USA Truck, Inc.
Q2 2015 Earnings Call Transcript

Published: 9 Aug 2015

[Operator:]

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

[Jody Burfening:]

Thank you, operator. Thank you, and good morning everyone and welcome to USA Truck's second quarter earnings conference call. Joining this morning from the company are Tom Glaser, President and Chief Executive Officer; Michael Borrows, Executive Vice President and Chief Financial Officer; also Russell Overla, Executive Vice President, Truckload Operations is with us 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 27A of the Securities Act of 1933, as amended, and Section 21E 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, continue, future, strategy and terms or 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 our underlying 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 factors that may affect future results and other disclosures by the company in its press release, Annual Report on 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 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 table at the end of the earnings press release and the slides accompanying today's conference call prepared remarks. With those housekeeping items out of the way, I would now like to turn the call over to Tom. Good morning, Tom.

[Thomas Glaser:]

Good morning everyone, and thanks for joining us in USA Truck's second-quarter performance and financial results. We’re going to start on page three of the slide presentation on your website. This summarizes our consolidated results for the quarter. As you can see, we sustained profitability and continue to improve our consolidated adjusted operating ratio, even though the base revenue was 6.2% below last year. Turning to slide four, let's go over the results of our Trucking segment. Our adjusted operating ratio improved 460 basis points to 97.5%. We benefited from continued pricing strength and fuel efficiency, but several HLAs, high-leverage activities, notably risk management, maintenance expense, asset utilization, and driver retentions still have considerable room for improvement. Base revenue declined year-over-year by 2.8 million or 3.4%, reflecting continued pricing strength offset by lower volume and revenue miles on fewer seated trucks. Net fuel expenses gave us a $4.6 million benefit in terms of operating expenses. We had reduced salaries, wages and benefits because of lower number of drivers, although this trend was offset, to some extent, by pay increase we implemented in the early June to attract more drivers in today's competitive environment. Insurance and claims were flat on an absolute basis, higher as a percentage of revenue. We haven't yet made the progress we wanted in our safety program to reduce collision costs. Operations and maintenance were up 3.3%. We have moved the needle on maintenance expense as far as we would like to have at this stage in our plan. As a result, we've been moving more rapidly to dispose of older equipment in our fleet, particularly tractors, and bring in new tractors and trailers. We ramped up that process in Q2 and accelerated our fleet replenishment program, which resulted in an early sizable increase in this quarter's gain on sale of assets. We'll go over those initiatives for tackling operating efficiencies shortly. On slide five, we've displayed key trucking operating metrics. With the rate up 7.9%, base revenue per seated tractor per week continued to increase, offsetting the decline in volume. In terms of asset utilization, we saw an increase in our dedicated truck fleet on shorter miles and network inefficiencies in our trucking operation. Let's move to SCS, whose performance is summarized on slide six. There, our gross margin remained solid at 18.1%, reflecting steady pricing and lower fuel costs. Lower fuel cost also contributed to lower operating revenue relative to last year's second quarter. However, as expected, our adjusted operating ratio rose 520 basis points to 91.2%, reflecting a combination of lower revenue, higher purchase transportation cost and continued investment to grow this segment. Our investments included the expansion of our branch offices and the opening of new locations, as mentioned in last quarter's call. Slide seven, with the review of our Q2 operating performance complete, I want to turn to the actions we're taking to make headway faster on certain high-leverage activities, in the process energizing USA Truck's turnaround and accelerating the pace of improvement in the second half of the year. I'll start with our Trucking operations. The increased rates we've realized over the past four quarters gave us the resources to implement a driver pay increase in June. The pay increases are also helping us upgrade the quality of our drivers, enabling us to place greater emphasis on capabilities and experience and rely less on student drivers. At the same time, our strengthened balance sheet gives us the flexibility to speed up the fleet replenishment plan. We started taking delivery of our new tractors in June, which will further improve fleet, fuel economy and increase the reliability of our equipment for the benefit of both our customers and our drivers. Going forward, we’re focused on several key initiatives, which are outlined on the left side of slide seven. Many of these initiatives are designed to upgrade the profitability of our customers at the lane level in order to improve overall yield and to increase our drivers' take-home pay and quality of life. We have already started to streamline the size of our tractor fleet and plan to end the year with a net reduction of 400 tractors and an improved average age of our fleet to about 2.5 years. This will help significantly reduce maintenance expenses. We’re also in the process of completing the comprehensive review of our maintenance facilities, an approach to managing preventive maintenance. In summary, we’re working to intensify our discipline around analytics to make operational decisions and drive profitability, while also taking steps to lower our fixed cost base and to prioritize return on capital employed and network density over the absolute size of our operations. For SCS, we also have a lot of action plans to restore the pace of growth and more fully leverage this highly strategic complement to our trucking operation. We are increasing the volume of loads from our customers by further integrating a centralized reengineered customer service organization. We will also use new technology whose features make it easier for customers to leverage our carrier partners within the enterprise. We are introducing additional capacity solutions and value-added services that will help us capture additional revenue stream. These include intermodal, refrigerated, flatbed, expedited and LTL. Investing in branch office expansion, including through acquisitions, while simultaneously reviewing productivity at existing branches to ensure we are leveraging our current resources as best as possible. All the initiatives we have laid out for our Trucking and SCS are designed to position us to accelerate our growth, profitability and reach our goals, which are summarized on the right-hand side of slide seven. We are just as committed to reaching our goals as we were the first - when we first detailed them for you. I'll turn the call over to Michael now for an update on our balance sheet.

