3Q2026 Earnings Conference Call - WERNER ENTERPRISES INC

Financial Performance:

• Third-quarter revenue reached $951 million, a 23% year-over-year increase.
• Non-GAAP adjusted diluted EPS was $0.16, up $0.19 from the prior year, though sequentially down due to headwinds.
• Adjusted operating income totaled $21 million, a 92% year-over-year increase, with the operating margin expanding 80 basis points to 2.2%.
• Truckload Transportation Services (TTS) adjusted operating margin increased 220 basis points year-over-year to 4.1%, driven by First Fleet accretion and one-way restructuring.
• One-way truckload adjusted operating margin expanded over 800 basis points year-over-year, shifting from loss-making to profitable.
• Logistics segment returned to positive adjusted operating income with a 0.4% margin, up 170 basis points sequentially, and brokerage gross margins expanded by $3.4 million.
• Consolidated gains on the sale of property and equipment were $8 million, up from $4.5 million in the prior year.
• Operating cash flow generated was $21 million, net of an $18 million legal settlement.
• Free cash flow for the year-to-date period was $160 million (6% of revenue).
• Year-to-date net capital expenditures were nearly $29 million (1% of revenue), with $37 million spent in Q3.
• Total liquidity stood at $654 million ($39 million cash + $615 million credit availability) at quarter-end.
• Outstanding debt was $847 million, a $95 million increase year-to-date; pro forma net leverage was 1.9 times.
• Adjusted EPS was impacted by approximately 18 cents sequentially due to fuel volatility, driver recruitment costs, and unfavorable insurance reserve development.

Guidance and Future Outlook:

• Full-year TTS average truck count guidance tightened from 16-18% to 16-17% growth.
• Dedicated revenue per truck per week full-year guidance lowered to a range of 4-5% growth (previously 5-6%).
• Net capital expenditure guidance reduced and narrowed to $190-$205 million (from $215-$250 million), attributed to OEM delivery timing rather than reduced commitment.
• Effective GAAP income tax rate guidance raised to 24.5%-25.5% (up from 17% YTD).
• Net interest expense guidance maintained between $40-$45 million.
• Gains on sale of assets guidance increased to $13-$16 million (up from $10-$14 million).
• Q4 outlook expects modest sequential EPS improvement over Q3's $0.16, driven by headwind abatement and peak season volumes, offset by lower gains and higher interest/tax normalization.
• Management targets a return to mid-cycle double-digit adjusted operating margins in TTS by 2027.
• Revenue per total mile for Q4 is expected to increase 10-13% year-over-year.
• Management anticipates further capacity attrition and rate increases through the remainder of the year.

Business Segments and Product Lines:

• Dedicated: Revenue net of fuel surcharges surged 52% year-over-year; revenue per truck per week rose nearly 6%. The segment represents 81% of the TTS fleet and 77% of TTS revenues. End-of-quarter fleet grew by 130 net trucks sequentially. First Fleet integration is on track for $18 million in annualized synergies, having already realized $11 million in initiatives.
• One-Way Truckload: Revenue net of fuel decreased 15% to $136 million due to fleet restructuring, but productivity metrics surged (revenue per truck per week +34%, miles per truck +22%). The average truck count fell 37% year-over-year to 1,673. Focus remains on yield and productivity over volume.
• Logistics: Revenue decreased 7% year-over-year but increased 2% sequentially. Final mile revenue grew 18% year-over-year to a record high. Intermodal revenue rose 7%. PowerLink and cross-border Mexico offerings are gaining momentum.
• First Fleet Acquisition: Eight months post-acquisition, the unit is performing ahead of targets with a 98% renewal rate on 85% of the portfolio.
• Technology: Transitioning from heavy investment to realizing operating leverage; focus on TMS platforms and enterprise efficiency to drive cost savings in 2027.

