Third-quarter earnings season is off to a good start for truckload carriers and transportation companies with exposure to the mode. A key concern for the group was whether or not rate increases would offset cost inflation and allow for continued margin improvement; so far they have.
A slowdown throughout the transportation complex with shippers taking longer to unload trailers at their warehouses due to a shortage of workers has hamstrung equipment utilization within carriers' fleets. Struggles finding drivers to meet record demand is also weighing heavily on capacity usage metrics.
Diminished capacity utilization and higher expenses — driver pay, fuel, purchased transportation, etc. — were among the most concerning potential pitfalls entering the current reporting period. However, many analysts raised estimates heading into the third-quarter prints under the assumption price increases would be sizable enough to offset rising expenses.
While there was still some apprehension that network congestion, Hurricane Ida, and costs incurred to navigate the chaos could pop a few balloons, so far that hasn't been the case — although everyone is pointing at hiring headwinds as a major concern going forward.
Higher rates push ORs lower; utilization a drag
A key measure of financial performance for a carrier is its operating ratio or operating expenses expressed as a percentage of revenue. It's the inverse of operating margin: the lower the better.
Heartland Express HTLD posted a 75% adjusted OR to kick off trucking's earnings season Thursday morning. The result was 650 basis points better year-over-year and 470 bps better than the second quarter.
The carrier doesn't provide operating metrics for pricing or utilization. However, revenue excluding fuel surcharges (FSCs) was down 10.1% year-over-year, 1.5% lower than the second quarter. It's pretty safe to assume the benefit from rate increases the industry is capturing was partially offset by higher costs and utilization headwinds.
Chart: Blue-shaded area shows spot rates. (SONAR: TSTOPVRPM.USA) – a seven-day average of rates per mile including fuel. The green line is the initial reporting of contract rates. (SONAR: VCRPM1.USA) – a seven-day average of dry van base rates under contract excluding fuel. Initial reporting is on a two-week lag. To learn more about FreightWaves SONAR, click here.
"Freight demand has continued to be strong and has reached unprecedented levels throughout the third quarter of 2021, and we expect these trends to continue for the remainder of 2021 and well into 2022," said CEO Mike Gerdin. "We continue to partner with our customers who have had to navigate their own employment-related disruptions in order to deliver our strong operating results during the quarter."
The company posted 31 cents in earnings per share (EPS), 2 cents ahead of expectations, 6 cents better than a year ago and 5 cents ahead of the second quarter. However, it did benefit from outsize gains on equipment sales in the period.
Shares of HTLD closed Thursday up 2.8% on the news compared to the S&P 500, which was up 1.7%.
"While HTLD's results are by no means a bellwether for the space, they confirm concerns around labor challenges/costs but also the strength of demand in the market, and they underscore our optimism regarding freight selectivity and the associated rate increases," said Amit Mehrotra, Deutsche Bank's DB head of transportation and shipping research.
Table: Heartland Express' key performance indicators
Traditionally a hauler for the auto manufacturers, PAM Transportation Services PTSI reported record revenue and operating metrics for the third quarter Thursday after the close.
The company used a 44.5% year-over-year increase in revenue per loaded mile (excluding FSC), a proxy for TL rates, to reach a 77.9% operating ratio in its TL segment. The OR result was 1,180 bps better than the year-ago quarter and 610 bps better than the second quarter.
Not surprisingly, PAM's utilization metrics fell due to the congestion.
The 45% increase in the per-mile rate ($2.70 excluding FSC, $3.11 with), was met with a 150-bp increase in deadhead, or empty miles, with total miles declining 6.3% year-over-year (loaded miles down 7.8%).
"We continued to see significant disruptions from some of our biggest customers in the third quarter and it accelerated quarter-over-quarter, but we are getting better at navigating the disruptions and that shows in our results this quarter," President Joe Vitiritto said.
Even with the disruptions, PAM's revenue per tractor per week was up 30.4% year-over-year, which any carrier would take in any quarter. Also worth noting: Without the chaos and drag on utilization, the per-mile rates carriers are recording wouldn't be so high to begin with.
The higher rates led the carrier to $1.87 in EPS, more than triple year-over-year and 41% higher than the second quarter. The stock popped in Friday's trading session, up more than 18% compared to the S&P 500, which was up 0.8%.