[Michael Borrows:]

Thank you, Tom. On slide eight, you'll find a summary of our balance sheet liquidity information. We ended the quarter with $85.8 million of debt outstanding, which year-to-date represents a 32.3 million or 19% improvement on debt and capital lease obligations, net of cash. The decrease in debt primarily reflected a $14.5 million paydown of the revolver and approximately 2.7 million in capital lease balloon payments. Debt to adjusted EBITDA was 1.3 times compared to 2.5 times in last year's second quarter and 1.9 times at year-end. As discussed last quarter, it is not our goal to continue to pay down debt, as we believe the leverage between the 1.5 times and 2.5 times makes sense in our capital structure and is appropriately accretive to our shareholders. So our balance sheet is solid and we have the liquidity to support our continuous improvement initiatives and exploit profitable growth strategies. Year-to-date we realized 21.1 million increase in cash flow from operations, reflecting improved profitability and working capital management. During the quarter, we had net capital expenditure of approximately 9.1 million, as we accelerated our fleet replenishment program, which is geared to reduce the average age of our trailers, for example, to about five years. We're on pace to take delivery of 1,200 plus trailers this year and 400 new tractors. We expect full-year 2015 net cash capital with the additional proceeds from the accelerated sale of tractors and related trailers to be in the $50 million to $55 million range. Finally, reflecting the company's intention to create value through the use of its balance sheet and liquidity position, I'm pleased to add that the Board authorized a repurchase program of up to 1 million shares, which will begin as early as the end of this week. Okay. With that overview, I'll ask the operator to open the call for questions, after which time we'll come back on for some closing remarks. Thank you everyone.

[Operator:]

[Operator Instructions] Our first question comes from Brad Delco with Stephens.

[Brad Delco:]

Good morning, Tom, and good morning gentlemen.

[Thomas Glaser:]

Good morning, Brad.

[Brad Delco:]

Couple of housekeeping items and I want to ask some other questions. Michael, do you have the average owner operators in the quarter?

[Michael Borrows:]

I do. The average owner operators in the second quarter was about 265 owner operators.

[Brad Delco:]

Okay. And then do you have, or maybe this is for Tom, an idea of where the ending fleet count was and can you talk about the impact of your June driver wage increase on sort of stabilizing the size of the fleet?

[Thomas Glaser:]

Brad, the ending fleet count for June 30?

[Brad Delco:]

Yes.

