USA Truck, Inc.
Q1 2015 Earnings Call Transcript

Published: 5 May 2015

[Operator:]

Ladies and gentlemen, thank you for your patience in holding. We now have your speakers in conference. Please be aware that each of your lines is listen-only mode. At the conclusion of today's presentation, we will open the floor for your questions. At that time, instructions will be given as to the procedure to follow if you would like to ask a question. It is now my pleasure to turn today's conference over to Jody Burfening. Ma'am you may begin.

[Jody Burfening:]

Thank you and good morning everyone and welcome to USA Truck's First Quarter Earnings Conference Call. Joining us this morning, from the company are Bob Peiser, Chairman of the Board, Tom Glaser, Interim Chief Operating Officer and Michael Borrows, Executive Vice President and Chief Financial Officer. Russell Overla, Executive Vice President, Truckload Operations is also with us today to answer questions. Before we begin the call, we'd like to note that this conference call will contain forward-looking statements within the meaning of Section 27(a) of the Securities Act of 1933, as amended, and Section 21(e) of the Securities Exchange Act of 1934, as amended. Forward-looking statements may be identified by their use of terms or phrases such as expect, estimate, anticipate, project, believes, plans, goals, intends, may, well, should, could, potential, continued, future, and terms and phrases of similar substance. Forward-looking statements are based upon the current beliefs and expectations of management and are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, which could cause future events and actual results to differ materially from those set forth and contemplated by or underlying the forward-looking statements. Accordingly, the company's actual results may differ from those set forth in the forward-looking statements. Investors should review and consider the factors that may affect future results and other disclosures by the company in its press release, annual reports and Form 10-K and other filings with the Securities and Exchange Commission. The company disclaims any obligation to update or revise any forward-looking statements to reflect actual results or changes in the factors affecting the forward-looking information. We'd also like to point out that the company is using certain non-GAAP financial measures in today's conference call that supplement its consolidated financial statements. A reconciliation of these non-GAAP measures to GAAP is provided in the tables at the end of the earnings press release and the slides accompanying today's conference call prepared remarks. With that introduction, I'd now like to turn the call over to Bob. Bob?

[Bob Peiser:]

Thank you, Jody. Good morning, everyone. Thanks for joining us to discuss USA Truck's financial results. As you know, a month ago we announced that CEO, John Simone is taking a medical leave for indefinite period and that Tom Glaser, Director and former Interim Chief Operating Officer is once again serving Interim COO. We're glad Tom was available to work with USA Truck and also that the company is very experienced management has all pulled together to follow through on the business plan laid out with John earlier this year. The purpose of our call today is to go over the company's Q1 results and we will not be providing further details on John's condition. I'd like to remind everyone that we're responding to his privacy and respecting his privacy and can't respond to questions on this matter. I'll now turn the call over to Tom for an overview of the quarter.

[Tom Glaser:]

