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Supply Chain Disruption: Key Challenges and Opportunities

Markets Plus Research & Strategy Podcasts September 01, 2022
Markets Plus Research & Strategy Podcasts September 01, 2022

 

New look, same great content! We’re proud to launch Markets Plus, our new podcast, where leading BMO experts share a wealth of timely and relevant perspectives on factors shaping the markets, economy, industry sectors, and much more.

This episode is a timely discussion on the several factors affecting the fluidity and stability of the global supply chain in the current environment. Our experts, Derek Leathers, Chairman, President and CEO of Werner Enterprises; Phil Yeager, President and COO of Hub Group; and Jonathan Ahdoot, President of Hardware Technology Solutions at Hypertec Group, discussed how their companies are dealing with these challenges as well as the opportunities that lie ahead.

In this episode:

  • How the pandemic exposed the difference between companies with strong winning models versus those who had cracks around the edges

  • Why a labor shortage, particularly among truck drivers, has been a critical factor behind the current inefficiencies in the supply chain

  • How companies are using technology to improve efficiency in everything from container tracking to billing, as well as how they’re meeting ESG goals in areas such as emissions reduction and corporate transparency


Markets Plus is live on all major channels including Apple, Google and Spotify 

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Bill Thomson: Hi, I'm Bill Thomson, Managing Director and head of BMO's US Logistics, Rail and Shipping Group. We recently hosted a client panel to discuss the current state of the supply chain, along with the challenges and opportunities and how these points continue to evolve.

Our event was moderated by Fadi Chamoun, BMO Capital Markets, Transportation, Equity Analysts, and it featured a distinguish panelists, including Phil Yeager, President and Chief Operating Officer of Hub Group, Derek Leathers, Chairman, President, and CEO of Warner enterprises and Jonathan Ahdoot, President of Hardware Technology Solutions at Hypertec group.

The panel discussed how the supply chain has evolved since 2020, what are they addressing now? What are some of the biggest challenges facing transportation companies and shippers at this time, key growth opportunities and suggestions for how transportation companies and shippers can work together to successfully navigate the current environment.

In the first half of the discussion, the panel discussed how the supply chain has evolved since 2020, what are they addressing now? And what are some of the biggest challenges facing transportation companies and shippers at this time?

In the second half of the discussion, they covered key growth opportunities and offer suggestions on how transportation companies and shippers can work together to successfully navigate the current environment.

I hope you enjoy this lively discussion as we believe it will add value to your business.

[Panel Discussion]

Fadi Chamoun:  Good day everyone. Um, my name is Fadi Chamoun, Transportation Analyst for BMO Capital Markets. I'm honored to be hosting today's panel discussion on an important topic for most businesses. And that is the challenges being faced in navigating today's supply chain and how to prepare for the future.

There are a lot of factors affecting the fluidity and the stability of the supply chain and the current environment. Many of the factors will likely prove transitory, but they are still a challenge for businesses to navigate, through the immediate term. Nonetheless, we have seen the west coast imports thrive 11% in 2021 versus the pandemic levels, that was the largest gateway. Los Angeles, Long Beach port up 18% and, and LA, Long Beach represents 65% of west coast import--just to put that in context. Now consider that this is occurring at a time when we are dealing with pandemic related operating protocols, workers attempt [inaudible] them because of health issues, driving and school that have been closed for a while during the pandemic.

And so we have fewer drivers as a result of that. And, ultimately, while the active population is shrinking for a long list of other reasons, the driver population. So not only it is hard to grow the supply chain in line with the demand. These factors slow down the velocity of the supply chain, further reducing supply.

And that is really been the vicious cycle that the supply chain has been dealing with for the past two years. At the heart of it is really demand stimulated during the pandemic that tossed into the availability of supply and, and, um, uh, and, and you've got a really massive supply demand imbalance. Businesses have to deal with these issues and the resulting inflationary pressures.

With time the supply chain will normalize. And, hopefully things will get better as we move on from here, but there are also fundamental change taking place that will permanently affect supply chains, including, you know, the step change in e-commerce share of retail sales that is reshaping how we consume freight transportation, uh, the need to increase supply chain security and diversification and increased focusing on environmental footprint of the supply chain.

A lot to cover in one hour, obviously, our panelists, can offer significant insights into the current state of the supply chain and what will shape them going forward. Um, we have with us, Phil Yaeger. He's President and Chief Operating Officer of Hub Group.

We have with us also, Derek Leathers, Chairman and President of Werner enterprise and, Jonathan Ahdoot, President, of Hardware Technology Solutions and Hypertec Group. Thank you all for being with us today. But to start, why don't you all introduce yourself, Phil? Um, we'll kick it off with you in terms of the introduction.

Phil Yeager:  Great. Thanks. Thanks very much for having me and for the opportunity today. Uh, you know, obviously as a very important topic and, and looking forward to the discussion as you, as you had mentioned, you know, I'm Phil Yaeger. I'm the President and Chief Operating Officer of Hub Group. We are a leading third-party logistics company, uh, really focused on end to end supply chain solutions.

We're nearing about $6 billion in total revenue. Um, and since our founding by my grandparents in 1971, we've really focused on supporting our customers through great service and great people. We have almost 6,000 team members across north America. Now our largest offering is, is intermodal, uh, where, uh, we have over 55,000 containers, three and a half thousand drivers, uh, really focused on, on long haul truck and train transportation with a great service level.

And we are seeing some good signs of service improvement on, on the rails, which we hope is going to continue. Uh, we're also one of the top 10 largest brokerage operations in the United States, offering dry LTL reefer support for our customers, as well as the top three PL, really focusing on managed transportation.

[Inaudible] bulky final mile and warehousing and consolidation services. And what we try to do is bring all those solutions together and really a very seamless way for our customers that help them, you know, have a few less things to worry about in this pretty hectic environment. So, um, that's, uh, me and hub group, but really once again, really appreciate the opportunity, uh, to be here. Thank you.

Fadi Chamoun:  Awesome. Thanks Phil. A word from you, Derrick.

Derek Leathers:  Sure. Well, Fadi, thanks for having us, uh, as well. I'm Derek Leathers, um, chairman, president CEO of Warner enterprises. I've been in the industry for about 32 years. Um, been a Warner for 24 of those, um, a little bit about Warner, you know, we're north American transportation logistics company. Uh, also focused heavily on kind of the end-to-end supply chain across North America.

We divested from some of our international operations over the last 18 months, and it really focused on that North American footprint. We have about 14,000 associates across Canada, Mexico, and the U S. Um, we, uh, are a dedicated, focused organization, meaning a dedicated represents about 63% of our fleet and growing.

Um, we have a heavy retail footprint, so about 65% of what we do overall is retail oriented. Um, and it's something that, uh, we feel that we provide best in class service to that customer group. Uh, we also are a very large player with cross border Mexico by trailer crossings per day, and other metrics that we monitor, um, we believe we're the largest cross border operator into and out of Mexico today.

And, the third leg of our sort of three-legged stool, if you will, is in logistics. And so in the logistics business, uh, we're on our way toward a billion dollar logistics franchise, uh, should get there, um, you know, middle of next year, if not sooner. Inside of that logistics business is predominantly brokerage, um, with a heavy emphasis on our, only as that continues to be something of greater and greater interest to our customers.

You know, our mantra around here is, is really service focused, service oriented with safety above all else. I'm proud of the results our folks put up with all their hard work and diligence over the last several years. And especially during the pandemic. Thanks for having me.

Fadi Chamoun:  Thanks Derek. Um, Jonathan, you're actually a shipper that's navigating these complex supply chain issues. Now, can you tell us about Hypertec and the customers you serve and a quick description of your supply chain, maybe, uh, from where you source to, where you distribute your end product.

Jonathan Ahdoot:  Sure. And also thank you for having me for this call.

It's definitely a great opportunity to share with, uh, you know, great leaders on the call here as well with the Derek and Phil. So, as you said, yeah, we're, we're a tech company, right? We're a tech infrastructure company. Uh, we provide through multiple business units. We have a wide range of the cutting-edge infrastructure, technology products and services.

