USA Truck, Inc.
Q4 2014 Earnings Call Transcript

Published: 11 Feb 2015

[Operator:]

Ladies and gentlemen, thank you for your patience in holding. We now have your presenters in conference. Please be aware that each of your lines is in a 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 an audio question. It is now my pleasure to introduce today’s first presenter, Ms. Jody Burfening.

[Jody Burfening:]

Thanks, David. Good morning everyone and welcome to USA Truck’s Fourth Quarter Earnings conference call. Joining us from management are John Simone, President and Chief Executive Officer, and Michael Borrows, Executive Vice President and Chief Financial Officer. 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, our 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. Management 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 management will be using certain non-GAAP financial measures in today’s conference call to supplement the company’s 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 those housekeeping items out of the way, I’d now like to turn the call over to John. Good morning, John.

[John Simone:]

Thank you, Jody. Good morning everyone. We brought the year to a very strong close at USA Truck. The impressive progress we are making in our business is summarized on Page 3 of the slide presentation posted on our website to guide today’s discussion. On a consolidated basis in Q4, we increased base revenue by almost 11% to $126 million, achieved net income of $8.8 million as compared to a loss of $4.6 million in last year’s quarter, improved earnings per share year-over-year by $0.84, bringing in our best fourth quarter in USA Truck’s history, as well as the highest EPS of any quarter since 2005 and turned in our ninth consecutive quarter of improved financial results and our third consecutive quarter of GAAP profitability. On a GAAP basis, we went from a loss of $0.44 in Q4 of 2013 to a positive EPS of $0.40 in this year’s period. Going into our operating results for the quarter on Page 4, you can see further evidence of how well our turnaround plan is progressing. The quarter represented our third consecutive period of positive operating income, which jumped $13.3 million on a year-over-year basis. Trucking contributed $11.8 million or 89% of that increase. Our consolidated OR improved 1,090 basis points to 93.2. We’re especially pleased that the contributions that our trucking and asset-light strategic capacity solutions businesses made to our company’s income were evenly balanced this quarter at approximately $4.3 million each, as opposed to past periods when this metric was primarily driven by SCS. In an important milestone for us, trucking OR improved by 1,400 basis points to 95.1. SCS operating ratio improved 160 basis points to 88.8. Let’s move to Slide 5 now so that we can start looking at the detail in our two reportable segments. As usual, I’ll start with trucking, where we benefited from both our intense focus on operational effectiveness and by capitalizing on today’s strong demand environment, crisp operational execution, and favorable fuel prices. For the quarter, trucking-based revenue increased 4.2% and we reduced operating expenses by $12 million. An important contribution came from our fleet fuel efficiency initiatives, which included investing in new equipment and enhancing our existing fleet. We brought average miles per gallon up 10.4% and reduced insurance and claims expenses to 4.4% as a percent of revenue compared to 5.7% in last year’s period. Our variable expense reductions were primarily offset by increases in driver compensation, which as you know are important to retaining and motivating our driver team members. Let’s turn to Slide 6, which provides an overview of our trucking operating metrics for Q4. We grew weekly revenue per seated truck above $3,000 for the fourth consecutive quarter. This 9.1% increase reflected a 13.5% increase in rate per loaded mile due to strong demand, improved fleet management, and customer delivery metrics. In addition to maximizing the utilization of USA Truck’s tractor fleet, we’ve been growing our use of dedicated and owner-operator trucks. Our owner-operator fleet allows us to quickly respond to market dynamics on both the upside and the downside. Our length of haul decreased slightly in Q4 due to the amount of assets that we committed to a number of our retail customers on a per-day basis versus on a per-mile basis. This impacted our length of haul; however, our revenue per truck was not negatively impacted. Another highlight for the quarter was the positive results we achieved through our drive recruiting and retention initiatives. To combat the challenges of the industry-wide driver shortage, we made these initiatives a top priority in 2014. Although we always need to keep working in this area, USA Truck made good progress in Q4 bringing our annualized driver turnover down by 650 basis points. Now let’s turn to Slide 7 to review SCS, which turned in another strong quarter, once again demonstrating the benefits of our integrated business model. Base revenue grew 28.5% to $39 million, accounting for almost one-third of our consolidated base revenue. On the strength of higher load volumes and the improved productivity of our team members, SCS operating income jumped 15% to $4.4 million while its operating ratio improved by 160 basis points to 88.8. At this point, I’d like to move to our full-year 2014 results and summarize the accomplishments of our turnaround efforts. As illustrated on Slide 8, throughout the year we’ve remained diligent towards our company-wide focus on operational execution, profitable revenue growth, and cost effectiveness throughout the year. Our approach enabled us to reduce our maintenance cost per mile, improve fuel efficiency, refine our freight network, improve our yield, and expand SCS operating income as well as increase the amount of revenue from customers who use more than one of our service offerings. We’ve also built a foundation for a strong dedicated business and continue to expand our owner-operator fleet. I think you’ll agree that this is an impressive list of accomplishments, so while there is still room for improvement, we have been successfully executing our plan in order to drive operating and asset leverage. Let’s move to Slide 9, which summarizes our consolidated results for the year. We achieved our financial goals for 2014, delivering the positive operating income and positive EPS goals we established at the onset of the year. We achieved record base revenue of $494 million, up more than 11% over 2013. Our operating income grew almost $26 million and our trucking OR is approaching breakeven, while we more than doubled SCS operating income. As I mentioned at the start, our earnings per share of $0.58 reached the highest levels since 2006. On a non-GAAP basis, we improved from a loss of $0.44 for 2013 to a positive EPS of $0.74 in 2014. At this point, I’d like to turn the call over to Michael Borrows, our Executive Vice President and CFO, for an update on our balance sheet and liquidity, which are also greatly improved. Michael?