Thank you, Bob. Let's start on Page 3 of the slide presentation posted on our website. It summarises our top line results. In trucking, base revenue rose by $1.7 million to $81.5 million in contrast base revenue from SCS fell by 9.4 percentage points to $33.9 million. As you recall, SCS was able to take advantage of bad weather in 2014. By helping customers solve disruptions caused by last year's storm. The spot market was especially strong last quarter as customer's searched for capacity. On a consolidated basis, base revenue fell by 1.8 percentage points to $115.5 million. Moving to Slide 4, you'll see the first box that trucking accounted for approximately 71% of our revenue and SCS 29% this quarter. Well continuing our customer driven transition from becoming a trucking company to a capacity solutions provider, with complementary services including a growing mix of dedicated business. During Q1, we introduced a new brand initiative to support this shift and some of you have, may have noticed that this was reflected in the logo used in this morning's press release. The USA Truck Capacity Solutions. I'd like to emphasize that this was USA Truck's fourth consecutive quarter positive operating income and in fact, our 10th consecutive quarter for financial improvement. For the period, operating income rose $4.6 million as trucking operating income swung from a loss to a positive and SCS generated $3 million in operating income. Consolidated adjusted operating ratio improved 400 basis points over last year's period to a 96.9%. It was the company's first positive first quarter in eight years. Now let's turn to Page 5 for more details on the trucking segment. Quarter-over-quarter base revenue increased 1.6% reflecting price strength offset by lower revenue miles. As I mentioned earlier, we did see an increased revenue from our new dedicated freight business. In total, we realized a $6.7 million improvement in operating income and turned in an adjusted operating ratio of 99.2% versus 107.6% in the last year's period. Lane [ph] engineering and yield management helped significantly as base revenue per loaded mile increased approximately 8.1%, which we believe is greater than the average for our industry. We gained back with lower miles per tractor and a slight increase in empty miles. But overall the impact on revenue per tractor and profitability were quite positive. Since rate per mile translates to the bottom line faster without variable cost of more miles. Fuel expense was another bright spot, our net fuel cost consist of three main components. DOE average price of diesel, net of surcharge recovery, miles per gallon including idle time and out-of-route miles and fuel network management compared with last year. The drop in DOE prices net of fuel decline was $2.1 million of savings. The remainder was generated by investments in tractors and trailers managing driver behaviour, negotiating better purchasing, optimizing routes and reduced idle and other factors. We also note that maintenance cost dropped by approximately $1 million, driver pay was higher as we continue to seek safe and professional drivers. In all in all, there were numerous puts and takes that we achieved at 840 basis point improvement in the adjusted operating ratio. Moving to Slide 6, you'll see this was the fifth consecutive quarter of improved revenue per mile. Revenue proceeded truck. We generated a 5.4% in this metric year-over-year. As I stated previously, we have an 8.1% increase in rate per loaded mile, it was partially offset by lower revenue miles. Our independent contractor's fleet increased by more than 50% reflecting a strategy to grow this part of our workforce. As we've said in this morning's press release, we'll be implementing a significant increase in driver pay on June 1. Our strategy is to increase our seated truck count for the year, while absorbing the higher compensation costs through continued and specific operating cost savings and cost efficiency gains, as well as increased base revenue. Now let's take a look at SCS highlights summarized in Page 7. I've already mentioned the impact of 2014's icy weather which propelled SCS to a record quarter last year and caused severe capacity shortages in the market. In 2015, our first quarter load count declined by 4.4%, but our gross margin remained strong at 7.4%. We did have higher operating expenses year-over-year. We made investments in future growth including an increase in headcount to support our business and the expansion of our branch offices and the opening of new locations. For the quarter, SCS had adjusted operating ratio of 91.2%. At this point, I'll turn the call over to Michael Borrows our Executive Vice President and CFO for an update on our balance sheet liquidity, which have continued to improve since year end. Michael?

[Michael Borrows:]

Thank you, Tom. On Slide 8, you'll find a summary of our balance sheet liquidity information. We ended the quarter with $106.2 million debt outstanding, which represents $11.3 million improvements since year end 2014 total debt. Our cash flow from operations reached $19.7 million almost $14 million above last year's number due to our improved profitability, working capital management and better operational effectiveness, particularly our truckload segment. Debt to adjusted EBITDA was 1.7 times compared to 2.8 times in last year's first quarter and 1.9 times at year end. As you can see on Slide 8, our current profile continues to improve. From a capital structure perspective however, we do not want to suggest that we're working to trend down to a complete elimination of debt. That being said, debt to adjusted EBITDA ratio just above or below 2 times is what we currently believe makes sense in our near term capital structure. Lastly, our planned net cash capital for 2015 will be above $65 million. Capital is previously discussed that primarily be invested in the business in 2015 to maintain the average age of our tractor fleet by purchasing 400 new tractors and with kicking off this share, a multi-year strategy to reduce the average age of our trailer fleet to about five years, with the purchase of at least 1,200 new trailers in 2015. Now back to you, Tom.

[Tom Glaser:]

Thank you, Michael. Turning to Page 9, Slide number 9. Understand our whole team is pulling together to build on our momentum and fulfil our ambition of making 2015 even better. We're still in a very early innings of USA Truck's transformation and while we're proud of what we've accomplished thus far, there is plenty of room to realize earnings leverage and drive increased return on our invested capital. What's important here, is it all of the employees and their buy-in, their hard work and the knowledge that we are in a much better place to succeed, with that overview I'm going to turn it over to the question-and-answer. Please open the call for questions.

[Operator:]

[Operator Instructions] our first question will come from Brad Delco with Stephens. Please go ahead.

[Brad Delco:]

Tom, I wanted to ask you the first question obviously. You've been put to this role as Interim COO; you've been involved in various trucking businesses in your tenure in the industry. Is there anything in particular, you see in operations that you want to focus on more, than maybe what was focused on prior or is this kind of just continuing the work that or the foundation that was laid from John?

