USA Truck, Inc.
Q4 2016 Earnings Call Transcript

Published: 7 Feb 2017

[Operator:]

Good day, and welcome to the USA Truck Fourth Quarter 2016 Earnings Conference Cal. All participants will be in listen-only mode [Operator Instructions]. After today's presentation, there will an opportunity to ask questions [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Jody Burfening. Please go ahead.

[Jody Burfening:]

Thank you, Alison. Good morning everyone and welcome to USA Truck’s fourth quarter earnings conference call. Joining us this morning from the Company are James Reed, President and CEO; Jim Craig, Executive Vice President and Chief Commercial Officer; Martin Tewari, President, Trucking; and Joe Kaiser Vice President and Principal Financial Officer. Before beginning the call, I would like remind everyone that this call will contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. And such statements are subject to the Safe Harbor created by those sections, and the Private Securities Litigation Reform Act of 1995 as amended. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated by the forward-looking statements. Please review our disclosures and our filings with the Securities and Exchange Commission. Also on today's call, management will be referring to certain non-GAAP financial measures in its analysis of the results to supplement the GAAP financial statements. A reconciliation of these non-GAAP measures to GAAP is provided in the tables at the end of the slide presentation accompanying today's conference call. With that introduction, I would now like to turn the call over to James. Good morning, James.

[James Reed:]

Good morning, Jody. Thank you very much. Thanks everyone for joining us this morning. Our focus on this call is fourth quarter earnings, but I want to begin by acknowledging our recent change in leadership with my appointment as CEO, and Jim to Chief Commercial Officer. We each have experience driving rapid and aggressive change in organizations, requiring significant operational improvements and will be the same here at USA Truck. Both of us and the rest of the USA Truck management team understand that we must execute and accelerate the pace of change at the Company. Our results have been unacceptable, and we are looking forward to leading USA Truck into the future on a much faster path. I'd like draw your attention to slide three to clarify what this change means to USA Truck and what you can expect from us in the future. This quote primarily grows sums up how I feel about the last several years in our Company. He said most companies don’t die because they are wrong, most die because they don’t commit themselves the greatest danger is in standing still. We will not stand still. Our strategy is sound, our execution and pace have not been. And that now has changed. Our execution and pace of change have already accelerated and we’ll continue to do so. You seen professional managers from within the industry, and there is no doubt many of them are exceptional, but we bring an intensity and immediacy to the table that I can say with certainty has not existed at USA Truck. We expect to improve, we expect excellence, we expect engagement and we demand maximum effort and fast results. This approach is already yielding early returns. Our operational results were encouraging and up in January that I will share a few key results from the month with you. The first is productivity proceeded truck per week in January was up 8.3% versus January of 2016, improving per truck productivity over 150 miles per truck in this environment is a testament to our team and their focus on results, despite what everybody knows was a slow start due to the weather in January country-wide. Our first quarter freight awards that are going into effect this quarter, which account for over $40 million of our annual revenue portfolio, are at least more than 5% higher than we were in 2016, we think that’s an encouraging trend. Jim’s new role is all about maximizing synergies between our truck load and logistics businesses. There are many latent opportunities for revenue generation at the laying customer and broader geography levels that are missed by artificial side OEMs of the business, and Jim is uniquely positioned to bring that together. Just this week, he lead the effort that launched the trucking and logistics load board desk that will now allow us to consider and quickly commit to incremental loads from shippers looking for immediate capacity commitments between our two businesses. We are moving quickly. With