[Michael Borrows:]

Thank you, John. On Slide 10, you’ll find a summary of our balance sheet and liquidity information. We ended the quarter with $117.5 million of debt outstanding, which represents an $11.4 million year-over-year decrease in total debt. Our cash flow from operations reached $49.7 million, almost 40% above the prior year’s number due to enhanced operational effectiveness across all of our services. Debt to EBITDA at year-end was 1.9 times versus 3 times at the end of the prior year and down sequentially from 2.1 times in Q3. As you can see on Slide 10, our credit profile has greatly improved since 2012. For 2014, our net cash capital is $37.5 million, predominantly invested in rolling stock. In terms of outlook, our planned net cash capital for 2015 is in the range of $55 million to $70 million. Capital will be primarily invested in the business in 2015 to not only maintain the average age of our tractor fleet at about 2.5 years or slightly less, but additionally we will more than doubling in 2015 the number of trailers purchased in 2014 in a multi-year strategy to reduce the average age of our trailer fleet to about five years. Moving to Slide 11, I’ll quickly summarize the benefits of the new credit facility we closed on last week and have put into place. Our objective for the refinancing was both to reduce interest costs/cost of capital and enhance our flexibility about how that capital, which as a side note is not currently earmarked for any specific purpose, could be used as we continue to execute on the turnaround vision John architected when he began to lead the company in early 2013. Our ability to attract capital from such a top-rated bank group and at such favorable market terms, I believe, is just more empirical evidence demonstrating the progress the entire USA Truck team has made in improving our business and operational effectiveness. Lastly, as disclosed in last week’s refi announcement, in the first quarter of 2015 we will record a non-cash write-off of the unamortized debt issuance costs related to our old credit facility of just less than $800,000. Now back to you, John.

[John Simone:]

Thank you, Michael. Let’s turn now to Slide 12 and the many plans we have for USA Truck in 2015. We’re in the middle innings of our turnaround efforts and have a lot of improvements still to come. The four unique components of our businesses are all designed to work together to solve our customers’ capacity needs and drive growth and profitability for USA Truck. In 2015, we’re focused on enhancing our position as a capacity solutions provider with a balanced and integrated business model. Throughout the past year, we’ve maintained the percentage of our top 100 customers who use multiple services above 90%, and our goal is to continue to penetrate our customer base and to continue to grow the number of customers that utilize us for multiple services. As summarized on Slide 13, we are poised to make 2015 even better. We’re determined to build on the momentum the entire USA Truck has helped create, continue to drive operating and asset leverage, and accelerate the progress we’ve been making. Our goals for 2015 include growth in revenue, operating income, and EPS. We want to further improve our yields as well as shift our revenue mix through a continued emphasis on delivering integrated services. We plan to continue to expand our owner-operator fleet, increase our share of customers’ transportation spend with USA Truck, and also grow our dedicated freight businesses to leverage the ongoing capacity shortages in our industry which are prompting increased numbers of shippers to seek dedicated capacity. Now with that overview, we’re ready to move to Q&A. Operator, please open the call for questions.

[Operator:]

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

[Brad Delco:]

Hey, good morning John, good morning Michael.

[John Simone:]

Morning, Brad.

[Brad Delco:]

Congrats on the good quarter. John or Michael, the first question I had was this impressive improvement in fuel economy, 10.4%. Can you kind of remind us when we really started to see meaningful improvement in that and how the comps look on that metric going into 2015?

