USA Truck, Inc.
Q3 2014 Earnings Call Transcript

Published: 3 Nov 2014

[Operator:]

This is a recording of the John Simone conference with USA Truck, Inc. on November 3, 2014, at 8

[Jody Burfening:]

Thanks, David, and good morning, everyone, and welcome to USA Truck's Third Quarter Earnings Conference Call. Joining us this morning from management are John Simone, President and Chief Executive Officer; and Michael Borrows, Executive Vice President and Chief Financial Officer. Before beginning 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 expects, estimates, anticipates, projects, believes, plans, goal, intend, may, will, should, could, potential, continue, 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, our actual results may differ from those set forth in 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 report in Form 10-K and other filings with the Securities and Exchange Commission. Management disclaims any obligations to update or revise any forward-looking statements which reflect actual results or changes in the factors affecting this forward-looking information. We'd also like to point out that management will be using certain non-GAAP financial measures in today's conference call that supplement the company's 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'd like to now turn the call over to Mr. Simone. Good morning, John.

[John M. Simone:]

Thanks, Jody. Good morning, everyone. It was another strong quarter for USA Truck as we made further progress with the turnaround plan we implemented last year. The consolidated financial metrics on Page 3 of the slide presentation for today's conference call, which you'll find posted on our website, clearly show how far we've come. We're especially proud of the fact that it was our 8th consecutive quarter of improved financial results. And even more important, it was our 2nd consecutive quarter of GAAP profitability. For the period, we grew consolidated base revenue, excluding fuel surcharge revenue, by $12.1 million or 10.6% and delivered earnings per share of $0.26. Quarter-over-quarter, this is a $0.32 improvement and also represents the company's highest EPS performance in 8 years. For the first 9 months of 2014, we now have consolidated net income of $1.9 million or $0.18 per share as compared to a net loss of $4.5 million or $0.43 per share for the 2013 period. As you'll recall, we had some adjustments due to nonrecurring expenses in this year's results. So on an adjusted basis, EPS for the 9 months totaled $0.33. This big step forward is despite the difficult winter that posed so many challenges to our industry at the start of the year. For the quarter, we improved our consolidated operating ratio by 450 basis points to 95.7%. As you'll see, when I drill down into our results in a minute, while trucking continues to improve, our asset-light Strategic Capacity Solutions business was the strongest contributor to our bottom line. Before we look at our results by segment, I'll remind those of you who are new to our call about the 4 different components of USA Truck's business, which are all designed to work together to drive growth and profitability. They're shown on Slide 4. For the past 4 quarters, we've kept the percentage of our top 100 customers who use multiple services consistently above 90. In the third quarter of 2014, it was 94%. This consistent performance underscores the importance of our diversified and integrated business model. As a side note, market conditions are right for growth in dedicated freight as our customers look for ways to ensure long-term capacity and provide consistent service for their own clients. Let's move to Slide 5 now so that we can start drilling down into our 2 reportable segments. As usual, I'll start with Trucking, where we've benefited from both our intense focus on operational effectiveness and by capitalizing on today's strong demand environment. For the quarter, we increased weekly revenue per seated truck by 7.5% through higher rates and length of haul and by ongoing improvements in our yield and network management. Our team has been considering network factors for every decision when on boarding new business and improving existing business. We've expanded into markets that have allowed us to deconcentrate less profitable regions, and we reserved capacity for our commitments, while carefully using the excess to capitalize on high-yield opportunities. Our rate adjustments have been timely and thoughtful, and we have strategically grown with customers who value our contributions to their business and work with us on rates, payment terms and multiple service offerings. Last quarter, our operating metrics reflected the effects of the industry-wide driver shortage with an increase in the number of unseated trucks in our fleet. To combat this challenge, we continue to stay focused on our driver recruiting and retention initiatives as a top priority, and as predicted, we have been making some headway. This quarter, we reduced our unseated truck percentage year-over-year from 6.2% to 5.2%, and we've been emphasizing owner-operator trucks to help us move freight for our customers. As a result of these initiatives, we were able to sustain the improvements in asset utilization made since our turnaround began since last year. Due to an increase in pricing, the sustained utilization helped us achieve growth in our weekly revenue per seated truck of 7.5%. Slide 6 provides further details on Trucking's improved performance. Base revenue grew more than 5%, reaching our highest level since the third quarter of 2010. In addition, we reached a key milestone in our turnaround plan by bringing in an operating ratio of less than 100%, a 370 basis point improvement. This is a big accomplishment, and we intend to keep up the trend, although higher employee health care costs have been hurting us in this effort. We're continuing to make good strides in our fuel economy and also in our insurance and claims areas and in maintenance operations, although it will take a little longer for the benefits of our safety disciplines to be seen in the numbers. Now let's turn to Slide 7 to review SCS, which turned in another strong quarter, again, showing the benefits of our integrated business model. Base revenue grew 24% to almost $40 million accounting for about 1/3 of our consolidated base revenue. On the strength of higher load volumes and the improved productivity of our team members, we increased operating income 93% to $5.3 million, and SCS's operating ratio decreased by 480 basis points to 86.6%. At this point, I'll turn the call over to our new Executive Vice President and Chief Financial Officer, Michael Borrows, for an update on balance sheet and liquidity. As you know, Michael joined us in late September. His extensive background in transportation and finance, including 14 years at BNSF Railway and Kansas City Southern, have helped him get off to a very quick start. We're glad to have him on board. Michael?