[Tom Glaser:]

It's the continuation, Brad that the foundation John has laid. In 2013, when John came in, he put together a staff that you know was well positioned and knew how John operated. We brought in a consulting firm in October of last year and what they really gotten a good head start on is the network consolidation and building a network that has a lot of opportunity for increased utilization and productivity of the trucks and they've made tremendous progress. As you can see, just by going from 107% down to 99% that's a big move and I think that the group is working very well together to get that accomplished.

[Brad Delco:]

Well great and then I have a couple other questions just related to some of the comments you guys made. Driver wages, you care to quantify what type of level of increase we're looking at?

[Tom Glaser:]

Brad to quantify it is difficult because we're looking at experienced drivers as well as trainees and any percentage is going to be different depending on the experience of the drivers, but overall it will be a double-digit increase.

[Brad Delco:]

Okay, can you maybe quantify what the breakout is between the drivers you recruit from schools versus experienced, historically?

[Tom Glaser:]

Russell, I'll turn that over to you.

[Russell Overla:]

Yes, it's to the make-up of our fleet Brad consisted about 65% to 68% on the experience side with the remaining being coming from the training schools, going through our training program then going through operated program into their own truck.

[Brad Delco:]

Great and then Tom on one of the slides, it said continuing the focus on growing your dedicated business. How should that impact some of the metrics that you report either utilization or pricing?

[Tom Glaser:]

Well, the utilization, they differentiated between truckload and dedicated and they call it trucking. The utilization of the dedicated business as it grows is much less than the truckload business today. We anticipate that moving forward to grow in the utilization as well, the truckload business has been impacted somewhat when you see the fewer miles per truck, run in this quarter as compared to the other because of the growth of the dedicated business. So the two of them combined influence I guess the metrics. It's tough to say, how quickly we're growing to grow that dedicated piece and how much it's going to affect the truckload business metrics. I hope that answers the questions.

[Brad Delco:]

I guess my questions was, I mean typically when we see growth in dedicated outpacing just overall trucking it tends to be kind of accretive to the deadhead, maybe a little bit dilutive to utilization and maybe a little bit dilutive to rate per mile, but just curios if we would expect to see that similar trend throughout your business in 2015?

[Tom Glaser:]

I think on the productivity side yes, on the empty mile side yes, on the rate side no. I think that we've seen very strong rates in the dedicated business comparable to the rates that we're seeing in the truckload business.

[Brad Delco:]

No, that's helpful and then I've got a few more if you don't mind, you mentioned investments for growth and SCS. Obviously first quarter had a tough comp versus kind of the weather induced tightness we had a year ago, what shall we be looking for in terms of growth in SCS, this year?

[Tom Glaser:]

Michael, do you want talk to the plan?

[Michael Borrows:]

Yes, I think Brad, what we expect right now just early outlook we haven't done a complete re-forecast of the full year but I think what we kind of expect, is that from a revenue top line revenue perspective, it might be a little bit softer than what our plan is, but at the same time, we believe our gross margin will be strong and our EBITDA contribution will be about what we expect and so, we're not working - we're working really hard in SCS in order to improve the top line and to tread more capacity and I think there is a number of plans to do that as well, the growth in offices and some of the folks in the brokerage business. So I mean, I think it's a story that going to continue to play out as the year unfolds.

[Brad Delco:]

Got you and I think maybe going back to some of John's earlier comments. I mean, he kind of alluded to the fact that, the OR [ph] last year was probably not sustainable, so I guess the question really is as if, we would expect operating income margin similar to what we've seen in the first quarter for the remainder of the year?

[Michael Borrows:]

Yes, I think that's appropriate, what John and I both communicated in number of meetings is that, we expect it to be in the low 90's. Right and so, I think the first quarter is a probably a good proxy for what we're looking at quarter-by-quarter.

[Brad Delco:]

And then last question, just some housekeeping items. Can you give us the average owner operators in the quarter and then any D&A guidance you have for the year and then what the average age of your fleet stands today versus where you want it to be at the end of the year?

[Michael Borrows:]

Yes, owner operators, at the end of the quarter, we're right about 218 owner operators which is an increase from 143 in the previous year's quarter, right. So about 75 more owner operator's year-over-year. As it relates to the fleet, our tractor fleet average age at quarter end here was about 32 months, right? And our trailer fleet age was about 85 months. Now you heard me say earlier, we're going to acquire about 400 new tractors this year to maintain our average fleet age, working towards a trends to maybe it improve it slightly as well as multi-year plan to purchase, an increased amount of trailers 1,200 I think probably minimum this year to and a multi-year plan to bring that average age to down to about 5 years.