The business unit I run, which is hardware, technology solutions or HTS. We design build, deploy and support computer hardware with a primary focus on servers and storage devices. So basically, we would be a customer of Phil and Derek. When you think about how we actually distribute those products. Now our customers are a mix of industries, you know, talking cloud communication, financial services, media entertainment, healthcare, and public sector verticals.

We're talking about more than 3000 customers in more than 80 countries or 450 data centers. Because like I said, most of what we ship our servers and storage. Now where we source technologies, mainly sourced out of Asia. There's a lot that comes out of Asia, but we also source that in north America and Europe, that's really at the component level.

When you think of sub-component, you know, it's, you know, you're looking at different regions within Asia. So components typically come from China and Taiwan, the majority of where we source our components. But when you think of it, the sub-components that make up those components, those can also come from Japan and Singapore.

So, when you're thinking about that from a, you know, a supply chain and freight perspective, you see how it can get quite complex, where we're bringing things from Asia and then shipping it across the globe. So when you think of an end customer perspective, again, it's really across the globe, North America, AMEA, APAC, and Latin America.

But you know, the majority of our customer base, the majority of those 3000 customers are based out of the U S, which is our largest market. Thank you for having me.

Fadi Chamoun: Okay, thanks Jonathan. Um, let's kick it off with a few topics here. So, um, I talked earlier about the state of the supply chain and supply demand imbalance, and we are experiencing and really across air, sea and land modes across the board.

What have been some of the key challenges for you since the pandemic started? Phil, let's start with you first.

Phil Yeager: Yeah. Great. No, thank you. Um, you know, I would start with, I think, you know, our team has just done a phenomenal job stepping up for our customers, uh, throughout the pandemic. And, uh, you know, it's been amazing to see how we've all rallied around, uh, really making sure our customers are succeeding.

But I, as I think about challenges, you know, I think first and foremost was the whipsaw of, of demand, right? When you think about when the pandemic started and, uh, you know, the closures and really lack of demand that was out there, uh, to what has been really a, a multi-year sort of significant growth, uh, in shipping demand, uh, coming really close after that.

And I think what you saw was. Uh, a lot of customers really tightened the belt. A lot of companies in our industry really tightened, um, you know, and, and didn't necessarily invest to the level that was going to be required, uh, to, uh, support that demand that was coming back so quickly. And so, um, you know, we did our best to continue to grow, continue to invest.

I think we did a nice job there, but as an industry, we definitely were, uh, not, we didn't have the capacity available to support that demand. And I think for us, we want to make sure we're stepping up and supporting our customers and giving them realistic expectations as well, because we don't want to over commit.

And make sure that there's so we can make sure they're set up for success. Um, you know, the second thing, and I'm sure everybody has, has struggled with this as is, uh, hiring. Right. And, uh, you know, I think for us both on our drivers, but, uh, you know, in our office staff as well, and in warehouses, um, it's been a very competitive, uh, hiring sort of time.

And, uh, and I think we've done well once again, being able to continue to add drivers, continue to grow our team of associates, but, uh, it has certainly been competitive and something we've had to get creative in our, uh, processes to make sure that we're bringing in the right people that fit our culture and, you know, but also being able to support the growth that's coming at us.

So, um, if I, if I look at those two, you know, those, those would probably be the biggest ones that stand out. But, uh, uh, you know, there's, there's certainly others that are out there, but all in all feel very, very strongly that we did a great job, you know, kind of managing through this and supporting our clients.

Fadi Chamoun: Great, thanks. Werner has also had a, obviously firsthand look at domestic shipping and you're heavily involved in that. Can you talk to us also about some of what you're seeing on your end, Derek?

Derek Leathers:  Sure, to be frank, it might be easier to talk about what hasn't changed since 2020 than what all has changed, just because it feels already indicated.

I mean, we've been through, um, you know, a very, um, strong whipsaw of, uh, demand to supply inflection. Um, I don't want to repeat what he's already covered. I think he did a well, um, I do, I will double down on some of the labor availability issues, both on driver, but across really the entire spectrum. I think one thing that that's played into that we've seen since 2020 that's in pristine is a time of in a time of very tight capacity and in a time when there was a lot of struggles, uh, for shippers to find, uh, the available capacity they needed. Um, I think it's important to note that we've seen an increase in inefficiencies at shippers and receivers really across the nation. Uh, I think it's driven by the same labor challenges. So not pointing fingers here.

It's just a reality that turn times well-times turn times have increased if you will, across both container and trailer, uh, throughout north America. And I think that's a way that we all can collectively find greater efficiencies as we try to get back to normalized operations with shippers and receivers. There’s been significant disruptions over the last couple of years both the availability and in the reliability. I would argue of new equipment as well as parts. And so we were in the business of, uh, you know, moving freight and it, it is still mechanical machines that do that every day. And, uh, the availability of that equipment has been disrupted at levels I've never seen before, especially for this extended period of time. And then that affects uptime and, and that affects reliability of the supply chain.

We’ve seen a further widening of the gap between what I would call winning customers and maybe those that are struggling within their own business models. Uh, I think the pandemic really exposed, um, the differences between strong winning models with winning management teams, as compared to those businesses that may have already had some cracks around the edges, uh, prior to the pandemic, those, cracks were further exposed.

And then the last thing is just, uh, at a time that all of this disruption was going on, I think all of us had been faced with the, the need to, and certainly our desire to continue to invest in tech at a rate that that also is sort of unprecedented.

And so that tech arms race continues and will continue. I think for the next several years, as, as every organization tries to find its sort of true north relative to giving customers, um, you know, not just what they expect, but really exceeding those expectations in terms of transparency, tracking and, and optimization of their network.

Fadi Chamoun: Great. Thanks for that Derek.

Jonathan, um, you can probably bring a little bit of an international kind of angle to this, but what has been kind of some of the key challenges you've seen on your end?

Jonathan Ahdoot:  It's been, it's been a roller coaster. I think, you know, echoing with the, with, with Phil and Derek said, I mean, you know, for us in the tech industry, we're used to seeing shortages, right?

This is not the first shortage of supply chain constraint we've seen in the tech industry. You know, there's always going to be a single component or raw material shortages that happen like pretty much on a regular basis and the IC and semiconductor world, I think a major difference with COVID with the sheer quantity of different components and raw materials that supply constraints combined with the factors were mentioned before [inaudible] and labor, right?

Those are the things that really made it. Uh, well, we all kind of agree as the largest and worst supply chain issue in the history of the tech infrastructure industry. Uh, it's kind of a, an interesting evolution that, that occurred 2020 when COVID started, you know, I think it's what happened, why the tech industry was disrupted was a totally different reason than why was disrupt in 21 or 22. 2020 was a sudden spike in demand for IT infrastructure to support the massive migration to remote working, right? Remote working, you know, kind of got turned on in a major way overnight, right?

And that led to a massive kind of a, you know, supply chain constraints for those components. If you tried to find a laptop in April of 2020 and good luck, right, it wasn't happening. So combine us with factory shutdown. So obviously everyone was, was not knowing what COVID was, was going to happen with COVID across the globe.

And so the factories are being shut down. Freight was being delayed by labor shortages, COVID related absenteeism and labor strikes. And finally, in natural disasters, I think we forget how many natural disasters occurred in the last few years. It really created this perfect storm of issues and the tech industry in 2020.

Though this did lead to a pretty mass, big disruption in the global supply chain. As you know, Hypertec didn't get impacted too much. We did incur higher cost and labor and freight, but we had already kind of prepared us. So we were a little more ready for 2020, then let's just say the future years. So it didn't impact our ability to deliver so much in 2020.

I do. I do definitely, uh, you know, applaud our team. They did a great job managing this, but 2020 wasn’t bad really, when you think of 21 and 22 is when it really started getting bad for the tech industry in Hypertec. I think that, uh, when you look at 2021 is a toll new factor that kind of, uh, introduce itself to new demand drivers surprise the markets.

