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Werner Sees A Decent Peak Season, Capacity Shakeout Coming

FreightWaves

Werner Enterprises Inc. (NASDAQ: WERN) echoed the recent sentiment that seasonality has returned to the truckload (TL) market.

In a question-and-answer session at the Morgan Stanley 7th Annual Laguna Conference, Werner's president and CEO Derek J. Leathers provided an update on the current market.

Leathers said that he is more encouraged by an uptick in recent freight trends. After a tough first half of the year that carried through July, the TL carrier is experiencing some typical seasonal improvement. Leathers cautioned that the recent improvement in market conditions is still not at the levels seen during 2018's freight boom. However, he said that the company is having "good dialogue with its customers regarding peak season and that they have already "firmed up" some peak season commitments.

Leathers believes that the truck market could tighten more meaningfully in 2020 and pointed to the spike in carrier failures and bankruptcies thus far in 2019 as a catalyst. He said that there is a large number of carriers that are likely just hanging on. He believes that carriers from five trucks up to 200 units, the bulk of the industry, are likely operating with 20% to 50% of their equipment in the spot market, off of contract. "None of those carriers were making 20% margins last year, and all of those carriers are enduring 25% lower spot rates," said Leathers.

He believes that those rates are too low and estimates that fleets more than 20% exposed to the spot market are operating at operating ratios (ORs) at 100% or worse. OR is a key financial metric used by TL companies to measure profitability prior to paying interest and taxes. A 100% OR means that the carrier was break-even before paying below the line items like interest and taxes.

Additionally, TL insurance premiums continue to increase. Leathers said that some of these carriers are likely to see renewals with increases as much as 70% to 150%. An increase most fleets can't absorb.

Leathers said that truck capacity is being corrected currently as truck order rates have declined precipitously and cancellations have increased. He said that there is an abundance of readily available data that is helping to quicken decision-making throughout the industry suggesting that the cycle could play out faster than in the past. These occurrences, along with new regulations, could force more carriers to exit the industry.

He said that Werner recently converted to full implementation and compliance with electronic logging devices (ELDs). He believes that the mandate from automatic onboard recording devices (AOBRDs) to ELDs is more cumbersome than many think and could curb capacity/productivity by 1% to 3%. He said that some of the industry has converted to the required devices, but he doesn't believe a large portion are operating them and fully compliant yet. He indicated that the pain will come once they turn on the device.

Further, he believes that a national drug and alcohol clearinghouse, which may eventually require hair testing in lieu of urine analysis for drug testing, could have material capacity consequences for the industry. He said that as drug test failures begin to be reported in January and carriers query the database on potential hires, it will have an impact on driver hiring and availability. Leathers believes that if hair follicle testing is approved as an acceptable vetting tool, whether or not it's mandated, it will likely become the norm throughout the industry. The thought is that no carrier will want to face a jury without requiring hair follicle testing of its drivers once the method is approved and accepted.

Leathers believes that there is a "large swath of the industry" that is operating at a loss. He said that the recent uptick in spot prices will save some carriers, but he believes that "they're on life support either way."

WERN stock chart – SONAR: STOCK.WERN

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