Trucker Profits Fall on Weak Demand

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The Wall Street Journal  /  April 21, 2016

Werner Enterprises and Knight Transportation blame too many trucks, too few customers for smaller first-quarter profits

Three of the largest U.S. trucking companies reported a drop in profits as demand for freight-hauling services slumped.

Werner Enterprises Inc. said first-quarter earnings fell 13% from a year earlier to $20.1 million, while Knight Transportation Inc.’s profits sank 24% to $22.5 million over the same period. Thursday afternoon, Swift Transportation Co. said profits fell 16% from last year, to $31.9 million.

Trucking companies say too many big rigs are plying the market, driving down the rates they can charge customers. Demand has also taken a hit from persistently high inventories at major retailers, which reduces the need for shippers to restock stores and warehouses. Rising driver wages are also squeezing profits, they said.

“Customers are aggressively working to take advantage of the favorable shorter term trends to the detriment of carriers,” Werner said in a news release.

Dave Jackson, Knight’s chief executive, said spot-market trucking prices are declining this year even compared with rates last year that were down as much as 20%. “So if you start to look at it over a two-year period, it’s an unbelievable decline in pricing,” Mr. Jackson said.

Mr. Jackson said he expects capacity to tighten and earnings to improve this year as truckers slow the growth of their fleets and manufacturing picks up. Companies ordered 37% fewer trucks in March compared with a year earlier.

Swift blamed a “soft freight environment,” including fewer total loaded miles driven and weak pricing, especially in the refrigerated cargo segment. The company said it plans to further delay equipment purchases and get rid of some of its tractors over the next quarter to reduce truck count by 200.

Werner, Knight and Swift are among the largest companies in the truckload market, where truckers carry full truckloads of goods for retailers and manufacturers, typically to distribution centers and factories.

Raymond James analyst Art Hatfield downgraded Knight’s shares after the announcement, in which Knight also lowered its second-quarter earnings guidance. The company said it is seeing contract freight rate increases from flat to 2% this bidding season, rather than the 2% to 3% it had expected at the beginning of the year.

Cowen and Co. lowered its earnings estimates for Werner, writing in a research note that the company “had been just about the only major [truckload] carrier with 2016 fleet growth plans, but such plans are no longer set in stone.”

Knight shares ended roughly flat at $26.72 Thursday. Werner’s stock dropped 9.6% to $25.73. Swift shares dropped 4.5% to $17.47. The company released earnings after markets closed.

The weak freight market is forcing large trucking companies to find more business in the spot market, where prices are more volatile, as opposed to signing long-term contracts with customers, analysts say.

The first quarter “is typically the weakest freight quarter of the year with improvement in Q2,” said Casey Deak with Wells Fargo. “With that in mind, it is not all that surprising that carriers were forced into the weak spot market maybe more than they would have liked. If the core customer base strengthens, we believe that quarterly results could see improvement as early as Q2.”

Werner’s revenues fell 3% year-over-year, from $495.7 million to $482.8 million. Knight’s revenue fell 6.3% over the last year to $272.1 million. Swift revenue, including fuel surcharges, fell 4.7% to $967.8 million.

Separately, Landstar System Inc., a company that arranges freight services, including trucking loads, for shippers, reported a 3% decline in first-quarter net income to $29.2 million on $711.6 million in revenue.

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Earnings Watch: Swift Profit Falls Nearly 16%, Forward Air Doubles

Heavy Duty Trucking  /  April 21, 2016

Truckload carrier Swift Transportation Co. saw net income and revenue decline in the first quarter compred to 2015, while time-definite transportation and logistics provider Forward Air Corp. saw its numbers double.

Net income for the Arizona-based fell 15.7% to $31.9 million, from 26 cents per share to 23 cents. Adjusted earning per share were 25 cents, beating a consensus estimate by Zacks Investment Research by 3 cents.

Total revenue fell 4.7% to $967.8 million, but revenue minus fuel surcharge improved 1.3% to $906.9 million.

According to Swift, the first quarter began with a soft freight environment, which caused the total loaded miles for combined trucking operations to be down roughly 4% on a year-over-year basis through January.

“Although freight volumes improved throughout the month of February, March proved to be challenging as freight volumes again weakened year over year, causing our first quarter 2016 combined trucking operations total loaded miles to decrease 1.5% compared to the first quarter of 2015,” the company said in its letter to shareholders.

Because of this, Swift said it has moved to downsize its combined trucking fleet by delaying equipment purchases while increasing tractor disposals.

“We expect these initiatives to reduce consolidated average operational truck count by roughly 200 units when comparing our first quarter 2016 to our second quarter of 2016, but we will continue to monitor the market and will adjust the fleet up or down as needed,” the company said.