[Michael K. Borrows:]

Thank you, John. I've been at USA Truck for only a short time, but I'm very impressed with the caliber of the company's management team and employees, their engagement in the turnaround vision and the progress that has been made over the past year. I've seen firsthand now that John and the management team, under his leadership, has taken the steps required to build a strong foundation that enabled much progress to be made, and even more importantly, on which the company's progress will now begin to accelerate. I'm looking forward to being a partner to John and to help lifting up USA Truck under his leadership, and I am genuinely excited about the opportunities that await the company. Okay. Back to the slides. On Slide 8, you'll find the summary of our balance sheet and liquidity information. We ended the quarter with $114.4 million of debt outstanding, which represents a $10.7 million sequential decrease. For the year-to-date, we reduced debt by $14.5 million, and for the past 12 months, by $26.5 million. At quarter end, we had $38.9 million of net borrowing availability on our revolving credit facility. This is net of the minimum availability we are required to maintain of approximately $19 million. As you can see, our cash flow from operations was very strong compared to recent quarters, and was in fact one of the best levels in recent years. Now back to you, John.

[John M. Simone:]

Thank you, Michael. I'll pick up on Slide 9 for just a minute where we list the goals we set for 2014. As you recall from our prior conference calls, we established 5 targets for pushing forward this year

[Operator:]

[Operator Instructions] Our first question comes from Donald Broughton with Avondale Partners.

[Donald Broughton:]

What is the OO or owner-operator count? You mentioned that you're focused on continuing to grow that in your slide presentation, but I didn't see the actual number.

[John M. Simone:]

Yes, owner-operator count in the third quarter average, Donald, was 154, up from 129 in third quarter of last year.

[Donald Broughton:]

Right. So up another 14 sequentially. You changed the -- I don't know if you talked about that yet, let's talk about average age of equipment. What was the average age of the truck fleet and the trailer fleet in months at the end of the quarter?

[John M. Simone:]

The tractor fleet is at 31 -- around 31 months, and the trailer fleet is right about 85 months.

[Donald Broughton:]

All right. And what was net CapEx, Michael, in the third quarter?

[Michael K. Borrows:]

Net CapEx in the third quarter was about $6 million.