One is you have the economic recovery and resulting increased demand. So you saw this increase the man out of nowhere for, for semiconductors and other sub-components. Then, uh, another one that we were not a thing we, as the industry, the growing transition from just-in-time inventory positions that most customers were taking pre COVID.

The customer customers now favoring the hoarding of inventory to avoid being, being stuck in a position we don't have enough, which led to artificial demand peaks. We had like a, you know, demand coming from not necessarily real demand. They're kind of placing orders just in case to protect themselves from another issue.

And that just created more shortages across the supply chain. And when I say supply chain, we're talking, you know, the, the main manufacturers and fabs in Asia, when you look at freight, you know, when you saw this increase in demand, you know, the more North American port infrastructure was not adequate to meet the needs of these new high shipping volumes as to continue labor shortages and the backlog of vessels burning off the west coast and general container availability.

We're seeing greater supply chain disruptions in 21, over 2020, and where that started impacting us was growing backlog customer orders. We started seeing customer orders come in, but not going out, right? Because we had specific gating of sub-components. 2022 though, early 2022, you know, showed signs of improvement on the availability of raw materials for key components, uh, as well as improved freight rates.

I think we saw an improvement of freight rates in January, 2022. I recall this specifically, there's several new factors that made it worse. You saw the, obviously the rush of Ukraine war started in February. And then probably a single biggest event that affected us in the tech industry is the China, you know, the China, you know, kind of pandemic approach, which was, you know, the zero COVID policy, which is ongoing by the way in China, where they, you know, just close a bunch of factories.

So a lot of our components and sub-components were just simply not available anymore or not accessible. So you had those factors that kind of extended the issue of not being able to fulfill customer orders and, you know, don't, we're seeing encouraging signs, uh, for those constraint component categories, it was certainly painful. Uh, and I can say that that was really how it kind of played out during the pandemic for us.

Fadi Chamoun: Thanks guys for these answers. I want it to take this conversation kind of on the demand side. Uh, you know, we're seeing macro economic data to kind of moderate a little bit, obviously, uh, we're all watching the same things. Um, we're also seeing consumer beginning to shift spending a little bit more towards services, some goods following the pandemic. Uh, we have also seen several e-commerce companies and parcel shipping companies, um, seeing, you know, moderating volume, even declining on your volume.

And we have a hydro reserve that is really determined on flowing demand to control inflation, all signs of slowing demand ahead. Maybe you can kind of give us some insight into, um, what are you seeing on the demand side from your customers. Phil starting with you, you have a lot of, uh, exposure or customers in the consumer space. What do you have been seeing on, on the demand side and how do you see things going in to the next six to 12 months?

Phil Yeager: Great. Yeah, no. And, and, um, you know, we're, we're about 45% retail, ecommerce, call it 30%, consumer products. So certainly have a heavy weighting towards the consumer. And, you know, to be honest, that we have seen a really, uh, strong continuation of demand in particular in the ports, both east and west.

I think we're going to continue to see that through the remainder of this year, uh, you know, consumer continues to be, you know, in our view, you know, relatively strong with still high savings rates and, um, you know, although inventories have increased as you heard from target and from others, you know, still there it's, it's some of the wrong inventory.

And so that will need to be replenished to make sure that they have the right things in the store and in their e-commerce network to support demand. I think you throw in the reopening of China off of code COVID lockdowns, uh, you know, you throw in a port negotiation in, LA long beach, we think congestion will still be there.

Our largest business intermodal is still seeing a ton of demand, um, mostly in longer haul lanes, as in particular with the higher fuel prices, um, that we're seeing out there. Uh, intermodal is just a much more fuel, efficient way of moving goods. And so there's a lot of savings associated with that, but we're also seeing customers want to lock in, uh, with partners to guarantee capacity.

And, uh, I think that is going to continue as well given the last couple of years of disruption. Now, I completely agree there certainly storm clouds, you know, as you look beyond 2022 potentially, um, you know, with, with interest rates and, and, uh, inventory is getting higher. At the same time in the near term, we're feeling very confident that it's going to be, you know, continue to be a strong demand environment for the remainder of the year.

Fadi Chamoun:  Thanks Phil. How about things on your end Derek? I mean freight segment's doing differently than other [inaudible].

Derek Leathers:  Yeah, sure. Um, and when we think about segments, um, you know, I'll start with this. I think, uh, you know, when we live in a world where somebody sees report to about a few retailers that maybe missed their numbers or struggled to be where they thought they'd be at this point in the cycle. And we tend to cast a wide net with how we interpret that and think that that means retail overall is struggling or that the consumer has stopped engaging. Um, we don't see that, that way in our network. And so within our network, you know, we were heavy in the discount retail space.

And so as these inflationary pressures rise, we see more and more people, uh, kind of trading down into discount retail, or cheaper alternatives. Uh, and that we think that bodes well for demand overall with those winning kind of models that do well in these environments. Home improvement has stayed very strong through the pandemic and stays strong still today and looks and has pretty bullish outlooks as they look forward.

Others that maybe, uh, I think are really suffering from a temporary issue, uh, like food and beverage has been off a little a year to date. And I think it's driven by frankly cooler temps and, uh, and, and worse weather. Uh, we've done some pretty exhaustive work on the overall weather trends year over year, and I'll kind of nationally and, um, found some interesting, you know, kind of anecdotal information, but you know, where, you know, the, the amount of increased just bad days, so heavily windy days or overcast or cooler days has really impacted things like food and beverage.

But as soon as things now are heating up, no pun intended, um, they are, they're seeing those, uh, those, uh, consumers come back. Uh, clearly durable goods are showing some signs of weakness overall, but I think to be fair, it's hard to separate what part of that is due to inflationary pressures or budgetary constraints.

And what part of it is that people are just tired of waiting eight months for a washer or dryer or sofa. And I think there comes a point where people are just not able to make those kinds of decisions and then wait around eight months to receive it. So they'll instead repair the one they have. And so I think there's a little bit of white noise in some of the data, but overall, uh, you know, I'm more Phil’s at. We still see a consumer that is engaged and although inflation is clearly going to provide pressure on their ability to spend over time, it sort of gets overlooked at how dramatically the financial health of the average us consumer improved during COVID. Savings rates are up considerably overall debt load is down considerably, although uptick recently still below pre pandemic levels. And so we have competence with consumer will stay more engaged than maybe the media gives them credit for.

Our outlook for the remainder of the year is similar to Phil's. We still think and see our network being pretty, pretty robust right now and prayed bookings, uh, remaining strong.

Fadi Chamoun: Great feedback. Thank you. I want to shift to labor situation, you know, it’s a challenge I think you all mentioned at the beginning of this call.

So, the market still feels very tight right now, but truck hiring has somewhat picked up in recent months and employment, has also improved. Um, so the industry seems to have kind of seen, uh, some improvement on that front over the last few months. Maybe starting with you, Derek, what has Werner had been doing to attract and retain drivers then what the situation is like on the labor front?

Derek Leathers: Sure it has certainly been one of the roughest labor markets I've ever been a part of over the last two years. And you're right. There are some statistics that would point towards some easing over the last couple months. I would argue if you dig deeper into those statistics, though, what you find is a significant increase in what I'd call straight truck, local truck Dre, truck, um, and, and like home delivery in a van and or straight truck, and a much lesser increase in actually still lower than pre pandemic levels in that over the road truck driver type of role.

So tightness is still out there in that space and I think will remain, uh, what are we doing? I mean, we're focusing on giving our drivers the highest quality equipment we possibly can, making sure our pay is competitive. Um, but I'd tell you that our, our biggest focus is probably on lifestyle, really leaning into meeting drivers where they're at in terms of where their desires are and trying to build a lifestyle that is not like that, which is often reported on.

You know, it's always interesting to me that when you you'll see articles from time to time saying. No, there's no driver shortage. There's just a pay problem or a lifestyle problem. And then they quote statistics that are three to four years old, at least, and sometimes older than that. And so they talk about average driver wages at $45,000.

