US Xpress Enterprises Inc (USX) 2004 Q2 法說會逐字稿

Good day everyone and welcome to the U.S. Xpress Enterprises, Inc. conference call. Today's conference is being recorded.

At this time, for opening remarks I'd like to introduce Mr. Tripp Sullivan of Corporate Communications. Please go ahead.

Thank you. Good morning. Thank you for joining the U.S. Xpress 2004 second quarter conference call. On the call today will be Max Fuller, Co-Chairman; Ray Harlin, Chief Financial Officer; and Jeff Wardeberg, Chief Operating Officer.

Before we begin, I'd like to cover the Safe Harbor language. This conference call contains certain forward-looking information that is subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Without limitation, these risks and uncertainties include economic recession or downturns in customers' business cycles, rapid fluctuations in fuel pricing or availability, increase in interest rates, and the availability of qualified drivers. We urge you to carefully review and consider the various disclosures made by the Company in its press releases and periodic reports on Forms 10-K and 10-Q.

I'll now turn the call over to Ray Harlin to summarize the operating results for the quarter.

Good morning. We will briefly discuss the results of our operations for the quarter, and following my comments we will be available to respond to any questions.

We are pleased that we continued our trend of quarterly earnings improvements during the second quarter of 2004. This represents the 10th consecutive quarter of year-over-year quarterly increases in revenue and earnings, and we expect this positive trend to continue throughout the remainder of 2004 and into 2005.

For the quarter, consolidated revenue increased 16.5% to 270.3 million. Excluding the effect of fuel surcharges, consolidated revenue increased 15.1% to 257.4 million. Truckload revenue, excluding the effect of fuel surcharges, increased 13.6% to 223.8 million, driven by a record increase in revenue per loaded mile of 11%.

As we stated in our discussion of the first quarter results, recognizing that we and the entire industry were facing significant increases in operating costs, we initiated an aggressive campaign beginning in the latter half of 2003, to improve our rates and replace business that did not allow us to receive a reasonable financial return. In certain cases, we have exited unprofitable lanes and business. Other factors contributing to the increase in rates include our regional and dedicated operations, which generally provide for lower length of haul and higher rate per mile, continue to grow as a percent of our truckload revenues. Together, these operations generated 26.8% of our truckload revenue in the second quarter, versus 20.3% in the 2003 second quarter.

Overall for the quarter, the average length of haul of our truckload operations declined 7.2% to 728 miles.

The shortage of truck capacity in many geographic markets has dramatically increased spot market rates for non competitive capacity. And finally, improved freight demand and improvement in our internal processes designed to allow us to make better decisions regarding freight solicitation and selection have resulted in better yields.

Net income for the second quarter increased 91.4% to 4.2 million, or 30 cents per diluted share, from 2.2 million or 16 cents per diluted share in the second quarter of 2003. The improvement in net income was driven by a 72.4% increase in our truckload operating income to 9.9 million, representing a 150-basis-points improvement in our truckload operating ratio. From an overall perspective, this improvement in truckload operating income was driven by the increase in rate per mile and our ability to continue to shift our operating assets to more profitable segments of our truckload business, as evidenced by our 62% growth in our dedicated business.

Also contributing to our improved results was the growth in our expedited rail program, which was virtually nonexistent a year ago and now represents over 10% of our truckload revenue. This program has enabled us to improve returns in many long-haul freight lanes, increase capacity to our customer base, and mitigate the impact of the hours of service change.

The improved operating results in our truckload operations were achieved in the face of absorbing significant increases in operating costs. The average cost per mile of our truckload operations during the quarter increased 8% over the second quarter of 2003. These increases included an approximate 10.5% increase in cost per mile for driver wages and benefits, primarily as a result of an 8% increase in driver pay initiated late in the first quarter of 2004. An approximately 8.4% increase in cost per mile for purchase transportation reflected an approximately 5 cent per mile increase in independent contractor compensation initiated during the first quarter of 2004.

Revenue cost -- revenue equipment costs have increased as the cost of new tractors has increased primarily due to the new EPA-compliant engines and lower residual guarantees. At June 30, 2004, approximately 36% of the Company-owned over-the-road fleet consisted of tractors with EPA-compliant engines.

