A multitude of costs caused Werner Enterprises to miss analysts’ third-quarter expectations Thursday. Some of the expense increases are transitory while others are not.
Werner (NASDAQ: WERN) reported adjusted earnings per share of 79 cents, 10 cents better year-over-year but 16 cents light of consensus and 7 cents lower than the second quarter. Management from the Omaha, Nebraska-based transportation and logistics company provided additional color on a call with analysts.
Increased driver sourcing costs (higher pay and investments in driver schools) were a headwind. Per-mile pay on company miles was 20% higher in the quarter.
Increases in liability and health insurance claims and expenses were a 10-cent-per-share headwind compared to last year and a 15-cent-earnings drag compared to the second quarter.
“In a word, miles were a major problem in the quarter,” Derek Leathers, chairman, president and CEO, said on the call.
Parts shortages led to an increase in equipment and driver downtime.
Total miles declined by 8.2 million across the TL segment in the quarter, with miles per truck per week moving 11% lower year-over-year in the one-way fleet. The increase in downtime resulted in minimum pay guarantees being tripped, which meant drivers were paid while inactive. Also, some drivers were quarantined due to COVID protocols.
Average trucks in service moved more than 100 units higher from the second quarter, excluding the additions from the ECM acquisition, which provided a bit of an offset.
A host of costs – hiring incentives, driver lodging, layover pay and pay guarantees – impacted the quarter by about 10 cents per share compared to last year.
The supply of parts has improved somewhat, which has put some equipment back into service. That is expected to relieve the pressure on mileage metrics during the fourth quarter. Also, as miles increase the minimum pay guarantees will ease.
But increases on liability and health insurance premiums and higher driver pay will remain in place.
The TL segment reported revenue of $528 million, a 15% year-over year increase. Revenue per truck per week increased 8% in the one-way segment as revenue per total mile surged 22%, which was partially offset by the decline in miles. Dedicated revenue per truck per week was flat as a high-single-digit percentage increase in the per-mile rate was offset by a similar decline in miles logged.
The TL operating ratio deteriorated 150 basis points year-over-year to 86%.
Gains on equipment sales of $15.3 million were a 13-cent-per-share tailwind compared to the year-ago quarter. A lack of new equipment in the market due to manufacturer delays and high demand for truck capacity have sent used values surging higher.
The adjusted EPS number also excluded an unrealized net gain of $16.1 million, or 18 cents per share, from equity investments (market valuation for Mastery moved higher but was partially offset by a valuation decline in TuSimple (NASDAQ: TSP).
When asked if the TL margin can improve sequentially in the fourth quarter, management said it believes so. The normal sequential improvement is historically 20% from the third to fourth quarters each year.
“If we can make further progress on some of the headwinds, in particular as it relates to miles as impacted by parts availability and some of the ramped up incentives, hiring that we had to do to meet contractual obligations, there could be some upside to that,” Leathers added.
Long-term target raised; 2022 rates to be higher than original expectations
Even with all of the noise around costs in the quarter, management raised the long-term target for the TL margin. The range now calls for an adjusted operating margin between 12% and 17%, up 200 bps on the bottom end of the range and 100 bps on the top end. The margin in the division was 15.9% over the last 12 months.
Rate increases in 2022 are expected to overcome cost inflation again.
“There are inflationary pressures across the P&L and we’re going to be asking our customers to support us as we support them through this peak and beyond,” Leathers said. He said contracts that were renegotiated late last year don’t reflect the current market and will see double-digit rate increases or higher.
“In those scenarios, we’re certainly in the double digits and above type range and in some cases higher than that,” Leathers added. “The thoughts of that sort of mid-single-digit [increase] are no longer prevalent at all. It’s got to be north of that and I think it’s a lot more rational to think about it in a double-digit format.”
At the beginning of the third quarter, Werner acquired an 80% equity interest in ECM Transport Group, which holds two regional TL carriers in Pennsylvania. The carriers run a combined fleet of 500 trucks and 2,000 trailers and generated $108 million in revenue last year at nearly a 20% operating margin. The deal is expected to add 20 cents annually to EPS once fully integrated.
- Freight swap leads Forward Air to Q3 record; 2023 targets issued
- Schneider sees ‘constructive market well into 2022’
- Old Dominion notes short-term cost headwinds; Q3 another record