Werner Enterprises (NASDAQ: WERN) continued to roll along in the third quarter of 2020, buoyed by a client list responsible for moving essential goods.
The Omaha, Nebraska-based truckload (TL) carrier reported adjusted earnings per share (EPS) of 69 cents on Wednesday after the market close. The result was ahead of consensus estimates ranging from 65 cents to 67 cents.
Management implemented a new long-term average margin goal for its TL segment. The new adjusted operating margin target, excluding fuel, is expected to average 13% throughout the cycle. The company expects to be well ahead of this mark in 2021 given several factors. The old target was 11%.
Werner’s four largest retail customers reported an average increase of 15% in same-store sales during the most recent quarter. Average inventories per store were down 8% over the same period, indicating that the restocking cycle has a long runway. On the Wednesday evening conference call, management said some customers are thinking it will take multiple quarters of inventory build to get their supply chains to a comfortable operating level.
On the capacity front, management said truck supply will remain constrained. They noted 2020 has produced significant declines in the available driver pool, which they expect to continue. Aging drivers, those sidelined by failed drug tests and issues obtaining permits from the government agencies, were a few of the cited headwinds limiting capacity.
Asked if rising Class 8 truck orders would impact the tightness in supply, management said the increases are coming from an all-time-low base and that truck counts at most fleets throughout the industry declined during the quarter. They also view a rising-cost insurance market as a barrier to entry.
All in all, management sees a “stronger setup” going into 2021 than they saw heading into 2018, noting that the economy isn’t even fully open yet. The “rate environment’s going to be robust,” they added.
Third-quarter results
Werner’s TL segment reported level revenue excluding fuel surcharges compared to the third quarter of 2019. Both segments, one-way and dedicated, reported mid-single-digit increases in revenue per tractor per week during the 2020 third quarter. The demand strength is stemming from a customer portfolio of discount and home improvement stores as well as providers of consumer-packaged goods.
Revenue per total mile increased 3% year-over-year in the one-way segment during the quarter, and the new guidance calls for this metric to be up 3% to 5% year-over-year during the fourth quarter. The level revenue result was due to a 370-unit decline in average tractors in the one-way segment, with the dedicated tractor count remaining flat. Management said the reduction was the result of difficulty finding drivers.
Price increases and “aggressively managing expenses” resulted in an adjusted TL operating ratio (OR) of 84.5%, 380 basis points better year-over-year. The company has achieved $20 million in annualized and sustainable cost savings.
Logistics revenue, 60% of which is TL-related, fell 3% year-over-year, with the gross margin declining 440 basis points to 10.8%. TL logistics loads were down 15%, with revenue per load remaining flat. The decline in gross margin was the result of surging spot rates, which forced the company to pay more for TL capacity in order to meet contractual rate agreements.
The logistics division posted a loss of $852,000, but management is forecasting profitability for the segment in the fourth quarter.
Werner ended the quarter with $40 million in cash and $175 million in debt. Net capital expenditures guidance increased to a range of $275 million to $300 million, which in part will be used to invest in the fleet and terminals. The company ended the period with an average tractor age of 2 years.
Cash flow from operations was $59 million in the quarter, and free cash flow is expected to be in excess of $150 million this year, a step down from current levels. Equipment purchasing has been weighted to the back half of 2020 given COVID-related outages at the original equipment manufacturers.
Werner provided a first look at a newly formalized sustainability program. The company plans to achieve a 55% reduction in carbon emissions by 2035, add three associate resource groups by the end of 2021, and launch a formal diversity leadership program by the end of the first quarter.
Shares of WERN are off 2% in after-hours trading.
