead with your presentation.

Derek Leathers

Thank you, and good afternoon, everyone. We’re excited to welcome you to the Werner Enterprises inaugural earnings conference call. We prepared an earnings presentation to accompany today’s discussion, and hope the additional insight into our results will add context to what we believe is an optimistic future here at Werner.

On our call today, I’m joined by our CFO, John Steele. Since this is our first earnings call, I’ll start by providing a brief overview of Werner and our current positioning, followed by a summary financial highlights for the quarter and full-year. John will then provide additional insights into our financials. I’ll finish by reviewing our business and capital allocation strategies and 2019 financial guidance. John and I will then address your questions.

Now, turning to Slide 4. We included some background information on Werner for those who may be new to our story, and I’ll highlight a few key items. For 2018, over three quarters of revenue was generated in our primary segment, Truckload Transportation Services, with the remainder coming from Werner Logistics, which we continue to grow.

Looking at revenue by vertical, just over half is in the retail category, which reflects the continuing strength of North American consumers. 18% of our revenues were in food and beverage and 18% were in manufacturing and industrial, with the remaining 12% in logistics and other category.

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. We remain committed to supporting our core customers and their growth, while mitigating outsized exposure to any single customer, vertical or seasonal revenue stream.

Next, let’s move to Slide 5 for a brief overview of our financial performance. In the fourth quarter, revenues grew 14% to $646 million. On an adjusted basis, EPS increased 79% to $0.75 per share. Adjusted operating income increased $73.6 million, and we expanded our total company adjusted operating margin by 350 basis points to 11.4%.

For 2018 in total, revenues grew 16% to $2.5 billion. The $341 million annual increase was the largest annual increase in our 62-year history. Adjusted EPS increased 86% to $2.38 a share. Adjusted operating income increased 59% to $229 million, increasing our full-year total company adjusted operating margin by 250 basis points to 9.3%.

Along with revenue growth, we’ve been able to continue an improving trend in adjusted operating margin, making 2018 the largest ever year-over-year operating income increase. These factors also contributed to our achievement of the highest ever adjusted EPS.

Results for the fourth quarter reflects freight demand that was stronger than normal, but not as robust as what we saw in the fourth quarter of 2017, which as you’ll recall was a typically strong due to the capacity tightening that occurred following the two major hurricanes in August and September of that year.

The fourth quarter 2018 also reflected a more orderly planned peak season, with increased communication and forecasting with our customers, resulting in strong and more consistent volumes. Reflecting our investments in a newer best-in-class fleet, we ended the year with 7,820 total tractors within our Truckload Transportation Services, or TTS segment, an increase of 385 trucks year-over-year and 70 sequentially.

The entire growth was in our dedicated truckload unit, as part of a deliberate plan towards a more resilient structure throughout the economic cycle. The economy could slow or other favorable trends could moderate in the future. But regardless of the environment, we’ve positioned Werner as a best-in-class carrier and believe our services will be in high demand across economic cycles.

Our portfolio has been expanded, our service is greatly improved and our revenue mix reallocated, all with an eye towards providing our customers and our shareholders with more consistent quality results as we look to 2019 and beyond. On that note, I’d like to sincerely thank our professional drivers, mechanics and office associates, who contributed to this historic year for all their hard work, dedication and commitment to safety. They represent a constant reminder of our internal rallying cry, average is for other people.

At this point, I’ll turn the call over to John to discuss the financial results in more detail. John?

John Steele

Thank you, Derek, and good afternoon, everyone. It’s great to be here with you today. Beginning on Slide 7, we provide some additional financial performance drivers in the quarter versus the prior year period. A few noteworthy items in the TTS segment. Our revenue per truck per week increased 6.9%, net of fuel and we increased the average number of trucks by 4.7%. In our Logistics segment, revenues grew 22%.

Moving to adjusted EPS. The 79% year-over-year increase consisted of TTS growth that contributed $0.24 and logistics growth that contributed $0.05, as well as the benefit of a lower tax rate, fewer shares outstanding and our other business units.

Turning to Slide 8, let’s look at full-year 2018 versus 2017. In TTS, revenue per truck per week increased 8.4%, net of fuel, led by double-digit rate improvement, and we increased the average number of trucks by 4.3%. Logistics segment revenue grew 24%. Adjusted operating income grew 59% and TTS operating margin expanded 290 basis points. At the same time, we continue to invest in our professional drivers by increasing average driver pay per company mile by over 10%.

Looking at adjusted EPS. The increase included TTS growth that contributed $0.78 and logistics growth that added $0.12, plus the benefit of a lower tax rate, fewer shares outstanding and our other business units.

Beginning on Slide 9, let’s look specifically at results for our Truckload Transportation Services segment. In the fourth quarter, TTS revenue grew 13% versus the prior year quarter to $495 million, primarily driven by an increase in revenue per truck per week of 6.9%, led by strength of our one-way truckload revenue per total mile increase of 10.5%.

Adjusted operating income rose 53% to $68 million, which was driven by an increase in adjusted operating margin of 360 basis points to 13.7%. This represents seventh consecutive quarters of expanding our TTS operating margin. Our adjusted operating ratio, net of fuel surcharge declined by 420 basis points to 84.1%.

For the full-year, TTS revenues grew 15% to $1.9 billion. The increase was driven by growth in revenue per truck per week of 8.4%, led by revenue per total mile increases in one-way truckload of 13.2%. Adjusted operating income grew 54% to $213 million, which resulted in 290 basis points of margin expansion to 11.3% for the full-year. Adjusted operating ratio, net of fuel declined by 350 basis points to 86.8%.

