Saia Inc (SAIA) 2003 Q4 法說會逐字稿

Welcome to the SCS Transportation fourth-quarter earnings conference call. This call is being recorded. With us today are Bert Trucksess, Chairman, President and CEO, Jim Bellinghausen, Vice President of FINANCE and CFO, and Greg Drown, Director of Treasury. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS). I will now turn the call over to Greg Drown. Please go ahead, sir.

Thanks for joining us today. We trust you have a copy of our earnings release. If you don't, you can obtain one from our Web site. The SEC encourages companies to disclose forward-looking information so investors can better understand the future prospects of the Company and make informed investment decisions. During this call, some forward-looking statements within the meaning of Private Securities Litigation Reform Act of 1995 could be made. These forward-looking statements and all other statements that may be made on this call that are not historical facts are subject to a number of risks and uncertainties, and actual results may differ materially. We refer you to our earnings release and our most recent SEC filings for more information on these risk factors that could cause actual results to differ. I will now turn the call over to Bert Trucksess.

Thank you, Greg, and welcome, everyone. As you see from our release, we again produced earnings improvement versus the prior-year quarter, consistent with our expectations. Our growth continues to exceed estimates of industrial production trends, which according to Blue Chip Economic indicators, rose more than 1 percent in the fourth quarter versus year-over-year declines in the previous two quarters. We are optimistic about the prospects for a stronger economy in 2004.

From an overall financial standpoint, we made progress in two key areas in 2003. First, our profitability is improving as we build density and current geographical markets, while working to control costs and improve yields. Secondly, we have improved our balance sheet and now have increased financial flexibility for future growth initiatives. To begin our discussion of the fourth quarter, I will now ask Jim Bellinghausen to review our consolidated results.

Thank you, Bert, and good morning, everyone. Consolidated revenue for the fourth quarter was 207 million, up 7 percent from the fourth quarter of 2002. Excluding the effects of fuel surcharge, revenue per day was up 6 percent over the prior-year quarter. Full-year revenue rose 7 percent to 827 million, and was up 5 percent, excluding the effects of fuel surcharge. Operating income for the fourth quarter was 8.3 million, up 11 percent from 7.5 million in the fourth quarter of 2002.

Net holding company operating expenses were about 1.7 million higher in the fourth quarter compared to the prior-year quarter. The increase was caused by two primary factors. First, approximately 700,000 resulted from the effect of our stock price appreciation on equity-based compensation and benefit plans. More specifically, we recorded a 400,000 expense for an increase in the estimated payout of our long-term incentive plan. We also accrued a $300,000 expense for investment appreciation under our deferred compensation plan. The second and larger part of the holding company expense increase was 900,000 and pertained to reserve increases on older casualty claims. These claims were incurred prior to our September 2002 spinoff, and had been subjected to a deductible buy-down program with our former parent. During the quarter, we conducted a comprehensive review of what remains of the 31 claims primarily incurred in 1998 through 2001. And we determined the 900,000 adjustment was appropriate to estimate the severity potential of these claims. We do not expect recurring reserve adjustments on these claims, and the entire subsidiary buy-down program was eliminated at the time of our spinoff.

In addition to the holding company expense increases, we also experienced an offsetting and non-recurring favorable benefit in income tax expense. Our effective tax rate for this quarter was 25 percent, reflecting this onetime tax benefit from previously unrecognized state operating loss carryforwards of one million. This benefit was recognized as a result of current year changes in state tax laws. The after-tax impact of the increases in net holding company operating expenses was about 6 cents per share and was completely offset by the onetime tax benefit, which was also 6 cents per share. As a result, net income was 4.6 million in the fourth quarter, up 50 percent from 3 million in the prior-year quarter. Fourth-quarter 2003 earnings per share were 30 cents, up 50 percent from 20 cents in the fourth quarter of 2002. For the full year of 2003, net income was 14.9 million, up 24 percent from 12.1 million in 2002. Earnings per share for the year were 99 cents, up 21 percent from 82 cents in 2002. As Bert mentioned earlier, our balance sheet improved in 2003. We had no borrowings during the fourth quarter under our revolving credit facility. As of December 31, debt net of our 31 million cash position, was 86 million, and the net debt-to-capital ratio was 31 percent. In November, we increased the capacity of our revolving credit agreement by 25 million, extended the terms and improved pricing. This increased our letter-of-credit capacity in support of self-insured retentions for casualty and workers' compensation claims without diminishing our borrowing availability. The Company replaced substantially all of the interest-related collateral previously provided by our former parent.

