The disclosure by truckload and logistics giant Werner Enterprises Inc. that its second-quarter earnings would be about half of what it originally forecast is the starkest sign yet of the damage being inflicted on the U.S. truckload industry by the myriad problems facing it.
The magnitude of the earnings reset, which was disclosed late Monday, nine days before its second quarter officially ends, came as a surprise even in a climate of lowered expectations for most truckload carriers. It led to a near 10-percent drop in the value of Werner's shares in Tuesday's trading. And it puts pressure on new CEO Derek J. Leathers, the first non-family member to hold the post in Werner's 60-year history, to pull the company through what has developed into a nasty cycle.
Werner said it will report second-quarter earnings per share of between 21 and 25 cents, compared with the 40 cents a share it originally forecast. (Werner said the expected earnings include a pre-tax gain on sale of real estate of $3.4 million.) The culprits in the downward revision are familiar ones: sluggish demand, which has driven down freight rates; a rough contract-negotiating cycle with shippers; recent wage increases for company drivers and per-mile pay hikes for Werner's large network of independent-contractor drivers; and a sluggish used-truck market.
Though Werner didn't mention it, overcapacity is also likely to be a problem. Thom Albrecht, transport analyst for investment firm BB&T Capital Markets, said that the truckload industry has about 4 percent more capacity than is currently needed, and that it may take a year to bring supply and demand into sync. Albrecht said he expects truckload failures to rise markedly in the second half of the year. However, the truckload sector will not return to equilibrium unless either many thousands of dry van trucks exit the market over the next three of four quarters, or the nation's industrial production returns to at least 2-percent growth, he said."Cost management initiatives"
Werner said in the announcement that it will "focus on various cost management initiatives" to offset the profit declines. It did not elaborate. John Steele, Werner's executive vice president, treasurer, and CFO, said in an e-mail today that the company will stick with its plan to reduce its fleet's average age to 18 months from 20 months by year's end. But that is likely to come through replacements, not additions. However, Werner will not expand its fleet "until such time as its freight and rate markets show meaningful improvement," the company said in the announcement.
Steele said Werner stands by its 2016 capital-expenditure forecast of between $400 million and $450 million. Much of that will be spent on newer tractors, Steele said. Leathers told an industry conference in late April that Werner would buy more new tractors in 2016 than in any year in its 60-year history.
Werner operates under contracts with its customers, as well as in the non-contractual, or "spot," market. The direction in spot rates usually presages upcoming contract cycles, though the lead times needed for contract rates to adjust may vary. Unfortunately for companies like Werner, spot rates have been tanking for about 18 months, which is now creating an unfavorable negotiating environment for the carriers.
DAT Solutions, a leading provider of load-board services that match spot-market loads with available trucks, said the average spot rate for dry van services fell 29 cents a mile between May 2016 and the prior-year period. That drop included a 10-cent-per-mile decline in fuel surcharges, mirroring the downward move in oil and diesel-fuel prices during that time.
Spot rates are beginning to firm, but it is too late to help the carriers for this negotiating cycle. Ken Harper, head of marketing for Portland, Ore.-based DAT, said shippers are looking to claw back some of the freight spend that they gave up last year when contract rates climbed.
Truckload carriers are also being hurt by reduced demand from traditional retailers, the carriers' bread-and-butter. Though retail sales nationwide have risen during the past two months, the gains have been skewed toward e-commerce, which is the province of parcel and, to a lesser degree, less-than-truckload carriers. Declining sales among brick-and-mortar operators have directly impacted the truckload segment.
In a climate of sluggish demand, shipper executives are seeing a change in the carriers' mindset. "For the first time in a long time, truckload carriers are coming to us for more freight," Rick Gabrielson, vice president of transportation for home improvement giant Lowe's Companies Inc., said yesterday at a press briefing in Washington, D.C., in conjunction with the release of the 27th annual "State of Logistics Report."
The report was written by the consulting firm A.T. Kearney for the Council of Supply Chain Management Professionals (CSCMP) and is presented by Penske Logistics.
Toby Gooley contributed to this report from Washington, D.C.