[Thomas Glaser:]

We had company tractors of 1,745. Company tractors, that does not include the owner operators that Michael just talked about.

[Brad Delco:]

Okay. So it looks like that ending count is below the average, so you ended, I guess, lower than the average count for 2Q. Did you see any improvement in those trends in June with the driver wage increase?

[Thomas Glaser:]

Brad, what we're looking at is, we're looking at improved driver community. We've moved away from the students. So what's our position is, is to have a good quality driver and reduce the dependency on the students. So I'm going to say that the fleet isn't going to grow any. We're going to continue to focus on improving the network, improving the driver quality, which is going to help us in insurance claims throughout the servicing customers, so on and so forth.

[Brad Delco:]

Yeah.

[Michael Borrows:]

Brad, this is Michael. So just for some clarity, we took acquisitions of our 145 new tractors in the second quarter and we disposed of about 335. So that's that average difference you are referring to.

[Brad Delco:]

Okay. And then, Tom, a question for you, some areas to refocus, some attention on the cost side, you call out about $50 million of operating income improvement, you are focusing on the truckload division. If we kind of talk to what that implies for OR and kind of what the order is, of how each of these items are going to be tackled and what we should be looking for in future results?

[Michael Borrows:]

The HLAs were set out 2.5 years ago when John walked in, and my focus right now for the rest of this year in the high-leverage activities is going to be centered around maintenance and it’s going to be centered around our safety. So I'm not sure if I'm going to answer the question you're asking, Brad, but the maintenance numbers have to improve. We've got to do a better job of rationalizing where the trucks are fixed, okay, were they maintained. And by improving the average age of the tractors and outsourcing some of the maintenance and improving what we do in-house is going to reduce our maintenance costs significantly in the next six months.

[Brad Delco:]

Okay, got you. But in terms of what that 50 million would imply, to me it kind of suggests the mid-80s OR. So that's kind of the longer-term target?

[Michael Borrows:]

That's the longer-term target, Brad.

[Brad Delco:]

Okay. And then Tom or Russell, any comments you can kind of give us on how July trends were, whether it's utilization or pricing or anything that may be changing the market, but you can update us on that would be helpful as well.

[Thomas Glaser:]

I think that July was a typical July. We didn't see a robust freight network. We didn't see a real downturn. So we got through July, I guess, even it’s nothing else and we're expecting much better in August and September. We’ve seen even the indications in the early part of August, albeit three, four days; even in the last week of July we saw freight trends picking up.

[Brad Delco:]

Got you. And then final question from me, Michael, do you have any prediction or any kind of guidance or goalpost you can give us on gains on sale for the third and fourth quarter?

[Michael Borrows:]

Well, just a minor correction. I gave you the year-to-date numbers on the acquisitions and disposals, not the second quarter. So as I look out at the rest of the year, we are on pace to still acquire 400 new tractors and we will dispose of approximately 800 tractors for the full year, a net reduction of 400 in terms of fleet count. So with that being said, I mean it's probably - not look too dissimilar to what we're seeing here in the second quarter in the third and fourth quarter, primarily we'll see a lot of disposals in the third quarter and it will taper off as we get into the fourth quarter. So probably a little bit less and we're heavily weighted towards the third, if that's helpful.

[Brad Delco:]

Yes, that's helpful. All right guys. Thank you so much for the time.

[Michael Borrows:]

Thanks, Brad.

[Operator:]

Our next question comes from Jason Seidl with Cowen and Company.

[Jason Seidl:]

Thank you guys, and good morning. I guess sticking on with the gains on sale, as we look to 2016, I imagine that we should taper off the expectations for your gains going forward or do you think that they're going to be high as well.

[Michael Borrows:]

We’ll continue to have gains on the sale of trailers, likely not - not related to tractors at this pace, Jason. So, yeah, that's the certainty. So I think that as you look at 2016 and you think about our normal replacement cycle, it probably is in line with what you have.

