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Making continued progress implementing sustainable rate increases
Werner Enterprises, Inc. has reported record Q2 earnings. The Company announced that freight demand in Q2, 2015 and so far in July 2015 continues to be stronger than the prior five years, with the exception of the same period in 2014 which was rebounding from severe winter weather in Q1, 2014 that temporarily backed up the freight network.
Constrained truck capacity combined with a gradually improving economy in the retail, consumer products and grocery products markets are contributing to strong freight demand.
Truckload industry capacity is being challenged by an extremely competitive driver recruiting market and heightened regulatory cost increases for safety and truck ownership, and this favourable trend will continue. There are numerous pending and proposed federal safety initiatives that could further limit truckload and driver capacity in the next few years, including mandatory electronic logging devices (ELD’s), a national drug and alcohol driver data base, increased minimum liability insurance requirements for carriers, more sophisticated drug screening procedures for drivers and mandatory truck speed limiter devices.
Total revenues in Q2, 2015 decreased 1.0% to US$534.6 million, as operating income increased 23.0% to US$52.2 million. Net income climbed 24.0% to US$31.8 million. Trucking revenues, net of fuel surcharge, increased 6.0% to US$353.1 million.
For the H1, 2015 period, total revenues were down 0.4% to US$1,030.3 million, as operating income increased 37.0% to US$90.4 million. Net income climbed 38.0% to US$55.0 million. Trucking revenues, net of fuel surcharge, increased 6.0% to US$682.2 million.
Average revenues per tractor per week, net of fuel surcharge, increased 3.5% in Q2, 2015 compared to Q2, 2014. Continued focus on securing driver friendly, highly productive freight and improved freight selection enabled the Company to essentially maintain average miles per truck in a strong, but not as stellar a freight market as Q2, 2014. Average miles per truck declined slightly by 0.2% in Q2, 2015 compared to Q2, 2014. Average revenues per total mile, net of fuel surcharge, increased 3.8% in Q2, 2015 compared to Q2, 2014.
The Company is making continued progress implementing sustainable rate increases with customers. These efforts are ongoing, as it works to recoup the cost increases associated with more expensive equipment, a shrinking supply of qualified drivers and an increasingly challenging regulatory environment. Strategic customers understand the collective capacity and service challenges facing the industry and are supportive of Werner's ongoing initiatives to provide sustainable transportation solutions in support of their supply chain needs.
In Q2 2015, the Company averaged 7,247 trucks in service in the Truckload segment and 51 intermodal drayage trucks in the VAS segment. On the strength of an intense company-wide focus to improve driver recruiting and retention, it ended Q2. 2015 with 7,275 trucks in the Truckload segment, a sequential improvement of 165 trucks compared to Q1, 2015 and a year-over-year improvement of 240 trucks compared to Q2, 2014. The Specialized Services unit, primarily Dedicated, ended the quarter with 3,700 trucks (or 51.0% of the total Truckload segment fleet).
Diesel fuel prices were US$1.15 per gallon lower in Q2, 2015 than in Q2, 2014 and were 9 cents per gallon higher than in Q1, 2015. For the first 20 days of July 2015, the average diesel fuel price per gallon was US$1.16 lower than the average diesel fuel price per gallon in the same period of 2014 and US$1.11 lower than in Q3, 2014.
The Company increased capital expenditures in the last 12 months to lower the average age of its truck fleet and attained an average age of 2.0 years as of June 30, 2015, which compares to an average age of 2.4 years as of June 30, 2014.
The driver recruiting market remained very challenging during Q2, 2015. Several difficult market factors persist including a declining number of, and increased competition for, driver training school graduates, a gradually declining national unemployment rate, aging truck driver demographics and increased truck safety regulations.
To provide shippers with additional sources of managed capacity and network analysis, Werner continues to develop its non-asset-based VAS segment. VAS includes Brokerage, Freight Management, Intermodal and Werner Global Logistics (International). In Q2, 2015, VAS revenues increased US$2.9 million or 3.0%, and operating income dollars increased US$2.7 million or 122.0%, compared to Q2, 2014. On-going efforts to address customer pricing, contractual and operational issues within VAS resulted in the best quarterly gross margin and operating income percentages since Q2, 2013. The VAS gross margin percentage in Q2, 2015 of 15.5% improved year over year compared to the gross margin percentage of 13.2% in Q2, 2014 and also improved sequentially from the 14.3% gross margin in Q1, 2015. The VAS operating income percentage in Q2, 2015 of 4.8% improved from Q2, 2014 of 2.2% and Q1, 2015 of 2.7%.
Fluctuating fuel prices and fuel surcharge revenues impact the total company operating ratio and the Truckload segment's operating ratio when fuel surcharges are reported on a gross basis as revenues versus netting against fuel expenses. Eliminating fuel surcharge revenues, which are generally a more volatile source of revenue, provides a more consistent basis for comparing the results of operations from period to period. The Truckload segment's operating ratios for Q2, 2015 and Q2, 2014 are 88.7% and 91.1%, respectively, and for year-to-date 2015 and 2014 are 89.7% and 92.9%, respectively, when fuel surcharge revenues are reported as revenues instead of a reduction of operating expenses.