A shortage of drivers dented Celadon Group’s earnings potential in the third quarter and is the primary reason why it is hunting for other motor carriers to acquire, company executives said during a conference call with analysts Thursday.
The company’s biggest negative was a 6 percent reduction in seated trucks – available equipment with a driver behind the wheel – compared to 2010 “and that probably cost us 8 or 9 cents a share in earnings,” Chairman and Chief Executive Officer Stephen Russell said.
During the quarter Celadon had slightly more than 2,500 manned vehicles.
The Indianapolis-based company reacted three weeks ago by buying the distressed dry van business of Frozen Food Express Industries, which announced Oct. 5 that it would concentrate on its refrigerated transportation operation and sell off non-temperature controlled trailers and associated tractors.
Russell said Celadon typically retains 65 percent to 75 percent of the drivers and two-thirds of the customer base in the wake of acquisitions.
The company has bought about 10 companies in the last decade.
Shippers are experiencing tight truck capacity as freight volumes pick up this fall from previous months and a smaller driver pool is part of the reason, industry officials say. Russell attributed the driver crunch to the Department of Transportation’s new Compliance Safety Accountability system and the temporary extension last year of federal unemployment insurance coverage up to 99 weeks.
CSA is designed to reduce large truck crashes by utilizing more real-time data to better monitor driver and carrier safety performance, and target enforcement on the most risky actors. The DOT is now able to track violations and assign scores to individual drivers. Those above a certain threshold receive a red flag. Carriers, who are ranked in certain safety categories, are now weeding out less safe drivers so their own scores aren’t negatively affected and they don’t become a liability risk in the mind of their customers. Analysts have estimated that 5 to 8 percent of the driver population could be lost because of CSA.
Russell said unemployment benefits are also making it difficult to recruit drivers because their after-tax income – factoring in the expense of meals, showers at truck stops and other over-the-road expenses in excess of per diem – is not enough to make them forego the money they make without working.
Celadon’s strategy is to buy other trucking companies for their drivers and customers and replenish the fleet with modern equipment. It has a $100 million line of credit with attractive interest rates at its disposal for such moves.
“We believe that will . . . put us in a better position as far as dealing with the driver shortage than other fleets might be able to do,” Chief Operating Officer Paul Will said.
The truckload carrier plans to dispose of the equipment it acquired in the FFE sale before the end of the fourth quarter, Russell said.
FFE drivers are excited because Celadon’s policy is that those with the oldest trucks get new replacement vehicles first, he added. FFE’s tractors were five years old on average.
Drivers want new equipment that doesn’t break down because they usually get paid by the mile and because they could get dinged under CSA’s vehicle maintenance category.
On Oct. 11 Celadon also took advantage of the lower stock price to purchase a 6.3 percent stake in USA Truck, a Van Buren, Ark.-based competitor. Celadon officials expressed frustration Thursday that their subsequent overtures to enter into talks on a possible merger or other arrangement with USA Truck have been rejected.
Russell suggested that USA Truck officials should be open to assistance given their recent financial results. USA Truck lost $4.3 million in the third quarter and $6.4 million in the first nine months of the year on the heels of a $1.5 million loss during the same period in 2010.
USA Truck, in a statement, said it wants to stay the course after recently implementing several management changes and operational improvements.
Celadon Group is the 42nd largest carrier in the nation and USA Truck ranks number 50 in the Transport Topics Top 100, based on 2010 revenue.
Celadon posted a 10.5 percent gain in operating income to $8.9 million in the third quarter ended Sept. 30 primarily on the strength of fuel surcharges. The truckload carrier said freight revenue decreased 6 percent to $112.3 million from $119.5 million during the prior year quarter, but fuel surcharge revenue increased 40 percent to $29.2 million.
Net income for Celadon, which includes freight brokerage and dedicated distribution units, increased 22.7 percent to $5.4 million. Earnings per diluted share increased 20 percent to 24 cents compared to the third quarter of 2010.
Celadon said it ended the quarter with $500,000 in cash.
The trucking group’s productivity, or operating ratio, improved by more than a point to 92.1 helped by lower equipment costs, cost controls on fuel use, better rates (a 6 cent increase in the average rate per loaded mile to $1.53) and improved earnings from Mexico operations.
Under the leadership of Will, who was promoted to COO last November, the carrier has reduced its trailer count by more than 1,200 units from a high of 9,300 a year ago. “Historically, our president and COO was a sales-oriented person and wanted to keep trailers because you never know you if you might get a booking here or there. Paul and his folks have really streamlined that and that is a meaningful saving,” Russell said.
During the past year, Celadon has also reduced the average age of its trailer fleet from 6.2 to 4.4 years. More than a quarter of the trailer fleet is now less than one year old with the deployment of more than 2,000 new trailers with aerodynamic side skirts, Celadon said in its quarterly report.
The gains in operating efficiency were achieved despite a drop in loaded miles due to the lack of drivers, better yield management that resulted in turning down customers with inefficient warehouse docks and a 2.8 percent decrease in miles per truck versus a year ago.
In the conference call, executives acknowledged that training drivers the past six months in the use of electronic onboard recorders may have slightly impacted productivity because the drivers have to come off the road for a day or two to learn how to operate the devices. Large motor carriers are installing the systems on their fleets to monitor their driver’s duty time ahead of expected government mandates to better ensure against fatigue behind the wheel.
The FFE deal is expected to be a wash for Celadon in terms of the impact on financial results because it plans to sell the purchased equipment and recoup its acquisition costs in the same quarter. Celadon essentially financed the disposal of outdated equipment for FFE in exchange for the opportunity to get access to FFE drivers and customers. Celadon officials declined to specify how much they paid for FFE’s assets, but said it was slightly less than FFE solicited in early October because FFE had already sold some units from its dry van fleet.
FFE at the time said it planned to sell 435 trailers and 290 tractors for about $15.5 million. Immediately following FFE’s divestiture announcement, Celadon sent a 10-person “SWAT” team on a flight to Dallas to evaluate the drivers, equipment and book of business, Russell said.
By selling to Celadon, FFE avoids having to remarket used equipment itself and can get the money all at once so it can focus on its core business, Will said.
Dallas-based FFE has offered to carry dry freight for existing customers on certain lanes as backhauls for its temperature-controlled trailers. Will said that FFE can also partner with Celadon now to meet customer needs for dry van service.
(For more analysis about the truck and driver shortage, and its implications for shippers, see the cover story, “Where Did the Trucks Go?” in the American Shipper November issue.) – Eric Kulisch
Celadon hits acquisition trail for driver capacity