Turning to fleet metrics on Slide 10. You may have noted in our earnings release that we began disclosing key operating metrics for both dedicated and one-way truckload within the operating statistics by segment section. We believe that providing transparency into each of the components of the TTS segment is a better way to evaluate our performance, given the different length of haul and pricing dynamics of dedicated and one-way.

Going forward, we will continue to report TTS segment truck, trailer and revenue per truck operating statistics. Given the additional clarity and transparency for dedicated and one-way truckload that we’re now providing, we will no longer report certain TTS revenue operating statistics.

For your reference, we posted an excel file with the comparable historical operating statistics data for both dedicated and one-way truckload for the last 12 quarters on the Investor Relations section of our website at werner.com.

So now, let’s look at the dedicated and one-way truckload metrics. For dedicated, for the year, we grew trucking revenues, net of fuel by 18% to $817 million. For the quarter, dedicated trucking revenues, net of fuel increased 18% to $215 million. Dedicated average tractors grew 12% for the year and quarter, dedicated revenue per truck per week increased 5% for the year and 6% for the quarter.

One-way truckload trucking revenues, net of fuel for the year increased 9% to $771 million. For the quarter, one-way truckload trucking revenues, net of fuel increased 6% to $204 million. One-way truckload average tractors declined 4% for the year and 3% for the quarter. One-way truckload revenue per truck per week increased 13% for the year and 10% for the quarter, due primarily to improved revenue per total mile.

Within our one-way truckload fleet are two service offerings that our Werner strengths. For over 20 years, we’ve been a leader in serving both the Mexico cross-border and team expedited markets, that on a combined basis make up over 50% of our one-way truckload revenues.

Our experience and expertise effectively managing the complex, highly-specialized and time-sensitive nature of these businesses provides a revenue stream that is more stable and less commoditized than traditional point-to-point drive van. Both cross-border and team expedited inherently have a longer length of haul, which you can see in our one-way truckload operating statistics.

Moving to Werner Logistics results on Slide 11. In the fourth quarter, logistics revenue grew 22% to $137 million, primarily driven by growth in brokerage. All five of our logistics units, Brokerage, Freight Management, Intermodal, International and Final Mile, experienced revenue growth.

Operating income increased 257% to $7.2 million, driven by a strong peak season and improved operational execution, contributing to the expansion of operating margin by 350 basis points to 5.3%.

For the full-year, logistics revenue grew 24% and surpassed the $500 million mark to $518 million. Operating income grew 135% to $20.4 million, which led to a 180 basis point increase in operating margin to 3.9% in 2018.

I’d now like to turn the final portion of our prepared remarks to Derek, who’ll cover our strategy, capital allocation priorities and 2019 outlook. Derek?

Derek Leathers

Thank you, John. Before getting into our strategy and outlook, beginning on Slide 13, I wanted to provide some important background on our execution over the last several years, which I believe has positioned Werner as a best-in-class carrier that will be in high demand regardless of where we are in the cycle.

Beginning in June 2015, we shifted the direction of the company by announcing our 5 T strategy, followed by our Founder, C.L. Werner, resuming his role as CEO. At that time, my role as President and Chief Operating Officer, expanded to include developing the pathway to realizing the 5 T’s objectives. And in May 2016, I became CEO.

Over the next three years, we made the necessary capital investments and implemented substantial changes to our organization to position Werner for future success. These efforts included: streamlining our organization by reducing the number of VP positions by 15%; establishing our balanced revenue portfolio initiative to move towards a goal of roughly one-third one-way truckload, one-third dedicated, and one-third logistics; aggressively raising hiring criteria for drivers, despite a tight labor market; vertically integrating the largest driver school network in the industry; launching our averages for other people initiatives; and increasing customer service to best-in-class levels; aligning the interest of the executive management team with our shareholders by implementing the comprehensive metrics-driven pay-for-performance program; expanding our nationwide terminal network and reengineering existing terminals for greater efficiency and better driver amenities; and finally, shifting our asset mix to less cyclical, more consistent revenue streams, resulting in dedicated now representing 58% of our truck fleet.

Moving to Slide 14, let me review our strategy. Since the initial roll out of our 5 T’s strategy, Werner has regained its rightful place as a top tier provider in the transportation and logistics industry. We implemented the strategy to further balance our portfolio and position Werner to excel in both high-capacity markets, as well as periods of slowing economic growth. We wanted to reinvent ourselves as a best-in-class carrier and put forth a differentiated value proposition that would be in high demand in any market.

I believe we’re succeeding by creating improvements that are structural and sustainable and that with our new and more efficient fleet, combined with high-quality professional drivers, we expect to generate more consistent financial results. In addition, our focus on investing in and growing our Logistics segment, further diversifies our portfolio, strengthens our customer offering and better balances our returns in a variety of market conditions.

As we begin 2019 in a relatively strong truckload market, but with broader macro uncertainty, we just completed the third-year of a significant reinvestment in our core business. Our investments, combined with our unwavering commitment to continuously raise the bar for on time, every time customer service, are allowing Werner to deliver meaningfully better results.

A few proof points. Our truck and trailer fleet ages are new, with an average of 1.8 years and 4.1 years, respectively, and we intend to maintain our fleet at or near these age levels going forward. This compares to an industry average truck age of 5.8 years. Despite the very competitive labor market, we’ve achieved one of the lowest driver turnover percentages in the last 20 years. I’ll speak more about why these two points are important in a minute.

