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Supply Chain News: Q4 Profits Up Big for Truckload Carriers Due to Tax Law Changes

 

Rates were Up Strong, but so Were Driver Costs Amid Growing Shortage

Feb. 26, 2018
SCDigest Editorial Staff

Profits in Q4 were up big time for most US truckload carriers, but that was mostly due to the changes to US tax policies signed into law in December, as performance otherwise seemed lackluster amid strong demand for freight.

We're back here with our usual quarterly review of results and trends by US transportation mode, starting this week with truckload carriers and their Q4 2017 earnings reports, followed next week with a review and the rail sector and LTL the week after that.

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"Driver availability was the primary constraint to further revenue growth during the fourth quarter of 2017," Knight-Swift said.

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The changes to the tax law were huge, as it enabled carriers to re-estimate their tax burdens, which are factored in before reporting net income.

For exampLe, Q4 profits at Werner were up a whopping 547%, as it said it benefitted from a $110.5 million reduction in Q4 income tax expense.

 

Without that boost, profits would have been a much lower but still strong 40%.

 

The refrain from most of the truckers was similar: strong demad and solid pricing power, but those positives were offset by difficulty finding enough drivers and rising costs to attract and keep them.

 

Schneider, for example, said that "A tight supply and demand environment existed in the fourth quarter and our price improved across the board - contract, tier and spot - as customers responded to driver capacity constraints in the market."

The American Trucking Associations' Freight Tonnage Index has of late been mostly showing strong freight volumes, up 3.7% for all of 2017, the highest jump since 2013.

 

Year over year, the ATA index was up 5.9% in December and 7.5% in November, putting pressure on capacity,

 

Meanwhile, data from the Cass Linehaul Index, which measures US per mile truckload rates before fuel surcharges and other accessorials. showed rates were up a strong 5-6% year-over-year in October, November, and December, making it six months in a row of higher rates after an unprecedented nine straight months of year-over-year declines. The streakof higher rates which was extended to seven months in January.

Also complicating our analyis for Q4 was the merger of Knight Transportation and Swift, with the new company called Knight-Swift Transportation. In the first full quarter of the new company's reporting, the comparable results from Q4 2016 are thrown out out off whack as basically the actually larger Swift results are reported as new revenues on top of the Knight revenue and profit base.

JB Hunt's commentary was illustrative of the quarter for most TL carriers. It said revenue per load increased  a robust 13%, primarily from a 12% increase in rates per loaded mile on an equivalent length of haul compared to fourth quarter 2016. However, these favorable changes from higher revenue per load were offset by higher driver wages and independent contractor costs per mile.

 

Interestingly, with rising rates, Schneider said it had success with "out of cycle contract discussions" with shippers.

 

All of the carriers cited the growing driver shortage as a huge issue.

 

"Driver availability was the primary constraint to further revenue growth during the fourth quarter of 2017," Knight-Swift said.

Average operating ratios, or operating expense divided by operating revenue, a key transport sector metric, actually rose on average in the quarter, from 89.7% on average for the group in Q4 2016 to 90.3% in this latest period. Part of that is due to a major jump in OR from Heartland Express, which said it decided to incur higher costs in the quarter to speed the integration of a July 2017 acquisition.

The full table of results from our carrier group is provided below. The big jump in Knight-Swift revenues comes from the merger
.

 

Q4 2017 US Truckload Carrier Results

 

 

Source: SCDigest Analysis from Company Earnings Releases

 


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As always, highlights of the comments from each carrier in their earnings releases are provided below, starting with Werner, which as usual uprovided the most in-depth commentary.

 

Werner

Huge gain in profits partly the result of a $110.5 million reduction in income tax expense.
Werner saw a 4.7% increase in average revenues per total mile in Q4.

Company said that "Freight metrics are improving, and we have increasing confidence that contractual rates will strengthen over the next few quarters."