Fuel prices averaged approximately 21% higher in the second quarter of 2004 versus the second quarter of 2003. These higher fuel prices net of the impact of fuel surcharges and the lower fuel efficiencies from the EPA-compliant engines, increased our operating costs in the quarter by over $3 million, compared to the 2003 second quarter. However, it should be noted that the second quarter of 2003 fuel costs were positively impacted by the favorable effect of higher fuel surcharge collections in a declining fuel price market.

Our total tractors at June 30, 2004, increased only 1% to 5,435, compared to the prior year, which was a slight decrease of 74 tractors from the beginning of the quarter. Similar to others in the industry, we are facing a very challenging driver recruiting market. For the most part, we have kept our trucks seated throughout the quarter, although with the trucks presently on hand, we could increase our seated trucks by 100 to 150. We continue to focus on driver retention and are seeing some improvements in certain segments of our truckload business. We continue to believe that capacity will be constrained within the industry for the foreseeable future due to the shortage of qualified drivers and the high cost of entering the truckload business.

Turning to our Xpress Global operations, which accounts for only 15% of our consolidated revenue, we did not achieve the level of performance that we had anticipated entering the quarter. Although revenue increased 13.3% to 40.1 million, operating income declined to 385,000 versus 1.2 million in the second quarter of 2003. This shortfall in performance was essentially due to lower-than-anticipated revenue in our airport-to-airport operations. We have initiated a number of actions to improve the performance of this segment of our business.

Additionally this month we completed the acquisition of the less-than-truckload airport-to-airport business of CRST Van for which we expect to add approximately $7.5 to $10 million in operating revenue to our airport-to-airport operations without a significant increase in fixed costs.

From a balance sheet perspective, our long-term debt increased to 193.7 million versus 160.8 million at the end of the first quarter. This increase reflects our decision to increase the proportion of our fleet financed with debt versus operating leases due to the necessity of generating additional tax depreciation in the current year. Our liquidity remains strong with over 40.8 million available for borrowing under our long-term revolving credit. Cash flow from operations for the quarter totaled 13 million and capital expenditures were 32 million. We expect our long-term debt to decline throughout the remainder of the year as cash flows from operation should exceed 50 million for the remainder of 2004.

Looking forward, we are currently experiencing strong demand in each of our business segments. In the truckload sector, we believe that given current supply and demand situation, there exists a continuing opportunity to increase yields through better freight selection and increasing rates. Further, we expect that the remainder of the year, capacity in the truckload industry will be restrained due to driver availability and other economic factors. We have a number of new dedicated contracts awards which initiate service over the next six months.

Further, we expect the expedited rail program to experience further growth as this allows us to provide additional long-haul capacity to our customers during the upcoming seasonally strong shipping season. At Xpress Global, we have the opportunity to significantly improve profitability by achieving our volume objectives for airport-to-airport operations.

Absent a significant softening in the economic and freight environment in 2004, or a continued acceleration of fuel prices from current levels, we expect to report revenues for the third quarter ending September 30, 2004, net of fuel surcharges, in the range of 265 to 270 million, and net income per share in the range of 35 to 38 cents per diluted share, compared with 19 cents per diluted share in the third quarter of 2003. Our previous guidance for earnings for fiscal 2004 for earnings per share was 90 cents to $1. We are increasing the range of expected earnings per share for fiscal 2004 to a range of $1.05 to $1.10 with consolidated revenues for the year expected to exceed $1 billion.

With that, we would be glad to respond to any questions.

Operator?

Moderator?

Yes, sir.

If you do have a question at this time, it is star 1 on your touch-tone telephone. Again, star 1 for any questions.

We'll take our first question from Edward Wolfe at Bear Stearns.

Hey, guys. I don't know if you saw it, but a little while ago something hit the news about at least part if not all of hours of service being overturned by an appeals court. Have you heard or seen anything about what was going on with that?

At this point we haven't, no.

Okay. So I'll wait on that. But there's been some news. It's a little tricky to understand. If hours of service were to be repealed by a court at this point, how would that change your business?

It would make things a lot easier. The big issue that we run into with hours of service is the fact that once the guy starts the clock for the day he can't stop it. So if he gets to a shipper location or a rest stop somewhere too soon or too late, the clock continues to run, and that's one of the big issues. If you look at where probably the biggest impact has occurred is look at the ports where a guy goes in and he has to sit for two to three hours to pick up a load or a container. You know, the clock is running on him, and he can't stop it, where in the past that's probably something that he could stop. So I think that, you know, if it does go back to the way it was before, it just gives us that much more flexibility.

