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UPDATE 2: Heartland’s CEO defends company’s strategy and its drop in revenue

Source: Truckstockimages

The CEO of Heartland Express (NASDAQ: HTLD) defended the company’s strategy Thursday in a phone interview with FreightWaves, saying that some analysts who are critical of the company’s approach “don’t understand our story.”

CEO Michael Gerdin said Heartland is “different from most. Our focus is on the bottom line.”

Gerdin’s comments came a day after Heartland posted third quarter earnings that showed a significant decline in revenue but a solid performance in profitability. In his prepared remarks in a company release, Gerdin said the company is “focused on the most profitable customers and lanes.”

The bottom line focus, he told FreightWavesw, involves things other than profitability, specifying pay, safety and “driving the best equipment.”

“That is our primary focus and we will give up the top line,” Gerdin said. Analysts “should be able to see our focus,” he added.

Gerdin cited the company’s acquisition of IRC last year, which he said had an operating ratio of 106 at the time of the mid-summer acquisition. “They lost money on every deal they did,” he said. Companies sometimes forget “that you have to make money. At an OR of 108, there are a lot of things to cut out.”

  Heartland CEO and Chairman Michael Gerdin Photo: Heartland Express
Heartland CEO and Chairman Michael Gerdin Photo: Heartland Express

Heartland’s earnings statement cited improvements and integration at IRC as one reason why it was able to cut its OR in the quarter. In the third quarter of last year, Heartland’s operating ratio was 92.9% and its adjusted OR was 91.9%. This year, those numbers were 83.4% and 80.7%, respectively.

Big shifts in that number for the quarter also pushed the nine-month OR down to 87%, compared to 87.8% after nine months of 2017.

“For us it was easy to make those decisions,” Gerdin said. “We will stop doing those things that don’t work. Guys do stuff for too low margins because they don’t know their costs, and they end up biting themselves in the end.”

The truckload carrier, which does not hold an investors call in conjunction with the release of its quarterly earnings, recorded operating revenue of $151.3 million compared to $182.1 million in the corresponding quarter of 2017. Fuel surcharges were flat at a bit more than $21 million, so that did not play a part in the decline in revenue.

SeekingAlpha, which tracks consensus earnings and revenue forecasts by analysts, said the revenue numbers fell short of projections by $11.5 million. But earnings per share of 23 cts using GAAP guidelines were 2 cts more than projections.

In its earnings statement, Gerdin focused mostly on the company’s net income, its operating ratio and the integration of acquired company IDC into the fold.

The OR and increase in net income to $19 million from $7.9 million last year was accomplished as the company significantly reduced its compensation costs and its purchased transportation. Salaries, wages and benefits declined to $55.1 million from $71.4 million, while rent and purchased transportation fell sharply, to $4 million from $16.6 million.

“Consistent with our acquisition plan of IDC, over the past year, we have integrated IDC into the Heartland platform and culture, focused on the most profitable customers and lanes, reduced our overall cost structure, significantly reduced the costs and operating limitations by ending many revenue equipment lease obligations, reduced the average age of our tractors and trailers, and heightened the level of service and safety afforded our customers and drivers,” Gerdin said in the company’s prepared statement.

CFRA analyst Jim Corridore said the drop in revenue could have been expected given the company’s strategy. “Revenues were slightly below our expectations and declined 17% as HTLD rationalized business to increase profitability and drove fewer miles,” Corridore wrote in a report to investors. “These efforts paid off, we think, evidenced by operating margin improvement as the adjusted operating ratio improved to 80.7% from 91.9%.”

But his comments were not all positive: “HTLD has been focused on cutting unprofitable and low profit routes gained from last year’s acquisition of Interstate Distributor,” Corridore wrote. “While HTLD is doing a better job here, its focus on cutting miles and costs has hurt its ability to take full advantage of a strong demand environment. HTLD is shrinking, while peers are growing.”

At Deutsche Bank, the team led by Amit Mehrotra said Heartland “was able to offset the topline decline by prioritizing margins over volume, focusing on the most profitable customers and lanes.”

Heartland has no long-term debt on its balance sheet. It holds $120 million in cash, up from $75.3 million at the end of 2017’s third quarter.

Investors on Thursday appeared to like what they saw. Heartland’s stock at approximately 1 p.m. was up 88 cts to $19.34, a gain of 4.77% on a day when broader indexes were lower, as were several competing truckload carriers, including Knight-Swift (NYSE: KNX) , Werner Enterprises (NASDAQ: WERN) and J.B. Hunt (NASDAQ: JBHT).

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John Kingston

John has an almost 40-year career covering commodities, most of the time at S&P Global Platts. He created the Dated Brent benchmark, now the world’s most important crude oil marker. He was Director of Oil, Director of News, the editor in chief of Platts Oilgram News and the “talking head” for Platts on numerous media outlets, including CNBC, Fox Business and Canada’s BNN. He covered metals before joining Platts and then spent a year running Platts’ metals business as well. He was awarded the International Association of Energy Economics Award for Excellence in Written Journalism in 2015. In 2010, he won two Corporate Achievement Awards from McGraw-Hill, an extremely rare accomplishment, one for steering coverage of the BP Deepwater Horizon disaster and the other for the launch of a public affairs television show, Platts Energy Week.