USA Truck Inc (USAK) 2014 Q3 法說會逐字稿

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

Ladies and gentlemen, thank you for holding, we now have your presenters and conference. (Operator Instructions). It is now my pleasure to introduce today's first presenter, Ms. Jody Burfening of LHA.

Thank you, David. 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, I would 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 in 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, estimates, anticipate, project, believe, plan, goal, intend, 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 underlining 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 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 would 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 statement. 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 Mr. Simone. Good morning, John.

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 will find posted on our website, clearly show how far we have come. We are especially proud of the fact that it was our eighth consecutive quarter of improved financial results. And even more important, it was our second 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 eight years. For the first nine 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 will recall, we had some adjustments due to non-reoccurring expenses in this year's results. So on an adjusted basis, EPS for the nine 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 will 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 will remind those of you who are new to our call about the four different components of USA Truck's business, which are all designed to work together to drive growth and profitability. They are shown on slide 4.

For the past four quarters, we have 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 two reportable segments. As usual, I will start with trucking, where we 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 onboarding new business and improving existing business.

We have 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 have 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 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 are 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 a third 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 will 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 are glad to have him on board. Michael.

Thank you, John. I have been at USA Truck for only a short time, but I am very impressed with the caliber of the Company's management team and employees, their engagement and the turnaround vision and the progress that has been made over the past year. I have seen firsthand now that John and the management team under his leadership has taken the steps required to build a strong foundation that enables much progress to be made. And even more importantly, on which the Company's progress will now begin to accelerate. I am 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 will find the summary of our balance sheet and liquidity information. We ended the quarter with $114.4 million in 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.

Thank you, Michael. I will 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 five targets for pushing forward this year: achieving positive consolidated operating income; continuing our operational improvements; continuing our market share gains; reducing our full-year debt; and achieving positive EPS. Based on our results for the third quarter and year to date, we believe these goals for 2014 are well within our reach.

Turning to slide 10, you can see how strongly we are executing on our turnaround plan, with trucking OR below 100. A consolidated OR of 95.7% and EPS of $0.26 for the quarter and $0.18 for the year, or $0.33 after adjusting for the $2.6 million in non-reoccurring costs we incurred in 2014. Plus, as Michael just mentioned, we have already reduced debt by a total of $14.5 million this year.

Now that we are in the fourth quarter, we continue to be pleased with how robust the fundamentals of the business are and how well our team is executing on our operations strategy. So while there are always macroeconomic trends not completely within our control, overall we are feeling very good about the progress we have made and are continuing to make in improving the Company's operational effectiveness.

And we have just enhanced our strategy with a view towards further improving the health and profitability of the business over time. For instance, we plan to continue shifting the revenue mix in 2015 through a continued emphasis on delivering integrated services. The box in the bottom half of page 10 lists the main initiatives we are pursuing, and I will be giving you more color on those in the fourth-quarter call.

With that overview, operator, we are ready to move to Q&A. Please open the call for questions.

(Operator Instructions). Donald Broughton, Avondale Partners.

What did the -- what was the OO -- owner-operator count? You mentioned that you are focused on continue to grow that in your slide presentation, but I didn't see an actual number.

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

Right. So I'll put that another 14 sequentially. You changed the -- no, let's not do 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?

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

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

Net CapEx in the third quarter was $6 million.

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 costs went up by 9.7%. What did you -- was there a pre-payment penalty involved, or how did the debt fall sequentially and interest expense sequentially rose?

The average rate on our borrowing facility was lower on this quarter than in the past. It was about 2.5%.

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

Well, I think our capital leases are driving that.

Oh, okay. So you had an increase in capital leases.

Over the prior year, yes. Absolutely.

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

Total debt. Grew a little bit.

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

We are nearing 100% completion, Donald. We expect to be 100% complete in the next two weeks.

So you are 90% plus now?

Yes, we are sitting right at 96%.

Fantastic. Congratulations on that.

Thank you.

And then I guess I had one more thing, and I will let someone else have the floor. You changed the way you account for fuel surcharge revenue is what it appears. The amount reported last year 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 the net basis you report $36.918 million. If I back into fuel surcharge, it looks like you have moved some fuel surcharge number -- revenue over there. Is that what is happened? And if so, can you explain the reasoning behind it, or if not the disparity?

We haven't changed the way that we are accounting for fuel surcharge. So that is something that perhaps we can talk with you later on about, Donald.

Well, what explains the disparity, and what you reported last year is a $4.8 million disparity between what you reported last year as debt revenue for SCS and the amount you reported this year.

It went from 4.8 to 5.4.

The amount of fuel surcharge included, and, but yes, the net revenue last year was three -- 32.095.

Right.

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

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

Okay. Well, one last question. (inaudible) on sale, did you disclose that? It was a separate line item up until this quarter.

Yes, it is another. And it's, I think usually -- you say we disclose that, it will be disclosed on a separate line item on our 10-Q. Is that what you --

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

Yes. Give me one second.

It was just in the common sized income statements and the release last year, last quarter (inaudible).

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

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

(Operator Instructions). Brad Delco, Stephens.

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

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

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

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

Okay. Yes, 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 the easy part of the job. And maybe working on the expense side is more of where the focus should be. Are there any line items specifically that we think could start seeing some improvement whether it is maintenance or other line items that we should see cost come out of going forward?

Yes. You will continue to see the efforts of the maintenance disciplines and safety disciplines reflected in costs reductions. And also, Brad, the outer 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.

Got you. And then maybe touching quickly on 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 the turnover metrics that we are seeing? Or is that stuff still to come, and should we be expecting that as we forecast the business here?

Yes, so we implemented increases in three 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.

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

Michael, but do have an answer to that? Inflationary cost pressures under our wages.

I think as we look at the trends here, I mean, nothing outside of -- in terms of the increases, there have been a number of different things that I think allow, or I believe allow, drivers to earn more pay. Now, it is not 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.

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

Got you, okay. Because I guess 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 or some other items running through the salaries, wages, and benefits line. Is that health care that you mentioned?

Yes. It is our increase in health care cost, and it is also our sign-on bonuses are included in that line as well.

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

About $2 million.

$2.7 million, to be exact. Yes.

Okay. All right, guys. That's all for me. Thanks so much for the time.

(Operator Instructions). At this time, we have no other questioners in queue.

Okay. With that, I will go to closing remarks. Thank you again for joining us this morning. As you've heard, we are 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 eight years. We are all going to keep working to bring in a great year and then keep improving on that performance. I look forward to giving you another good update on our year-end call. Thank you.

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