[John Simone:]

Brad, this is John. We began the efforts at the end of the first quarter of last year, so we still have through the first quarter of this year pretty meaningful improvements, and then throughout Q2 through 4 is when we really started to see the benefits of the changes to both our current fleet in parameters and also our new assets that we began to take delivery of. But we’re not done - we still believe that we can achieve some improvements in the existing fleet that we have in place.

[Brad Delco:]

Got you. Can you talk a little bit more about--you know, I understand the fuel benefits of newer equipment, but you kind of mentioned enhancements to the older equipment. Can you just give us more details on what that entails?

[John Simone:]

Sure. One of the large initiatives that we had last year is we had taken delivery of a number of assets, over 200 assets that were not equipped with auxiliary power units, and we retrofitted that 200-plus tractors with auxiliary power units. We went through all of the specifications on the existing fleet and made sure that they were set for optimal fuel economy. We looked at our road speeds of our assets and we’re controlling our road speeds, our idle times, and then also working with our drivers on driving habits as well.

[Brad Delco:]

Got you. Then maybe, John, because there has been some interesting action and a lot of the truck load stocks have put up strong quarters in the fourth quarter, could you talk a little bit about what you’ve seen this far in January and how this January sort of stacks up against what you saw in your business a year ago?

[John Simone:]

Yeah, January is--we were into the weather last January, so January is, I’d say, better than last year but a more typical January for us. Freight isn’t as abundant as it was in Q3 and Q4. It’s more of a typical January for us, but still robust, certainly much better than last year when we were faced with severe weather.

[Brad Delco:]

But from a demand perspective, it doesn’t seem like you’ve seen anything out of the ordinary relative to normal Januaries?

[John Simone:]

It’s a little more robust than I would say a normal January.

[Brad Delco:]

Okay. Then last question and maybe I’ll jump back in queue, I’ve calculated your utilization or miles per truck was down about 6% this quarter. Is that a function of a comment I think I heard, where you said you had shippers paying on a per-day basis as opposed to a per-mile basis, and so as a result that could have impacted utilization, or is there something else going on there?

[John Simone:]

No, that’s exactly right, Brad. We had a number of our retail customers that came to us to secure capacity in Q4, and as a result paid us on a per-truck basis and utilized the asset how they wanted to utilize the asset, and it actually helped us with our margins.

[Brad Delco:]

And then, I apologize, last one - can you give us the average owner-operators that you had in the business in the fourth quarter?

[John Simone:]

The average of owner-operators in the fourth quarter--I can get that number pretty quickly - 182.

[Brad Delco:]

Okay. All right, guys, I appreciate the time. I’ll get back in queue. Thank you.

[John Simone:]

Thanks, Brad.

[Operator:]

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

[Jason Seidl:]

Hey John, hey Michael, how are you guys this morning?

[John Simone:]

Great, good morning.

[Jason Seidl:]

Good morning. A couple quick questions. One, could you talk about any capacity growth plans here for 2015 and beyond, and sort of your views on the industry? And I have a follow-up question regarding your SCS division.

[John Simone:]

In terms of growth in capacity, we certainly are keeping a close eye on our company driver fleet and expanding that driver fleet as the opportunities will present themselves. We’re able to supplement our workforce, our company driver workforce with owner-operators. Our owner-operators are almost double year-over-year, and it provides us the flexibility to expand and contract with the supply and demand.

[Jason Seidl:]

And on the growth side, if you had it, where do you think it would be? Do you think it would be more in the pure truck load or more on the dedicated side?

[John Simone:]

There’s a lot of growth on the dedicated side right now just because of the capacity constraints, so we’re going to continue to grow both but I think as a percentage, dedicated will grow at a larger percentage just because of the strong demand that we’re seeing currently in the market.

[Jason Seidl:]

Okay. If you go back to last year, obviously the rail network was something short of fluid, I think is a nice way to put it. What did that cost your intermodal operations last year, and should we see better margins this year, all things remaining equal?

[John Simone:]

You know, from an intermodal perspective, it is a complementary service for our customers and we did not--it was really insignificant to our operations. We’re continuing to reposition and focus on our intermodal operations for a value-add for some of our shippers that want to utilize us across multiple service offerings.

[Michael Borrows:]

It might be interesting to also note, John, that in 2014 it was the first year that our intermodal operations actually provided contribution to the company. In 2013, I think it was the first year that we broke even in intermodal, so to John’s point, it’s a complementary service but it is starting to add, even small, but still contribution to the company.

