Soft Demand, Rising Costs Hit Earnings of Truckload Carriers in Third Quarter

This story appears in the Oct. 22 print edition of Transport Topics.

The initial round of third-quarter earnings reports from four publicly traded trucking companies reflected weakness, triggered by softer freight demand, rising fuel costs and higher expenses related to the driver shortage.

Net income declined 19% to $12.4 million at Heartland Express and fell 15% to $25.1 million at Werner Enterprises, two truckload fleets that often post industry-leading results.

In addition, Marten Transport’s net income rose 2.9% to $6.5 million, and J.B. Hunt Transport Services Inc. posted a 14% increase to $78.2 million, with a strong contribution from its intermodal business.

Similar mixed results are expected in the coming weeks.

Werner’s report, which followed an earlier warning that profits would lag Wall Street analyst estimates, described freight trends as “disappointing.”

“Freight demand did not show normal seasonal improvement from mid-August through September,” said Werner. “Freight trends for October to date have continued below trend levels.”

Marten described the economy as “persistently weak.” Its profit before taxes and interest declined 9.5%, and earnings rose because income tax expense was reduced.

As a result of softer demand, revenue changed little at Marten, Werner and Heartland.

Marten climbed 4.7% to $163.6 million, Heartland rose 1.9% to $135 million and Werner’s revenue fell 1% to $506.5 million.

Hunt’s performance was differentiated by its intermodal franchise, where revenue rose 15% to $793.8 million, or 62% of its $1.30 billion total. In the year earlier period, intermodal was 59% of the revenue total.

Intermodal operating income excluding interest and taxes climbed 25% to $97.9 million.

Hunt’s all-highway business that includes truck, dedicated and brokerage revenue fared worse. Combined revenue from those businesses rose less than 5% to $510.5 million, and combined profit fell 13% to $35.1 million.

Three carriers mentioned the effects of a tight driver market.

Werner said “the driver recruiting and retention market became more challenging in the third quarter,” compared with this year’s second quarter, due to pay increases and more competition to hire driving school graduates.

Heartland’s assessment was “the industry continues to be challenged by the shortage of qualified drivers.”

Hunt, Lowell, Ark., cited higher costs to hire drivers in the dedicated unit and reported that results in the trucking unit were hurt by higher driver pay and costs to attract owner-operators. Profit margins at the brokerage unit were hurt by higher costs to pay drivers.

Three carriers also cited the harmful effects of higher third-quarter diesel prices.

Heartland highlighted the “erratic” price moves that play havoc with fuel surcharge collections, including increases of 40 cents per gallon during the quarter and a swing of 45 cents between the highest and lowest prices.

“Fuel price swings of this nature  will continue to have negative impacts to our earnings,” said the report by Heartland, based in North Liberty, Iowa.

Werner’s report also cautioned that diesel-price pressure is mounting. So far this month, Werner noted a 40-cent-a-gallon increase, compared with last year.

The report by Marten, Mondovi, Wis., noted the effects of “steadily rising fuel prices.”

A report from BB&T Capital Markets analyst Thom Albrecht said higher fuel costs cut Marten’s earnings by 10%.

Other analyst reports mixed concern about the market weakness, with hope for a late-season rebound.

Jason Seidl of Dahlman Rose & Co. said Werner’s comment about October activity “heightens our truckload concerns in the short term.”

However, he said that future results in the sector could improve because of a stronger housing market and inventory replenishments by retailers and that the uncertainty related to the November elections will soon dissipate.

Robert W. Baird analyst Benjamin Hartford cited modest improvement on the pricing side, particularly on the spot market.

Werner, for example, managed just a 1.9% rate increase, while saying spot market prices “trended lower.”

Hunt and Marten both reported rate increases, while Heartland didn’t discuss pricing.

Results at Heartland were hurt by a drop of $5.1 million in the proceeds from used equipment sales. Excluding that gain, Heartland’s operating income fell just 2%.