Werner Enterprises, Inc.
Q4 2020 Earnings Call Transcript

Published: 5 Feb 2021

[Operator:]

Good afternoon, and welcome to the Werner Enterprises Fourth Quarter and Full Year 2020 Earnings Conference Call. . Please note this event is being recorded. I would now like to turn the conference over to Derek Leathers, Vice Chairman, President and Chief Executive Officer. Please go ahead.

[Derek Leathers:]

Thank you, and good afternoon, everyone. With me today is our CFO, John Steele. 2020 was a very challenging and disruptive year. I'm proud of our Werner team for their resilience, tenacity and perseverance throughout the year. Werner associates quickly reacted to changing freight and work conditions and delivered record results. The Werner team achieved record operating income and adjusted earnings per share in 2020. Our drivers and mechanics relentlessly kept America moving for Werner customers and end consumers despite the demanding operational protocols necessitated by the pandemic. Werner office associates continued to produce superior service to our customers, drivers and mechanics despite restrictive changes to their work environment.

[John Steele:]

Thank you, Derek, and good afternoon. Beginning on Slide 7. Total revenues for fourth quarter decreased slightly with fuel surcharges reduced by $20 million year-over-year due to lower fuel prices. Our TTS revenues per truck per week increased 5.3% due to improved revenues per total mile and slightly lower miles per truck, which was caused by the increased mix of shorter haul dedicated trucks. Our logistics revenues increased 8%. The significant improvement from the 16% decrease in second quarter and the 3% decrease in third quarter. Our cost management initiatives and programs continued to perform well in fourth quarter. We effectively managed our controllable costs with sustainable improvements through improved associate productivity, better leveraging our procurement spend and doing more with less. We aggressively managed expenses, and in 2020, we delivered nearly $23 million in annualized sustainable cost savings.

[Derek Leathers:]

Thank you, John. Moving to Slide 15. I will update you on our 5 T's + S strategy. Over the past 5 years, Werner implemented structural and sustainable upgrades to our TTS segment with a modern and more efficient fleet with the latest safety technology, raising our hiring and retention standards for high-quality, safe professional drivers and further strengthening our service product to our customers. Our first 2 Ts, newer trucks and trailers, have young average fleet ages of 2 and 4 years, respectively. All Werner trucks are equipped with advanced closure mitigation safety systems, automated manual transmissions, forward-facing cameras and an untethered tablet-based telematics solution for our professional drivers. The tight driver market remained very challenging in the fourth quarter. Since the onset of COVID last March, social distancing and other safety requirements, combined with state licensing cutbacks, have reduced the number of driver training school graduates nationally by an estimated 40%. Despite these challenges, Werner's industry-leading driver training school network continues to be a significant resource for highly trained new drivers. Driver recruiting, safety and equipment maintenance will be further enhanced by the opening of our 2 state-of-the-art terminals in the next few months. We are making major strides upgrading and modernizing our IT infrastructure and data security. In November, we announced our partnership and investment with Mastery Logistics Systems. Over the next 4 years, we will replace our existing transportation management systems with Mastery's cloud-based Mastermind TMS to improve functionality and visibility in one integrated trucking and logistics system. During our third quarter earnings presentation, we unveiled the addition of sustainability as a core component of our strategy. In November, we issued a comprehensive ESG presentation, building on a strong foundation to drive greater sustainability at Werner, which is available at werner.com. In that report, we announced 3 significant ESG milestone goals.

[Operator:]

. As a reminder, please direct your attention to the disclosure statement on Slide 2 of the presentation as well as the disclaimers on Page 6 of the earnings release related to forward-looking statements. Today's remarks contain forward-looking statements, including those related to COVID-19 that may involve risks, uncertainties and other factors that could cause actual results to differ materially. 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 to the earnings release and in the appendix of the slide presentation. Our first question comes from Todd Fowler with KeyBanc Capital.