[Jason Seidl:]

As they say in my business, green is good. On the freight brokerage side, when you combine it with intermodal, is there a percentage of the business that you guys would like to see this thing become over the next, call it two to three years?

[John Simone:]

We look at--I’m going to pause for a second, because I don’t know that there’s a hard and fast, but I think that on the asset side we’re looking for a 60% asset, 40% asset life, but that could be dictated by the market.

[Jason Seidl:]

Okay, fair enough. Gentlemen, I appreciate the time, as always, and impressive quarter.

[John Simone:]

Thank you, Jason.

[Operator:]

Our next question comes from Donald Broughton with Avondale Partners.

[Donald Broughton:]

Good morning, gentlemen.

[John Simone:]

Morning, Donald.

[Donald Broughton:]

An impressive rate per mile improvement. Give us some backdrop there. Certainly you had an impressive improvement in the third quarter, so on a year-over-year basis, this is a big jump but it’s even a big jump sequentially. How much of that was contractual, how much of it’s spot, and of the improvement that was contractual, kind of walk us through how you were able to elicit such an increase? Does that mean you were up, what, $0.08 a mile sequentially?

[John Simone:]

Yes sir. So we’ve got an intense focus on our network and our utilization of our network, and we are continuing to be selective on the lanes and improving our rates with our customers. We improved our rates close to 10% year-over-year in the markets where we were underpriced. I want to say the truck load market in general probably averaged around 4 to 6%, so we had to recover some of the rate where we were underpriced and then we were able to also price back to where the market is now.

[Donald Broughton:]

But how much of that was contractual in nature and how much of it was spot?

[John Simone:]

Our spot mix is about 75% contractual, 25% spot. I would say we’re very heavily influenced by the contractual freight, and we’re able to go back and re-price. A point in the re-price that I want to make is we have to be executing in order to get the price from our customers, so we’re continuing to improve our operational execution and at the same time providing capacity and value to our customers to be able to get those prices increases.

[Michael Borrows:]

Some of the rate per mile--oh go ahead, Don, sorry.

[Donald Broughton:]

No, go ahead.

[Michael Borrows:]

I was just going to add that some of the rate per mile is really--improvement there is because of some of the stuff that we had in the fourth quarter related to the retail business you heard John reference, where it was more of a day rate than based on mileage. Our revenue per truck was still between 9 and 10% improvement, but you’re right - the rate per mile was even a little higher than that, and that’s what was driving that difference.

[Donald Broughton:]

It’s impressive, and I was just looking at the source of it and the sustainability of it, et cetera. So basically, you’ve got 75/25 contractual/spot, and you got big improvements in just being more selective in which lanes you were running in, which makes a lot of sense. I’m doing some basic back of the envelope math here, and I’m just a confused sell-side analyst. If I take the total operating expenses that you generated and I just take fuel out of the equation last year and fuel out of the equation this year, and I take purchase transportation out of the equation in both of those years, and I understand certainly that your owner-operator population went from 101 to, you just said 182, I think?

[John Simone:]

Yes.

[Donald Broughton:]

What that gives me is that we had base revenue for trucks of $86.8 million, $83.2 million last year, and then we had base cost not including fuel, not including purchase transportation of $74.9 million and $71.05 million, which would mean not including fuel or fuel surcharge, you ran a base OR last year in the truck division of 85 and you ran a base OR in the truck division in the fourth quarter of this year of 86. Then when I back into it the other way, I look at fuel - fuel was a $4.5 million benefit in the quarter, which--am I missing something, because the operating cost, not including fuel, on a per-mile basis went up 17.4%. Your pricing is amazing but your costs are still going up at a pace on a per-mile basis that far exceeds that of your pricing.

[John Simone:]

Yeah, just trying to follow you quickly though that, there’s a couple of things that I could think of that would point to some price pressures, and one was, if the you recall, the significant increase--we had a really good healthcare year in 2013, so we had an increase in a few claims that provided us a headwind on healthcare costs, and then with our focus on our dedicated operations, we have some upfront start-up expense.

[Donald Broughton:]

Okay, and that would be primarily where, in the salaries line?

[Michael Borrows:]

Yes, that’s right, primarily in the salaries line in the dedicated business.

[Donald Broughton:]

Because you’re right - your insurance and claims line on a year-over-year basis was a pretty dramatic increase. I think you went from, what, $0.07 a mile to $0.13 a mile, or $0.075 to $0.13. But even sequentially, insurance and claims went from 12.8 to 13.5, so it was going in the wrong direction. But you said dedicated - dedicated, we have salaries and wages topping $0.81 a mile.