that introduction, let's turn to slide four for a look at our consolidated results. The overall freight environment in our business was just okay in the fourth quarter. We saw slightly lower volumes, and expected particularly in October. We also saw shorter seasonal window than we have historically experienced. However, upward price pressure was evident during the peak of the quarter, and tightened capacity became more of an issue in our sector than it was in 2015. We’ve wrestled with higher than expected unseated tractors, which limited our ability to fully take advantage of the improving conditions. For the quarter, operating revenue was down 12.6% and we had an operating loss of $4.6 million, and our operating ratio was 104.5%, well below our results for the same period in 2015. In this year's fourth quarter, we recognized the $2.8 million pre-tax or $.23 per share impairment charge on assets held for sale that was included in per share earnings. The 2015 quarter included $200,000 benefit from lower costs associated with facility closures, and that was adjusted out at the time in the per share earnings for comparative reasons as you look at those two. In Trucking, we have an operating loss of $6.2 million, driven by lower base revenue per loaded mile, a smaller fleet and increase in insurance and claims expense, less gain on sale of assets and higher fixed costs. In Logistics, we had operating income of $1.5 million, down compared to last year's period due to soft demand and an increase in revenue -- a decrease in revenue per invoice. I want to emphasize that while I believe the Company's strategy is solid, we have real work to do to execute and return to the levels of performance we expect, including a profitable first half of 2017 and beyond. Before we talk about next step, let's move to slide five for a closer look at Trucking's fourth quarter results. The good news in Trucking was that the base rate per loaded mile improved almost $0.03 or 1.7% sequentially, reflecting improvements in our customer service, which has been a focus for the last 15 months, as well as stronger pricing trends. On average, bids that became effective in the fourth quarter were up 2% over 2015's period, and we're continuing to see that trend in 2017. Another bright spot was the sequential increase in base revenue per seated tractor per week that averaged $3,018, the highest quarterly average of the year. We had a lower seated tractor count throughout the year as we eliminated high cost tractors, but we also experienced some challenges with driver retention in the fourth quarter. We're addressing that situation now with steps like a more effective on-boarding process and improved monthly bonus program, and a highly successful driver relation model that's given us some really good early returns. Moving to slide six where we’ve summarized Trucking's operating metrics, I'll call out a few notable items; average miles per seated tractor improved by 4.9% versus the fourth quarter of 2015, even as empty mile percentage improved 20 basis-points. The fourth quarter was the first full quarter of in-sourcing our road assistance program and retiring certain high cost tractors and trailers, which contributed to $1.7 million improvement in our operations and maintenance expense compared with the fourth quarter of 2015. We also reduced non-driver headcount and corporate overhead during the quarter by approximately $1 million annualized, and we’ve taken additional organizational steps in this year's first quarter to decrease our growing fixed costs, that's noted in the release and that's about $800,000 on an annualized basis. Insurance and claims costs continue to be a burden on a CPM basis, but will have a lesser impact as our truck productivity metrics continue to improve. Let's now move to slide seen, although financial results for USAT Logistics in the fourth quarter were down year-over-year due to ongoing market softness. And revenue per invoice declined versus 2015 they did improve as the quarter progressed. November and December both showed encouraging load revenue and margin performance exceeding our internal expectations. During the fourth quarter, we continued to take steps to cut non-productive overhead; reconfiguring our Seattle and Buffalo offices to satellite sales offices under regional centers in Sacramento and Chicago respectively, along with reconfiguring our intermodal leadership. We’ve reduced annual salary and benefits expense by $600,000. Now, I'll turn it over to Joe Kaiser to discuss our balance sheet and liquidity. Joe?