Well, that job doesn't exist and nobody's found $45,000 to a driver today. Um, they talk about drivers being out three weeks at a time. And that job is, is very rarefied era. Yes, it exists, but it's not the common job that any trucker's hiring for today. Uh, so lifestyle customization has been an industry focus.

It's certainly going to focus at Warner. Uh, we spent a lot of time expanding our training programs and the training as predicted.

We've spent a lot of time expanding our training programs and training is specifically always focused on safety. And so we haven't shortened any of that focus, but we've expanded what training means now here a great deal to include a lot of sort of life on the road training, lifestyle support, lifestyle training that's been, uh, I think beneficial.

And then our vertically integrated school network is a huge part of our long-term strategy. We operate the largest school network in America. We have absolute confidence that those drivers graduate better prepared with, with better skills than drivers that we may source from other, um, methods. So we’re very bullish on our ability to continue to produce a more and more polished driver over time coming out of that school network.

And then the last piece is, uh, uh, just leaning into the strengths of Warner as it relates to some of the creative alliances we built over time. So, you know, we're fast approaching one in four of our drivers being former military and our relationships we built with the department of defense and with military bases across the country have served us well.

We have over doubled the national average of female drivers in our fleet, and we've really been able to produce a product that, that female drivers find driving for Warner to be comfortable and, and, and rewarding work. And so I think that number will actually probably increase over time. Uh, you put all that together and you really, what it allows you to do is kind of old serve nobody's growing by leaps and bounds right now with organically, at least with their truck [inaudible].

And, most fleets are actually still down pre pandemic to present, uh, at least over the larger points because that's held up this qualified driver market has become, uh, there's a lot of folks holding CDLs, but they're not necessarily employable in the industry based on driving records or, or criminal convictions or other things in their backgrounds.

And so those are things that we'll just keep navigating and trying to win. And, uh, we've been able to grow some organically, uh, which has been pretty rare if you look across the competitive landscape.

Fadi Chamoun: Great. Thanks Derek. Phil, how about Hub? I mean, you have probably, you know, a lot of kind of traders, local deliveries, kind of traffic in your network. How has the driver’s situation been for you?

Phil Yeager:  Yeah. Um, you know, it's certainly been, uh, challenging just like everybody else has, uh, has experienced, you know, um, we have been adding drivers so far this year on a weekly basis and seeing some good trends there, but I think, you know, it's really starting with a competitive pay.

We moved our, our pay up in, in several markets, 20 to 30%. Um, some even more than that, um, over the past several months, Uh, that you have to, I think that's table stakes at this point, you obviously need to be competitive from that perspective. Um, beyond that you mentioned our, our business is typically shorter haul.

Um, our drivers are home most nights, pretty much every night. Um, and we're also trying to position with them the career trajectory that they could have into roles, uh, in management at the organization by, uh, you know, being with us for several years and showing their commitment and understanding the operations, but also being a leader within our fleets and terminals.

Um, you know, we also are really highlighting the age of our fleet. Uh, we've invested significantly gotten by the end of the year we’ll be down to about a 2.3, uh, average age in our fleet, uh, at the end of this year. So, you know, one of the newer fleets in our industry, and we think that really benefits our drivers with great safety technology, but also just a really nice drive as well, fewer M&R issues and, uh, and really helps to, uh, make sure they're having that strong quality of life.

You know, I think along the, those other lines, you know, we've been trying to do the same things around making sure our training is expedited, but also very effective that we have great benefits, uh, for our drivers, that they see that career path, that they're a part of our team. But also, just operationally making sure we're planning them that they're, that they're able to make the wage that they should.

And that our customers are supported at supporting us in moving our drivers along as well. I think that's been a great, uh, discussion we've had with a lot of our clients is how do we make sure that our drivers are being optimally utilized? Um, whether it's running shuttles, whether it's moving more to a drop and hook sort of program, uh, all those things help make our drivers more fluid.

Getting rid of, uh, you know, big chunks of paperwork that we need to bring when we're making a delivery and moving that to more of a automated tablet, uh, and an email driven workflow, all those things help our drivers be faster, more nimble, uh, and have a more productive day, which makes them want to stay with Hub, uh, for the long-term.

So, you know, it is, uh, it is a challenging problem. There's a lot of nuances and a lot of effort being put behind it. I also believe, you know, like Derek mentioned, it is an industry problem that we need to solve over, over the long-term. But, you know, I think companies like Werner and Hub, or trying to do the right things to, to attract and retain those drivers.

Fadi Chamoun:  Okay. I want to stay with you a little bit more Phil on the intermodal side. I mean, we're seeing those labor, um, challenges for railroad partners of yours. They're having a tough time adding train crews. How is that impacting your intermodal solution on the service side and on the capacity side? And do you see things getting better from this point or is it still very challenging?

Phil Yeager:  Well, it almost has to get better from this point to, to be honest. Uh, I think we, we hit a floor, um, you know, and I've seen us, um, really stay stable in the service that our, our real providers are giving us. Now, our transits are still very elongated, which is leading to a slower turn time of our equipment.

That takes capacity out of the network. Um, most of that is rail delays, but we obviously can be better on the street. Our customers can help us turn our capacity faster. So we're really focusing on the things that we can control. Um, but you know, it has been a challenging environment. We are seeing hopefully signs of recovery in the hiring side, which will lead to a better service product.

We have elongated our transits to our customers, which, you know, once again, uh, is, is going to slow down our network, but allows us to give a higher assurance on our on-time performance. So we have seen actually on our raw on-time performance to our customers, a significant improvement on a year, over year basis.

But most of that is driven really by, uh, going to our customers and giving more realistic transits, which, you know, in a, in an environment where, uh, Inventories or more replenished that's more acceptable and palatable from a, from a supply chain perspective versus where we've been as of late, um, with inventories in recovery, uh, the need for a faster transit was, was much higher, so that we think is going to be another piece that continues to drive intermodal conversion.

Even if we are running a little bit slower is the fuel costs as well as not as much of a need to expedite all of the deliveries into, uh, into their networks. So, um, for us, you know, continuing to see a ton of demand, um, as, as I mentioned in particular in the ports and what we are, we're seeing some really nice signs of improvement in the east. We need to see some more in the west, but, uh, at least stable, uh, at this point in time.

Fadi Chamoun:  Okay. Thanks Phil. Um, the Jonathan, I'm trying to bring you in here on this topic, obviously Hypertec is impacted both directly and indirectly by some these challenges that Phil and Derek talked about of labor. Are there other labor vulnerabilities you're seeing in the supply chain and how are you minimizing the disruptions? Any feedback you can provide to us?

Jonathan Ahdoot: Yeah. So I think you got it right. You know, it's indirect and direct, right? So you have the indirect external, which has all the factors we mentioned before, uh, you know, with the, the vendor, you know, our manufacturers or vendors having labor shortages driven mostly by COVID related to factory closures.

Then obviously all the freight elements that Derrick and Phil have been covering. When you think of direct internal labor though, like, you know, people have worked for Hypertec, uh, you know, we did have obviously periods of higher than normal absenteeism led by strict, uh, you know, COVID related protocols throughout the pandemic.

I can say, you know, similar to what everyone else is saying. The most impactful issue has been, you know, really a lack of availability of skilled workers, right? Uh, we're seeing this, you know, it's, it's something that's, it's a phenomenon that's played out in a way that I don't think many of us expected.

And it is kind of an acceleration of, you know, more people retiring, uh, less access to skilled workers in general. And, you know, we're seeing this happening in few key departments in our group talking about engineering, manufacturing, warehouse workers, we've had, we've had a lot of trouble kind of, you know, finding the right type of skilled workers. Clearly, the kind of growth of e-commerce and everything that's going on around that.

What I'm thinking eCommerce, I'm talking about really, you know, Amazon and other and other companies like that has also created some pressure for some of those jobs as well, because we do have similar roles within our organization. Now, even if that has been the largest factor, uh, we've done many investments to kind of minimize the issues and the impact of those, uh, of that labor shortage.