[Jason Seidl:]

Okay. And can you talk about the wage increase and the impact that you've seen at least in the near term since June on retaining the drivers and maybe potentially attracting new ones. Do you think it's been successful early on or are you sort of just treading water?

[Russell Overla:]

I think, Jason, this is Russell, stabilize - certainly stabilize the departures of the fleet and as we continue to look at the overall payback as we posted and as Tom mentioned earlier, the quality of life for the drivers. So there’s still some adjustments we’re making to enhance. The overall driver payback just focusing on rate per mile, but it has stabilized in June and we're seeing that in July and August as well.

[Jason Seidl:]

And as you look at just pay and I understand that's the whole package, not just pay, but when you comp yourself against your peers, what buffer are you guys in, are you below the average, at the average, slightly above the average?

[Russell Overla:]

I would classify this as above the average, in between the middle and the top. I wouldn’t say slightly above the average.

[Jason Seidl:]

Okay, perfect. And I guess, Tom, this is one for you. You guys have obviously talked about your HLAs before and $50 million over the next couple of years is a pretty big goal, especially when you think about it from an earnings perspective for investors. Could you talk about sort of the lower-hanging fruit, what we should see sort of over the next 12 months and how much of that $50 million do you think you could probably count on coming over the next 12 months?

[Thomas Glaser:]

Jason, that's a good question and if we focus - the biggest dollars that we're expecting out of those HLAs are going to come out of maintenance. And the second biggest is going to come out of insurance and claims. So as we go through the last half of this year improving our maintenance facilities and where we get the maintenance done is going to afford and not only that, but replenishing the fleet and improving the average age of our fleet is going to bring down that cost significantly. And hiring a better quality driver is going to improve the insurance and claims. To monetize that or give you a number, that's a tough one for me to identify.

[Jason Seidl:]

I understand. Let me ask it a different way. So you said those are the two biggest buckets. What percentage are sort of that safety and maintenance of the 50 million?

[Thomas Glaser:]

Well, if you take a look at those two, that's 25 million, that's 50% of it.

[Jason Seidl:]

Okay, well, that's good color.

[Thomas Glaser:]

Out of the number.

[Jason Seidl:]

Okay. And I guess my last question, I'll turn it over to somebody else, here I generally take up all the time, but you mentioned a lot of different areas that you would like to go in and expand for your asset-light business and you mentioned intermodal, refer expedited and LTL. That seems like a lot to take on, over what time frame were you looking at this expansion?

[Thomas Glaser:]

We’re looking at that in the next 12 months, because it's natural. We grew our SCS business out of the truckload and it was our truck and even dry van, we had a focus on the dry van business. And as we have really got a solid base, I mean $200 million approximately in revenues is a solid base for which we can expand into the refrigerated and into the flatbed. And what Mike Weindel has done is, he’s identified people within our organization and even some of the new people we're bringing in that have the LTL experience, that have the flatbed experience, and that have refer experience. So we've started peppering those people into the branches that we have and we’re starting to see small increases in that business. So I don't think it's such a big hill to climb for us, as it is getting our branches familiar with the refrigerated and flatbed, intermodal we're already doing. So I don't think it's going to be a big learning curve at all, to be honest with you. I think we can start seeing benefits within the next six months.

[Jason Seidl:]

Great. Guys, thank you for your time. I appreciate it as always.

[Operator:]

Our next question comes from Donald Broughton with Avondale Partners.

[Donald Broughton:]

Hi, good morning gentlemen. Congratulations, Tom, on the new role and the new post. You've been the Jose Oquendo, the utility infielder of the team.

[Thomas Glaser:]

Yeah. Some people call me Brett Favre, too.

[Donald Broughton:]

I’m going to stick with Jose Oquendo.

[Thomas Glaser:]

Don't know when to quit, Donald.

[Donald Broughton:]

When did the driver pay increase, it started May 1, is that right?

[Thomas Glaser:]

June 1.

