Fleetowner 7700 Werner1

First look

April 18, 2008
“Unprecedented high diesel fuel prices, continued softness of freight demand, weaker demand in the used equipment sales market, and worse than normal winter weather conditions created the most challenging quarterly period in many years for Werner and the ...

Unprecedented high diesel fuel prices, continued softness of freight demand, weaker demand in the used equipment sales market, and worse than normal winter weather conditions created the most challenging quarterly period in many years for Werner and the truckload industry in first quarter 2008.” -From Werner Enterprises‘ first quarter earnings report.

Every trucker worth his salt knows it‘s tough out there. Now, we‘ve got the data to prove it, as first quarter earnings reports roll in from some of the biggest publicly traded carriers in the industry.

According to truckload carrier Werner Enterprises it‘s been one of the toughest quarters in many years (as the quote above duly notes) and that‘s saying something for a company that‘s been around since 1956.

Werner noted in its first quarter earnings release that revenues, excluding trucking fuel surcharges, declined 6% to $417 million in first quarter of 2008 compared to $443.5 million in first quarter of 2007. Earnings per share decreased 43% to12 cents a share, compared to 21 cents per share in first quarter last year.

It‘s interesting to note, though, that if you include fuel surcharges, Werner‘s revenue stream actually increased 2% to $512.8 million in first quarter of 2008 compared to $503.9 million in first quarter 2007. Yet despite that gain, fuel costs are still eating a hole in Werner‘s pockets.

Compared to the same months in 2007, Werner said diesel fuel costs were 88 cents per gallon higher in January 2008, 92 cents per gallon higher in February 2008, and 117 cents per gallon higher in March 2008. “Due to the rapid increase in diesel fuel prices during first quarter of 2008, there was a lag between the timing of the fuel cost increase and the delayed recovery of fuel surcharge revenues that caused the company‘s fuel surcharge recovery percentage to fall below the typical recovery rate,” the carrier noted. “For the first 16 days of April 2008 compared to the same period in 2007, average fuel prices increased 110 cents per gallon.”

Then of course there‘s the continuing softness in freight demand, most noticeable in Werner‘s medium-to-long haul dry van business segment.

“The continuing softness in the housing and automotive sectors that are not large markets for Werner caused carriers that serve these markets to compete more aggressively in the consumer non-durable markets principally served by Werner,” the company noted. “In addition, slowing economic growth and retail inventory tightening also contributed to lower freight demand. These factors and the significant increase in truck supply caused by the industry truck pre-buy prior to the 2007 engine regulation change led to a very competitive market in first quarter of 2008.”

Other carriers are noting similar conditions. Describing the business climate as “lackluster at best,” Douglas Stotlar, president and CEO of Con-Way Inc., said, “We‘re operating in a challenging and uncertain economic environment, which continues to restrain demand and place pressure on pricing and margins. Based on current economic data and feedback from our customers, there appear to be few catalysts to accelerate demand in the freight markets, at least in the short term.”

Some metrics that Con-way noted show the impact higher fuel prices are having on the bottom line of many carriers. For Con-way, the impact on its trucking freight business looks like this:

-- Operating income of $36.1 million, a decrease of 24.3% from the $47.7 million earned in the first quarter of 2007. The decrease reflected the effect of unprecedented fuel costs, the influence of pricing pressures on cost recovery, and higher operating expense. Income in the first quarter of 2008 also was lower in part due to $5.2 million in expenses for completion of Con-way Freight‘s business transformation.

-- Revenues of $743.3 million, a 9.4% increase over last year‘s first-quarter revenues of $679.7 million.

-- Tonnage per day handled by Con-way Freight increased 3.1% over the first quarter of 2007.

-- Yield for Con-way Freight improved 7.8% from the first quarter of 2007 ... however, if you exclude the carrier‘s fuel surcharge, yield improved only 2.1%.

-- Finally, there‘s the operating ratio - and in this case the higher the number, the worse the ratio. Con-way Freight said it recorded an operating ratio of 95.2 in the first quarter of 2008 compared to 93.2 in first-quarter last year, reflecting the extraordinary escalation in fuel costs, pricing pressures and higher operating costs. Excluding the previously noted business transformation costs, the operating ratio reached 94.4 for the first quarter this year.

Not pretty, by any stretch of the imagination, but then again all things considered things could be worse.

Nevertheless, Con-way is lowering its earnings outlook for 2008, now expecting diluted earnings per share from continuing operations to be between $3 and $3.40 per share, down from its previous estimates of $3.40 and $3.80 a share.

“Given the weak demand environment and the inflationary effect of unprecedented energy costs, we believe pricing will remain under pressure for some time,” said Stotlar. “Until such time as we have tangible evidence of improving economic conditions we believe a cautious, measured approach to the outlook for earnings is warranted.”

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