We significantly upgraded and expanded our terminal network in multiple strategic locations to improve our driver training and equipment maintenance capabilities. This investment also provided our drivers with the facilities and infrastructure they need and deserve to keep America moving every day.

Since 2016, we’ve nearly tripled our IT investments as part of the 5 T strategy, improving service to our customers and professional drivers, generating operational efficiencies and introducing new capabilities across our service offerings. We value the business of IT and prioritize rank and measure our technology initiatives to ensure they align to operational priorities and support our business strategies. These efforts resulted in Werner delivering the best financial results in our history in 2018.

In Truckload Transportation and Logistics, you earn and keep the trust of your customers with each and every shipment. In simple terms, they vote with their freight everyday and we sincerely thank our customers for each and every vote for Werner.

On Slide 15, I’d like to focus on the talent aspect of the 5 T’s. As you know, hiring, training and retaining skilled drivers is very challenging in the truckload industry, particularly given, we recently reached a 50-year low domestic unemployment rate. I’m extremely proud of the job our management team has done to build one of the best and most experienced work forces in the industry.

One of the ways we attract and keep top drivers is with our modern and efficient tractors and trailers. Our truck fleet has nearly 100% auto-manual transmissions and full active braking collision mitigation technology and we are aggressively implementing forward-facing cameras.

We have grown operating margins, while offering top driver pay and nearly 60% of driving jobs within dedicated, which offers better quality of life characteristics. 70% of our drivers get home at least once a week and frequently, our drivers get home multiple times a week, if not nightly.

We have the largest owned driver training school network as measured by professional driver graduates. We have an industry-leading driver recruiting retention program for former military personnel. And in 2018, we were one of 15 organizations in the U.S. and the only transportation company to earn the Freedom Award, the highest recognition awarded by the United States government to employers for their outstanding support of employees serving in the National Guard and Reserve.

We are also proud to have twice the industry average of female drivers on the Werner team. Even with the tight labor market, we achieved our second lowest driver turnover in the fourth quarter in the last 20 years. And for 2018, we had our third lowest driver turnover rate over the same 20-year period.

Shifting gears. On Slide 16 is a summary of cash flow from operations, net capital expenditures and the resulting free cash flow over the past 5 years. As I noted earlier, since 2015, we’ve been in a relatively high 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 now targeting net CapEx to be more consistently within the range of 11% to 13% of gross revenues over the long-term. We also expect to generate significant free cash flow this year of $100 million or more.

With increased cash generation, our capital allocation priorities on Slide 17 are as follows. Our first priority is to continue to invest in growth and productivity. We will not deviate from our commitment to our drivers, customers and associates to maintain a best-in-class fleet, network and technology platform.

We will continue to invest in our IT, operational and commercial initiatives, as well as logistics technology across our fleet. But as noted, net CapEx will moderate going forward and be in the $275 million to $300 million.

Second, 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 to shareholders. During the quarter, we declared a regular quarterly cash dividend of $0.09 per share and we purchased 800,000 shares for $26 million.

For the full-year, we repurchased nearly 2.1 million shares per $72 million. We will continue to evaluate all viable options to increase shareholder value, including continued buybacks and dividend increases.

Finally, we’re committed to maintaining a flexible balance sheet. With only $125 million of debt outstanding and over $1.2 billion of stockholders’ equity, equating to a low debt to EBITDA ratio of 0.3 times, our financial position remains strong and flexible to deliver shareholder value.

Looking ahead to 2019 outlook on Slide 18. We expect to add approximately 3% to 5% growth in our TTS truck fleet and dedicated in the first-half, with minimal truckload planned for the remainder of the year.

Revenue per total mile for full-year 2019 is expected to increase in the range of 4% to 8% compared to 2018. The increase should moderate through the year due in part to the comps for revenue per total mile, which strengthened at the end of 2018.

Gains on sales of equipment this year are expected to be similar to the $19 million in 2018 and more consistent quarter-to-quarter. Our effective tax rate will be in the range of 25% to 26% for the year. We expect capital expenditures to be in the range of $275 million to $300 million. This will allow us to maintain our truck and trailer fleet at or near the current age level of 1.8 and 4.1 years, respectively.

So far in the first five weeks of 2019, freight demand in our one-way truckload unit has been better than normal for this time of year, but not as robust as the unusually strong freight demand during the same period a year ago. Remember, that the first quarter 2018 benefited from two significant events occurring at the end of 2017: U.S. tax reform, which strengthened demand and the electronic log device mandate for driver service hours, which limited supply.

On Slide 19, we’ve outlined a couple of growth scenarios. Over the past several years, we worked very hard to structure our company to succeed in both a growing economy or one in which GDP growth moderates. In our bullish case, we assume domestic GDP growth greater than 2.5%, which would be characterized by tight driver supply and a solid freight market. In this case, we expect our one-way truckload revenue per total mile and driver pay increases to increase in the mid to high single-digit percentage range year-over-year.

Our diversified portfolio allows for the one-way truckload and logistics businesses to prosper, while dedicated continues to provide stable, consistent results and services that are in high demand.

In the event, the domestic GDP falls below 2.5%. We would likely see some improvement in driver availability and moderation in freight demand. Truckload revenue per total mile and driver pay increases would likely moderate to the low to mid single-digit percentage range year-over-year.