Net capital expenditures for the year were 50 million, 18 million coming in the fourth quarter of this year. We expect capital expenditures to increase somewhat in 2004 to around 55 million, the large majority for replacement of revenue equipment. Depreciation for 2004 is expected to increase to approximately 47 million. I will now turn it back to Bert to discuss details on operating-company performance.

We are pleased to report continued progress in improving earnings at Saia and Jevic, despite wage-rate, health care and some other expense increases. Consolidated LTL volume continues to outpace the economy. At Saia, fourth-quarter revenue, excluding fuel surcharge, was up 5 percent due to continued volume gains. Operating income rose 29 percent from the fourth quarter of 2002 and the operating ratio improved 100 basis points to 94.3. Saia's LTL tonnage per day was up 5 percent in the fourth quarter 2003, again outpacing the industrial economy, consistent with trends in previous quarters. LTL revenue per hundredweight, excluding fuel surcharge, was down a half of one percent. An increase in ATL weight per shipment of about 3 percent is a primary factor in the decline. Although pricing remains very competitive, Saia continues to pursue improvements in both prices and mix of business that we expect to produce bottom-line improvement. Yield improvement continues to be a key priority for 2004.

At Jevic, revenue per day, excluding fuel surcharge, was up 9 percent from the prior year, due to improving volumes and yield. Excluding fuel surcharge, LTL yield improved 2.2 percent versus the prior-year quarter, and truckload yield improved 3.9 percent. We also saw the best performance of the year, in terms of volume gains. Consistent with our plans to increase the mix of higher-yielding LTL business, LTL tonnage per day was up about 8 percent. And truckload tonnage stabilized, down 1 percent from the prior-year quarter, compared to larger year-over-year declines earlier in the year. Jevic's operating income was 3 million in the fourth quarter compared to 2.1 million in the fourth quarter of 2002, a 39 percent improvement. The operating ratio improved 80 basis points to 96.2. Jevic's driver recruiting effort advanced in the quarter, as efforts to build the applicant pipeline are producing an increase in driver hirings. The Company is still not at desired levels, thus requiring the increased use of higher-cost purchased transportation, especially during end-of-month surges. Looking forward, we continue to enhance efforts to recruit qualified drivers, as the market tightens due to an improving economy and the expected impacts of the new hours of service rules. We are encouraged with the growth in yield improvement progress at Jevic, and continue to see additional profit improvement opportunity, as the driver recruiting and other operational efficiency initiatives advance.

Finally, I will discuss our earnings guidance for 2004. Based on Company-specific initiatives and our economic outlook, we expect first-quarter earnings per share in the range of 12 to 18 cents and full-year earnings per share in the range of $1.22 to $1.30. With respect to the 2004 economy, the consensus Blue Chip forecast for industrial production stands at 4.8 percent. Our guidance is based on a slightly more conservative estimate of industrial production growth of approximately 3 percent.

In closing, this quarter concludes our first full year as an independent company. Despite a relatively flat 2003 economy in the industrial sector, we are encouraged by our overall progress. We see this as a good start, and believe there are even greater opportunities ahead. We hope these comments are useful to you. Now we would be happy to open it up for questions and answers.

(OPERATOR INSTRUCTIONS). Doug Col, Morgan Keegan.

Congratulations on a pretty full first year.

Thank you.

Jim, if you could one more time go through the $700,000 for me; and is that an expense that we should look for, based on the stock-price performance only in the fourth quarter, as we tie up the end of the year, going forward?

Sure.

I just didn't catch the explanation of the 400,000 versus the 300,000.