Do you think you would be able to keep some of the assessorial rate increases you put in?

At this point I think so. One thing that's happened is we've gotten a lot of customers to increase the efficiency of how they operate, and I'm not sure that they would ever really roll back. If you look at the amount of chargeable events that we have because customers have more delays, that's been minimized because of the fact now it's chargeable, where customers in the past didn't have incentive to fix it, today they do, and that's been the biggest plus that we've seen from hours of service, is the customers that were the most abusive are now the ones that are having to pay, and the ones that were probably less abusive have fixed their systems.

How about particularly with the team drivers but on a longer distance picking up that 11th hour versus the 10th hour? If that goes away, does that impact you negatively in any way?

No, I don't think so.

Hey, Ray, am I reading this right? Was revenue per load and mile up 11%?

That's correct.

How much of that is mix and how much of that is fuel and how much of that is kind of real rate?

Well, not -- we've got about -- hard to get a perfect number, but about 2 cents of that increase is probably the change in our length of haul mix. In other words, more of our business being dedicated, more of our business being regional, so in round numbers maybe 2 cents of that is rate.

We have -- we probably have more fixed rate -- or flat charge freight this quarter than we've had in the past, and that, in essence, has fuel in it to a certain extent, so that may be a penny in that number. Other than that, it's -- it's a combination of rate increases on our existing customer base, getting -- or changing our freight mix, i.e., working on that bottom half that we weren't receiving a reasonable rate for what we were doing, and we've made a number of changes in our freight that we're hauling and lanes we're hauling. And then, you know, the spot market has been very strong this quarter.

So it sounds like if I take out 3 cents I'm getting about 8.5% on the rate side, and you think that you can hold on to that?

I believe we will, yes.

In fact, we think we can continue to see rates go up as we go deeper into the year.

And is any of that assessorial related to hours of service rates?

Very small. Very small.

Okay. In terms of the tractor fleet and CapEx, can you give some thoughts going forward where you see CapEx ending the year and --.

I think we will probably -- we've made a shift since the beginning of the year because of our increased profitability. We obviously want to minimize our tax cash outflow so I probably will have an additional $20 million in CapEx for the remainder of the year.

And where does that put us at?

That would put us at about $63 million.

That's a net number or a gross number?

That is a net number.

Okay. And next year how would you see that trending?

I would see that trending slightly down because we've had a number of trailer additions this year, so I would say that would be in the $40 to $50 million range next year.

Okay. And in terms of net new tractors you're down sequentially, you're up a little year-over-year. How -- from here do you expect the tractor fleet to rise, stay the same, or shrink?

We think it will be about where it is today.

I thought I heard either you or Max say something to the effect of if you wanted to you could probably grow 100 with drivers. Is that what you said?

In essence we're saying as of today I've got enough trucks -- I've got about 100 to 150 unseated trucks.

All right. So, in other words --.

-- that would be available for seating, because you're always going to have some transition trucks.

Right.

But if I had another 100 to 150 drivers today, they would be out running.

I gotcha. Where was that number at the end of March?

It was a little bit less than that.

And the end of December?

December, it was a couple -- I think we were 2 to 300, as I recall.

Yeah, it's about that, yeah.

Seasonally I'm guessing that's probably part of that, though, but year-over-year, where were you a year ago? Nobody?

Ed, I don't have that number. I don't think it was significant a year ago.

Okay. One last question. We've been hearing some economic news that the consumer is dropping off a little bit in June and July. Have you seen any slowdown in retail in June or July at this point?

No.

Nowhere? Just across the board strength?

It's very strong in June. We've had the typical seasonal slowdown for the first two weeks of July because of July 4th, but orders are strong right now and seem to be bouncing right back.

Okay. Thanks a lot, guys, for the time.

Thank you.

We'll go next to Dan Moore with Stephens.

Mercy. Good quarter, guys.

Thank you.

Couple of questions. Maybe if you could talk to us a little bit about the demand environment characterized in terms of history, compare it, if you would, to 1994.