[Brad Delco:]

Okay.

[Michael Borrows:]

Did I get them all, did I miss any of yours?

[Brad Delco:]

Any D&A guidance for the year? I know D&A was down year-over-year, but I would imagine that relates to the average number of trucks you have?

[Michael Borrows:]

Yes, I'll look into Russell [ph] a little bit to see from a guidance perspective I think, likely to be determined.

[Brad Delco:]

Okay, all right I'll turn it back over and get back in queue. Thanks guys.

[Operator:]

Thank you for your questions. [Operator Instructions] your next question will come from Adam [indiscernible] with ABW Capital [ph]. Please go ahead.

[Unidentified Analyst:]

I just wanted to say congratulations; this was an extraordinary quarter and what I recall, the seasonally weakest quarter in transportation in general. You guys posted an 840 basis points improving in trucking. If I think about what you guys did in the fourth quarter, which was a 5% operating margin. You guys spoke about improvement in 2015 off on that number and if I annualize out, the 840 basis point improvement and the seasonally weakest quarter, you didn't have a lot of sales leveraging. It stands to reason, that you guys should be able to produce a pretty robust operating ratio in trucking compared to previous year. How should we think about, in relation to the 5% and the 840 basis points of improvement?

[Michael Borrows:]

Yes, I think Adam as you're quoting and you think about where we were at in the fourth quarter and the improvement we had in the first quarter. I don't think, looking at the fourth quarter as a proxy to think about our full year 2015, would be inappropriate. So I think along those lines would probably be the best way I can answer that particularly because we don't obviously give a lot of forward-looking guidance. But I think to frame it that way would be appropriate.

[Unidentified Analyst:]

Just to kind of summarize, the fourth quarter is indicative on the normal seasonality quarter and obviously maybe there is room to improve off of that and then you guys did, 840 basis points off of improvement off of the first quarter last year. I mean because if I take the one-on-one that you did last year and I add, 840 onto it, albeit you don't have a lot of sales leveraging in the first quarter I get to 750 basis point. So getting that type of improvement when you don't have the improvement, when you don't have the benefit of top line sales, it's pretty impressive. So I guess, what you're saying is 5% is kind of a good benchmark, but I mean there seems to be a lot of wiggle room you know from that. I mean, if I just add through the algebra, it seems like there is room for substantial improvement beyond that.

[Michael Borrows:]

Yes, I think that's a good point. When you look at the fourth quarter and the first here sequentially, I mean it's right. It's a tougher quarter seasonally etc., but that would not be, that would be a good way to look at the full year.

[Unidentified Analyst:]

Okay, very nice. So then if I take that information and I apply that to call it $350 million or $360 million base revenue and I take somewhere between 5% operating margin and 8% operating margin. I mean, even with a little bit of slight decline in SCS is a function of reinvestment. I mean, we're getting to numbers on EBITDA that are, somewhere between $80 million and $90 million and that's earning number called mid $2. I mean you guys are, your trade revaluation, you traded the substantial discount to the peer group. How do you see that material on revaluation narrowing and it's also not lost on meaning that's in the most recent proxy. Management has now compensated on return on invested capital and EBITDA growth. So I mean, how do you think about narrowing that material on revaluation and what types of tools you have in your kind of toolkit to narrow that on revaluation at the same time, focus and grow become invested capital.

[Michael Borrows:]

I think, Adam what you're articulating is obviously what we see, where we believe that there is a lot of operating leverage in our model, right and so that's what the entire management team and all of our employees at USA Truck's are working diligently to do is to unlock that potential and that leverage and produce the kind of results that you're articulating. Now that being said, we're not necessarily going to comment on what we think our EBITDA projection is going to be for the full year, but I think you're not off the market all, when you're looking at it from the perspective of there is a lot of unlocked opportunity and that's what we're going to be striving all year to reach.

[Unidentified Analyst:]

Right, so in summary you guys are kind of running on 12 cylinders and there is a lot of room for improvement obviously you can't forecast things change quickly, but if things kind of exist kind of function the way they have been and kind of what the trend is, there is substantial improvement to be made off of last year.