There are two components to it. The first is that the Company recorded a $400,000 expense for a change in the estimated payout under our long-term incentive plan. This is a plan that, you may recall, it's more fully described in our annual proxy. But it essentially provides for cash-based awards that is tied to SCST's stock price performance over a three-year period compared to a peer group of companies. The 77 percent annual appreciation in our stock price resulted in an increase in our estimate of the level of award that would be paid out at the end of the performance period. So we, in essence, had a catch-up adjustment, if you will, in this fourth quarter.

The second piece, the 300,000 expense, relates to appreciation of assets in our deferred compensation plan. And most of our senior-level employees contribute to a non-qualified tax-deferred plan. The way these plans work are the assets and liabilities are actually reflected on the Company's books. while a substantial portion of those assets of the deferred compensation plan are invested in SCST stock. As the price of SCST stock increases, the Company is required to record an increase in the liabilities of participants as an operating expense. However, under the current accounting rules, the Company cannot recognize the corresponding depreciation and the participants’ investment in SCST stock. It is essentially treated like treasury stock. Therefore, we do get a burden or a penalty based on our own stock-price appreciation. And that particular type of charge, which is a noncash charge, would continue as people continue to invest their deferred compensation dollars in SCST stock, and as we hopefully see increased appreciation of our stock over the long-term.

Doug, does that address your question, or do you still need some more clarification?

Now, I think that does pretty well. To me it feels like it's something that will be trued up at the end of the year then, right?

Actually, we will look at these on a quarterly basis at every public reporting period.

I was just pulling up a chart to see what the stock did in the fourth quarter versus you know, what it did in the second quarter or something, because I don't -- maybe it was just a smaller number and I don't remember it in the second quarter or something.

We actually, three quarters -- were on the long-term plan, we're kind of accruing that at what we would call target level of performance. And it was kind of our view that we would adjust for stronger performance, kind of, over time. And we consulted with our accounting advisers and determined that it would be better to go to kind of a mark-to-market approach. So in the fourth quarter, we assessed that at that point of time. we were kind of trending at a much higher than targeted amount, and we did a true up at that point. Again, that's all based on what we did relative to a group of what was originally 16 peer companies that now is 15 peer companies.

Okay. Just a couple of small things. On the 55 million in CAPEX guidance you gave for '04, what's the split in your all's mindset or budget at the end of the year? Or what's the split, maintenance versus growth CAPEX of that 55 million?

Do you have the split between --?

I would say that we do have -- the increment that you are seeing, that 55 over the 50 this year, is largely attributable to some planned real estate and structures. But the bulk of it is still revenue equipment. And the majority of that revenue equipment would be replacement capital.

Probably -- let's give just the breakdown by category, for the total plan year. Let's break the 55 -- do you have that?

Sure. In terms of revenue equipment, we are looking at roughly 39 million in revenue equipment; somewhere in the 9 to 10 million for land and structures; and the balance is investments in technology and other assets.

(Technical difficulty). As we grow the business, even in the existing geography, there's kind of an economy of scale there, so that's not linear, and we are probably looking at (technical difficulty) that capital, it's probably to or 3 percent that's growth capital on the revenue equipment. The land and structures, some of that is where we have perhaps a lease facility, and we are looking to -- maybe at a strategic location -- we are looking to control ownership. And we would be looking to buy that; or it's a facility we've outgrown and we are looking to buy a larger facility. So that tends to have a growth component to it. And the technology-type investments we have make are really -- they are kind of a different category. But they are trying to be an enhancement for our business. And to that extent, they tend to be -- have a growth component as well.

Any comments you guys might want to make on hours of service and the impact at either Jevic or Saia?

Let me comment on that. The first thing is that with Saia's network operation, there's really not any significant effect there. At Jevic, where they have a different operating model, hours of service has required some adjustment to, I guess, mitigate both some costs and service challenges. While it is still early, most of our operating indicators are showing only minimal to no change. And we're we see challenges, some of those are as much related to our being below optimal driver levels as they are hours of service. We have looked at some operating changes in the business for hours of service, and they've included things like looking at how our various runs are set up. In some cases, we've had to adjust departure times. We've had to change some routes to reduce both the length of the total run. In other cases, we have had to reduce the number of stops that could be on a run. And you recall on the Jevic model, we would have a road or line-haul driver often making stops along the way. And we've had to refine those runs. We did add over 50 drivers in the fourth quarter, as part of our recruiting effort. And 36 of those came in in December. So it was kind of an encouraging progress in the quarter, though it tended to be back end loaded. And as we sit here today and kind of just look at where we would like to be in the business plus some of the hours of service effects, we would still like to add 50 to maybe even 80 drivers in the first quarter. We have also been implementing road relays in the system to an increased extent. We now have 50 road relays. This helps us on our service. It helps on our quality of life issues for drivers. But it also helps on hours of service.