[Zachary Haggerty:]

This is Zach on for Todd. Just wanted to dive a little bit deeper into the One-Way guidance here for the first half. I guess what does it incorporate in terms of seasonality for the first half of the year? And then if you could just kind of touch on, what does it assume for maybe project freight in maybe the second quarter?

[Derek Leathers:]

Yes. So this is Derek. Thanks for the question. On the seasonality, I'm not sure I understand exactly what you're asking, so I'll just speak to how seasonality has developed thus far. I mean, right now, it's January and February, as we mentioned in our prepared remarks, have been seasonally stronger than normal. All the channel checks that we're having with customers and as we have dialogues about the progress of freight and current inventory levels would suggest that, that will continue. We would expect, based on those conversations, current inventory levels and the overriding capacity constraints that are more structural and systemic than they are fleeting in their nature, that second quarter should be set up for project opportunities. Obviously, that's a long time from now, and we'll get better clarity as the quarter develops. But in a normal year, the second quarter, especially the end of the second quarter, does set itself up well for project freight, and we would be expecting at this point that to be the same this year.

[Zachary Haggerty:]

Okay. Helpful. Yes, I understand with your prepared remarks indicating some greater seasonality there as more looking for -- into the second quarter, I guess. But I guess just in terms of fleet growth, I understand it's focused more towards Dedicated. But what is -- what are your thoughts on just kind of the One-Way fleet as we move through '21? Does that, I guess, stay flat from current levels and more so focused on Dedicated? Or is it kind of a continued shift from the One-Way into Dedicated?

[Derek Leathers:]

I'm sure. So I think the way to think about it would be, right now, the Dedicated pipeline is very, very strong. And so just known business that's either in implementation or soon to be forthcoming means that, in this driver market, when it's difficult to obtain and bring onboard new drivers, we just know that what's the end effect is that we're going to see more growth in Dedicated as a percent of the total, but we do expect that total fleet growth has some opportunity to move north from where it is today. We price all of those Dedicated opportunities based on the premise that we have to be margin enhancing. And we're looking for sustainable structural alignment with winning customers. That is the case with these opportunities that we're looking at now, both those in implementation or soon to be in implementation. So it's not so much at this point, we're looking to limit One-Way Truck growth. It's more a matter of a tight driver market, a robust pipeline in Dedicated and strong margin opportunities to be able to sustain ourselves through the cycle, which is what we've been committing to the investor community for some time.

[Operator:]

The next question is from Scott Group with Wolfe Research.

[Scott Group:]

So I want to ask, Derek, about margins. Last quarter, you talked about margins getting as good as 16%. Any reason why we shouldn't be assuming 16% this year? And given that you just did, I think, 18% in the fourth quarter, is there upside potential to that 16% in your mind?

[Derek Leathers:]

We're always going to kind of work to exceed expectations wherever we can, Scott. It's a great question. Our guidance is our guidance, which is we think we're going to be on the high end of the range. I mean I think that's something we're comfortable with at this point. We think the setup is as good or better right now than it was the last time we spoke. And so we feel better about the overall market dynamics, the capacity constraints that are out there and where we're at in the bid cycle and how those conversations are going. So the potential is there, yes, but I'd rather not stray from the structure of the guidance that we've previously given. But what I'll tell you, and I think the fourth quarter with the 81.8% that you referenced demonstrates that if the market is there, we're going to make sure and try to maximize margins for our shareholders while also taking care of our customers.

[Scott Group:]

Okay. And then just second question. The guidance implies a little bit of a deceleration in Dedicated revenue per truck. Any thoughts there? And then just any color on the power-only business? We're hearing more and more about that from carriers. And just curious about that?

[John Steele:]

Yes. The Dedicated revenue per truck, we were, I think, 4.8% this most recent quarter. It does fluctuate some from quarter-to-quarter, but in the environment where we had some pretty solid increases in rates in 2020, we think that a 3% to 5% range is reasonable for 2021 based on the current market conditions. And I'll let Derek answer the power-only question.