Market and Competitive Landscape:

• Management views the market as being in the "early innings of a multi-year upcycle" driven by structural supply contractions and regulatory enforcement.
• Barriers to entry are high due to rising insurance premiums, litigation risks, fuel costs, and regulatory requirements, limiting the threat of non-compliant capacity.
• Demand remains stable, particularly in discount, grocery, and non-discretionary retail sectors, with leaner retailer inventories potentially boosting freight recovery.
• "Flight to quality" is evident as shippers seek reliable, compliant asset-based capacity in a post-Montgomery ruling environment, though adoption takes time.
• Used equipment market remains strong due to OEM manufacturing constraints and the approaching 2027 EPA emission standards.
• Spot rates saw temporary easing in July/August but have improved recently; tender rejections remain elevated.

Risks and Challenges:

• Fuel Costs: Rapidly rising diesel prices created a temporary margin headwind due to surcharge lag effects and narrowing wholesale/retail spreads; management is revising surcharge structures with specific customers.
• Driver Costs: Elevated onboarding, recruiting, and retention expenses impacted results by 18 cents per share sequentially; these are front-loaded investments necessary for growth but will remain elevated into Q4.
• Insurance: Unfavorable reserve development on select First Fleet claims contributed to the quarterly drag, though underlying accident rates are at a 20-year low.
• Labor Market: Intense competition for high-quality drivers nationwide; application rejection rates for drivers are up 170% year-to-date.
• Regulatory/Border: Increased enforcement and inspection at the southern border are causing delays for cross-border Mexico freight, though the company benefits from using legal US drivers vs. visa alternatives.
• CapEx Timing: OEM delays in 2026 engine deliveries are shifting capital expenditure and asset sale gains to future periods.

Management Commentary and Tone:

• Tone is confident and optimistic, emphasizing that the business strategy is delivering results despite temporary headwinds.
• Management expressed strong belief in the structural strength of the business and the resilience of their model.
• Emphasized that the 18-cent quarterly drag is not a structural issue but a result of deliberate strategic investments in driver hiring.
• Reiterated the "flight to quality" thesis, suggesting long-term opportunities for compliance-focused carriers.
• Expressed determination to reach 10%+ operating margins by 2027 through a mix of market tailwinds and operational self-help.

Analyst Questions and Answers:

• Margin Trajectory: Analysts asked about the path to double-digit margins; management clarified that Q4 will see sequential improvement over Q3 as fuel and reserve headwinds abate, with the full benefit of rate and volume gains realized in 2027.
• One-Way vs. Dedicated Mix: Addressed concerns about shrinking one-way fleets; management stated it is too early to judge the final mix, noting the one-way restructuring was painful but necessary to align the network for future growth.
• Driver Cost Recovery: Clarified that dedicated driver costs are funded through customer relationships and contract negotiations, while one-way costs rely on market rates; investments are front-loaded to prime the pump for future growth.
• Fuel Surcharge Lag: Explained that the one-week lag effect is exacerbated by consistent weekly price increases and narrowing fuel spreads, but stabilizing prices will improve surcharge effectiveness.
• Cross-Border Mexico: Confirmed bullish outlook despite border inspection delays, highlighting the advantage of using legal US drivers and strong underlying FDI growth in Mexico.
• CapEx and 2027 Standards: Confirmed that lower Q4 CapEx guidance is purely a timing issue regarding 2026 engine deliveries and does not reflect a change in fleet refresh strategy or exposure to 2027 emission standards.

Other Key Points:

• Safety Performance: DOT preventable accidents per million miles are down over 40% year-to-date, reaching a 20-year low.
• Customer Retention: Dedicated customer retention remains exceptionally strong at over 95%.
• Credit Facility: On October 5th, the company entered a new $1.1 billion unsecured credit facility with a five-year maturity and reduced borrowing costs.
• Capital Allocation: Balanced approach focusing on strategic reinvestment in a low-age fleet, First Fleet integration/synergies, and future shareholder returns.
• Strategic Focus: The company is aggressively refreshing its fleet to capitalize on the 2027 EPA emission standards and the anticipated spike in demand for high-quality used assets.