As we have tweaked the operation, we have also had some mix changes in the type of drivers that we use. You may recall that Jevic has a road fleet and our regional fleet and a local fleet. And as we have had to adjust back some of the road stops and in some cases, they even do pick-ups, we have had to move that to the other driver category. So there is a little bit of mix changes.

And then finally, with respect to customer effects, we have had some situations where there is an effect that (ph) specific customers. And our sales force has been real active in identifying those situations and working with the customers. In some cases, we have been able to solve the problem just with working with the customer on an operating accommodation, either at their level or in just changing when we sequence our delivery into their location. In a few cases, we've seen a cost increase that was necessitated and assessorial adjustment. And then in a very few cases, we've just determined it doesn't fit with us, and that business could better be served by somebody else.

So I guess in summary, it's something we are still looking at. It seems to be manageable. So we are pleased with our progress so far on that.

Okay. Just one last thing -- I know in the first quarter, you had given a pretty wide range of guidance. And weather always seems to be more of a factor in the first quarter. At Jevic's business, the extreme cold, I guess, up along the Eastern seaboard, is that a benefit with half their trailer fleet being heated? Is that a little offsetting benefit at the moment?

We actually had, some of the days, the week before last where the Northeast was extremely cold. We did have an increased demand for freezable protection, which is good and we've picked up some additional business. We also have some situations where we had to manage what we picked up because we had four (ph) customers that regularly gave us that business, and we had some short-term capacity challenges with new business. So we really had to prioritize our core customers and really had to manage some of that surge.

All right. Great job and good luck this year.

Thom Albrecht, BB&T Capital Markets.

A couple of other questions here. First of all, you said the Blue Chip growth forecast is what, 4.9 percent or 4.5?

I think it was 4.8 for the year.

You are using approximately 3 percent in your forecasting?

Yes.

Could we go a little bit farther with some of the underlying assumptions, specific to Jevic and Saia, what kind of tonnage growth and/or yield increases you might hope for in '04?

I probably can't be real specific on that, other than let me just give you a couple general comments. One would be, we certainly would look at our volume in the existing geography to grow to 2 to 3 percent better than the -- normally, we would look at let's say 2 percent better than the underlying economy, so that would kind of be 5 percent. But one of the other things that, if you look back, we are very focused on initiatives to improve yield at the same time. So we are looking at ways to be smart about revenue and yield management, and where appropriate, to take additional risk positions. So there's really going to be potentially some trade-offs, relative to maybe what we did in 2003 on yield improvement versus volume improvement. Some of that is difficult for us to project on a call like this. So that's the best general guidance I can give you.

Okay, that's fair. On Saia, we continue to basically be flat to slightly down on yields there. Given what's going on with the economy as well as LTL capacity, do you think we can move forward with yields this year? Or is it going to continue to be a flat type of yield environment at Saia?

It is certainly a great opportunity for us. And if you look back to last year as we talked in prior calls, we said that a lot of these shorter-haul markets are very competitive, and didn't have the degree of benefit from the long hall adjustment that occurred from CF's going out of business some year and a half ago. And so again, as we look at the business, we recognize the leverage to the bottom line we can get from yield initiatives. If you look at a couple of their -- like in the fourth quarter, we saw weight per shipment was up just under 3 percent. Length of haul was up about 4 percent. And the class was comparable. We saw revenue per shipment was actually up 3.4 percent. When we look at some of the individual contract renewals that we're going through, I would tell you that we had our best success in the year in the fourth quarter. And the management team there is very focused on continuing that success in 2004, because Saia has done a good job improving its profitability. It's largely been done by building density and improving costs and productivity. And we really haven't enjoyed the yield improvement benefit to the extent we would like. And with the economy strengthening, we really see increased opportunity next year.