[Derek Leathers:]

Yes. On the power-only question, Scott, I would say that it is a topic in this building. It's something we're working on as well. We do quite a bit more of it than perhaps we've communicated. We're going to continue to grow it from here. It's something that we think has a lot of upside for an asset-backed player like Werner. When you think about brokerage and being able to combine the best of assets and nonassets, power-only is a great place to do that. We have a glide path right now towards significant growth in that area; and in particular, we have a strong power-only operation in our cross-border mix. And so when you think about our business to and from Mexico, where we're a large player, we've got the large facility on the southern border. We've just built a new and even larger cross dock. We're doing a lot more power only to and from the border, and we'll continue to grow that going forward.

[Operator:]

The next question is from Amit Mehrotra with Deutsche Bank.

[Amit Mehrotra:]

Congrats on the great results. I guess, first question, the 81.8% OR in the quarter was kind of -- it was eye watering in terms of how strong it was. And obviously, over 60% of your fleet is Dedicated, so I -- and 7% yield growth is strong, but it's -- there's obviously something else there that's allowing you to report those types of margins. Can you just talk about the freight selection opportunity in the quarter? And was that what really allowed you to kind of achieve those types of really, really great margins in the quarter?

[Derek Leathers:]

Yes. Amit, great question. I guess the first thing I'd say is, yes, the 81.8% is something we're really proud of. We're also proud of how clean it is. I mean it's a solid 81.8% across the board with really a lot of blocking and tackling involved. So throughout up and down the P&L, it's execution at the level that we've talked about getting to for a long time. It's a lot of focus and work by the team. And so I'm proud of what they did. It also points to why only one metric, which could be rate per total mile or any other one metric production or any other one, is not always the secret sauce, right? So we look at it more holistically than that. We think about it on how the parts fit together. And we've had a vision for a long time around here, and I've had a vision around if we give -- if we have the right equipment, the right customer mix, the right quality drivers and the right folks internally that are dedicated at excellence, we can get there, and it doesn't have to be just through raising rate or with only focusing on production maybe at the expense of service. We've got to be able to execute across all of those facets simultaneously. And I think that's why, if you look at the quarter, it's not just the 81.8% that I'm proud about. It's the fact that the 81.8% is driven across multiple different product offerings. It's with Dedicated representing 63% of the truck count and still being able to achieve a result that looks like that. It shows the cycle proof nature of the business that it's not held back in a strong market and yet is uniquely prepared for any potential cycle turn that may be coming. We think that cycle is not yet here. We think we're still -- have a lot of runway when you think about the systemic capacity constraints that exist. But when that day comes, this portfolio is better built than it's ever been to be able to execute strongly. And so we're excited about it as we look forward.

[Amit Mehrotra:]

Yes. And that's helpful. Just to be maybe devil's advocate a little bit. Maybe the fourth quarter also represented just a perfect storm of good things. You guys haven't really done drive -- big driver pay increases. I think that's coming this year or already have come maybe at the start of this year, and then demand sort of inflected. So as we think about all the moving parts into 2021, you've got maybe $15 million to $20 million of headwind on driver pay. You've got probably some headwind on claims expense as congestion rises. You've got tailwinds on gains of sales. And then I guess maybe the X factor is if the freight selection opportunities, just the demand environment stays as strong as it is. But you have a 13% long-term target there. Do you think that no one is expecting 81.8% again but -- for the entire year 2021, but you kind of split the difference between the long-term target 81.8% and that kind of gets you to what you guys think you can do this year just given some of the puts and takes on the cost structure?

[Derek Leathers:]