Our diversified portfolio allows for the logistics and dedicated businesses to prosper, while our reduced exposure to one-way truckload should help mitigate risk in a moderating economy. In addition, in one-way truckload, our unique strengths in Mexico cross-border and team expedited services enables more resilient performance in a less robust economy, compared to traditional one-way drive van.

In both scenarios, our commitment remains constant. We will continue to offer best-in-class support to our customers, given our new truck fleet, experienced drivers and continued strong operational performance.

In summary, Werner is well-positioned, with nearly 60% of our fleet in dedicated, a more stable and predictable business; over 20% of our revenue from a rapidly growing Logistics segment; and less exposure to the one-way truckload market than many of our larger competitors.

I’m confident that we are positioned for success and our ability to effectively navigate whatever economic environment comes our way in the future. Our fleet is refreshed, our team is rebuilt and our commitment to excellence is unwavering.

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

Question-and-Answer Session

Operator

Thank you. And we will now begin the question-and-answer session. [Operator Instructions] This call will end at 5:00 PM Central Daylight Time, following the company’s closing remarks. And our first questioner today will be Brad Delco with Stephens. Please go ahead with your question.

Brad Delco

Hey, guys. Good afternoon, Derek and John.

Derek Leathers

Hi, Brad.

John Steele

Hi, Brad.

Brad Delco

First of all, congrats on the quarter. Glad you guys are doing this call and appreciate all the color you provided us and then good guidance as well. I wanted to ask you about that rate guidance. I guess, we should assume that your dedicated rates will be pretty – continue to move up consistently, and so wouldn’t necessarily be a significant drag to that 4% to 8% range. But how should we think about your inflationary cost pressures? What buckets should we be paying attention to? And I guess, that question really is asking about the driver environment, too?

Derek Leathers

Okay, Brad. This is Derek. Good question. And so from my perspective, first on the inflationary side. As we’ve outlined in the bullish and sort of more bearish case scenario, if we get strong GDP growth, there may be wage inflation, but we like our position and where we’re starting the year.

Our driver wages are very competitive today. Our driver turnover is at near 20-year lows. And our ability to mitigate and manage through wage pressures, we feel is at least as good as what others will be faced with. We’ve got a lot of programs in place and partition pay packages across our network, that allows us to kind of apply the medicine where the pain is in the event that we have tightening labor markets in a specific region of the country.

To the portion of the question about dedicated, the reality is, dedicated is proven, I think, through this cycle. Their ability to take rate and be paid at – commiserate with the services we provide and it wasn’t a drag through 2018, certainly was a contributor to our record results. And we feel comfortable that our customers and the relationships we’ve built and the stickiness of the business we’re in and it’s hard to deliver freight characteristics are such that they’re going to pay for the value that we’re delivering.

So I don’t view dedicated as a drag and our rate guidance is inclusive of how we think about our rates overall. Clearly, in dedicated, you can mitigate some rate concerns through operational collaboration with the customer. But I can assure you that our growth in dedicated is not designed to be a drag in our overall returns.

John Steele

And just to clarify, Brad, this is John. The guidance is one-way truckload revenue per mile increases year-over-year of 4% to 8%.

Brad Delco

Yes, I appreciate that, John. And then as a follow-up, if you don’t mind. I guess, in a 4% to 8% rate environment, I don’t imagine you would expect margins to decline. I doubt you’d have given your guidance to that, but could you envision a scenario where you get 4% to 8% increases in one-way truckload rates and margins would decline on a year-over-year basis?

John Steele

Brad, we did not include earnings guidance as part of this call, it’s difficult in trucking with all the variables of the freight market, the rate market, the driver pay market, the safety performance, the used truck market and other factors to predict how earnings will play out.

So we wanted to set some guidepost for you with the six different guidance metrics that we provided to give you some help in doing your modeling. But it’s hard to answer that question, because we don’t really know where some of the cost factors will play out. I mean, it’s our expectation to continue to improve Werner’s earnings performance going forward, and that’s our goal.

Derek Leathers

I would just add that, our focus this year is clearly going to be on the cost side of the equation. 2018 was a year buoyed by strong rate improvement. And as we think about 2019 knowing that the rate environment will not be the same as 2018, but we still believe has upside. Nevertheless, we have to have a laser focus on controllable cost and operational excellence, and that’s what our focus will be on everyday.

Brad Delco

No, I appreciate that guys. I had – I felt like I had to try, but I appreciate the color. And again, thanks for doing the call.

Derek Leathers

Thanks, Brad.

John Steele

Thank you.

Operator

And the next questioner today will be Amit Mehrotra with Deutsche Bank. Please go ahead.

Amit Mehrotra

Thanks. Congrats on the good results and thanks again for the call as well. John, I’m sure you’re going to miss those marathon callback sessions. I – you talked about wage inflation with respect to driver pay in the bear and I guess, bear case. I was hoping you could help us bridge that to the actual comp wages and benefits line on the income statement just given the mix impact on that line from maybe more dedicated mix. So any thoughts there on how do you think that line item should trend in 2019 either maybe on absolute dollar basis or in a total mile basis, anyway you want to think? Can you help us think about that?

John Steele

Okay. I’ll just summarize, salary wages and benefits were up $19.6 million, roughly $12 million, or two-thirds of that – not quite two-thirds was due to driver pay. The other items that increase to our non-driver paid is a fleet growth, merit increases in performance pay and then logistics paid is the growth in logistics also had a less significant impact on increasing salary wages.

For dedicated, being nearly as 60% of our fleet. It’s a one customer discussion, when we are working with our customers to obtain driver pay increases for our drivers in a difficult driver market. So it’s not as complex a process as one-way truckload, where it’s multiple customers that are involved.