I think if you look at 1994 the transportation market, to characterize it, had a pretty good shortage of transportation assets between trucks, planes, and also trains, and I think that if you look at where we're at today that's probably somewhat similar. The type of customers and type of business has changed because we're not manufacturing as much in this country as we were back in 1994, so imports are a lot bigger part of that story, and it appears like exports are a little bit less of that story as compared to 1994. But if you look at the freight environment, if you look at the pricing environment, this is probably even better than 1994 as far as the fact that we're getting bigger rate increases, customers are willing to make major changes in their networks that they weren't, say, in 1994, because they think this is going to be a much longer trend. And this probably will be a longer trend due to the fact that there's not a major supply of drivers coming into the market.

As the government passes the highway bill, as construction continues to pick up, we're still competing with those industries for drivers, and the driver situation's probably going to get tighter as the economy starts to pick up. So we don't see this thing subsiding probably even in this whole business cycle. We think that the driver situation's going to be here probably for several years going forward, and that may mean that we'll have pricing power because there will be a shortage in transportation assets. Even if people wanted to add capacity we don't think that they can.

Seems like in 1994 there was obviously a -- kind of an intense effort on the part of most of the industry to add a lot of capacity, and despite what some of my competitors have suggested, it doesn't seem like we have seen or are seeing a lot of that, despite the fact that orders are up, build rates aren't that bad, and I guess all of that kind of falls in line with your view, but on the driver pay front, I think you make a good point.

What do you think's in store for the second half of '04? Could we see another round of driver pay increases going into effect?

I think at this point, most of the people are talking about doing some type of incentives, like sign-on bonuses, which ultimately comes with pay increase. Most of us are trying to target how we're doing our increases to where we have the biggest needs, as opposed to doing across-the-board increases. But you may see some people do across-the-board increases.

I think driver pay has to go up. I think driver pay has to go up substantially to fix the situation, and I don't think $5,000 or $10,000 a year fixes their problem. I think it's a substantial number. And I'm not sure that customers will be willing to pay that much more overnight. It'll probably take time before they're willing to pay that much more and for to us get driver pay to that level to attract more people back to the industry.

What about -- what about the risk of rail service? Obviously this is a new venture for you. Could you give us a sense for what your rail revenues are running at currently on an annualized basis and talk to us a little bit about service problems and how they have or may impact your profitability moving forward?

One thing that we've done on the rail service is we've taken a very conservative approach. U.S. Xpress, our legacy has been in the expedited market in just about every segment that we deal in, so we don't deal in the container trains and some of the slower rail services. The only thing we're dealing with is the Z-train networks or the (indiscernible) expedited trains that exist that was primarily set up for companies like UPS that needed expedited train capacity going coast to coast. The rates on those are much higher than what you have on the container trains. The average speeds on those trains run closer to 70 miles per hour, where the container trains typically run closer to 30 miles per hour or less.

Due to the fact that the rates are higher we're being told that if we need more capacity, the capacity is there. It's not endless, but if we needed to add, say, several thousand more loads in the rail network for the balance of this year the capacity is there for us.

We've spent a lot of time with the railroads that we deal with making sure if we go out and sell this product that they can service it, they can service it with a 97 to 98% on time, and if we see a carrier or a lane that's not being serviced at that level, we discontinue that lane relatively fast. But what we're seeing today is we're maintaining above the 97% on-time and the way the railroads measure that is from 0 to 2 hours from the due time, but we're maintaining that, and at this point they're saying that they can add several thousand more loads before we start to run into trouble. And they think that since this is a premium rate that when there's more capacity needed, that those will be the first things that they will add. If you look at what's happened this last week, like with the BNSF, they actually went out to some of their container trains and slowed them down by almost a full day, just to make more capacity available for these premium trains which we think was a fantastic move.

Dan, the run rate on the rail right now is approaching 100 million.

Okay. Great. I was going to follow up with that question that didn't get answered originally. Talk to me, Ray, real quick, if you could, about the $1.05 to $1.10 guidance. What would have to happen for you to exceed that guidance in your mind? Is it a function of rates? Obviously demand's going to get stronger as we enter the peak season. What sort of assumptions are you implying with that $1.05 to $1.10?

Obviously we believe the rate environment is good and that we will have the opportunity to increase rates going forward, but it does not assume a significant uptick in rates sequentially over this quarter. So it does modest rate increases through the remainder of the year. If it is -- the capacity is as tight as it is, then rates could very well go up at a higher rate, and that would be an up-side. Fuel obviously is a factor. Fuel, as you know, has ramped back up in July for the first two weeks. If it continues to go up, it will be a -- it will be an obstacle; if it moderates somewhat, it will be a plus.