[Joe Kaiser:]

Thank you, James. Given that James has already provided color around operating results, I'll walk-through some of our other financial metrics. As of December 31, 2016, our net debt was $152.3 million. Total availability under our credit facility as of December 31, 2016 was $45.9 million. Additionally, we are inclined with all bank covenants as of December 31, 2016. Our focus in 2017 will be on enhancing cash flow from operations and reducing our leverage ratio towards our long-term goal of less than 2.5 times adjusted EBITDA. We believe we'll increase our 2017 cash provided by operating activities beyond our 2015 level. With reduced CapEx requirements, in 2017, we expect to let our tractor age increase during 2017 to approximately 2.7 years from 2.1 years as of December 31, 2016. This driver fee should increase free cash flow in 2017 compared to 2016 in addition to improved operational performance in both of our segments. We expect to finance approximately $15 million to $20 million of new revenue equipment, primarily consisting of trailers with operating leases during 2017. Depreciation and amortization expense is expected to be in the range of $30 million to $32 million for 2017, as we have determined that our depreciation policy is in line with the current market conditions for the used tractors and trailers. However, we expect our equipment rent expense to be in the range of $9 million to $10 million for -- up from $7.4 million as of December 31, 2016. I'll now pass the call back to James.

[James Reed:]

Great, thanks, Joe. We now look at slide nine, you'll see the strategic action plan that we laid out for trucking in our third quarter call with you on the left side of the screen. It outlined a number of initiatives critical to 2017 success, and we wanted to offer an update on progress to those goals, which are on track. First, increasing our rates; as I mentioned earlier, we're making steady progress on this front, and we're managing this aggressively. Second, improving maintenance costs; we're planning for continued progress on maintenance cost reductions and you see that in our results. Third, optimizing our network; our network management is progressing nicely as we noted in the January highlight that I mentioned at the onsite of the call. And finally, increasing the percent of independent contractors; we didn't make it to the 20% goal we've set for the end of 2016, but we did end the year with an increase over 2015. We remain committed to this outcome and have exciting programmatic changes in the works that we hope reveal in the future quarters. The two new performance targets we've set for 2017 that are outcomes of the strategic action plan are shown on the right side of the screen; the first is to increase base revenue per seated tractor per week by 3% to 5% over 2016 average from $2,998; and the second is to increase seated truck count by 5% to 7% over this fourth quarter 2016 average of 1,547. We’ll report to you quarterly on how these efforts are going. Martin is on the call and will be available in the Q&A for more detail on these initiatives and other questions you might have regarding the trucking business. I'll now turn it over to Jim Craig to discuss logistics business. Jim?

[Jim Craig:]

Thanks, James. Turning now to slide 10, we’re very pleased with the traction of our business development initiatives as the fourth quarter progressed. We grew our Plus Power fleet sequentially by approximately 15%. And with our accelerated recruiting efforts, we’re targeting the addition of 10 to 15 trucks a month, each month, in 2017. Customer interest and support is solid and this capacity complements, rather than competes, with our asset needs. Our sales agent initiatives have been progressing steadily. We’re now at 21 sales agents and have been continuing those recruiting efforts as well. Our primary focus now is on training the new agents on USAT Logistics service offerings and systems utilization. As I said on last quarter's call, ultimately not all agents will make the cut as our standards and expectations will be high, but continuous recruiting will keep us north of 20 agents and growing the roster count throughout 2017. In the fourth quarter, our realigned and reenergized national sales team demonstrated a renewed and measurable focus in indentifying and pursuing opportunities for both active and prospect accounts. In addition, we are pleased to announce today the creation of USAT Logistics de Mexico, and the opening of an office in Central Mexico. We've been working on this initiative for the past eight months, and are launching this location effectively a new regional center for USAT Logistics with a fully staffed office with preexisting in-depth market knowledge in both customer and carrier relationships already in place. We expect that new office to generate meaningful revenue, and to be operating profitably before the end of 2017. Our initiative to reintroduce Company trades and TLC service has been well received. And we’re seeing traction and regular contribution over a specific and limited service network. We continue to hire into market facing roles, while assessing those resources in the first quarter, and reinvesting where appropriate. The combination of these initiatives will help us reach our goal of generating approximately 45% of the Company’s consolidated revenue from USA to Logistics by the end of 2017. Now, I'm going to turn back to James for his closing remarks.

[James Reed:]

Thanks a lot Jim. As a recap and this is our final slide, I would like to highlight some of the comments that we’ve made in this and prior releases; the first is continued fixed cost reductions. Last quarter, we targeted $3 million to $4.5 million in fixed cost reductions, so we made a lot of progress on that. We’ve about $1 million to $2 million remaining to the remainder of 2017. Next, we expect 1% to 3% increase in Company on tractors in 2017, pursuant to the capital that Joe discussed earlier, and 15% to 25% increase in independent contractors as well. We expect USAT Logistics, as Jim shared, to generate 45% of our consolidated revenues by the end of 2017; our net debt to adjusted EBITDA between 2.5 to 3 times by December 31, 2017, our goal is 2.5 times; and finally, a return to profitability in the first half of the year and beyond. There is no magic bullet or silver -- there is no magic formula or silver bullet to deliver on these items. It's just pick-and-shovel work, and we have a team that enjoys and is experienced at that kind of effort. At this point, Alison, we’d like to open the call for question.

[Operator:]

Thank you. We will now begin the question-and-answer session [Operator Instructions]. Our first question will come from Brad Delco of Stephens. Please go ahead.

[James Reed:]

Brad you’re there?

[Operator:]

Mr. Delco, your line may be muted.

[Brad Delco:]

Hey guys, can you hear me?

[James Reed:]

Yes, we just -- congratulations Brad. We just assumed that may be the triplets had taken the toll on your sleep.

[Brad Delco:]

Well think that’s only have but I do appreciate that. I don’t know what was going on, I had to switch lines. So I appreciate all the details you guys gave with the plan. My first question on really tied to reducing fixed costs relative to the size of the fleet. You made a comment that you have $1 million to $2 million of reductions to make. Now, is that based on where the fleet is today, or is that based on needing to grow at $5 million to $7 million? and I guess the question is really is, if you're not able to grow the fleet 5% to 7%. Is there additional fixed costs that need to come out of the business?