So our customers in dedicated have supported us with driver pay increases – with rate increases that would allow for driver pay increases in the past, and we expect with proper justification they will do that going forward.

Derek Leathers

The only thing I would add is that the other thing that will have some benefit from 2019 is, as we grew our logistics business north of 20%, you have to lead often in logistics with labor. There’s a training curve, learning curve and development curve that takes place. Our tech and our tech investments are now catching up to that. And our ability to have to gain productivity out of new hires is better as we look forward than it was as we look to the rear. So I do believe, that part of the component that John spoke about looks better as I look forward than what we’ve seen in 2018.

Amit Mehrotra

Okay, that’s helpful. And then just as a follow-up. I guess, on the higher truck count, the 3% to 5% in dedicated, I guess, that will obviously continue to pressure overall length of haul and as a result overall utilization. You obviously have utilization down 2.8%, almost 3% in 2019. Is that how we should think about 2019? Is that even – can we see even more pressure in 2019, given the growth in the dedicated truck count?

Derek Leathers

Well, that’s a good question. But the reality of part of why we’ve broken out and chosen to, not only be more transparent with some of the operating metrics, but also give you where we’re looking three years comparable on our – on the metrics we’re providing, is we think the more appropriate metrics, is not a combined length of haul or a combined productivity. But rather, how is one-way truckload operating? What is happening from production? What is happening with length of haul? And obviously what is – how does that translate to revenue for truck per week and revenue per truck per month.

On the dedicated side, fleets come in all shapes and sizes. So we can have low productivity, high-yield fleets. We can have high productivity fleets that are priced appropriately for the miles that are inclusive. And so we really believe in dedicated, it really comes down to kind of revenue per truck per week or in our case, internally revenue per truck per day type metrics, that define success.

So we would prefer, I would prefer that people have less focus on what is a combined or blended fleet average, because it’s less meaningful than less of an indicator to ultimate results than the new kind of broken out more transparent metrics that we’re providing.

John Steele

And clearly, Amit, there’s significantly different lengths of haul miles per truck, rate per mile characteristics between dedicated and one-way based on the increased transparency we provided with the one-way truckload metrics.

Amit Mehrotra

Great. Okay, I’ll hop back in the queue. Thanks a lot, guys. I appreciate it.

Operator

And the next questioner today will be Ben Hartford with Baird. Please go ahead.

Ben Hartford

Yes. Hey, thanks. Good afternoon, and thanks for having the call. Derek, so as we look at TTS margins all in at a 11.4%, you’ve talked about an 11% all in full cycle margin, so well done getting to this level. As we think about the business and the mix shift that you talked about the path forward, how should we think about the margin profile in the business from these levels having tripped at 11%? Is this – is there still more work to be done? And the opportunity for margin improvement is still there? Kind of irrespective of the rate environment, should we think about that 11% all in as a full cycle leverage? Could you provide a little bit of perspective on that? Thanks.

Derek Leathers

Sure. Thanks for calling in, Ben. It’s good to talk to you. First off, we had said short-term goals out of the last couple of years to get to that 11% operating margin. And we knew, it would be – we had a lot of work to do to get there. You’re correct, we’ve arrived and we’ve achieved that margin as we sit here today.

Certainly, our goal is not to rest on our laurels or accept that as status quo. I think, as we think about margins going forward, the way we think about it is use the word through the cycle. And obviously, sometimes in trucking, cycles can get very tough. And so, our commitment is that, it’s a 11% or better on average through the cycle.

But clearly, our aim is to expand on margins as we go forward and do better than that and periods throughout the cycle. But there – I can’t predict the future. I can’t predict what the U.S. economy looks like two years out. And so I’m not willing to commit to a margin by year. Looking forward, our expectations are rising, our execution is improving, that I will commit to.

John Steele

And let me add, Ben, that to clarify, these are margins inclusive of fuel. So some of our competitors – and we’ve also disclosed the impact of net of fuel margins. That would be another 200 to potentially 300 basis points higher, if you did it on a net of fuel basis.

Ben Hartford

That’s helpful. Thanks. I got a quick follow-up. On the logistics side, obviously, facing some tough comps, but great growth. Here, specifically, Derek, the line that you included in here about shippers tending to consolidate business with larger asset-backed logistics providers. I guess, first, can you provide us some sense as to what volume or revenue growth in logistics should look like in 2019 against these comps?

And then two, when that business does win business in 2018, in particular, kind of going forward, who do you think you’re winning that business from and could the pace of that perhaps accelerate for any given reason?

Derek Leathers

Okay. So there’s a lot there, but a good question. First off, as we think about logistics growth, clearly, we’ve indicated that it will have an outsized revenue growth compared to the overall TTS segment. Our focus is there, the market is right, and there’s opportunities in front of us. We’re going to continue to pursue those aggressively.

As you think about inside of our logistics business, roughly two-thirds of that business is in our brokerage unit. Our brokerage unit is winning business across the multitude of different avenues. To include this, some of it’s coming from small brokers or traditional brokers we’re able to compete, and with our investment in technology, automating more processes, using more machine learning in AI to be able to execute that business more efficiently. That allows us to compete head-to-head with the biggest of the big out there.

And so, as you – in the latter part, was – is there anything that you should think about as it relates to accelerating that growth or increasing those trends. And the only one I would point to that I feel excited about, but we’ve got work to do is, we’ve built this business predominantly with smaller to midsized shippers and in many cases, new to Werner customers.