You know, when you think about, you know, what we had to do to kind of deal with it, uh, you know, we actually looked at investing heavily in training and development. I think helping current employees and new employees grow within the organization is definitely been very beneficial and helpful in being able to mitigate this, uh, investment and employee engagement.

So there's many different initiatives that our HR team has done to kind of make the experience at Hypertech better. And we feel that that has, has helped retention. There's paid benefits. There's no doubt that the market did see, uh, you know, an impact there. And in some cases, pretty substantial on what that looks like from a benchmark perspective.

Then when we talk about inflation, that's all kind of tied to it. Uh, we did invest also in infrastructure automation. So, oftentimes, doing some of the work we do is manual, right? So in the work we do in manufacturing space is manual and the more we can automate it, make it more pleasant to do, make it safer, uh, that has helped with retention and satisfaction.

We've also restructured our organization. You know, I think, you know, this labor market issue, I don't think is going away. I think it is going to be continued issue to deal with. And, you know, I think companies need to be creative in the way they approach it. Right. Uh, you know, I think, uh, you know, Phil and Derek mentioned some really creative ways in the way they're dealing with it, the way we've done it is that we've kind of decentralized some of the critical functions to diversify, you know, where we actually need those skilled labor people.

So, you know, oftentimes when you see a labor shortage, you know, some markets are affected more than others. So it's really a matter of kind of not putting all the eggs in the same basket and decentralizing, you know, where those critical functions need to operate. So that's something we've enabled.

We actually enabled that in 21, and we've seen a lot of benefits from that implementation. So what we've noticed with all this is actually increased employee satisfaction, despite all that cloud of COVID, that's been over their heads. Our attention rates have gone up and we've minimized labor disruptions.

That's really the key, but that probably most importantly is driven efficiency. In years where it's been difficult to really bill and invoice customers, given the supply chain constraints, efficiency was key. And we actually saw efficiency at the labor side, despite the higher wages and everything. So I think that that's definitely been a success, uh, on the side of Hypertec.

Fadi Chamoun:  Good. Thanks Jonathan. Shifting over to inflation, you know I mentioned earlier pay inflation in the order of 30%. And obviously there are other things that are also inflating within the cost structure, uh, you know, fuel and others, obviously.

Can we discuss what you're seeing on that front, and the ability to pass these inflationary cost pressures to the consumer down the line. Um, you know, obviously with demand moderating, I think there's a little bit of risk here that, you know, the pricing, um, you know, moderate, probably the worst time when the inflation remains a little bit too high, uh, starting off with you, Derek.

You know, like I said, a lot of factors that feed into the rising costs, labor and fuel, and other, how are you trying to minimize those increases? And how much of that increase are you or your customers able to absorb?

Derek Leathers:  Yeah, sure. Um, you know, as far as how we try to minimize them, obviously like we'll, I'll take them one at a time, but on the fuel side, you know, we're doing everything we can to lower environmental footprint, increase our MPG. Um, make sure we're running as lean as we can and fill as many empty miles as we possibly can.

So that at a minimum, you know, as we think about that, that line and the P and L it's it's the vast majority of every mile driven needs to be revenue producing. And so, um, you know, we'll said at any given time on our one-way network and, you know, call it low double digits of empty miles in total.

And when you think about a shrinking length of haul, that increasingly is sub 500 miles. If you've got less than 10 or around 10 to 12% empty miles, you know, you were already highly efficient. You're essentially going from one side of a city to another side of the city, uh, to pick up that next load more often than not.

So a lot of focus there, a lot of focus on, uh, dedicated back hauls and making sure that we do everything we can to increase the revenue, share opportunities for our customers to lower their overall spend. But there are inflationary items up and down the P and L. I mean, labor and fuel are the two big ones.

You've already spoken about those, but equipment's not getting any cheaper and parts availability, um, is, is very disruptive. And so what happens is people do what people do including us, which is they go out and try to secure greater availabilities and deploy more inventory across their network to make sure that they can impact uptime and lower overall operational costs.

But that comes at the expense of higher procurement cost of those parts. Um, the increased focus on lifestyle across the industry, I think is one thing that's been very much overlooked in terms of how much productivity has taken out. The publicly traded carrier group on average is down 12% in productivity from before the pandemic till present.

And many carriers are down, you know, mid double digits. Um, and there's many things that are involved in that, you know, the uptime issue because of parts about. You already talked about the congestion on the highways as people are returned to normal lives, but honestly, the largest single piece of that is, is design it's engineering more lifestyle into the job and getting people home more often, and that does raise your overall cost per mile. But if you don't do it, you're not going to have this tractor seated to begin with and there's going to be a bigger issue. Um, the last one I I'd probably point to is, you know, the ongoing pressure on the insurance and claims line carriers like Warner and Hub and others are making tremendous progress in the frequency of accidents and even greater progress on the severity of accidents

And haven't done so for many years. Um, and yet, uh, the cost of insurance continues to rise regardless because of nuclear verdicts and these outlier type, uh, outcomes that happen in, in the courtroom. And I think, uh, it's, uh, not all, all that well understood that when some of these verdicts go as nuclear as they do and ends up in the cost of goods, uh, because it has to end up somewhere and it's, it's not free money.

We've got to continue to focus on a safer and safer future. Um, but there's always still going to be these days where decisions are made inside of a courtroom that are very hard to follow or understand in terms of the, the awards that are, that are coming out of those, uh, courtrooms at times.

That’s an inflationary pressure as far as how the customers support us. I think they're very supportive. Um, uh, the, the real linear, um, uh, items like driver pay. They understand that in order to see the truck, we have to pay more in order to pay more. We have to receive more. And so the beauty of our model is that with 63, 64% of our fleet and dedicated, you know, we're making that decision jointly with them.

You know, we need to pay this fleet more money. Here's why. And what do you, how do you feel about it? And then what else can we do to improve lifestyle outside of pay so that we may not have to pay as much, but, but the drivers are actually more satisfied. And so we're doing everything we can, you know, in a, in a, and I think on the domestic front, at least it, although rates have been up and there's, there's no doubt that there has been inflationary pressure on rates.

It pales by comparison to what's happened with rates, um, you know, in the ocean networks and other places, you're not, you're not seeing, uh, domestic truckload rates go from $2,500 to 20,000, but you do see that in certain ocean rates. And so our argument to make is a little easier path when we're really having a rational discussion with our customer about needing their support to be able to continue to support them.

Fadi Chamoun:  Absolutely. Absolutely. Thanks Derek. Jonathan, I guess from your end, how are you dealing with these inflation cost issues that you're seeing on the supply chain side, but also perhaps across your P and L as well.

Jonathan Ahdoot:  So I think for us, I mean, you know, since the business was founded nearly 40 years ago, I think we we've really pride ourselves on building relationships with our customers based on trust and with our customers, knowing that regardless of the market conditions, we'll always price our products and service competitively, right.

And at any price increases we pass on will be justified and reasonable. I think it seems obvious, but unfortunately we live in an industry where some companies will take advantage of situations like this and see these opportunities to drive higher margins because, you know, tech is critical to the customer's infrastructure, right?

So, you know, you're in a leveraged position sometimes when they can't find it elsewhere. Right. And that's something that we really pride ourselves on, really making sure that we, you know, whatever price increases we have, we're very transparent about them and, you know, and we justify them. So they understand what they are.

So that's definitely contributed heavily in our ability to recover these costs. Right. And consider that these costs, the main drivers are raw materials. Uh, you know, you're talking about freight, you're talking about direct labor so that, you know, they're pretty easy to quantify, right. So, you know, we've had a, not so hard of a time, you know, claiming that back.

