Covenant and Werner reap huge tax reform windfalls

covenanttruck.jpg

Covenant CEO Parker cited difficulty in recovering peak season costs

Parker says reefer contract rates will go up 7-9% for best customers, double-digits for everyone else

Large publicly traded truckload carriers are beginning to register huge savings from the Tax Cuts and Jobs Act of 2017, the tax cut passed into law by Congressional Republicans and signed by President Trump last month. Werner Enterprises and Covenant Transport released 4Q17 earnings reports yesterday and on conference calls this morning, executives from both companies discussed the infusion of cash from the tax cut, economic tailwinds improving the climate for freight, and specific aspects of their companies’ performance.

Werner said it earned $1.94 per share in 4Q17, compared to $0.30 for 4Q16. Overall EPS for 2017 was $2.80 compared to $1.09 for 2016. Werner said that its fourth quarter results included a $110.5M reduction in income tax liabilities, which accounted for $1.52 per diluted share. Werner reported that their truckload business had a Q4 operating ratio of 88.3% (compared to 90.7% YOY), while their logistics segment had an operating ratio of 98.2% for the fourth quarter of 2017 (compared to 96.1% YOY).

Covenant said it earned $2.68 per share in 4Q17, compared to $0.33 per share in 4Q16, with $2.18 per share attributed to the tax cut. Covenant said its fourth quarter total revenue was up 6.5% YOY, its freight revenue had grown 4.7% YOY, and its operating ratio was 91.8% for 4Q17 compared to 92.9% for 4Q16.

During Covenant’s earnings call, Chairman and CEO David Parker reflected on 2017, including missed opportunities during peak season, and gave a preview of what Covenant expects for 2018. Covenant was committing its contractual capacity in the second quarter of 2017, when the freight market was still fairly soft. The company was planning for peak season when the Harvey started hitting the Gulf Coast in August, but Parker says they thought the storms’ effects on the freight market would dissipate by Thanksgiving. Instead, Irma came through in mid-September, then ELD compliance started removing capacity from the market. 

“Then we went out into the marketplace around the 20th of November,” said Parker, “after everything was set in stone and agreed upon, and then we realized that to get the capacity we needed, the peak season was up way higher than we anticipated. We actually hauled quite a few of our peak loads at losses. That game won’t fly no more.” FreightWaves predicted the spot rate explosion in an article on September 24th, with YOY increases of 9% or more.

Parker cited challenges including high freight volumes moving in a peak season that is trending shorter (5 to 5.5 weeks), the procurement of increased trailer needs, unpredictability of shipper cancellation, and volatile pricing on acquiring outside capacity, and said Covenant planned a steep rate hike for peak season 2018. Parker said that January 2017 had been exceptionally strong, and that “I couldn’t be any more excited than I am for 2018.”

When asked about the prospect of further driver wage increases in 2018, Richard Cribbs, Covenant’s senior VP and CFO, said, “The driver market is moving rapidly. The carriers rarely get ahead of their customers in terms of raising rates and compensation, but now they’re doing it. This tells you the market for freight is doing really well… our customers are being really receptive as to what we’re trying to accomplish. We’re encouraged by how our customers are responding to that initiative. We’re going to get those increases covered, plus some. But this is rare, as far as what’s happening in the driver market—it’s only happened twice in 20 years for us. But we have to because the market’s moving and we feel very good about the prospect of covering it.”

Covenant said they had raised driver pay for Southern Refrigerated Transport, their reefer division, by 6 cents a mile. Parker said Covenant would cover the pay increase with big rate hikes, commenting that “refrigerated side has very good double digit numbers of increase there, and there’s a great opportunity… Reefer is very fragmented, lot of small carriers, and it’s being impacted by ELDs much more than dry van. We’re absolutely seeing double digit increases, and that’s what we expect. On your biggest, long-term, most loyal customers, 7-8-9% is the low bar. For the rest, 9-11% is normal.” 

“Driver wages are going to be up 6-8% in total,” added Cribbs. “Rate per mile is going to be as high as 7 or 8%. We participate in a lot of surveys regarding contractual pricing—you’re gonna see high single digit increases. The key is how the first of year starts out; everything builds sequentially off that. The beginning has been encouraging and gives us confidence that we’re gonna push the higher range of that, between 6-10%.”

Stay up-to-date with the latest commentary and insights on FreightTech and the impact to the markets by subscribing.