Now that this business has scaled, now that it’s relevant and now that the business execution is at that top tier level, we are now gaining entry into more of our traditional book of business and starting to grow with people that we have longstanding relationships with.

So the opportunity for that to sort of gain momentum over time or at least to start adding new revenues in larger quantities and then perhaps more lumpy as you think about the revenue coming in the door is in front of us. And we’ve seen recent examples of that, that have been internalized and executed on very well.

Ben Hartford

Thank you for the time.

Operator

And the next questioner today will be Tom Wadewitz with UBS. Please go ahead.

Thomas Wadewitz

Yes. Good afternoon, and thank you also for doing the call and for all the good information that you’ve provided. Wanted to see – Derek, if you could offer some thoughts on capacity in the market. I think that we see some data points of private fleet expansion. I think, I’d be curious your thoughts from the brokerage side, if you think small fleets are expanding. So maybe just kind of an overall look on capacity?

And then also, I think, if you can weave in something on used trucks, because you think if at some point, the used truck prices might be slowing or falling off, if the new tractors really replacement tractors. So sorry, that’s a little longwinded, but some thoughts on capacity?

Derek Leathers

Yes, no problem, Tom. I’d be happy, too. First on the capacity side. So we’ve been consistent throughout 2018 with our messaging that, truck orders are not the same as truck builds. And the truck builds are not – that replacement level truck builds were higher than previously anticipated.

Our reasoning for that is, I’ll go back to the third quarter data, because we don’t have everybody released yet for the fourth quarter. From the third quarter, publicly traded group ran 8.8% less miles across their fleets than they did a year prior, despite having relatively flat capacity levels.

And the point is, as we continue to see more congestion, more of an impact from electronic logs and other factors out there that make short like shortening length of hauls, you need more trucks to deliver the same amount of freight. Now do I believe some truck capacity came into the market, I do. The question is, how much was needed to simply do replacement tonnage levels due to the inefficiencies I just described, and I think that eats up a chunk of it.

As we said in January, freight is as strong as we indicated, not as strong as 2018, but stronger than the majority of the preceding five years and has remained so. It’s also been more orderly. So I feel capacity is tighter than people think. Our conversations with our customers continue to be positive and we continue to have conversations about securing more capacity not about an abundance of overcapacity.

As you cycle that through the used truck market, that one is really a market within a market. And we’ve spent a lot of time and effort to refresh our fleet and to put ourselves in a position for lower-cost of total ownership through selling our fleet to the younger age, our trucks at a younger age through a more retail network.

o frankly, I feel as though, although, there may be some softening in the back-half and there’s no indication of that currently, by the way, even then when we’re selling automated manual transmissions with collision mitigation technology with low miles and warranty still available, we feel good about our positioning via our retail network to outperform the market.

Thomas Wadewitz

Okay. Yes, that’s great. That’s helpful. And maybe just a quick – I don’t know if it’s a clarification or more detail. The 4% to 8% view on pricing, so that’s a full-year number. How does that translate to kind of what you get in the bid season? Is that kind of low single-digit, mid single-digit? How do you think about that part of what you – kind of what you get coming out of the 2019 bid season?

Derek Leathers

Well, the unfortunate reality of our Q4 call is that, it happens early enough in Q1 that we’re not really into the throes of bid season just yet. I can tell you that recent experiences have been very positive and conversations continue to be at or above those ranges that are – that we’re currently talking about.

We do expect that as you get further into the year, the potential exists. And it’s mostly with an eye toward macro economic uncertainty than it is to anything structural or secular within our building that I can’t predict exactly what that look like hence the broader range.

But earlier in the year, you’ll have some lapping effects and some comp effects that will be more positive. We indicated that it would mitigate or rate increases year-over-year may mitigate as the year – as you get further into it. But early signs are positive, early renewals are at or above those ranges provided. And so to your comment about low single digits, that is not something we’re seeing currently.

Thomas Wadewitz

Okay, great. Thank you for the time.

John Steele

Thanks, Tom.

Operator

And the next questioner today will be Todd Fowler with KeyBanc Capital Markets. Please go ahead.

Todd Fowler

Great. Thanks and good afternoon. Derek, on the March towards getting to a third dedicated, the third one-way truckload and a third logistics. Can you talk about how the one-way truckload fleet fits in that strategy? Is that to continue to kind of shrink that fleet over time, or is it to hold it steady, while the other businesses grow? And if you could provide just some maybe some thoughts on 2018 – or excuse me, on 2019, understanding a lot of the growth that’s getting on the dedicated side. What should we expect with one-way truckload?

Derek Leathers

Yes. So first off, what we wanted to do with one-way truckload just to – from a history purposes is, we needed to right-size it, we needed to focus on our strengths. And so our strengths are cross-border Mexico and expedited just in time type delivery cycles. They both have longer length of haul profiles. They’re harder to do businesses and service expectations are at the very, very top of the portfolio.

We wanted to emphasize that and right-size that fleet to be able to serve that specific portion of our business. We’ve done that. As we look forward and you think about a one-third, a one-third, a one-third, it really comes down to growing the pie overall. What we want to do is, continue to pursue a revenue growth path that allows the opportunity for both of us to better serve our customers, grow opportunities for our associates and provide more high-quality driving jobs for our drivers.

So that is really where our focus will be. We have some work to do in logistics to continue to outgrow logistics, as comparison to the other two-thirds and we’re doing that. Our commitments are wavering to continue to accelerate that growth and to – and try to sort of round out the portfolio, if you will.

