Werner beats in Q1, expects spot-market carriers to fail

A white Werner tractor with a white trailer on the highway

Werner Enterprises maintained its 2022 outlook on a call with analysts Tuesday after the market closed. Management from the company noted that freight demand for its one-way truckload fleet was strong to start the quarter but “moderated in March from strong to very good.”

Werner (NASDAQ: WERN) reported first-quarter adjusted earnings per share of 96 cents, 9 cents ahead of the consensus estimate and 28 cents higher than the year-ago mark. The result excluded one-offs including an 11-cent-per-share unrealized loss tied to equity investments in autonomous technology companies. Gains from equipment sales were 12 cents higher per share year-over-year as used truck values have soared on production delays among manufacturers.

This was the seventh consecutive quarter that Werner posted record adjusted EPS.

Price increases continue unabated

The one-way TL segment, 37% of Werner’s 8,200-unit fleet, only generates 10% of its revenue in the spot market. Contractual rates in the segment have increased by a low-double-digit percentage so far in 2022 as the division remains “consistently oversold.”

One-way revenue increased 19% year-over-year to $187 million as revenue per truck per week increased 11% and average trucks in service increased 7%. The dedicated fleet reported 13% year-over-year revenue growth as the fleet count increased 5% and revenue per truck per week was up 7%.

Roughly 60% of Werner’s freight is tied to retail, with the majority coming from discount retailers and home improvement stores. The revenue book from that group is growing as its top customers are logging top-line growth of 17% on average.

“That population of our customers are winning in their space, and that’s why we worked very aggressively to develop relationships with them,” Derek Leathers, chairman, president and CEO, stated on the call. “Our conversations with our customers, especially as it relates to Q2 and things like back to school and normalized projects, that frankly during COVID didn’t exist much, that are now coming back online is encouraging to us.”

Werner completed 45% of its contractual rate negotiations in the first quarter, with an additional 25% in the works currently. So far, there has been no change of course. The company raised revenue-per-truck-per-week guidance in its dedicated division by 1 percentage point at each end of the new range of 4% to 6%. The one-way revenue-per-total-mile forecast was lowered by 2 points to a range of 14% to 17%.

Table: Werner’s key performance indicators

Spot market woes not a concern for Werner

Leathers said carriers reliant on the spot market are likely in trouble.

“I think the washout will be severe,” he said. “We’ve seen an absolute explosion of single-vehicle registrants as new entities as they chase these spot market opportunities. What they all have in common is they overpaid for equipment. They’ve paid up to get drivers. They’re bearing the brunt of overexposure to the spot market that has seen deflationary pressures over the last 90 days.

“But that has very little to do, or bearing, on what we do for a living.”

Pushed on what a downside scenario might look like for Werner, the answer was a 27% decline. The scenario assumed moving the TL margin from the 16.4% average recorded over the past 12 months to the low end of its long-term range for the division, 12%. Management doesn’t see the low end of the range coming into play in the future.

The TL division posted an 83.6% operating ratio (16.4% operating margin) in the first quarter, which was 220 basis points better year-over-year. Higher rates more than offset cost inflation.

“We don’t think that’s in the cards based on the more defensive nature of the portfolio today,” Leathers added. “It’s much more durable than it was in any prior cycle.” The comments were directed to the fact that the company now has “a degree of insulation” as the bulk of its TL network is operating under long-term contractual agreements.

Cash flow from operations increased 14% year-over-year to $155 million in the quarter. Cash on hand was $126 million, with total debt of $426 million. Net debt-to-earnings before interest, taxes, depreciation and amortization stood at 0.5x at the end of the quarter.

Management said it will continue to explore share buybacks and acquisitions as a means of deploying cash. It repurchased $36 million in stock during the first quarter.

The 2022 net capital expenditures budget was reeled in by $25 million to a range of $250 million to $300 million. Production delays were the reason.

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