Table: PAM Transportation's key performance indicators
On Friday, J.B. Hunt Transport Services JBHT beat analysts' estimates by 11 cents, posting EPS of $1.88. The result was 27 cents higher than the second quarter and 70 cents better year-over-year. Shares of the multimodal transportation heavyweight jumped 8.7% on the report.
Congestion in the ports, slower service on the rails and delays turning trailing equipment at shipper warehouses weighed on results in its largest division, intermodal.
Intermodal revenue increased 16.6% year-over-year even though network disruption resulted in a 6.1% decline in loads, and container turns slowed from 5.6x in the year-ago quarter to 5x. Box turns also dipped 1.7% sequentially from the second quarter even though J.B. Hunt enacted stricter enforcement of accessorials to customers holding onto equipment longer.
Revenue per load, which benefited from a better freight mix, higher rates, accessorials and higher fuel surcharge revenue, was up 24.1% year-over-year. Management didn't provide any specifics on core price increases other than to say pricing will continue to cover cost inflation, which was up 20.4% per load in the quarter.
J.B. Hunt is adding 12,000 containers to its fleet of more than 102,000 to meet heightened demand and improve network fluidity. However, management wasn't ready to say when the equipment additions would start to improve box turns.
"We're focusing with our customers every single day on how to improve that number related to their actions that are influencing it," said Darren Field, EVP of intermodal, on a Friday call with analysts. "I would have said at the end of Q2 that I can't imagine it getting worse, and you know what, it did."
Even with the noise in the quarter, the intermodal OR improved 270 bps year-over-year to 88.3%.
Table: J.B. Hunt's key performance indicators – intermodal
J.B. Hunt's dedicated segment recorded 280 bps of OR deterioration at 88.2%. However, the company has been onboarding new contracts at a record clip, adding 774 revenue-producing trucks sequentially in the quarter. New business wins are associated with startup costs and can take several months to ramp to normalized profitability.
Revenue increased 20.2% year-over-year but operating income was basically flat with last year and the second quarter.
The company's TL unit posted a stellar result.
Revenue was up 86.6% year-over-year, with rate increases driving the bulk of the move higher. Revenue per loaded mile excluding FSCs increased 36% (up 38% to $3.70 including fuel) with contractual rates climbing 29%. The OR improved 450 bps to 92.8%.
J.B. Hunt's TL segment is not a true comp to traditional over-the-road fleets. It has a lighter asset profile as it deploys drop-trailer capacity to customers and utilizes a tractor fleet that is more than 60% tied to owner-operators.
In a Monday note to clients, Morgan Stanley MS analyst Ravi Shanker increased his earnings estimates for J.B. Hunt by roughly 5% for this year, next year and 2023. He maintained his "equal-weight" rating on the name, saying that the stock already trades at a high valuation multiple and its ability to charge accessorials in the future may not continue.
"There remains too much uncertainty ahead to get overly excited about 2022 at this time. We are still unsure how much of the 2Q and 3Q beats were driven by ‘cost recovery actions,' and we are unsure how sustainable that is heading into 2022," Shanker said.
Table: J.B. Hunt's key performance indicators – dedicated and truckload
It's all about labor going forward
Of the three carriers that have reported third-quarter results thus far, all cited labor challenges as a major concern in the near term and potentially longer.
"We also believe that hiring and retention of employees has reached levels of unprecedented challenge across our industry for both carriers and shippers," Gerdin said. "We believe that this shared challenge of hiring and retaining both drivers and other supply chain critical employees will continue in the year ahead."
Nick Hobbs, J.B. Hunt's COO and president of contract services, said issues with workers are widespread.
"It's across the board. It's maintenance techs, it's drivers. There's going to be tremendous pressure on wages. I see that continuing on for quite some time, all throughout the supply chain," Hobbs said.
J.B. Hunt expects the current upheaval in the supply chain to intensify in the near term and push peak season deeper into November and December. That will carry the inventory replenishment cycle into the first half of next year, meaning first-quarter results will likely be "unusually stronger."
Chief Commercial Officer Shelley Simpson hopes "the cost that our customers are experiencing today in their budget will not be the long-term cost for their budget." But she sees wage inflation lingering for a while.
"The underlying cost of drivers, equipment that is going to stay," Simpson added. "I don't see in this environment taking driver wages down or customers taking their own wages down. Our equipment is not getting any cheaper."
Table: Q3 TL earnings calendar
Click for more FreightWaves articles by Todd Maiden.
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