[Michael Borrows:]

We also had increases in healthcare costs year-over-year, as well as when you look at--you know, not just related to volume but we did some driver wage increases midyear this year for our two-year driver segment. Also maybe, John, you want to put some color around, we paid out retention bonuses to our drivers here in the fourth quarter.

[Donald Broughton:]

But you still have 6.9% of the fleet unseated.

[John Simone:]

That was correct.

[Donald Broughton:]

So you’re going to need to take yet another pay increase to drivers or even further retention bonuses?

[John Simone:]

Yeah, we’re continuing to evaluate the market on wages, Donald. It’s very fluid, as you know. We’re also going to continue to tighten up our asset fleet to get more productivity out of the assets that we have, and then as I mentioned earlier in the call, we have the opportunity on the owner-operator side to flex.

[Michael Borrows:]

I think what you’re highlighting though, Donald, is that are we satisfied with where we’re at on the cost side of things? No. So we’ve made a lot of headway, but at the same time I think that also illustrates, this conversation illustrates how much leverage we have left in our model, and that’s why we’re very optimistic on where we’re moving to in 2015.

[Donald Broughton:]

I’m just trying to figure out how, on an ongoing basis, where the model, a couple of these lines--. I mean, I understand the $0.075 a mile is an unsustainably low insurance and claims line, and that maybe for you $0.11, $0.12 is a more ongoing number. But the salaries line keeps creeping. It keeps creeping - we’re at $0.81 a mile now and the fleet is still not fully seated, so I just wonder what does that line need to get to, to get all the assets you own out there on the road and productive?

[Michael Borrows:]

We’ve got some time scheduled after this call, Donald. Let’s take a deeper dive into this in that time.

[Donald Broughton:]

That’s fine. I’ll let someone else have the floor. Thank you very much for your time.

[John Simone:]

Thank you, Donald.

[Operator:]

Our next question comes from Brad Delco with Stephens.

[Brad Delco:]

Thanks guys for getting back to my follow-up. John, I wanted to see if you could go into a little more detail about what type of dedicated business you’re winning, what’s essentially the duration of the contract, and I guess the only concern would be it changes if a lot of shippers are trying to secure dedicated capacity in this capacity-constrained environment, and the lengths of these contracts we’re hearing about is two to three years, which might get us through this tight supply-demand dynamic. Are these contracts longer in duration, or can you kind of give us some more detail as to what you’re signing up for in these contracts?

[John Simone:]

Yeah, our new dedicated agreements are traditional high-level service dedicated type contracts, and they’re coming in at a minimum of three-year commitments, three to five-year commitments depending on the client.

[Brad Delco:]

Got you. At this point, is there any way you can give us an idea as where the margins are in that business relative to your, call it traditional over-the-road trucking, or what impact we might see on utilization or pricing as a result of that becoming a larger portion of the business?

[John Simone:]

We don’t disclose dedicated at this point, Brad. What I’ll tell you is there is some pressure on the dedicated margins currently due to the start-up costs, right, so you have upfront start-up costs so there is some pressure until we get to full steady state in those dedicated operations.

[Brad Delco:]

Any idea as to how long we’ll see those persist, or do we start seeing those dedicated start-up costs roll off by the second quarter?

[John Simone:]

We’ll see the operations that we started up in 2014 begin to stabilize or normalize, I would say, but our expectation is that we’ll have a whole lot more start-ups coming up in 2015.

[Brad Delco:]

Got you. John, I know you’ve given a sort of outlook for 2015 even better, but maybe to ask a more specific question, you guys have had a pretty good history of exceeding expectations, at least on the earnings line. Do you think the environment, at least in the first quarter, is robust enough? Were you seeing enough improvement in some of your operating cost buckets, the fuel economy improvement being one of them, to see positive earnings in the first quarter?

[Michael Borrows:]

This is Michael. Our outlook is positive in the first quarter.

[Brad Delco:]

Is that a general statement, or is that in terms of what you think you could do from a GAAP EPS perspective?

[Michael Borrows:]

It’s really both.

[Brad Delco:]

All right, guys. I thought I’d just give it a shot and see what I could get. Again, congrats on the numbers and good luck with things going forward.

[John Simone:]

Thanks, Brad.

[Operator:]

At this time, we have no other questions in the queue, so I will turn it back to John for closing remarks.

[John Simone:]

Thank you, everyone. Thanks for joining our call this morning. As you’ve heard, we’re seeing a lot of improvement and momentum in our business. I can’t emphasize enough the hard work and focus of our team members in getting us back to our best EPS since 2008, and we’re all working together to make 2015 even better. I look forward to giving you another positive update on our first quarter call. Thank you.

[Operator:]

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