Okay, all right. That's a fair description. If you had to kind of give us a ballpark figure, what percentage of your contract business comes up for renewals at Saia, let's say, between December and May? Would that be like two-thirds or more?

December has a fair amount. But like the first -- Thom, I don't really know what the percent is. I would say January to May, which is five months, would probably somewhat less than five-twelfths of the annual cycle, because there is a heavier bias in the fourth quarter. And we know that in Saia, the segment of the business that is subject to contract, certainly has grown over time.

I know Doug asked about hours of service, but let me ask about it from a slightly different angle. You discussed some of the changes you have made to make sure productivity losses are minimized and that. But what about the shipper who is a heavy truckload shipper with a lot of multi-stocks? It would seem to me that Jevic might have some opportunities there with its hybrid truckload -- less than truckload model -- to actually pick up some business with some of those shippers concerned about multi-stock fees from some of the truckload guys. Can you discuss what, if any, opportunities might exist at Jevic?

That's a good point, Thom. That opportunity is there. I don't think we have seen a huge windfall of volume coming that way to date. But that potential exists for that to grow and I have been encouraged at Jevic's early January trends. I commented before to Doug's question about the freeze protection benefit. That is there too. But there is definitely that potential for some additional demand coming our way. Again, it comes back to making sure that as we assess that business, we are smart on price, because we are always looking for well-priced additional business.

Okay, good. Congratulations on a good quarter. Thanks, guys.

Thanks, Thom.

Jason Seidl, Avondale Partners.

Some quick questions here -- could you guys give me length of haul in the quarter for both Jevic and Saia?

Jevic's length of haul is about 750 miles. Saia is around 550.

Around 550?

Actually, that was for the year. The fourth quarter was probably up a little bit.

Okay, I guess I can get that off-line when you guys get it. I wanted to talk a little bit about --

Actually, I can give it to you. The fourth quarter at Jevic -- at Saia -- was around 560.

560, okay. I want to talk a little bit about the sequential improvement at (ph) yield at Jevic, some exclude fuel surcharge. You had some pretty impressive gains, it looks like it was about 4 percent on an LTL basis, over 4 percent -- almost 3 percent on a truckload basis. How much of that, Bert, is mix, and how much of that is price?

I can't really give you the split on it. But it is definitely a combination of both. The truckload, in particular, is subject to a lot of mix issues because where the truckload moves, it can really have a different kind of shipment characteristic. And on the LTL -- this is just ballpark -- I would say it's probably at least two-thirds real price.

That's pretty good. I just want to kind of piggyback on your comments about the freezable protection, Bert. Obviously, you said you saw a surge in January. Are you concerned at all that the cold weather will keep natural gas prices high, thereby kind of restricting some of the demand from your chemical customers?

To the extent that concern would be there, I think we have also got the contrast of just the overall strengthening of the industrial economy. So I still feel pretty good about the net overall result.

Okay. And I apologize, you were talking about driver recruiting, and another line rang and I missed what you said. Did you give a number of how many drivers you plan to recruit per quarter?

What I said in the fourth quarter, you will recall on our prior calls, we've talked about the fact that we kind of found ourselves below where we wanted to be kind of late in the first quarter. And we had been out of the driver recruiting market to the extent that we needed for a number of years. So I guess the good news is, we've now had a need to expand those programs. And when we tried to ramp them up, we really didn't have an active pipeline. And progress was slower than we would have liked through much of 2003. But it began to build due to the focused efforts of the team there at Jevic in the late summer. And we really had a good result in the fourth quarter, in particular. We added 50 drivers in the fourth quarter, 36 came in in December. When we looked at kind of where we are both on hours of service and just kind of some of the other operating challenges that we have, we would really like to continue that progress and add -- and I gave a range of 50 to 80 drivers in the first quarter.

First quarter? Obviously, your yielding number is going to depend on what the economy actually does, right?

Yes.

What's the turnover rate on drivers at Jevic, Bert?

I am going to give you a ballpark number -- around the high teens, just under 20 percent.