Yes. So I think it's -- obviously, it's early in the year. There's a lot of unknowns. We're still dealing in a world where COVID does exist, and vaccine rollout is somewhat problematic. But the strides we've made on injury rate, accident rate, yes, some of that is aided by congestion, and we called that out in the remarks, but a lot of that is systemic. It's the deep dive revamping that we've done through our driver training programs, from the very first day we start recruiting through the day they are assigned their first truck. It's the utilization of technology and simulators and other driver-focused training initiatives that have been launched that are paying dividends in ways that we thought they would, and now we've got results to show that it's true. The freight market is still a tailwind. The freight market looks to stay that way for several quarters as people look to restock inventories. On the driver pay side, I wouldn't expect to hear some huge announcement from Werner because, a, we were paying competitive wages going into this cycle. And as the market continued to tighten, we continue to focus on bettering the lifestyle and life that our drivers have, giving them the right equipment and paying them the right wage. Our turnover results have continued to improve, and I think it shows where morale is in the fleet. And so yes, there's headwinds, but those will be offset by the needed and necessary rate negotiations that we'll be having throughout this bid season. And so yes, I like the setup, the opportunity for us to continue to make, as I mentioned earlier, sort of up and down the P&L, improvements while making sure that we're paid based on the service levels we're offering at market competitive rates and then treating our drivers through more than just pay to a lifestyle that they want to stay and they want to be a part of. That's where we're sitting today. As we look forward, certainly, there's always upside to guidance that we may give. But the first call out of the gate in January is usually not when I'm going to start changing that guidance. So our goal will be to continue to achieve at the top level. We've given metrics that, I think, are in guidance that's aggressive. It's stuff that we plan on fulfilling, and that will be our go-forward strategy, to continue to focus on quality above all else throughout the range of everything from service to driver quality, to alignment with winners, to the quality of our equipment and now even the expansion of our terminal network to include best-in-class terminals in a couple of places where we had gaps previously.

[Operator:]

The next question is from Jack Atkins with Stephens.

[Jack Atkins:]

Okay. Great. Really appreciate it. I guess maybe taking a step back and thinking about more of the longer-term strategic partnerships and investments that you announced this quarter. Derek, can you talk for a moment about both the partnership with Mastery? And you gave a little bit of color on that in your prepared comments. But how should we think about the time line before that starts to really bear fruit for Werner from a profitability perspective? And what exactly are you looking to sort of get out of that partnership over the next couple of years?

[Derek Leathers:]

Yes. Sure, Jack. Thanks for calling. The partnership with Mastery is, in our view, the best way for us to accelerate our sort of cloud-first, cloud-now strategy. It's a way for us to accelerate the integration of what is today still more than I would like to see, separate systems across logistics and our asset base. It's an ability to lean into and leverage some industry expertise that has proven a knowledge base in this area that is strong. And frankly, we like the fact that it is a start-up or new entrant anyway with deep industry roots, but a new entrant because it's unencumbered by legacy systems and legacy obstacles and things that would otherwise be present. In the meantime, we're still investing and still have a robust IT group here at Werner. We're going to continue to build and develop what we believe to be secret sauce, things that, for instance, lead us to industry-leading revenue per truck per week in our Werner -- in the Werner One-Way network for the fourth quarter across the entire industry. So we're going to continue to optimize and build some of the back-end functionalities, if you will -- or I should say the execution functionalities but then buy some of the core TMS and the cloud-based TMS that allows us to integrate more rapidly, allows us to be more -- have more mode neutrality over time and really, frankly, be able to bear the fruits of our overall portfolio more easily to our customers and provide them with a more seamless solution across multiple parts of the portfolio. So we're excited about it. Now as far as how long does it take? These things are not easy. They certainly aren't overnight, but we do expect that we will have certain aspects of the Mastery platform integrated and functioning within our building this year for sure. The current plans would be some of those would be launching late second quarter and starting to bear fruit at that time, but it's really going to be a back half traction that you'll start to really see more progress on that front.

[Jack Atkins:]

Okay. That makes sense. And then, I guess, maybe for my follow-up question, when we think about the asset-based carriers this quarter and their logistics operation, we saw a fairly wide range of outcomes. Some folks of very aggressive top line growth and pretty healthy margins. And I guess you guys weren't able to sort of see that same level of performance, and that definitely presents an opportunity in 2021. But I guess when you think about Logistics, maybe what prevented you guys from being able to really capitalize on the strong spot market that we saw in the fourth quarter? And how do we think about the action plan to get that on track in 2021?