That being said, we've seen some exposure, more related to increases in support for filling costs. So when we, after we ship out a system, let's say breaks, we do need to go and fix it. So usually you, you factor in your warranty costs at the start of the, at the start of the period when you actually sell the gear. you can't adjust that on the fly. You know, you incur thos costs and obviously all the costs related to admin and overhead, which is driven primarily by freight and wage increases. So I think that has really been the cost have been difficult to mitigate because though we end up adjusting our price, which again, justifiable and reasonable, uh, you can't predict how these costs are going to trend ahead of time.

It's very difficult to predict exactly how they're going to increase. So a lot of times there's adjustments are only done prospectively, right? So we do get impacted in the short term in those instances. So. Really given that approach for our customer matters. I can't say that this has been a major issue.

Obviously we do see short-term impact from the P and L, which is kind of expected, but in the long run, I think that the, you know, I don't see any concern for the inflation, how it affects our ability to charge our customers.

Fadi Chamoun:  Great. Thanks. I want to shift over quickly to technology and how you're using technology to improve the supply chain, improve service. We can start out with you Jonathan.   How is Hypertec using technology and innovating to improve the supply chain?

Jonathan Ahdoot: So innovation is definitely a key value here, Hypertec right? It's always been the heart of our business. And when we think of innovation, I think a lot of us think of some new technology or some new, uh, you know, kind of something as fancy and nice, but, you know, it's, it's across the board. It could be a process-related matter.

It could be the way we approach supply chain, you know, in every aspect of our business, we really try to adopt the innovative approach when the supply chain issue hit us in 2020. Right. Uh, you know, due to COVID, we're able to leverage some of the key strategies, you know, in regards to our supply chain, be a redundancy or our global reach that really helped us counter the effects of the shortages.

Now that really helped us get through 2020. And we understood quickly that as the, as the market kind of shifted, we needed to pivot to be able to deal with the headwinds are coming up in 21. And then again in 22, uh, so the way we kind of approached it is that, you know, it's really kind of pivoting for expanding our global vendor base. So that was key. And when I say expanding, our global vendor base is not only the direct vendors, also their vendors. So the sub-component vendors as well. That's something we do that others do not do where we really start sourcing the sub-components for our actual vendors.

We increase our inventory retention strategies and we're a manufacturer. So, you know, really buying ahead of time. Key inventory is really the key to kind of help, uh, alleviate some of the supply chain issues. Uh, and we also expanded our authorized vendor list. So, you know, when a customer is buying, we've been promoting, obviously we've always been promoting, having multiple sources for every component, but we kind of went on that whole initiative, uh, kind of went on steroids.

We took it to a different degree where we really sat down with each customer and really proposed all these different vendors that can work with to kind of limit the impact of the supply chain. Now, from a technology perspective, though, we did implement additional automation tools, saw improve process really around our supplier CRM.

Our focus has been more lean, more on the innovation of our products. So we actually changed the way we develop products so that we select components. They're even more common. Obviously, always making sure we have multiple sources for each component and also reduce our dependency on, you know, oversee vendors, overseas vendors.

That was really one of the biggest things we did. And it actually not only led to better access to components, but also increased sustainability in the sense that we had reduced carbon footprint by reducing the amount of things that need to be shipped across the ocean. Now, overall, I've been very satisfied with what our team was able to accomplish.

You know, these approaches will help us significantly mitigate market conditions, such that we're actually achieving industry leading shipping to booking ratios. That's a key metric in our industry right now, given that, you know, there are certain components that you just can't get, you know, seeing how much booking you're getting, how many bookings you're getting versus how much you're actually delivering.

We're really leading the pack in that regard. And we're actually outperforming some of the largest players by more than 50%. So I think we've done a great job, kind of managing a lot of what's been going on and using our innovation as a way of doing it.

Fadi Chamoun: Great. That's fantastic. Phil, how is Hub using technology?

Phil Yeager:  Yeah. So, uh, you know, we talk about it. Hub is innovating with purpose, so making sure that there's, uh, an application or return, um, you know, on the investment that we're making in technology, um, Shiny objects. You know, we, we certainly want to be pushing technology on the edge, but we also want to make sure that we're, we're being practical and thoughtful in what we're doing and make sure that it's going to bring value for our key stakeholders of, you know, our customers, our team members, our vendors.

Um, so, you know, I'll give you some examples of things that we're doing, but, you know, we've had satellite tracking in our fleet, uh, of 55,000 containers for several years now. And, uh, we're really focusing on leveraging that technology, using it, to make our drivers more efficient when they're in a rail ramp, showing them exactly on a satellite image where the container is that they're looking for.

And if that one's not available, actually giving them an alternative to go grab while they're in the ramp. So they're not having to sit around and wait, um, really making them more efficient. Uh, we've also used that to automate billing with our customers by geo-fencing their facilities and showing them the load and unload times.

And when we're entering a facility to automate that billing process, take one more step out of the chain. One more thing where they don't have to have a, a person walking around doing a yard check of how many hub containers do I have today, really not utilizing a person to their optimal, uh, sort of, uh, contribution.

I'd say along with that, we've set up fast passes with our, our rail partners to get our drivers in and out faster. We've used our tablets to take paperwork out with our customers and have versus a, uh, paper BOL, um, you know, other across our teams and all, all, all of our office associates we've implemented, you know, RPAs to help take out the multiple touches.

We need to do re-entering information into a customer website or, uh, you know, being on a load board and manually bidding. Put APIs in place to automate that bidding process. So for us, it's all about that, um, incremental improvements that are going make us more efficient, make our team more efficient, make our customers better, uh, and be the easiest to do business with.

And, and probably the biggest investment that we've made in the last several years along with integrating all of our ERPs and getting onto a single operating platform is our customer facing technology. And we really think that we're best in class there. And that's why we've seen the outsource logistics portion of our business grow so phenomenally is customers feel as though, even though they've outsourced their logistics to Hub, they also feel as though they have that control and information on a day-to-day basis, that they require to still feel confident in that. So, so really, uh, you know, focusing on those practical applications and around the, uh, team experience.

Fadi Chamoun:  Okay, thanks Phil. So Derek onto you. What are the technology levers you're using on processors in your company?

Derek Leathers:  Yeah. So here at Warner it's a lot of it is going to sound redundant because it's very similar to what Phil just talked about, but it's about making sure we stay on the leading edge, but not the bleeding edge, making sure that we stay away from the shiny objects as he referenced. Uh, there's a lot of desire always to make life easier internally, but we always try to focus on making sure that we do that, but with an eye toward our customer. We need to make the customer's ability to interact with us easier and easier over time. We're obviously looking at a lot of lean principles around here and trying to eliminate unnecessary steps and processes wherever we can, and then further and take that next step and then automate everything that's able to be automated so that we can really kind of move people's roles up the value chain in the more productive things where all that experience and knowledge that they bring to the role is actually able to be utilized versus doing kind of redundant, repetitive tasks.

We have recently announced investments in both mastery from a underline, a TMS perspective and an, and we're kind of jointly developing, uh, that that's the structure of that software, uh, with them, um, as well as, uh, you know, staying very close to all of the different players across the autonomous sphere. Um, and in particular, you know, making an actual financial investment with two simple and sitting on the advisory board and having some ownership stake with embark and others.

We continue to look, um, from an advisory perspective to stay as close to that. And the development of really, I think what will mostly be driver assist for the foreseeable future, but improved safety technology and improved lifestyle technologies for our drivers. Um, from a, if you pull back a little bit and just think about it philosophically, what we're really going to try to focus on as we go forward on our roadmap is making sure we build things that we think our secret sauce, things that maybe increase our ability to optimize.

And make our customers freight network, school networks, more efficient, but then buy things that are more, uh, rudimentary or foundational, um, um, maybe less, uh, sexy in nature, but, but need to be highly efficient. And, and so we're taking kind of a hybrid strategy, uh, as we bring all of our various divisions on the one platform we're in the call it early to middle innings of that endeavor.

And that roadmap is still probably two to three years of runway before we see all of the benefits, but at a, at a sea level, measurements of productivity, continue to increase efficiencies, continue to increase across the sort of brokerage, intermodal logistics overall, as well as our asset business. Uh, and then the last thing is, is using technology to better.