, Okay. So it's much less --

It's actually pretty good for the -- compared to like the truckload industry. It's high to network LTL. But when you try to grow the fleet -- the other thing we're working on is we are trying to grow our driver population. Obviously, if we can cut that number down even further, that's a good thing. And by the way, that's also one of the benefits we get by adding the relay because we create more structure in the operating model that enables drivers to get home more frequently.

Okay. That obviously is a big deal with drivers -- at least when I talk to a lot of the guys I know. If I were to look at 2004 and some of your assumptions for the fourth quarter, excuse me, first quarter, obviously, last year you guys were hit by pretty bad weather in the Northeast. Does your low end of the range assume some weather problems in there, Bert?

The two things -- we start with the premise that it's our seasonally weakest quarter and I think most of the people on this call understand that seasonality. Then within that, the other variable we put in is -- one is the potential for adverse weather, because it's the greatest adverse weather potential quarter we have. And then also, the fourth quarter that we just completed was one of the best quarters we have had for what I would call accident severity. We didn't have one high severity accident in the fourth quarter.

Knock on wood, Bert.

I know. And we have had major investments in safety, hopefully that is part of it. But the other part, is we recognize no matter how good our safety programs are and how much we work on them that we are in a business that there is going to be quarters and years that have different levels of, in effect, frequency of high severity accidents. So the other thing that we are cognizant of in providing guidance is the potential for having had a bad accident. An on a percentage basis, if you have a bad accident in the first quarter, since the underlying earnings are lower, it just has a greater percentage increase. So if we had an accident for -- that we determined was a $500,000 accident, for us, that's 2 cents a share.

Last question, and I will turn it over to someone else here -- your old parent has been saying they were signing some of their contracts at pretty favorable rate increases, in the 4 percent range. How is Saia and Jevic signing? Are you getting what you thought? Are you getting a little bit more because of people's capacity fears in '04?

We are seeing a definite bump up in negotiated increases. I don't think it's appropriate to exactly say what numbers we are seeing. But I can tell you that the fourth quarter numbers were kind of double what we were seeing in prior numbers. And we are very focused on what the opportunities will be, as the economy strengthens.

Okay, fair enough. Thank you guys. Good quarter.

Robert Dunn, Sidoti & Company.

I was just wondering at Jevic, I was looking at the 60 basis-point improvement in the purchase transportation. Which was the more significant number, was it the improvement in yields? Or was it the better driver situation that improved the OR?

I would say more the yield improvement, because that purchased transportation did not drop dollar-for-dollar to the bottom line. Remember, we have had a conscious program to displace purchased transportation with Company-operated equipment and drivers. So what we were doing is eliminating both some of the premium to that cost. But also, the company driver enables us to have a better service capability. So it wasn't just a cost benefit. There was some cost benefit and there was an important service attribute, as well. So there was a displacement effect there. And the yield improvement was the bigger effect.

Max (ph) Bather (ph), Winfield Capital.

Most of these smart guys asked all my questions. I just have one last one. I wanted to know how Central was impacting you, and if that was going to -- as you guys get into each other's hair a little bit, how you see that affecting your ability to increase yields in the Saia portion of the operation, if at all?

It's not our practice to talk about individual competitors. The only thing I would say is while they have gone through an IPO process and are now a public company, they are an entity that we have competed against historically in the past. And the fact that they are now publicly owned hasn't really changed that. We also have any number of companies that are regional operations that overlap with either parts of our territory or all of our territory that we compete against on a day-to-day basis. And in some cases, some of those companies already cover all the map. In other cases, they are companies that say we want to expand to another region. So that is the environment that we operate in. And I would just tell you that as we focus on our core priorities of starting with a foundation of excellent service, working to be as efficient and productive as we can, to be smart about yields, I mean, we are really comfortable competing against anybody. And that's how we run the business.

That's great. Keep on doing it. We appreciate your progress.

Thanks, Max.

At this time, there are no further questions. Are there any closing remarks?

Thank you, very much, and we look forward to visiting with everybody again in April. That concludes our comments.

Thank you, very much for joining today's conference call. You may now disconnect.