[Donald Broughton:]

June 1. All right. So what are you - let me make sure I build my math right here. Basically 130, 131 unseated trucks at the end of the quarter, company trucks. So you're still running 7.5% on seated. What do you see as fully seated and when do you think the driver pay increase and the focus on experienced drivers will get you there?

[Thomas Glaser:]

Fully seated, I guess I have to tell you what the counts of trucks is going to be and we're still trading trucks in the last half of the year and we're bringing in new trucks.

[Donald Broughton:]

Because you're bringing the fleet down by another 200 trucks read the released truck.

[Thomas Glaser:]

Right. So I think, Donald, if you look at our - relook at our forecast, as we end the year and move into the new year we should have, based on those projections, a fully seated truck count, if not, maybe even a little bit better than that. I don’t know Russell if you have anything to add to that, is that -

[Russell Overla:]

Not much specific.

[Donald Broughton:]

Better than a fully seated, as I mean -

[Thomas Glaser:]

No, I think that we see better than that, Donald. I guess what I'm saying is, is we have the ability, obviously, to throttle our truck sales and the acquisitions based on - I mean if we have the opportunity to pick up more drivers, we may just do that.

[Donald Broughton:]

In which case you would have - you wouldn't shrink the fleet by a full 200?

[Russell Overla:]

Slowed down the acceleration of the -

[Thomas Glaser:]

Right. We slowed down the acceleration of that. But at the same time, we think that we can also pick up more utility in our fleet and network. And so, that also even without increasing the fleet would put more drivers to use.

[Donald Broughton:]

I know. Let me perfect sense if you have that opportunity, you should take it. I guess that makes perfect sense. Let me change topics real quick. I know we talked in previous calls that spot market - the utilization of spot market was essentially 25% of the loads. Where are you now in that and is there any change - Tom, do you have any change in philosophy? Do you want to do more than that, less than that, et cetera?

[Thomas Glaser:]

Donald, are you talking just the Trucking portion of the business or SCS portion of the business?

[Donald Broughton:]

We talked about just the Trucking part of the business in previous calls, but probably about 25% of it was spot.

[Thomas Glaser:]

I think that 25% was consolidated company, Donald. Probably - and I’ll let Russell answer, but it's more like a 95-5 split. There’s very little spot, it's mostly contract and trucking.

[Donald Broughton:]

All right, very good then. Thank you. I'll let someone else ask a question.

[Thomas Glaser:]

Thanks, Donald.

[Operator:]

[Operator Instructions] Our next question comes from Brad Delco with Stephens.

[Brad Delco:]

Yeah. Hi guys, thanks for taking my follow-up. Michael, one quick question. In some of my notes I had a prior expectation of net CapEx of $65 million for the year and I think I heard you saying the new net CapEx target is 50 million to 55 million.

[Michael Borrows:]

That's correct.

[Brad Delco:]

It sounds like you've actually accelerated your replacement cycle. So how do I reconcile the difference between the prior expectation and the current expectation?

[Michael Borrows:]

Well, the difference is really related to additional proceeds, right. And so based on the disposal of incremental tractors, we talked about for the full year we’ll be taking about 800 tractors out of the fleet and we'll be replacing 400, so we'll have a net 400 decrease full year.

[Brad Delco:]

Okay, got you. Versus kind of more of a prior goal of one-to-one.

[Michael Borrows:]

Right. I mean one-to-one would been our plan initially, right. So that would relate to that 65 million-ish number, that's correct.

[Brad Delco:]

Okay, that makes sense. Thanks very much.

[Operator:]

Our next question comes from Jason Seidl with Cowen and Company.

[Jason Seidl:]

Thanks. Just a quick follow-up here. Michael, with the share repurchase that you guys just announced, how aggressive do you see yourselves being with the stock price around these levels?