[Donald Broughton:]

All right. And you brought down debt 14 -- I'm sorry, $10.7 million in the quarter, so you brought down debt by 9.4%, but interest cost went up by 9.7%. What's -- did you -- was there a prepayment penalty involved? Or how did the debt fall sequentially and interest expense sequentially rose?

[Michael K. Borrows:]

The average rate in our borrowing facility was lower this quarter than in past, it was about 2.5%.

[Donald Broughton:]

But debt fell, but interest expense rose, I'm missing something.

[Michael K. Borrows:]

Well, I think our capital leases are driving that.

[Donald Broughton:]

Okay. So you had an increase in capital leases...

[Michael K. Borrows:]

Over the prior year, yes, absolutely.

[Donald Broughton:]

Okay. So while you're paying down debt on balance sheet, debt overall is actually growing?

[Michael K. Borrows:]

Total debt grew a little bit.

[Donald Broughton:]

Well, 9.7% sequentially was the cost increase. But okay, fair enough. How many of the trucks now have EOBRs in them?

[John M. Simone:]

We're nearing 100% completion, Donald. We expect to be 100% complete in the next 2 weeks.

[Donald Broughton:]

So you're 90-plus percent now?

[John M. Simone:]

Yes, we're sitting right at 96%.

[Donald Broughton:]

Fantastic. And then, I guess, I had one more thing unless someone else have the floor. You changed the way you account for fuel surcharge revenue is what it appears. The amount reported last year's third quarter as your SCS revenue and the amount you reported this year are different numbers. In that last year, you reported SCS revenue of $32 million, $32.095 million to be exact, and then this year, on a net basis, you reported $36.918 million. If I back in to fuel surcharge, it looks like you've moved some fuel surcharge number revenue over there. Is that what's happened? And if so, can you explain the reasoning behind it, or if not, the disparity?

[John M. Simone:]

We haven't changed the way that we're accounting for fuel surcharge, so that's something that we're going to have to talk with you later on about, Donald.

[Donald Broughton:]

What explains the disparity in what you reported last year, the $4.8 million disparity between what you reported last year's net revenue for SCS and the amount you reported this year?

[John M. Simone:]

We went from $4.8 million to $5.4 million.

[Donald Broughton:]

The amount of fuel surcharge included in, but yes, the net revenue last year was $32.095 million.

[John M. Simone:]

Right.

[Donald Broughton:]

And you reported it this -- you restated it as $36.9 million in the release.

[John M. Simone:]

I can't answer that right now. I don't know.

[Donald Broughton:]

Okay. Well, one last question. Gain on sale, did you disclose that? There's a separate line item up until this quarter.

[Michael K. Borrows:]

Yes, it is in other. And it's -- I think, you said we disclosed that. It'll be disclosed on a separate line item in our 10-Q. Is that what you...

[Donald Broughton:]

Well in last quarter, it was in the release. Can you tell us what the gain on equipment was?

[Michael K. Borrows:]

Yes, give me one second.

[Donald Broughton:]

It was just in the common size income statement in the release last year -- last quarter.

[Michael K. Borrows:]

The gain this quarter was about $300,000 back [ph].

[Donald Broughton:]

Approximately $300,000. I'll let someone else ask a question. I'll get back in the queue.

[Operator:]

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

[A. Brad Delco:]

John, could you speak a little bit about the trucking operation? You look at rates up 9.4%. Obviously, a strong performance there, but it seems like there's some puts and takes. I'm noticing your empty miles are trending higher. I'm trying to kind of piece together how the maybe growth in dedicated and how you're, sort of, I guess, reallocating some of your assets to higher-yielding freight, how that's kind of impacting the income statement. Because typically, when you see rates of that magnitude, I guess, you'd expect a little bit greater margin improvement. So what are sort of the puts and takes to the kind of operating metrics that we're seeing right now that are driving the numbers?