Utilize these increasingly expensive assets that play a role in everything we do. Um, and so we're able to do more asset sharing across, you know, dedicated one way and logistics, uh, which ultimately benefits our customer, uh, when we do that, because it lowers the cost of operation. Uh, those are some things, things that come to mind.

I guess one last one that just popped into my head is, is the work we're doing on the driver experience. So we've got kind of this, this app called drag Warner pro it does some of the same things Phil alluded to. She doesn't just give you a trailer assignment. It tells you exactly where the trailer is because every trailer in the fleet is satellite equipped, but it also gives you all kinds of pay data and, and, uh, you know, next load data, uh, as well as, as, as trended data in, in what you've been earning over time to kind of avoid the pitfalls of, uh, reacting to a moment or one load or one day, and a much a person sees their glide path, uh, lets them do, you know, kind of tetherless, uh pre-trip and post-trip inspections.

And therefore it eliminates tons of paperwork, but actually increases accuracy of those inspections. So lots of things to just continuously try to make that driver's lifestyle, less tethered to the truck and more of a job that, that people can embrace and enjoy over a course of their career.

Fadi Chamoun:  Yeah, these are great feedback. Thank you all for, for this. I want to switch over to a, another important topic, sustainability and ESG, specifically, really the environment. I think we all have a stake in ensuring, uh, emission reduction and the cleaner being an environment obviously, and next generation of consumer and everybody is basically, you know, holding us accountable.

And I think looking for leaders like you to try to show the way and have an impact. Maybe we can go, um, quickly and comment about how are you approaching this challenge? What are you exactly doing to affect change and become greener as an organization? Maybe we can start with you, Phil?

Phil Yeager:  Oh, sure. Yeah. And this is something that, you know, has been close to our heart for, for a very long time. And, uh, you know, we, uh, just completed our new headquarters, which is going to be a lead gold, uh, building, but really with intermodal being our core offering, it's 69% more fuel efficient than truck. Um, we actually, uh, do a lot of reporting on, uh, sustainability metrics with our customers and we're seeing that become a more important part of purchasing.

And so, you know, we were able to save our customers 3.1 billion pounds of CO2 emissions last year by converting business to, to intermodal. Um, we need to continue to better use our drivers, make sure they're fully loaded, uh, all the time. And we're also increasing our LTL consolidation network and across that network cross dock network, that's really helping to, uh, create more, more full trailers, take, uh, less, uh, more freight off the road, um, and, uh, and continue to, to drive that forward.

I think the last thing I would highlight is, um, you know, we are making an investment in electric vehicles. Um, we'll be receiving those in early 2023. Um, and believe that that is, you know, although there are some constraints around it and we want to make sure that we're generating the right return on capital, um, that, uh, that will be something that we'll invest in well into the future, given the short haul configuration of our, uh, business.

So, um, all that you know, to continue is, uh, is a really a part of our strategy to continue to be a more sustainable organization and align that with our customers as well.

Fadi Chamoun:  Great. What about Warner, Derek? What are some of the ways that Werner is trying to become greener?

Derek Leathers:  Sure, so for us, it's kind of an, all of the above strategy. Um, you know, if you start on the fuel side or the energy side of the equation, which obviously is the biggest single place that we think we can make an impact over time. Uh, we have electric, uh, in our fleet today. We're adding 10 more of those units, uh, later this year.

We're a hydrogen test, uh, set to be launched, uh, yet this year, uh, we've done and continue to test CNG, LNG and dual fuel type, uh, opportunities across the fleet. Um, I think what gets overlooked in this question or ordinance when people get on this subject sometimes is frankly the biggest thing we can do to lower the overall environment, uh, environmental impact as an industry, it's just get more and more folks on newer equipment, clean diesel, uh, transitions, meaning getting out of the five to six mile per gallon trucks and getting into something much more efficient than that is, is a huge step in the right direction.

And actually a bigger difference maker than almost any of these alternatives that we're discussing. Uh, we operate our fleet, uh, around 2.0 average age, uh, in recent quarters. That's drifted up to two, two, but that's just relative to equipment availability. Uh, and we've just completed, uh, really last year, but we completed the complete retrofit of all of our terminals yards offices, et cetera, relative to bringing them up to the latest standards that we possibly could. In some cases, they can't be lead certified because the age of the building and the construction of the actual building, but, but they certainly can be retrofitted with, uh, the, the absolute latest in, uh, energy, efficient lighting and electrical grids and smart controls and everything else.

And we've done that. And so we'll continue on this journey. We've announced a 55% reduction in carbon footprint by 2035. And we're well on our way toward that. And if we can exceed that, we're certainly going to push the envelope and exceed that even further.

Fadi Chamoun:  Great. Jonathan, you know, you probably attack these kinds of things from a product maker perspective, as well as how we consume transportation.  Can you walk us through your thoughts on that?

Jonathan Ahdoot: Yeah, sure. I think, you know, for us, you know, as I mentioned before, you know, we're, we're importing from Asia and other regions and then exporting, uh, you know, from Canada or us to the U S or other, you know, Europe and Asia and Latin America. I mean, that's a lot of movement of stock, right?

So for us, it's always been a question of how we can reduce the amount of movement. Cause we know every single time you shift something, regardless how efficient your, your method is, shipment is, you know, it does create carbon emissions. We we've tried to find a way to reduce that. So even before the pandemic, we had initiated a program to identify and develop, you know, different capabilities of insourcing.

So, you know, not producing an Asia and producing more in North America and really trying to move the most possible components from Asia to north America. And the reason for that is multifold, right? We have, we know we control, uh, how our factories operates and, you know, in terms of the, the emissions you'll, we run extremely green, uh, factories.

When you think about the type of power we use to run them, uh, the type of air conditioning that the certifications we get. So, you know, that's one factor. Uh, the other one is obviously to reduce our dependency on Asia. So not only a, an ESG thing, but also, you know, making sure that we have, we control more of our destiny in that regard.

And obviously, you know, we wish we could accelerate a little bit faster on that. And I made, because that was one of the main concerns and impacts from everything we just discussed today. But then the last one is really to reduce our carbon footprint. So I spoke about the factories and then it's really the carbon for running around the fruit as a whole.

This really led us to the implementation of injection molding and CNC system that allows us to manufacture our own chassies. So, you know, when you buy a computer or a server product, you know, it's enclosed in this metal box and, you know, a lot goes into that metal box. And a lot of carbon emissions are kind of the, you know, a lot of coverage and missions are related to that, then manufacturing that box.

We really wanted to take that in and really insourcing and manufactured in Canada in the us. And what it would let would let, would lead to a, what really happened there is we actually started an R and D project where we developed the patented, uh, graphing composite material to replace the metal that we can manufacture here.

That's fully recyclable and made up of more than 50% plastic waste recovered from the ocean and agreement with oceanworks. So really it's changing it from a metal box produced in China or Taiwan to a mixed graphing plastic, but you using plastic waste, that's recyclable a manufacturer in north America in green factories.

We started to roll those products out in 2022. And what we've seen is obviously the decrease in manufacturing related emissions, we've reduced our IC related waste and we reduce freight related carbon footprint by more than 75%. So all of this while improving the robustness of our supply chain.

So we think, you know, this is really the path we're taking. We're looking to insource more and more to reduce the footprint of our products, uh, how they're being developed, how being shipped. And, uh, we're pretty proud of the progress we made the, this far.

Fadi Chamoun:  Great. Thanks for the fantastic rundown.

A couple of more things I want to do before we wrap up the call. One will require you to take out your crystal ball. Um, now we can start kind of looking moving forward. What are the one or two key themes that you think will affect the supply chain over the next five years? Maybe we can start with you Derek? Sure.

Derek Leathers: I'll try to be quick. Um, you know, I think ongoing conversion of the propulsion systems and trucks is going to be a hotly debated and interesting topic as it plays out. I think you'll see winners and losers. I think it's too early to tell which one will win. Um, the other one is I do believe you're going to see after the disruptions of the last few years.