[Michael Borrows:]

It's a good question. The actual price at which we'll be acquiring shares we're not disclosing, Jason. But we will be starting that program, here it will be a 10b5-1 plan. So we'll set some thresholds and we'll let our partner, our agent go ahead and execute on those instructions. So we are going to be, I shouldn’t say, moderately aggressive, we're going to be somewhat indifferent to price within our thresholds and acquire those shares. Our intention is to acquire the full million shares over time. Obviously, we're limited to regulations, right, and what we can do on a non-block trading volume per day, et cetera. But I think you could - how the mechanics of all that work. But to say what the price is or to say how aggressive or not, we're going to be - our intention is to acquire our million shares.

[Jason Seidl:]

Okay. Thank you, guys.

[Operator:]

Our next question comes from John Szabo with Flint Ridge Capital.

[John Szabo:]

Thanks. Good morning. I think my question was around that capital structure. So would you expect similar level of profitability that your debt levels would begin to go back up in the second half of the year or would that continue to kind of come down, sort of putting aside the share repurchase question?

[Michael Borrows:]

Yeah. Well, when we look at our projection from a capital structure perspective over the second half of the year, we don't see debt levels increasing that much outside of share repurchase and/or maybe potential acquisition on the SCS segment. So as we think about that, we'll be entering into some lease activity on some of these new tractor acquisitions and so forth as we move forward. So that would - including even potentially an operating lease, right. And so we think that that won't go up that much between now and the end of the year, but at the same time our expectation from a capital structure is really we feel comfortable between 1.5 times and 2.5 times, as I stated earlier. We think that's appropriately accretive and our goal is not to pay down our debt to zero.

[John Szabo:]

And based on that question, included in that 50 million of synergy, that's just sort of within your base of business. In terms of getting to sort of peer level profitability, I mean do you feel like you need an acquisition to get there or there's enough within the existing business to sort of close the gap with your peers?

[Thomas Glaser:]

This is Tom Glaser and I think there's enough within our business to get close to our peers. We’ve got a good network setup. We continue to improve that network and improve the customer activity within the lanes. So I think that there is every reason to believe that, yes, we can get to what our peers are with our business.

[John Szabo:]

Okay. Thank you.

[Operator:]

Our next question comes from Travis Anderson with Gilder Gagnon Howe.

[Travis Anderson:]

Good morning.

[Thomas Glaser:]

Good morning.

[Travis Anderson:]

I wanted to ask whether - with the shrinking of your fleet, you feel that you are shrinking with the industry which already has been softer lately or is this really - are you losing share and if so, to whom?

[Thomas Glaser:]

I would suggest if you take a look at our competitors, you'll see that they have increased their fleet sizes and we have declined in the past six months and I think we’ve done that as a result of looking for more quality drivers, going to less students and building our fleet with drivers that are going to move us. I guess what I'm trying to say is, we're going to have a better base of drivers to give better service to our customers and help us grow the business going into the future, building on our reputation. Drivers follow trucking companies with good reputations. And in the past, our reputation has not been that good. In the last 2.5 years, we have reenergized ourselves and built a reputation, we're building a reputation as a better carrier, which is attracting better drivers. So we’ve kind of taken a step backwards in order to go forward by improving our maintenance cost, improving our driver pay and improving our safety source.

[Russell Overla:]

But is it fair to say - I mean I think the question was in terms of losing share, there’s plenty of trade out there we believe for the drivers that we have. Our bottleneck hasn’t been losing share as then customers to our peers, it's been more about our ability to attract and retain the right segment of drivers and drivers in total. Is that -

[Travis Anderson:]

Okay, thanks. Yeah, that's all.

[Operator:]

[Operator Instructions] And at this time, we have no further questions. I'll turn it back to Mr. Tom Glaser for closing comments.

[Thomas Glaser:]

Thank you everyone for joining us this morning. As you've heard, we are implementing a lot of actions to energize USA Truck's turnaround and get back on track and the efforts of all of our team members are key to restoring that momentum. And we know that they are dedicated to that new game plan. There's a high sense of urgency throughout the organization and we're looking forward to our progress in the third and fourth quarter. Thank you very much.

[Operator:]

Ladies and gentlemen, that concludes today's presentation. You may disconnect your phone lines and for webinars, and thank you for joining us today.