[Derek Leathers:]

Yes. Great question. So I'll start with the obvious. You're right. Logistics is an opportunity in 2021. Simply stated, it didn't perform the way that I'd like to see it performing. We've got work to do there. But I'll tell you that there's some very good foundational progress happening. We made a lot of -- we did a lot of work on legacy agreements and legacy contracts. We talked about it in the third quarter with an eye towards fourth quarter profitability. We had things we needed to clean up structurally with more on the contract side of logistics than anywhere else. And we've done that work. We had to continue to staff up and to continue to add personnel for some of the volume that we have in the pipeline, and that's more difficult in COVID and perhaps an area that we didn't have as much success as we would have liked. But we've got plans now, to your real point, in '21 to attack that. We're actively engaged right now on the onboarding business, onboarding personnel to better manage that business. And frankly, some of the relief of the tech that we've been building out both ourselves as well as the Mastery journey we referenced earlier will bear fruit as the year progresses. So while I'm unhappy with the fourth quarter results and how we ended the year, I'm very happy with the sequential improvement from Q3 to Q4. And I think directionally, that gives you a sense of where we're headed as we go into Q1 and forward. I do believe that there's opportunity for margin expansion there. I do believe that we've got volume growth going the right direction, but it's going to be less of the headline but still more of an opportunity story for Q1 and Q2. And then I'm confident that in the back half, you start to see that performance be reflective of the overall performance that you've seen from Werner in the last couple of quarters.

[Operator:]

The next question is from David Ross with Stifel.

[David Ross:]

You mentioned, keeping on the asset-light theme, that you want to grow brokerage, freight management, intermodal and final mile. Final mile is an interesting one right now, getting a lot of attention. Can you talk about what Werner's capabilities are there today and what you want them to be?

[Derek Leathers:]

Yes, sure. I mean so our capabilities today as we have a national network, we've got a strong, big and heavy presence and sort of 2 men in a truck. We're building out and have built out now more of the one-man model regionally, and that is still going to need further expansion to get more of the national presence. Volumes have continued to grow and grow steadily in that area, our final mile area overall that is. Margins have continued to perform well, and the tech on that side is also performing well. So I'm excited about the core structure there. That's a part of the growth story within Logistics. It's something that we are excited about. It was part of the decision to divest from WGL and really focus on a North American footprint, which is where we think our strength is. One of my goals is to make sure whatever we do, we do to win and that if we're going to put time and effort against it, it needs to have the return profile to justify doing so. I think this new -- this renewed focus on North American logistics provides us an ability to improve those results. The final mile footprint that we currently have provides the foundation to build upon. And so I'm pretty bullish on it as I think about it looking forward.

[David Ross:]

You said the margins are performing well, which is interesting because one of your big competitors exited the business because the margins were poor and others that are in it aren't reporting good margins. Is there anything unique you're doing on the cost side, whether it's using ICs or company drivers? Or is it more of a pricing issue?

[Derek Leathers:]

Well, I think there are several things, but probably the most -- the least surprising one to you is that we're taking our conservative approach, meaning we aren't building out or going full speed ahead until we felt we were ready. So we haven't led with a lot of final mile commentary on these calls. We haven't spoken about it and let our rhetoric get out in front of our reality. The time now is to start focusing more on how we speak to it and communicate it. But I think our -- the methodical nature of our launch is a big part. I think we've got some strong leaders and execution partners in it. We did steer clear of going asset-heavy into something before we understood it or knew it, and we are still predominantly a non-asset play in that space. But we also spent a ton of time in our final mile launch, listening to our customers and trying to build what they want versus building out what we thought they needed. And I think that does pay dividends. And so it takes longer to do it that way. It takes a lot more R&D before you start having revenue and profits. But by doing it that way, we know once we launch and once we start having those conversations, it's a product that they're looking for. And that was really heavy systems, heavy communication visibility, claims resolution processes and other things that there are still gaps in that final mile space really across the board in terms of the customer experience. And we're all working hard both here and other organizations to address it, and I like our chances.

[Operator:]

The next question is from Ken Hoexter with Bank of America Merrill Lynch.

