Heartland CEO: More than two years needed to get operating rates down following IDC acquisition

Heartland Express CEO Michael Gerdin said Tuesday it might take 2 1/2 years to get the company’s operating rates down to the low 80’s, following the acquisition and ongoing integration of its July purchase of Interstate Distributor Co.

Presenting at the Stifel 2018 Transportation and Logistics Conference, in person and via a webcast (which FreightWaves listened to, so information and graphics on slides were not available), Gerdin said Heartland’s operating rates were solidly in the mid 80’s just before it bought IDC. “It’s a great acquisition, but it had a little bit of weight to it, and we’re still working on that today,” he said. “We still have some work to get to an optimal operating ratio. We anticipate this to be a 2 1/2 year process, but with the current freight market and with the efficiencies we’re gaining with the amount of freight out there, it may take us less time to get there.”

Gerdin said there was no surprise in the troubled finances of IDC. “We knew this going in, that they had an operating rate more than 100,” he said. “You don’t just take a carrier operating at over 100 and get it into the 80’s in two quarters. It takes more time than that.”

The IDC acquisition came four years after Heartland first took a West Coast presence with the $300 million acquisition of Gordon in 2013; the enterprise value of the IDC purchase was $113 million. The West Coast footprint that those two acquisitions gave Heartland, if attempted through organic growth, “would take the rest of my career to do,” Gerdin said. “I did it with two strokes of the pen.” Additionally, organic growth is difficult during a time of such a tight market for drivers. “To grow organically, we would have to do an outstanding job retaining drivers when drivers are very short,” he said. “Acquisitions make a lot of sense as we go forward.”

The rise in Heartland’s operating rate becuase of the IDC acquisition has been one of the drivers behind several Wall Street equity analysts hanging a fairly rare “sell” rating on Heartland’s stock. Earnings for the fourth quarter also failed to meet consensus estimates.

Heartland may not be done buying. The Gordon acquisition was made through a combination of cash and debt, the latter of which was paid back in a little more than a year. The IDC transaction was all cash. Heartland has a $175 million borrowing line and a balance sheet free of debt. Heartland drew down its cash stockpile to buy IDC, but Gerdin said the company is in cash-building mode again, though growth in the cash stockpile in 2018 is expected to be small.

Capital expenditures have continued–though stock buybacks have not–and as a result, Geridn said the company’s average tractor by the end of 2018 will be 1.3 years old, compared to 1.8 at the end of 2017. Gerdin said the company views that as a retention tool: “drivers love new trucks.”

Gerdin raved about the current strength of the freight market several times in his presentation, calling it the “best truckload market that any of us has ever seen.” Heartland has “not seen this many turndowns in many years,” where the company rejected a shipping offer for any one of several reasons, but driver supply being a leading one. “If we have this many turndowns in January, who knows what the rest of the year looks like?”

Bid week activity that is ongoing will probably show price increases of 4-5%, Gerdin said. He noted that last fall, he had predicted that the increase would be more like 3-4%. The ELD manadate is having an impact on the market, Gerdin said, “but it is really going to have an impact on April 1 when they start to enforce things.”

But retention of drivers was a theme he frequently revisited. Heartland’s turnover rate has generally trended in the 75%-85% range, Gerdin said, compared to the industry average of more than 100%. Heartland acquired about 150 owner/operator relationships in the IDC purchase, Gerdin said, but owner/operators are a “dwindling breed.” Back in the 90’s, about half of Heartland’s drivers were owner/operators, “but a lot of our OO’s just turned their trucks in and went back to driving company for us.”

 

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