Swift said the pricing environment in the first quarter under pressure from weak demand trends and excess capacity.

“Pricing was especially difficult within our Intermodal and Swift Refrigerated segments, as we saw intermodal providers reduce rates in an attempt to gain market share. We strategically resisted the impulse to lower our intermodal pricing in response but instead decided to remain disciplined to moving only intermodal freight that meets our pricing and network standards” the company said. “To help offset these pressures, we also implemented several short- and long-term intermodal cost control initiatives.”

Intermodal segment revenue less fuel surcharge dropped by 1.8% to $75.9 million in the first quarter of 2016 compared to the first quarter of 2015. Swift said this was primarily driven by a 2.2% decrease in load counts but partially offset by a 0.4% increase in revenue minus fuel surcharge per load.

The company's refrigerated operations suffered a loss of business resulting from a change in strategy by two key customers, accounting for most of a $7.5 million drop in revenue minus fuel charge in this segment, which fell to $76.9 million, Swift said. However, the company found new business, most of which is scheduled to begin in the second quarter.

Swift said its truckload segment saw first quarter revenue minus fuel surcharges drop $13 million from a year ago to $455.8 million, driven mainly by a 3.4% reduction in loaded miles driven. That was partially offset by a 0.6% year-over-year increase in revenue minus fuel surcharge per loaded mile.

Dedicated segment revenue minus fuel surcharge grew 12.1% to $219.8 million in the first quarter of 2016 compared to the first quarter of 2015.

“This growth was driven by a 9.2% increase in weekly revenue minus fuel surcharge per tractor to $3,500 primarily due to improved pricing and freight mix, and various new contracts that started over the last 12 months, which contributed to the 1.5% increase in our average operational truck count year-over-year,” the company said.

“We are laying the groundwork which should enable us to react and adjust quickly to what we expect will be a more favorable second half of 2016,” Swift said. “We anticipate the capacity-demand equation will tighten up in the back half of 2016, further bolstered throughout 2017 by the upcoming electronic device mandate."

However, the company now anticipates its full year 2016 adjusted earnings per share will be in the range of $1.45-$1.55, down from an estimate of $1.50 to $1.60 when it released fourth quarter 2015 earnings in January.

Forward Air Earnings Jump Following Completion of Purchase

Tennessee-based Forward Air the company has been only the second trucking company so far this earning season to report an increase in profit (following J.B. Hunt), hitting $13.1 million in the first quarter compared to $4.8 million a year earlier.

Part of this is due approximately $11.8 million in one-time deal and integration costs associated with the Towne Air acquisition that were included in the 2015 first quarter results.

Earnings per share also moved higher, as expected from an estimate by Zacks Investment Research, hitting 43 cents, up from 16 cents a year earlier. Revenue increased 11.5% to $229.5 million.

On an adjusted basis, income from operations of $21.4 million compared with $20.1 million a year earlier, and net income for the current period was $13.1 million compared to $12.1 million in the prior year quarter. Also, on an adjusted basis, income earnings per share for first quarter were 43 cents compared to 40 cents a year ago.

“In the aggregate, our results came in as we anticipated," said Bruce A. Campbell, chairman, president, and CEO. "Expedited less-than-truckload was the star performer, and our intermodal business posted a solid performance."

According to Campbell, Forward Air has been experiencing lighter volumes in the second quarter.

“Also, we have a difficult second-quarter revenue comparison, as a year ago we hadn’t eliminated lower-yielding business that resulted from the Towne acquisition,” he said. “We will, however, continue to benefit from the pricing and dimensional factor changes made over the last two quarters. This, along with post-integration operational efficiencies, should enable us to deliver meaningful earnings growth even if revenue growth remains tepid.”

Forward Air is projecting second quarter year-over-year revenue growth to be in the range of 1% to 5%, with income per diluted share to be between 57 cents and 61 cents, compared to an adjusted 51 cents per share in the second quarter of 2015.

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Earnings Watch: Lower Truck Sales Hit Dana, Rush Enterprises' Profits

Heavy Duty Trucking  /  April 21, 2016

A truck component manufacturer and one of the nation’s largest truck dealer networks continue the trend of many businesses reporting lower first quarter earnings as truck sales are down from a year ago.

Dana Holding Corp. saw its profit decline by 25.6% to $45 million from a year earlier. Earnings per share moved lower from 38 cents to 30 cents, missing a consensus estimate from Zacks Investment Research by 9 cents.

Revenue fell 9.9% from a year earlier to $1.45 billion, with foreign currency exchange rates lowering this by figure by $72 million.