[Kenneth Hoexter:]

Congrats on a solid quarter and good luck in the Lehigh Valley. It's a great place. But others are seeing some rising CapEx. The industry is moving to lower. The age, it seems like, of their fleet, they kind of let it age a little bit recently. You're standing still in the market. Is that a sign just the driver market is too tough kind of, as you mentioned, to expand the fleet or take advantage of that kind of others focused on just the fleet renewal at this point with the CapEx targets?

[Derek Leathers:]

Well, I think the CapEx target, first and foremost, is driven by the fact that we already have a young fleet, and we're going to keep it that way. I mean there are others that have more of a sudden increase in their CapEx this year, but it's driven by wanting to renew or refresh their fleet and try to bring the age down. We like our fleet age where it is. It's one of the newest fleets out there, and so we don't have to do that -- we don't have to fight that particular battle front. So it just comes down to how do we feel about fleet growth. On fleet growth, if it's long-term relationship, long-term contract, cycle proof defensible type freight at our margin expectations or better, we're going to add it. And we're going to go out and use the driver school network that we've built and invested in, and we're going to have access to high-quality drivers. We're going to continue to fight the fight in the experienced driver side. And through the combination of lifestyle, equipment and compensation, we're going to win that fight more often than some. And if that provides upside through the profile of freight that I just talked about to exceed that TTS growth target, then we'll do so. But at that growth target -- and that growth target corresponds to that CapEx range, and it's consistent with that 11% to 13% of revenue target that we've talked about for several years around here because we finally got our house where we want it as it relates to age, quality, both terminals, infrastructure as well as fleet infrastructure. And these last 2 terminals kind of finished at setting that table.

[Kenneth Hoexter:]

Wonderful. Just coming back to the Dedicated. You talked about rates up 3% to 5%, yet talking about rate pressure of 6%. Maybe you were talking about that on over the road, but you threw out a number for Dedicated kind of rate pressure as well. Do you see that margin pressure when you step back and look at your outlook because of those -- that increased driver pay?

[Derek Leathers:]

No, I do not. So we will have driver pay pressure, make no mistake about it. We talked about that right now targeted to be in that -- the driver pay rate of being up 6%. We came -- we finished the year very strong on driver turnover, driver retention overall and fleet morale. And so we're going to pay our drivers appropriately. But the ability for rates to outpace driver increases is one thing I'm very confident in right now with the market that we're in. On the Dedicated side, we talk about 3% to 5%. Driver pay is often a stand-alone separate line from that altogether, meaning either the driver pay is already far out in front of where One-Way Truckload is to begin with because of the work style of the type of work it is. And if for some reason, it was to come under pressure, we have that conversation with our customer. We make that decision together. And if we need to raise pay to shore up that fleet, we'll have that dialogue. But our Dedicated driver pay is some of the best W2 earnings out there in the trucking market because we expect high-quality, 99.5% or better service, and it's often tough driver work, but the compensation is commensurate with the work that they do. So driver pay will be offset, and I don't -- that is not an area where margin erosion will take place in my view.

[Operator:]

The next question is from Ravi Shanker with Morgan Stanley.

[Ravi Shanker:]

Can you give us a little more color on the forwarding business sale and kind of what the logic was behind that apart from, obviously, taking advantage of a multi-generation peak in the cycle? And what does the kind of portfolio businesses look like? Or anything else there that you think you can kind of monetize or would be noncore at this point?

[Derek Leathers:]