[Michael Borrows:]

Yes, that's right. I mean we're on all cylinders and we're, again working hard to unlock that leverage.

[Unidentified Analyst:]

Very good. Well appreciate all the hard work, guys. Thank you.

[Operator:]

Thank you for your questions. [Operator Instructions] your next question will come from Brad Delco with Stephens. Please go ahead.

[Brad Delco:]

Tom, I wanted to ask you about the current environment maybe particularly related to the bid season. How has USA Truck's experience been throughout the bid season on weights and should we expect or what kind of rate improvements should we expect based on kind of contracts you've won. And is this going to be realized because of a major change in the network or are you just seeing kind of fine tuning of the existing network just with better rates?

[Tom Glaser:]

Brad, let me answer and I'd probably turn most of this over to Russell, but the bid season was successful for the company. There was new contracts and new customers that came in as well as increased business from existing customers, as far as rate we expect the rate to increase and I'm going to say and I'm going to ask Russell to chime in here, but I'm going to say it's going to be in the 3% to 4% range and as far as the network is concerned it's improving the network that they've already improved. There's been tremendous change in how the trucks flow from October to-date. It's compressed, it's gaining speed and the improvements will come in the empty miles and that is obviously is going to improve the total rate per mile. So I think that overall, the network improvements and the rates increases are going to should have a very positive effect on the year.

[Michael Borrows:]

Tom, what [indiscernible] say though that, I mean the spot market obviously a bit softer but steady. So maybe in that 3% to 4%, but most of our businesses is contractual right in that. I mean, Russell I think we've been guiding a little bit higher maybe in that 4% to 6% range, is that?

[Russell Overla:]

Yes, we targeted higher. We're actually in the bid process now, Brad but we expect anywhere from 4% to 6% and I think that's pretty much what the industry saying as well and to echo Tom's comments here on the network enhancements. We're pretty excited about what we are seeing and the early stages of that and continue to focus to his point on reducing the empty percentage, the outer route, but also important to us and our drivers would be to dwell trying to get those drivers back and making them more productive than where they're today.

[Brad Delco:]

No, that makes sense. So it seems as if the network is fairly fluid. We shouldn't be expecting major changes in the network flow just little bit of fine tuning in greater or better rates, is that fair?

[Russell Overla:]

That's fair.

[Brad Delco:]

And then other follow-up question I had, the SCS revenue being down year-over-year. I know you included intermodal in that segment. Did you see any significant impact from the West Coast ports disruption in this quarter?

[Michael Borrows:]

We didn't' see any impact, I mean intermodal revenue was up year-over-year and continues to be, we talked about it a few, I think it was a call or two ago, Brad where we said intermodal recently within the last year was in 2014 it was profitable. I think maybe for the first year ever, is what we've to keep looking back. In 2013 it was breakeven and we're seeing to continue to contribute in revenue growth and bottom line.

[Brad Delco:]

Got you and I know you guys don't provide forward-looking guidance but in terms of there was obviously some fuel benefiting the first quarter as we look sequentially from first to second typically the operating environment it's a lot better, is it fair to expect earnings despite the driver wage increase and despite maybe a little bit less tailwind from fuel for earnings to be up in second quarter from first quarter?

[Michael Borrows:]

Well, this is fair question. It's guidance that we don't provide Brad, but at the same time as it relates to fuel. I mean as long as fuel, diesel fuel prices favor where they're at, I mean, we do expect that, the net of our fuel price of fuel surcharge will likely be some benefit going forward. So a kind of ebbs and flows as you know in the fuel surcharge index etc. is to how much and how they get passed on. So fuel prices drop, quickly like they did in December. Perhaps you pick up some additional benefit there in fuel surcharge, if they spike quickly we feel it at the pump right away, right and so there is some timing as those prices come in. But I would say that from a fuel proxy perspective I mean, we would expect some benefit going forward, as fuel prices, diesel fuel prices stay low.

[Brad Delco:]

Okay, great. Go ahead, sorry.

[Russell Overla:]

That there is you know, as we mentioned on the dwell time as we reduced and we get the [indiscernible] then continue to focus on our LPG [ph] efforts that really have some good traction within the company produce really good results that will help as well.

[Brad Delco:]

Okay, well guys thanks for taking my follow-up questions.

[Operator:]

Thank you for your question, sir. Speakers, now I'll turn it back to you for closing remarks.

[Tom Glaser:]

We'd like to thank everyone for participating today and thank you for your comments.