Over time, future asset adds in TTS are going to be determined by returns. And so, although, we say in the first-half of the year, dedicated is where those trucks will grow, that is because of ongoing either closed or near closed opportunities that we need to build for and prepare, and that’s where those fleets – those trucks will end up. But over the cycle, we will compete for trucks. Our people internally understand this very well.

As opportunities come and CapEx budgets are decided upon, those trucks will be opened for acquisition by both parts. And it will really come down to what’s the return profile, does it play to a strength and do we believe we can be best-in-class in that space? If we can, we will pursue it. If we can’t, we’re going to fall back to focusing on what we do better than what we believe best-in-class.

Todd Fowler

Okay, that helps. And then just for a follow-up. I think that we’ve seen points in prior cycles where demand for dedicated increases when we get to points where capacity is really tight and then you shift to dedicated – the market in general shifts to dedicated and then when things loosen up some of those dedicated accounts kind of walk away from the commitments that they’ve made. What would your view be on the dedicated market now? And maybe why that may or may not happen, if we see some loosening in the market going forward?

Derek Leathers

So my biggest view is really – first of all, your assessment is correct, but it’s only if you allow it to happen to you. It – and it doesn’t start once you have the account, it’s how much you let in the door. And so over the last year, although, dedicated is growing, our win rate in dedicated arguably was at historically low levels, because we were that specific about what we wanted to let into the fleet and into our portfolio.

What I – what you’re really referring to is designated fleets, which were masquerading as dedicated, and we work very diligently in this cycle to not let that happen. So the fleets that we’ve added in the year, as well as the fleets that we’ve removed had fell on one side or other of that fence. So what we were pursuing was take-or-pay variable pricing fleets that had fixed and variable rate structures, where we were in it together with our customer to provide best-in-class service.

What we try to avoid is fixed rate fleets or designated fleets or things that do go away, as capacity starts to exceed demand. And so I think our positioning for the cycle is better than it’s ever been. And that’s why throughout our opening remarks, we continuously spoke to that fact. So will there be pressure? There could be. But pressure starts in spot, goes to one-way, ends up in dedicated, and if you have designated, they will find it. And so we like our positioning across our portfolio and how we’ve structured our defensibility for any cycle chains that may be forthcoming.

Todd Fowler

Okay. Very helpful. Thanks for the time, and nice quarter tonight.

John Steele

Thanks, Todd.

Todd Fowler

Thanks, John.

Operator

And our next questioner today will be Scott Group with Wolfe research. Please go ahead.

Scott Group

Hey, thanks. Good afternoon, guys

John Steele

Hi, Scott. How are you?

Scott Group

Good. Thanks for the call. So wanted to just follow-up on that last point, Derek, as we think about the increasingly mix of dedicated. Is there anyway you can help us think about the variability of dedicated versus over-the-road margins through a cycle like sort of the typical peak-to-trough range? I’m guessing it’s a lot smaller for dedicated, but is there anyway you can put some numbers around that, so we can…?

Derek Leathers

Sure, Scott. It’s a great question and it’s part of what we spent so much time on in 2018 to position ourselves in advance of a cycle that we believe is still, call it, too early and perhaps too aggressively. But to answer your question in dedicated, peak-to-trough is going to be 200 to 300 basis points, and we believe we can live within that range and often even operate tighter than that. It has to do with characteristics, the defensibility of it.

Frankly, the hard to deliver expectations of those customers and the fact that what we – the space that we operate is in more the economic or recession-proof area of the retail sector. Obviously, in one-way, traditional variability has been more in the 500 to 600 basis points range.

However, with our increased focus and now over 50% of our one-way assets being sort of set aside or focused on cross-border Mexico and expedited services, those have generally operated better and have less range. So as we look forward, we think the traditional 500 to 600 basis points range for one-way probably until proven otherwise, should still apply. But it’s certainly our expectation that, that will not be the case with our current structure on the one-way side.

Scott Group

Okay, very helpful. And then one just sort of maybe smaller question. The over-the-road length of haul is going higher. What’s driving that? And do you think that’s sustainable?

Derek Leathers

I think it is sustainable, and what’s driving it is our – is our focus on cross-border Mexico and team expedited service. So again, when you think about our over-the-road length of haul, part of why we want to break our metrics out and be more transparent and show what we do in our one-way network is, because of the sort of white noise that can otherwise be created and thinking that all over-the-road truckers are created equal. We have different niches, different strengths, and we’re playing to ours.

Cross-border Mexico length of haul has been consistently long for as long as I’ve been doing business, and I’ve been doing business in Mexico for 30 years. Team expedited is similar in its nature. Team expedited is also more defensible against intermodal conversion, because it’s by its very nature service sensitive and more importantly, transit sensitive. So that’s where we want to put our focus and our efforts, that’s what we’ve done and we’re going to continue to build upon it. So yes, I think it is sustainable.

Scott Group

Okay. Thank you, guys. I appreciate it.

Operator

And the next questioner today is David Ross with Stifel. Please go ahead.

David Ross

Yes. Good afternoon, gentlemen.

John Steele

Hi, Dave.

David Ross

So I guess, just if you can comment on the year-to-date, the first five, six weeks started off here in 2019 business levels, conversations with customers about their outlook for the year. How does that compare to where you would have thought it would have been, say, in December?