[John M. Simone:]

Sure. So on the increase in rate, we are seeing empty miles and out of route slightly elevated for a couple of reasons. One is we've had a lot of activity, moving equipment through the shop for EOBRs. We, quarter-over-quarter -- I'm sorry, quarter-over-quarter, sequentially, we installed about 300 more EOBRs in Q3 than we did in Q2, so that creates some out-of-route and empty miles depending on whether it's moving through with a load or not. We are starting a more dedicated business, which creates some empties and out-of-route to get equipment in the position, and then we have some startup costs associated with starting up those new dedicated accounts, Brad.

[A. Brad Delco:]

Are you getting paid for all miles on that dedicated but still reporting empties when you're not moving freight? Or how does that sort of -- how is that accounted for?

[John M. Simone:]

That's correct. Today, we are accounting for all miles paid, and we show the empty in our empty percentage.

[A. Brad Delco:]

Okay, that makes more sense to me then. Then, when you look at the business now, John, are you still focused more on improving the business mix? It seems like the environment is robust enough to where maybe the freight selection should be kind of the easy part of the job and maybe working on the expense side is kind of more of where the focus should be. Are there any line items specifically that we think could start seeing some improvement, whether it's maintenance or other line items that we should see costs come out of going forward?

[John M. Simone:]

Yes, you will continue to see the efforts of the maintenance disciplines and safety discipline reflected in cost reductions, and also, Brad, the out-of-route and empty miles as we get to a more normalized network, and we don't have to reposition as much of our equipment in for some of the changes we made this year to programming to get the fuel economy, to get our EOBRs in the units. You should start to see some reductions in those line items.

[A. Brad Delco:]

Got you. And then, maybe just touching quickly on sort of the driver environment for you. Have you done anything with driver pay or any sort of sign-on bonuses to try to improve some of these, the turnover metrics that we're seeing? Or is that stuff still to come? And should we expect -- should we be expecting that as we kind of forecast the business here?

[John M. Simone:]

Yes, so we implemented increases in 3 tranches. We did owner-operators earlier in the year. We had a certain group of drivers based on experience levels towards the middle of the year, and we just concluded our third increase for our more tenured drivers a few weeks ago. And yes, we are doing sign-on bonuses as well.

[A. Brad Delco:]

Can you sort of quantify what you think on average, your inflationary cost pressure is with driver wages?

[John M. Simone:]

Michael, do you have a sense of that inflationary cost pressures on driver wages?

[Michael K. Borrows:]

I think as we look at the trends here, I mean, nothing outside of -- you mean, in terms of just increases, there have been a number of different things that, I think, allow or I believe allow drivers to earn more pay. Now it's not kind of an increase per se, but it's, I think, allowing -- there's additional pay features, I guess is how I would describe it, in their package that has enhanced driver pay in the last year.

[John M. Simone:]

Across the board, Brad, we see about $0.01 per mile impact to the increases that we put in place.

[A. Brad Delco:]

Got you, okay. Because when I look at the model on a total mile basis, it looked like salaries, wages and benefits were up about 15%. So I was trying to figure out if that's all driver wages. There's some other items running through the salaries, wages and benefits line item. Is that health care that you mentioned?

[John M. Simone:]

Yes, it's our increase in the health care costs and it's also -- our sign-on bonuses are included in that line as well.

[A. Brad Delco:]

Can you quantify for us what health care costs were up year-over-year?

[Michael K. Borrows:]

About $2 million.

[John M. Simone:]

$2.7 million to be exact, yes.

[Operator:]

[Operator Instructions] At this time, we have no other questioners in the queue.

[John M. Simone:]

Okay. With that, I'll go to closing remarks. Thank you again for joining us this morning. As you've heard, we're seeing a lot of improvement in our business. I can't emphasize enough the hard work and focus of our team members in getting us to our best EPS in 8 years. And we're all going to keep working to bring in a great year and then keep improving on that performance. I'll look forward to giving you another good update on our year-end call. Thank you.

[Operator:]

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