[James Reed:]

Yes, that’s a good question. That’s based on where the fleet is today, Brad. We’re not going to pursue and if you build that they will come management strategy, so we don’t disclose the numbers but we manage very closely our trucks per non-driver headcount in the business. And I'm confident to tell you that, right now, we’re where we need to be. But we will not pursue and if you build that they will come, headcount and fixed costs strategy. I don’t know if that answers your questions, but…

[Joe Kaiser:]

I just want to iterate that we're anticipating to grow the Company on tractor fleet by 1% to 3%.

[Brad Delco:]

But, with the independent contractors gets to $5 million to $7 million, am I right?

[James Reed:]

Correct, yes.

[Brad Delco:]

And then I guess maybe you answered the second part of that question, James. I think generally speaking, most best-and-breed truckload carriers operate fixed drivers to everyone, non-driver personnel. You're not going to give us any idea where you are today versus where you want to be?

[James Reed:]

Not at this time, other than to say that we managed it aggressively and we're always seeking to improve it. I mean, one of the things that our management team has in spades is a continuous improvement background. And there's no doubt that we can get better. But I can tell you that we're competitive with other carriers, maybe not best-in-class, but certainly competitive.

[Brad Delco:]

And then the one concern I would have as well, it seems like you want to upgrade your existing driver base, and that generally comes at the expense of increased pay. What are you prepared to do with driver pay this year? And what's basically in the budget that has you returning to profitability in first half of '17?

[James Reed:]

So, with respect to drivers, we constantly are looking at the competitive environment. We're mindful of the fact that we want to pay drivers a fair wage. And we have some initiatives that are looking at ways to do that. The best way we can give drivers pay increases is by being more efficient with our network. And maybe I could turn out over to Martin for just a second to kind of tell you what we're doing in the first half, first quarter, to address some of those productivity enhancements. Martin, do you want to take that?

[Martin Tewari:]

On the driver pay side, first part of your question. We just implemented a monthly bonus program for them where the driver can make up to $0.05 per mile per month. And with that, with improved productivity that we're seeing on our fleet, we believe our drivers will be pleased with their new compensation, and it helps us grow our fleet.

[Brad Delco:]

And then maybe the final question, James. The comment to return to profitability in first half of '17, I mean, to me that seems to be quite a lofty goal. I know you provided some color about the productivity trends in trucking. I think I have 8.3% in January. Do you see enough evidence in January results that returning to profitability, maybe first quarter I understand, is probably the toughest quarter to get there. But you have enough confidence in January's results that you can return to profitability, at least by second quarter.

[James Reed:]

Absolutely, we've set an aggressive plan this year. And we're not going to get in the habit of kind of pre-announcing financials, and you didn't ask me to do that. But we are close enough on-track with that plan coming out of January, from an operational standpoint, that we're confident in that forward leaning projection.

[Brad Delco:]

Maybe -- I'm sorry this is the last question for Joe. The goal is 2.5 to 3 times debt to EBITDA. And I'm assuming, I mean, I know you're extending the average age of the equipment, so cash flow should improve. But that's primarily going to be driven by growing into the capital structure versus debt pay down. Am I thinking about that the right way?

[Joe Kaiser:]

No, we're anticipating to pay down a significant portion of debt this year, as well as the currently the operations of both sides to the Logistics and Trucking.

[Brad Delco:]

Anyway you can give us a range of what you would like to pay down with cash flow?

[Joe Kaiser:]

$30 million to $40 million of debt…

[Operator:]

[Operator Instructions] Our next question will come from Donald Broughton of Avondale Partners. Please go ahead.

[Donald Broughton:]

Congratulations on your new role, James. And appreciate you reaching out to all of us in the last week, which get better acquainted. And a couple, just a little bit of housekeeping, first of all. What was the beginning and ending Company truck-count? And what was the average number of owner operators this quarter?

[James Reed:]

Average number of own-operators for the quarter was 286, and the Company owned-fleet was ended December 31st at 1,415 tractors.

[Donald Broughton:]

So you’ve to plug-and-play with the model. Make sure I heard that's right, your average age of your trucks right now is 2.1…

[James Reed:]

Correct…

[Donald Broughton:]

And you sort of let that go to 2.7, did you say 7?

[James Reed:]

Yes. I mean, certainly, our goal long-term for the investment thesis is to keep it below 2.5. Our focus this year is on generating cash and paying and debt, while returning…

[Donald Broughton:]

Are you going to buy any trucks this year?

[James Reed:]

Yes, we do have some trucks that will, what leads with, we’ll finance with operating leases. They’ll be smaller than the 310 that we purchased this year.