Ongoing efforts to nearshore, um, more manufacturing. I don't think it's going to be the wholesale change. People think it may be, but I do think around the edges, you'll see more nearshoring. And I think that bodes well for domestic transportation. Um, and we're excited about the reality that a lot of that will probably be Mexico related.

Our positioning there is, uh, second to none. And the last one, I guess, that comes to mind is, is I do think we're going to continue to see pressure on the labor front, because if, just look at overriding demographics across the country, there's going to be a lot more people retiring than potentially entering the full-time workforce.

And especially in the roles that where those retirements will be most apparent. Uh, so the trades truck, truck driver mechanic, those types of roles have a tremendous amount of pressure on them over them coming, you know, call it five to 10 years. And I think we'll, we'll have to continue to find ways to excite people, to enter those profession.

Fadi Chamoun:  Thanks Derek. Jonathan, what do you think of [inaudible]?

Jonathan Ahdoot: So I think I agree a lot with, uh, with Derek. I think you're really going to see what he mentioned. The labor shortage I don't think is, is going to necessarily improve itself, uh, over the coming years. I know there's different strategies to kind of address it, but I don't think that's going away anytime soon.

In terms of insourcing or nearshoring, as you mentioned, I think that you've already seen that in the tech industry, uh, you know, there's announcements from TSMC, Intel, and some of the major semiconductor manufacturers where they're building massive plants in north America. Uh, that's coming online in the 24.

And I think that will alleviate a lot of what we experienced. You know, the tech industry was caught by surprise with everything that happened. I think a lot of industries would conference surprise, but I know, you know, I know that I know the tech industry was definitely, you know, shocked by everything that happens.

It showed a lot of the vulnerabilities in our supply chain, and I think there's a lot of good action being done to kind of address it. The only issue is the actions do our longer term. It's not something that's going to correct itself overnight. There's a lot of infrastructure to kind of implement, uh, to deal with everything that happened.

What I think is really, is trying to see from the challenges where the opportunities are and how they're kind of a, you know, find ways to address customer needs ahead of time. And the way I really see that is, you know, you, you can try to mitigate the most possible elements that are not in your control.

But, it's really focused on developing a redundant supply chain, decentralizing operations. I think there's been a focus of doing everything, manufacturing, everything in Asia and producing it across the globe. I think, you know, looking at the ways of kind of decentralizing where we're manufacturing not only needs to be, uh, in north America, it could be across the globe and really get closer to clients to reduce the reliance on cross continent freight, and then leveraging innovation.

I think that innovation is going to be the key, uh, to a lot of what's going on is for again, mitigating supply chain and reducing carbon footprint. I don't think we really have a choice, especially seeing how technology is growing, right? It's growing at an accelerated pace with COVID the fact that everyone is working more from home.

There's more, the infrastructure is growing at a faster pace than ever before. We need to find ways to leverage innovation, to reduce how much we're really admitting in terms of carbon and dependency on international vendors.

Fadi Chamoun: Great. Thanks. Phil, anything to add from your side?

Phil Yeager: No, not really. I would agree with those. I think it's about attracting and retaining talent and that's going to bring about a lot of innovation. I think the only other thing I'd highlight is that I think with all the disruptions that we see have seen, um, I hope there's going to be, you know, for everybody more of a focus on longer-term partnerships and really building that stronger, more durable supply chain for, for all the stakeholders involved here.

Fadi Chamoun: So, great. Thanks. Last topic and maybe, it's not really a topic but advice. As we wrap up this call, first Jonathan, starting with you, what would you give, in terms of advice to the freight companies and how they can help your clients, uh, clients like you obviously?

Jonathan Ahdoot:  So I can tell you what it way told our freight vendors. And obviously they went through, you know, we had these discussions over the, over the pandemic. For me, it's all about partnership, right? I think it's the measure for me of a true partnership is how the parties act when times are tough, right? When they're competing interests, you know, some vendors kind of, that will protect themselves at all costs, right?

You know, they want to make sure to protect your business first, which is, you know, tends to happen. Even unfortunately use the opportunity to prioritize other larger, higher volume accounts or even pad margins. We've seen it. And when we deal with many different vendors in this regard, others saw it as an opportunity to provide the much needed support to their partners and weather the storm together.

I know it sounds like a very, you know, global kind of, or high-level approach, but I think, it's like what Phil just said. Long-term partnerships is what drives growth for everyone. And I think this was a true test of a lot of partnerships we saw. Uh, we were glad to see that a lot of our freight vendors, you know, really decided to weather the storm together, very transparent about what was going on and, you know, really it helped us grow together and figure out ways to solve our problems.

So that's really my advice. It's really just to focus on partnership and really focus on, you know, being transparent and, uh, and really weathering the storms together with, with the client and not just deciding, Hey, you know, I have tons of volume, you know, you're not, you're not big enough for me to, to really move a lot in this regard. I think that that's really what the, what I would focus on is really, really the partnership.

Fadi Chamoun:  Great. Phil, maybe get out to you from your end. What do you say to shippers, out there, in terms of how they're using the supply chain, how they can get better?

Phil Yeager: Yeah. So I would actually kind of reiterate a lot of what Johnson said. Uh, you know, to me, it's about partnership and locking in with your partners, both through contract terms, right? Locking in capacity over a longer cycle. Um, but also if you're not, if you don't want to do that, also walking in with those partners through different cycles and managing through them together.

Right. I think that that is going to set your company apart and allow you to manage volatility, which it's, it's going to continue to be volatile, uh, much more successfully than your competitors. And that's going to allow your partners to invest right. And have a longer term view of the relationship. And I guarantee you, if you take that approach, you will get paid back.

Only other thing I would highlight is transparency and openness around your strategy and your priorities with those partners. Because all the companies that you're probably working with have, are doing other things with other clients that if you're open and transparent with your priorities, they could help you solve those problems through things they've seen with other clients and, or have already implemented or are doing. So, I just think that transparency comes with partnership, but, uh, but it would be something else that I think you'll get a lot of return on that openness around your strategy as well.

Fadi Chamoun:  Great. Derek, any insights you want to add?

Derek Leathers: Yeah, sure. Tough to have lots of that. So I'll be quick. Um, uh, you know, the one thing I would say that maybe hasn't been mentioned yet is we talked earlier about the decreased efficiency at a shipper and constant knees around the country during COVID.

I know that that was driven by labor constraints that they were struggling with. And so we do understand that it's not intentional, but there is an opportunity now to get back to normalize levels, we've seen dwell times increase. Industry-wide both in the container and trailer market, both the tripper.

And consignees, I think so focusing on the four walls and making sure that you, you, you create your own future capacity through increased efficiencies will be important. I think focusing on working with well-capitalized safe and efficient carriers, uh, is important and then demanding of those carriers.

But, that they are innovative with you, that they work through your issues with you and bring solutions to the table is critical. You have to do that. You've got to do what Phil said, which is we we've gotta have a level of transparency about where the shipper's wanting to go and why, what their forecasting looks like and why, and really dial in that forecasting.

The better transparency and visibility we have to where, uh, shippers freight flows may be going. And then with those longer lead times, we could add that just makes us better providers. So help us help you. Uh, and I think we work together. We can continue to make progress on this.

Fadi Chamoun:  Okay. Thank you. Derek, Jonathan, and Phil, your time is very, very valuable, and we really appreciate you taking the time to join us today and all for these great insights. Uh, no doubt, uh, very valuable to the shippers and carriers alike. And, uh, thank you everyone for listening. Um, as always reach out to your BMO relationship manager, if you have any questions or along to hear how we might be able to help you and your business planning, uh, navigate these interesting times, um, we have a monthly resource report we publish called Cargo Connection. It looks at supply demand across all the various modes that, uh, we, we talked about it today. That could be an area that you can kind of keep, uh, keep up to date on what's going on in these markets. So reach out to your relationship manager, if you want to be on that distribution list. And again, thanks all for listening.

Fadi Chamoun, CFA Transportation Analyst

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