Derek Leathers

Well, I would say from my point of view, I mean, we certainly expected that January wasn’t going to look like December. And so we came into it with eyes wide open and understanding seasonality and the expectation that it would be different. I would tell you that in January, if you take the five weeks and you slice it a little more finite, the opening couple of weeks of the year were perhaps a little slower than I might have expected, but then quickly rebounded and have consistently remained stronger than all but 2018.

We think that’s the normal, not the first two weeks. And the first two weeks, I think, were driven by a variety of things, but one of which was to the extent there was some around the margin pull forward and other items that took place relative to people supply chain management, we may have suffered from some of that.

The other thing was, both Christmas and New Year this year hit at very inopportune times just in terms of the cadence and within the week. And what it created was larger bridges from the actual holiday to the following weekend with more drivers off. That quickly has bounced back, our network is back in balance. And as we’ve said, it’s been consistently stronger than every year but last year. And last year was truly an anomaly in January, especially.

David Ross

And then, Derek, you talked about one of the focuses in the last few years to get the margins right and to get the company position where you wanted to be was on service. Could you add a little bit more color around the service improvements that you made? How you measure them? How you got them?

Derek Leathers

Absolutely, that’s a great question. I’m glad you asked. So yes, the whole part of this process really starts with you have to have a product that people want to buy and it has to be in high demand. In order for that to be real, it has to be high-quality. So we had to make a deep down commitment to improve our service levels and we did so throughout the organization.

We’ve always measured it, we’ve always had metrics, but the focus and the expectation of acceptable wasn’t where it needed to be. So over the last two years and specifically even in 2018, we’ve increased our service levels across each one of our major operating units. And in each case, I believe they are now at best-in-class levels and we can compete with anybody on service head-to-head. It makes it easier for our customers to use us. It makes them easier to vote for Werner and it’s something we’re very proud of.

I mean, as a side note, I was looking at this yesterday. But over the last 18 months, we’ve won 52 different awards, spread across customer awards, employment awards and governmental recognition. That is far greater than what we would have seen in the five preceding years combined. So people are noticing. We still have work to do. We’re going to stay committed on this, and we’re going to continue to drive forward.

But I will tell you this and it is a last thought, nothing beats having high-quality drivers that choose to stay in your fleet, gain tenure and get better at what they do. And so I just want to plug our drivers one last time that 20-year low turnover that we’ve been talking about for multiple quarters in a row, it’s really coming home to roost in the form of high-quality service.

Of course, we wrap it with technology and systems and tracking and tracing. But at the end of the day, the professional men and women out there delivering the service are doing so at levels we haven’t seen in a long, long time, and that’s something I’m very proud of.

David Ross

That’s great. Thank you.

Operator

And the last questioner for today will be Bascome Majors with SIG. Please go ahead with your question.

Bascome Majors

Yes. Thanks for squeezing me in here. I mean, I mean, your outlook you put out here today is sounds pretty constructive and certainly, constructive in some corners of the marketplace. And you’ve talked about returning capital and attractive free cash flow and lower CapEx. I was curious, what tolerance do you have for leverage if the opportunity presents itself to be more aggressive and opportunistic on the buyback? And maybe a little bit on how you think about the buyback conceptually, is it quantitative? Is it P-based, like how do you asses valuing your own shares? Thank you.

Derek Leathers

So let’s start with the first part of the question about tolerance for debt or leverage on the balance sheet. We are very committed and very proud of the strong balance sheet we have today. We also like the flexibility in the capacity that we have on that balance sheet to be able to be opportunistic should the right situation arrive.

We are open-minded to leverage and will remain that way, but it’s got to make sense. And so as we think forward and look at the opportunities in front of us, even in – throughout a cycle, our current leverage ratios are low. There’s opportunity obviously for them to expanded and still be concisely conservative in nature, and we will utilize our balance sheet as we see fit based on what we think is the best opportunity to create shareholder value.

The second part of your question, buybacks. So you saw that we participated in some buybacks throughout the year. Buybacks are simply one of the things on the menu as we think about returning cash to shareholders, we think about dividends and buybacks. Obviously, M&A and special dividends is something that we’ve employed in the past as well.

We will continue to be open to those options. We’ll continue to look at each of those and evaluate what we think makes sense given the current market conditions, our current balance sheet strength and what we think makes the most sense at the time. Beyond that, I can’t give you a lot more color, because it will be a decision that we will work on and debate internally and give serious consideration to over time.

Bascome Majors

Thank you, Derek.

Operator

And this will conclude our question-and-answer session. I would now like to turn the conference back over to Mr. Derek Leathers, who will provide closing comments. Please go ahead, sir.

Derek Leathers

Thank you. So first off, I want to thank you all for calling in today. It’s a historic day for us to have our first earnings call and something that we’re proud to be doing and proud to be a part of with all of you.

We’ve spent the last three years, if you go to Slide 21, strategically investing in and transforming our company to perform across a variety of economic cycles. 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, increasing experienced team of associates and the commitment to industry-leading technology.

As we look ahead, our long-term margin and return expectations are higher than what they’ve been in the past. And finally, we’re better positioned today than we have been in our recent past. We’re committed to delivering shareholder value cross the cycle. As I tell our drivers all the time, there’s never been a better time to drive blue.

In closing, our decision to begin hosting quarterly earnings calls underscores our commitment to increasing our transparency and it’s concerted effort to enhance our investor relations efforts. I want to thank everyone for participating in our first earnings call and for your interest in Werner Enterprises. If you have any follow-up questions, please don’t hesitate to reach out to us.

Operator

And today’s conference has now concluded. Thank you for attending today’s presentation, and you may now disconnect your lines.