The third-quarter earnings season is off to a solid start for truckload carriers and transportation companies with exposure to the mode. One of the group’s main concerns was whether rate hikes would be enough to offset cost inflation and allow for continuing margin improvement; thus far, they have.
Shippers take longer to unload trailers at their warehouses due to a labor shortage, which has hampered equipment usage within carriers’ fleets. Finding drivers to fulfill record demand is also putting a strain on capacity utilization measures.
Reduced capacity utilization and higher costs — such as driver pay, gasoline, and purchased transportation — were among the most alarming possible hazards at the start of the current reporting period. However, several analysts upped third-quarter projections on the idea that price increases would be significant enough to cover rising expenses.
While there was some concern that network congestion, Hurricane Ida, and the price of navigating the mayhem would pop a few balloons, that hasn’t happened yet – while everyone is pointing to hiring headwinds as a key concern moving forward.
Higher charges reduce ORs; usage is a hindrance.
The operating ratio, or operating expenses as a percentage of revenue, is an essential indicator of a carrier’s financial performance. Operating margin is the inverse of profit margin: the lower, the better.
On Thursday morning, Heartland Express (NASDAQ: HTLD) kicked off the trucking earnings season with a 75 percent adjusted OR. The result was 650 basis points higher than the previous quarter and 470 basis points higher than the second quarter.
The carrier does not publish price or utilization operating figures. However, revenue excluding fuel surcharges (FSCs) fell 10.1 percent year over year and was 1.5 percent lower than the previous quarter. It’s plausible to presume that rising expenses and utilization difficulties somewhat offset the industry’s benefit from rate hikes.
“Throughout the third quarter of 2021, freight demand remained strong and reached new levels, and we expect these trends to continue for 2021 and far into 2022,” stated CEO Mike Gerdin. “To produce our good operating results throughout the quarter, we continue to engage with our customers who have had to navigate their employment-related issues.”
The company earned 31 cents per share (EPS), 2 cents more than expected, 6 cents higher than a year ago, and 5 cents higher than the second quarter. It did, however, benefit from significant increases in equipment sales over the era.
On the news, HTLD stock rose 2.8 percent, outperforming the S& P 500, which rose 1.7 percent.
“While HTLD’s results are by no means a bellwether for the space, they confirm concerns about labor challenges/costs, as well as the strength of demand in the market, and they underscore our optimism regarding freight selectivity and the associated rate increases,” said Amit Mehrotra, head of transportation and shipping research at Deutsche Bank (NYSE: DB).
After the market closed on Thursday, PAM Transportation Services (NASDAQ: PTSI), a long-time vehicle hauler, posted record revenue and operating metrics for the third quarter.
To achieve a 77.9% operating ratio in its TL division, the company employed a 44.5 percent year-over-year increase in revenue per loaded mile (excluding FSC), a proxy for TL rates. The OR was 1,180 basis points higher than the previous quarter and 610 basis points higher than the second quarter.
PAM’s utilization indicators dropped as a result of the congestion, which was unsurprising.
The 45 percent increase in the per-mile charge ($2.70 without FSC, $3.11 with FSC) was accompanied by a 150-bp increase in deadhead, or empty miles, resulting in a 6.3 percent drop in total miles year over year (loaded miles down 7.8 percent ).
“We continued to encounter major disruptions from some of our largest clients in the third quarter, and it accelerated quarter-over-quarter, but we are getting better at navigating the disruptions, as evidenced by our results this quarter,” said President Joe Vitiritto.
Despite the setbacks, PAM’s income per tractor each week increased by 30.4 percent year over year, a figure that any carrier would be happy with within any quarter. It’s also worth mentioning that without the confusion and drag on usage, carriers’ per-mile rates wouldn’t be as high, to begin with.
Because of the higher rates, the carrier’s EPS jumped to $1.87, more than tripling year over year and up 41% from the second quarter. In Friday’s trading session, check soared by more than 18%, outperforming the S&P 500, which gained 0.8 percent.
On Friday, J.B. Hunt Transport Services (NASDAQ: JBHT) reported $1.88 EPS, beating analysts’ expectations by 11 cents. The final result was 27 cents greater than the previous quarter and 70 cents higher year over year. On the news, shares of the multimodal transportation behemoth soared 8.7%.