Sure, Ravi. It's a good question. So when you think about the WGL sale to be very direct about it, the fundamental premise was I want this to be an organization focused on being best in class in everything they do, that wakes up every day and leverages our strengths to enhance shareholder value. Now to do that, that means if we have any businesses that are a little too far afield or a little bit outside of the integrated core North American footprint or purpose of what we're trying to provide for our customers, I think we had to call it in question. So we did that. And as we went through it, it is -- I want to be clear. It was a business that was profitable. It was a business that was actually growing some. But I believe that the time, energy, effort and investment was -- will be better spent with us focusing on our core business here in North America. At the same time, it's obviously dependent on finding a buyer that we think highly of and a company that we think there's synergies with, where we can still provide a solution to our customers in this new arrangement that provides them with real economic value for them to be able to still get their needs met, while we, the reciprocal is also true, provide that value to their customers where it makes sense. And so there was just a lot of synergies in this particular deal, in my view, for us to continue to focus on our core business and improving our execution while still opening up potentially even new markets, new opportunities via this -- the buyers' avenues with their customer base. And so we're happy with the outcome. I think to the second part of your question, no, it isn't like we're going through the inventory list of products or businesses looking for other things to sell. It really gives us an opportunity to put more focus on the rest of the portfolio versus looking to divest from other items.

[Ravi Shanker:]

Got it. John, I think you mentioned the two facilities that you're switching from leased to owned in the first quarter. Is that going to have an impact on numbers at all?

[John Steele:]

That's part of the cost that we'll be dealing with in 2021, but I wouldn't consider it a major cost. I mean, from a personnel standpoint, the costs are comparable. From a facility standpoint, what we're going to have now is a state-of-the-art facility that is top shelf from a driver recruiting, from an equipment maintenance standpoint, from a design standpoint for the people who work there. So we think it ultimately will be a benefit rather than a meaningful cost item. It'll probably have a slight cost increase, but not anything significant.

[Ravi Shanker:]

And just lastly, Derek, your balance sheet's in great shape. You're nearly net cash. You're doing a great OR with a lot of the cycle still ahead of you. You have a great story to tell with sustainability and digital and everything else. Is there a case to be made that you should probably be a little more aggressive with cash return and buyback if the market's not giving you the full credit for everything you're doing right now?

[Derek Leathers:]

Sure. I mean there's a case to be made for sure. The question is how far from our routes will we stray as we think about this doubling down of our efforts on excellence. We've guided to the reality that we are -- we have an appetite for a net debt-to-EBITDA ratio that's higher than we've traditionally been. In the fourth quarter, you saw us actively in the market and repurchasing shares. We have talked about needing to get our house in order and show both externally and internally to give everyone the confidence that this type of execution is possible. And we've done that in the fourth quarter and gotten the house in order and shown what's possible here at Werner. As you do all of those things, you generate increasing free cash flow, which we've done for four consecutive years. And our expectation is to have free -- to generate free cash flow as we move forward as well and to continue to grow that from here. All of the above leads to shareholder return opportunities, right? So we're going to look at share repurchase. We'll look at dividends, both regular and other. And we also will look opportunistically at M&A. That's going to have to be the right opportunity that we think is going to be accretive and it's going to be something that is material enough for us to move the needle. But all of that is on the table. And I think you get a sense for more aggressiveness as we -- we just celebrated our 65th anniversary, and I could tell you that we think the best is yet to come. And we're looking to accelerate as we drive forward.

[Operator:]

The next question is from Tom Wadewitz with UBS.

[Mike Triano:]

This is Mike Triano on for Tom. So I wanted to ask about the truck adds for '21. With the strong pipeline Dedicated and the tightness in the driver market, is it fair to assume that the Dedicated split of the fleet could drift up a bit from the 63% by the end of the year?

[Derek Leathers:]

Yes, I think that's fair. Right now, the Dedicated pipeline is strong enough and the driver market is tight enough that it -- although we have line of sight as to how we're going to fill and feed the pipeline that's necessary as it relates to Dedicated deals that are coming through that are meeting our hurdle rate and as well as those that are replacing potentially other fleets that are not meeting sort of those return expectations, but to try to project something further than that would be difficult. The driver market is tough. We are adding 4 schools to our school network. We still believe that we have an advantaged situation as it relates to having one of the largest school networks in America producing high-quality drivers. If the market continues as we believe it will continue on the freight side, we're going to be scratching and clawing like everybody else to do our best to bring on drivers, but I can assure you they'll only be brought on if they are of that highest quality. And so with all that said, if I'm looking out in the future, and that's kind of why we guided the way we did in the prepared remarks, it would be a fair expectation to think about Dedicated getting a slightly larger percentage than even where it is today. It also sets us up to be that much more resilient at whatever point the cycle does turn, in my view, sometime at the earliest in '22.