The Ohio-based maker of Spicer brand truck drivetrain components also saw its light vehicle business sales drop from $637 million a year earlier to $613 in the most recent quarter, also negatively affected by foreign currency rates.

Sales in Dana's commercial vehicle driveline business fell by 23.1% to $333 million.

“Lower volumes reduced [commercial] sales by $79 million, primarily due to higher share with a key customer in the first half of last year, weaker Class 8 production in North America this year, and weaker demand in Brazil, where medium- and heavy-truck production was down 35% from first-quarter 2015,” Dana said in a statement. “Foreign currency, principally a weaker Brazilian real, lowered sales by an additional $20 million.”

Company sales were also lower in the quarter for Dana’s off-highway and power technologies businesses. However, its light vehicle driveline and power technologies business units posted combined currency-adjusted sales growth of $28 million, 3% higher than a year ago, driven by higher light-vehicle end-market demand in North America and Europe, as well as new business gains, according to the company.

Rush Enterprises Net Income Falls 85.7%

The truck mega-dealer network Rush Enterprises Inc. reported its first quarter profit plummeted to $2.4 million from $16.8 million a year ago but says it has already started cost-cutting measures, including closing some locations.

Earnings per share fell to 6 cents from 41 cents as revenue fell 10.3% to $1.07 billion. Adjusted earnings per share came in at 18 cents, 2 cents better than expectations by Zacks Investment Research.

"As we expected, increased capacity from near-record Class 8 truck sales in 2015 significantly reduced used truck residual values, and continued softness in the energy sector had a negative impact on our new Class 8 truck sales, aftermarket revenues and profitability this quarter," said W.M. "Rusty" Rush, chairman, CEO and president. "Our Class 4-7 new truck sales, however, remained strong, slightly outpacing the U.S. medium-duty truck retail sales.”

Part of Rush Enterprises’ expense reduction plan is the consolidation of 12 Navistar locations in Georgia, Illinois, Indiana, North Carolina, Ohio, Oregon and Utah in the first half of the year. The company has already consolidated its Alice, Texas, location into a newly constructed dealership in Corpus Christi.

“This was not an easy decision to make,” said Rusty Rush. “However, with changes in technology and, in certain cases, the local markets, we were no longer able to justify operating these locations in such close proximity to our other dealerships."

He said the company does not expect to realize the full benefit of these changes until mid-year, and it caused the company to incur an $8.1 million restructuring charge, reducing earnings per share by 12 cents in the first quarter.

According to Rush Enterprises, while U.S. Class 8 retail sales were 53,203 units in the first quarter, down 6% over the same time period last year, the company’s Class 8 sales decreased 34%.

Market analysts are forecasting U.S. retail sales for Class 8 trucks to be 207,000 units in 2016, an 18% decrease compared to 2015, but Rush said he believes sales this year could be less, as excess truck capacity and low used truck valuations may prompt many fleets to delay new Class 8 truck purchases.

Rush's Class 4-7 medium-duty sales increased 22% over the first quarter of 2015, accounting for 5.7% of the total U.S. market and also outpacing U.S. Class 4-7 truck sales in the first quarter, which increased by approximately 20% over the first quarter of 2015. Market analysts are forecasting U.S. retail sales for Class 4-7 vehicles to reach 220,850 units in 2016, a 1% increase over 2015.

"Our medium-duty business remained strong this quarter, primarily due to stable demand across the country from a range of market segments," said Rusty Rush. "Our solid sales performance was also the result of several large fleet deliveries into the lease and rental and recycling markets. We continue to see strong sales of our ‘Ready-to-Roll' work-ready inventory particularly in Florida and California.

"With the forecast for Class 4-7 new truck sales relatively flat over 2015, we expect our solid sales performance to continue throughout the year, keeping pace with the U.S. Class 4-7 retail market.”

Rush’s aftermarket business accounted for approximately 67% of the company's total gross profit in the first quarter of 2016, with parts, service and body shop revenue up 1.5% as compared to the first quarter of 2015, according to the company

"Energy sector activity continued to decrease and adversely impact our parts and service business, but we were able to help offset some lost aftermarket revenues with general maintenance and repair of vehicles, particularly in the western and southeastern parts of the country, largely driven by increased construction activity and improved economic conditions in these regions," said Rush.

Many analysts have been expecting overall corporate earnings in the first quarter to be down from a year ago for a variety of reasons, including a U.S. dollar being strong against foreign currencies, reduced manufacturing output the past several months, lower oil prices causing some energy operations to cut back, and generally anticipated sluggish overall economic growth.

So far, such conditions have contributed to three major fleets – Knight Transportation, Landstar Systems and Werner Enterprises – reporting lower first quarter earnings earlier this week.