Werner Sees CDL, ELP Enforcement Affecting Capacity, Lanes
Class Action Lawsuit Settlement Payments Hit Bottom-Line Results but Revenue Increases 3%
Key Takeaways:
- Werner Enterprises reported a $20.6 million net loss for the third quarter, reversing a $6.6 million profit a year earlier, despite a 3% revenue increase to $771.5 million.
- CEO Derek Leathers said tighter enforcement of visa, licensing and English-proficiency rules could sideline up to 200,000 foreign commercial drivers, tightening truckload capacity.
- The company cited legal settlements, startup costs and insurance expenses as near-term headwinds but expects capacity reductions and new verticals to support longer-term growth.
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Among the usual analyst queries about the company鈥檚 financial performance, Werner Enterprises CEO Derek Leathers during his company鈥檚 third-quarter earnings call answered questions about how stepped-up enforcement of federal driver licensing and English-language proficiency laws is affecting truckload capacity.
鈥淐apacity continues to exit, and recent supply-demand tightening would suggest the pace is increasing, given developments surrounding non-domiciled CDLs, B-1 visas and English-language proficiency,鈥 Leathers said during the Oct. 30 call. Leathers suspects as many as 200,000 holders of non-domiciled CDLs could be affected but noted that those estimates can vary.
He also suggested that capacity reductions being driven by the visa, language proficiency and non-domiciled CDL issues could rival the driver exodus that followed when federally mandated electronic logging devices supplanted paper logs for most drivers.
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鈥淓ven at Werner 鈥 within our own results 鈥 we have pointed very clearly to the duress in the one-way over-the-road network,鈥 Leathers said. 鈥淭hat duress is pronounced through the proliferation of a lot of things, to include the B-1 visas, cabotage opportunities, ELP and lack of enforcement of existing laws, and the non-domiciled CDL proliferation.鈥 Cabotage refers broadly to drivers on Mexican CDLs staying in the U.S. to handle domestic loads after arriving stateside with cross-border freight.
鈥淎s this challenging operating environment continues, we are taking actions to position the business for long-term growth,鈥 Leathers said.
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Werner for Q3 reported a net loss attributable to itself of $20.6 million, or negative 34 cents per diluted share, compared with a net profit of $6.57 million, 11 cents, the previous year. Werner鈥檚 Q3 operating loss was $13 million, a shift from operating income of $17.6 million a year ago. Total Q3 revenue increased 3% to $771.5 million compared with $745.7 million.
Werner in Q3 reached an $18 million settlement in a class action lawsuit alleging unpaid wages, unauthorized deductions and other items. It incurred $3.4 million in legal fees related to this litigation. Werner listed these items as adjustments to its operating income on a basis not adhering to generally accepted accounting principles.
Segment Results
Performance across the company鈥檚 individual segments was a mixed bag.
Truckload Transportation Services revenue slipped 1% to $519.8 million compared with $522.8 million. Werner said the average number of trucks in service during Q3 increased 1.2% from the prior year, but average revenue per truck per week decreased 0.7%.
For dedicated TTS, average revenue per truck per week increased 1.3%, while one-way revenue per total mile increased 0.4%. The segment experienced an operating loss of $13.8 million during the quarter.
Logistics segment overall revenue increased 12% to $232.6 million from $206.8 million the previous year. Drilling down, truckload logistics revenue increased 13% due primarily to higher volume, while intermodal jumped 23% due to volume gains and relatively stable revenue per shipment.
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Final-mile revenue decreased 1% year over year but jumped 4% sequentially. Operating income came in at $3.01 million, compared with a net loss of $345,000 the prior year.
鈥淲e are building a foothold in new verticals like tech and aftermarket automotive parts,鈥 Leathers said. 鈥淏ut there is a short-term upfront investment as we pursue these opportunities. In terms of the challenges in the quarter, in logistics we experienced margin pressure from mixed changes, and in one-way, we saw decreased miles per truck, although we view this as temporary, as one-way production has been recovering throughout October.鈥
He added, 鈥淪tartup costs in dedicated were more elevated compared to the second quarter and more than we anticipated.鈥
TD Cowen analyst Jason Seidl in a report noted that Werner missed expectations due to startup costs and elevated insurance costs but said he expects headwinds to Werner鈥檚 margin performance to moderate sequentially. He also supported the case Leathers made during the call that driver exits compelled by visa and ELP enforcement will help balance capacity.
鈥淸Management] attested to on-the-ground checks, seeing non-domiciled drivers exit the market permanently driving rate firming in respective geographies,鈥 Seidl said.
Werner ranks No. 18 on the Transport Topics Top 100 list of the largest for-hire carriers in North America and No. 8 on the truckload sector list. Also, Werner ranks No. 32 on the TT Top 100 list of the largest logistics companies.
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