[Mike Triano:]

Got it. And then for the truck adds, in terms of the cadence for -- throughout the year, will they be back half, first half load, second half loaded? Or do you think they come on kind of gradually throughout the year?

[Derek Leathers:]

Now at this point, I think it's better to assume -- or it's safer to assume they're front half loaded than back half. Again, it is a battle royale out there right now for drivers. We're all working very hard on it. Step 1, obviously, is always just continue to retain better than you ever have and make sure you hold on to the ones you have. And we're working every day for that. But yes, the goal at this point would be front half loaded, and that would be consistent with the Dedicated implementation that's already sort of known and right in front of us.

[Operator:]

The next question is from Jordan Alliger with Goldman Sachs.

[Jordan Alliger:]

Question. So can you talk a little bit about your thoughts on miles per truck as we go from here on productivity? I think in the past, you've mentioned there might have been some impact from difficulty with team driving situations. I'm just sort of curious, do you expect that to stabilize and see some improvement over the coming quarters?

[Derek Leathers:]

Yes. So it's a bit tough because right now, I think as COVID continues -- as vaccine rollout continues and as you start to see more and more comfort with people being in closer proximity, that should bode well for both teams as well as our leader program, where we bring in new drivers into the industry and they go out with a leader for a period of weeks, et cetera, and all other team like capacity formats that we have here, and we have quite a few different variations. Downside is, as the vaccine rolls out and everybody starts feeling more comfortable, you're going to see an increase in congestion, and you're going to start to see that seep back into transit times and the overall mile per hour. So I think it would be premature at this point for me to tell you which end of the rope wins that tug of war, and a better way to think about it is probably utilization fairly flat. The levers that matter right now are going to be rate and retention and driver hires more than most everything else, and so we've got to make sure and get the rate that's commensurate with the service we're providing. We've got to make sure and retain the quality drivers we have, and we've got to go out and attract new drivers to Werner as the employer of choice. And I think the setup again is very good on those three fronts, and now it's time to go execute.

[Operator:]

I'll now turn the call over to Mr. Derek Leathers, who will provide closing comments. Please go ahead.

[Derek Leathers:]

Yes. Thank you. So I just want to thank everybody for being with us again today. You've trusted us and been with us over this journey over the last several years. I think you've seen our consistent executing against the focus that we've had relative to quality above all else. It's translated clearly in recent quarters in -- to improved service. It's translated to a stronger driver base with more tenure with higher morale and a better seated truck count than many in our industry. Our associates have been stellar throughout the year, and I want to thank them once again. And all of that has led us to the results that we just talked about. Those are results that we expect around here. Those are results that we knew were attainable but only with that laser focus. And so it's a proud quarter for us. We're still in an ongoing evolution of our portfolio, but the goals behind it are to make us more cycle resistant than ever before. We're better positioned for the ups and downs of the trucking cycles that we're all too familiar with. We've generated four consecutive years of growing free cash flow, and we expect to continue that trend as we move forward. We're going to continue to grow with winners. So our alignment with winning customers, with winning management teams, with winning models is something that we're going to continue as we move forward. And all of that's leading to record earnings in 2020 during the middle of the pandemic, record fourth quarter earnings during the time of great uncertainty, both socially as well as on the health front. It's led to some record customer retention, and we're proud of how we acted during that fourth quarter to support our customers and the professionalism we tried to show them. I mentioned it earlier, and I'll close with this one more time. It's our 65th anniversary. We're celebrating our Founder, C.L. Werner. We're celebrating all that he's handed us as he has taken a step back and turned those keys over. But I'll tell you the story isn't over. We're only beginning to write the next chapters, and in fact, I think as we look forward, we're excited about the acceleration in front of us. So thanks for spending your time with us this afternoon, and thanks for believing in Werner.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.