[Donald Broughton:]

So what do you -- how many you plan on getting bringing -- how many -- I'm assuming you’re tending out proxies, selling the ones you held for sale. And you are going to trade how many trucks?

[James Reed:]

In the current year?

[Donald Broughton:]

Yes.

[James Reed:]

So in the current year we were anticipating…

[Donald Broughton:]

…this is with projected CapEx, so even though you’re going to finance with operating leases obviously…

[James Reed:]

So, we’re expecting to take delivery of about 40 to 50 trucks this year.

[Donald Broughton:]

…40 to 50 trucks. What about trailer side?

[James Reed:]

Trailers, we’re expecting 450 to 500.

[Donald Broughton:]

400 to 500, and will you operating lease those as well?

[James Reed:]

That's correct, that's what our expectation is.

[Donald Broughton:]

And your current trailer count, are your trailer counts into the quarter?

[Martin Tewari:]

Just under 5,600…

[James Reed:]

5,605 as of December 31st.

[Donald Broughton:]

So, let me understand this. I understand what you're doing with the balance sheet that on one hand make sense. You are going to not really buy that many trucks, and what trucks you are going to buy you are going to lease. So you could use that incremental cash to pay down debt. But if the average age of your truck-fleet goes from 2.1 to 2.7, how do you accomplish the goal of bringing down maintenance costs? How do you accomplish the goal of keeping the truck-fleet fully seated without really have the driver pay increase? How do you accomplish the goal of increasing the rate you're going to give because you’re on-time service is going to deteriorate?

[James Reed:]

Yes, absolutely. Those are all things that we consider, and I think we have a good handle on. I'll take a swing at answering the questions, and then I'll ask Martin and Joe to chime in. From a driver satisfaction standpoint, having a fleet that’s around 2.5 years, a little north of that isn’t a huge problem, right. It's still a fairly new fleet and we keep the miles at an appropriate level to maintain our cost. You're right on the CPM. We have to remain rigorous in our discipline about maintaining those tractors on their plans, kind of maintenance intervals. We've done a great job of bringing stuff in-house to being more effective in maintaining those. Martin and I were just talking yesterday about some of the in-house continuous improvement opportunity to have to get even better there. The short answer is a relentless and somewhat maniacal focus on the costs, will be the way that we manage that. Now, in terms of on time delivery, again our service numbers, everybody’s services numbers are a little bit nebulous. But I can tell you, our service numbers are as good as anybody’s in the industry. And then Martin has been focused on that for the last 15 months. And I think it's more a reflection of our operating thesis than it is a truck maintenance issue. Now, you're right to bring it up as a potential risk. But if we're mindful of that risk, which we are, we can manage it. So, do you want to say any more about that Martin?

[Martin Tewari:]

Donald, as far as managing some of those older trucks in our fleet, what we’ll do from maintenance prospective is, we'll always have a certain percentage of fleet that are unseated. And our best strategy there is obviously to keep our oldest trucks unseated versus and keep the newer one seated. So, we're actively making sure any that’s unseated, we're seating our newest trucks with new drivers as they come in and keep those older once when we have unseated trucks. Those are the ones that will be parked and will help us, both on maintenance cost perspective, and obviously driver side perspective, as well.

[Donald Broughton:]

But, I don’t see the truck count ought to be, what 2%, 3%, you’re running -- you got 11% of the fleet sitting on the fence right now?

[James Reed:]

Yes, you’re right. So we have a bunch of initiatives that we talked about in the discussion, the prepared comments, that are in slides that are actually having a really discernible impact on an unseated truck. Well, on-fleet, we think it should be at about 5% unseated, and that’s what we're managing to. And we will be there within the first quarter.

[Operator:]

Ladies and gentleman, we’re having no further questions. This will conclude our question-and-answer session. I would like to turn the conference back over to James for any closing remarks.

[James Reed:]

Great, thanks, Alison. Thank you all for participating in our call this morning. I would like to sum-up by saying, company-wide, we have a relentless focus on execution throughout the organization. And we are committed, as we discussed, to returning to profitability by the first half 2017. We think we have a clear, it's a challenge, but we think we have a clear flight-path to there. We'll be in New York and Florida for industry conferences in the next two weeks. You'll see details in the advisory announcement that we issued yesterday. We'll also be available for one-o-ones, and I know quite a few of you have already requested timeslots for those meetings. We look forward to meeting you and discussing our plans for strengthening our business in both the short and the long-term. Thanks a lot.

[Operator:]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.