In its largest division, intermodal, congestion in the ports, slower rail service, and difficulties turning following equipment at shipper warehouses weighed on earnings.
Even though network disruption resulted in a 6.1 percent drop in loads and container turns slowed from 5.6x in the previous quarter to 5x, intermodal revenue rose 16.6% year over year. Even though J.B. Hunt enforced more vigorous accessorials to customers holding onto equipment longer, box turnovers fell 1.7 percent sequentially from the second quarter.
Revenue per load increased by 24.1 percent year over year because of a better freight mix, higher rates, accessories, and higher fuel surcharge revenue. According to management, pricing will continue to meet cost growth, which was up 20.4 percent per load in the quarter.
To accommodate increased demand and improve network flexibility, J.B. Hunt is adding 12,000 containers to its fleet of over 102,000. However, management was unsure when the new equipment would begin to enhance box turns.
On a Friday call with analysts, Darren Field, EVP of intermodal, said, “We’re focusing with our clients every single day on how to enhance that number connected to their actions that are influencing it.” “At the end of Q2, I would have stated that I couldn’t see it was getting any worse, and you know what? It did.”
Despite the noise in the quarter, the intermodal OR improved 270 basis points to 88.3 percent year over year.
J.B. Hunt’s devoted section experienced a 280-bps drop-in OR to 88.2 percent. However, the company has been onboarding new contracts at an all-time high, adding 774 revenue-producing trucks in the first quarter alone. Recent business victories are connected with starting expenditures and ramping to baseline profitability might take many months.
Although revenue climbed by 20.2 percent year over year, operational profitability remained virtually unchanged from the previous year and the second quarter.
The TL division of the corporation had a fantastic year.
Revenue increased by 86.6 percent year over year, with rate hikes accounting for most of the increase. Contractual rates climbed 29 percent, resulting in a 36 percent rise in revenue per loaded mile excluding FSCs (up 38 percent to $3.70 including fuel). The OR increased by 450 basis points to 92.8 percent.
The TL division of J.B. Hunt is not a true competitor to traditional over-the-road fleets. It has a lower asset profile since it uses drop-trailer capacity and a tractor fleet of more than 60% owned by independent contractors.
Morgan Stanley (NYSE: MS) analyst Ravi Shanker raised his earnings expectations for J.B. Hunt by about 5% for this year, next year, and 2023 in a Monday letter to clients. He kept his “equal-weight” recommendation on the stock, arguing that the stock already trades at a high valuation multiple and that the company’s potential to collect accessorials in the future may be limited.
“At this point, there is far too much uncertainty in the future to be too enthused about 2022.” “We don’t know how much of the 2Q and 3Q beats were driven by ‘cost recovery initiatives,’ and we don’t know if that’s sustainable going into 2022,” Shanker added.
Going forward, it’s all about labor.
All three airlines that have released third-quarter results have mentioned labor problems as a significant worry in the short term and possibly the long time.
“We also believe that attracting and retaining staff has reached historic levels of difficulty for both carriers and shippers across our industry,” Gerdin said. “We believe that in the coming year, the joint difficulty of hiring and maintaining both drivers and other important supply chain professionals will persist.”
J.B. Hunt’s COO and president of contract services, Nick Hobbs, said worker difficulties are frequent.
“It affects everyone. It’s the mechanics and the drivers. Wages are going to be under a lot of pressure. “I see that lasting for a long time, all the way through the supply chain,” Hobbs predicted.
J.B. Hunt predicts that the current supply chain turmoil will worsen shortly, pushing peak season into November and December. This will make the inventory replenishment cycle into the first half of next year, implying “unusually stronger” first-quarter results.
“The cost that our clients are seeing today in their budget will not be the long-term cost for their budget,” says Chief Commercial Officer Shelley Simpson. However, she believes wage inflation will continue for some time.
Simpson continued, “The underlying expense of drivers, equipment that is going to stay.” “In this atmosphere, I don’t see customers lowering their pay or drivers lowering their earnings.” Our gear isn’t getting any less expensive.”