Werner ended fourth quarter 2017 with 7,435 trucks in its truckload segment, a year-over-year increase of 335 trucks and a sequential increase of 60 trucks. Its dedicated unit ended fourth quarter 2017 with 4,000 trucks (or 54% of the total truckload segment fleet) compared to 3,650 trucks at the end of fourth quarter 2016.

As usual citing a challenging driver market, Werner said "We were pleased to grow our fleet by nearly 5% in 2017 in this difficult driver market. Our driver turnover rate once again improved, achieving our lowest fourth quarter and annual driver turnover rate in 19 years."

JB Hunt

Q4 results include a $309.2 million decrease in income taxes from our reasonable estimate of the change in future tax rates on deferred tax balances.

Revenue per load increased 13% primarily from a 12% increase in rates per loaded mile on an equivalent length of haul compared to fourth quarter 2016. However, these favorable changes from higher revenue per load were offset by higher driver wages and independent contractor costs per mile.

Dedicated contract services (DCS) segment revenue increased by 20%, primarily from the addition of new customer accounts and improved asset utilization.

In its intermodal unit, Hunt said revenue per load excluding fuel surcharges increased approximately 2% compared to a year ago.

Schneider National

Company said "A tight supply and demand environment existed in the fourth quarter and our price improved across the board - contract, tier and spot - as customers responded to driver capacity constraints in the market."

Schneider was able to seat additional drivers in QA as a result of recruiting efforts in Q3 of 2017.

With rising rates, company said it had success with "out of cycle contract discussions."
Schneider said compared to the fourth quarter of 2016, for-hire standard revenue per truck per week increased 7.6%, due to increased price and truck productivity.

Heartland

Company saw a deferred income tax benefit of $32.8 million in the quarter.

Heartland said earnings were hurt by costs related to the acquisition of Interstate Distributor Company (IDC) in July 2017, as it focused on "operational investments and decisions that resulted in short term increased operating expense" to get the companies integrated.

Added that "to attract new drivers to our organization, we introduced a consolidated pay package across all of our operating areas to address the ongoing issue in our industry of attracting and retaining safe and experienced over-the-road drivers."

Heartland also said it made the decision to end services which were not core areas of focus as an organization such as brokerage, intermodal, contract carriers, and eliminated the overuse of brokers and third party logistics customers which were a notable component of IDC revenues.

Knight-Swift

This was the first full quarter after the merger of Knight and Swift Transportation.

Company said that included in the results for the fourth quarter is an income tax benefit of $364.2 million representing management's estimate of the net impact of the Tax Cuts and Jobs Act enacted during the quarter.

It added that "We continue to face perhaps the most difficult driver environment we have seen, and we expect these conditions will persist. Sourcing and retaining drivers remains a top priority across our fleets."

It added that "The freight environment continued to strengthen in the fourth quarter and showed more staying power than is typical into late December and January. We believe we have begun experiencing the impact of the Electronic Logging Device (ELD) mandate in December, as seen through increased freight tenders as well as tightness in third party carrier capacity."

During the fourth quarter of 2017, the Knight trucking segment produced an adjusted operating ratio of 81.6% compared to 83.7% for the same quarter last year. The strong freight market and tight capacity provided non-contract revenue opportunities throughout the quarter and into January.

In addition, the company saw a huge 14.9% increase in revenue per loaded mile, excluding fuel surcharges, in the quarter.

In the still separately reported Swift Truckload segment, with the strong freight market, average revenue per tractor increased 6.7% compared to the same quarter of 2016, despite a 2.5% decrease in utilization which was pressured by driver availability.

"Driver availability was the primary constraint to further revenue growth during the fourth quarter of 2017," the company said.

Marten Transportation

Results that include a deferred income taxes benefit of $56.5 million related to the federal Tax Cuts and Jobs Act of 2017.

Marten's operating ratio 92.2% for the fourth quarter of 2017 versus 91.6% for the fourth quarter of 2016.

Average revenue per tractor was 7.1% in Marten's truckload operations and by 2.5% in its dedicated operations versus Q4 2016.


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