I remember you guys saying that if fuel went up in the second quarter that it would be an obstacle. Turns out it really wasn't. Are you being conservative?

Well, it was an obstacle --.

You came out at the top of the range, though.

I've got to tell you, Dan, they give me a hard time around here, but I certainly didn't expect 11% rate increase. I didn't think Wardeberg could pull that off.

Last question or two just with respect to the balance sheet where should we expect CapEx to come in at on a full-year basis, net CapEx, contingent with that, what about debt levels? Where are debt levels going to go, and can you give us a little bit of an update on the cash flow statement, and that will be it.

Dan, I told Ed earlier that we expected capital expenditures for the year since we've had to shift to more ownership to get some tax depreciation, CapEx will be up in the $60 million range.

Okay.

We will --.

Missed that question.

Pardon?

I missed that question earlier. Sorry about that.

Yeah. That's fine. And we -- we will be generating -- and that's an additional 20 to 25 million in CapEx for the rest of the year above where we are today. We will be generating in excess of $50 million in cash flow from operations, so debt will be declining in that $25 million range. These are round numbers, obviously, and can be shifted based on what we might do for lease versus purchase, but we would see debt coming down 20 to 25 million from where it is today.

Good enough. Thanks, guys. Good quarter.

Thank you.

We'll go next to Donald Broughton of A.G. Edwards.

Gentlemen, how are you?

Good. How ya doing?

Talk to me about Xpress Global. We continue to not only not make any -- much money, but it's gone down.

We have said the airport-to-airport is not generating enough revenue to cover the fixed cost of the network and we're taking a number of actions to correct that hopefully. And again I guess I want to put it in perspective, though. That is a 5% of our consolidated revenues and we're making the investment for the future at this point in time.

Well, then, the $64,000 question is how long are we going to invest in the future?

We hope for -- that it won't be very much longer, but we've got -- we're working on it.

A quarter? A year?

Donald, I guess what I'm saying, we're doing a lot of the right things but I'm not willing to sit here and say it will be next week or six months or three months. I think we will make a lot of progress in the second half of the year.

Donald, if you put it in perspective, we've gone in and changed a lot of the upper management and airport-to-airport operation. We opened up a hub in the last 60 days in Columbus, Ohio. We changed a lot of their line haul network to reduce the cost of that network. We've improved service for our customers fairly substantially over the last 30 days.

I think that given time that you'll see this thing improve fairly substantially. We're not going to invest in this thing forever. That's not the goal. The goal is to make the thing a profitable contributor to our bottom line. It's another one of the mix of services that we're developing for the U.S. Xpress Enterprise organization, and we think since we're in that expedited market, we can make good money out of that market, we are the second largest in that space today, in airport to airport, and we think just given some time for some of the things we've put in place to work, we'll make this thing a contributor.

With the addition of the CRST assets, or, I should say, how much revenue do you expect the addition of that business to add to your existing?

We're expecting between 7.5 to 10 million additional dollars to come in. And if you look at the real problem, in order to take on the number one player in that market, we had to have a very extensive nationwide network. Okay, and we didn't have the volume to justify that, and that's where the losses are at. As we add more volume to that, then you'll see the profitability improve.

Most of that cost on this incremental volume coming in, you can sit there and say, well, most of the cost is about 90% fixed as long as you don't have that truckload portion totally full or you're not having to add additional truckloads to it. So all we have to do is fill these trailers. They're running in some cases at 15,000 pounds of freight, and push it up into the 30 to 35,000 pound area. We've actually had some lanes with only 5,000 pounds in order to service that lane. That's where the big issues are at, and that's the reason more volume solves the problem.

I just -- I know it's not -- or it's -- certainly if it's not pricing, it's certainly less pricing. Forward Air [ph] has quit complaining about you being too aggressive in your pricing, which I take it as an indication between that and Mr. Lusk's assurances that he's being disciplined in pricing. I take that as an indication that you're going out and getting paid a fair rate. But then I see revenue continues to go up, yet the operating results continue to get worse. And I just --.

We could probably bring additional volume in almost overnight by dropping prices, but then it's going to take us and Forward Air the next couple of years to get prices back up. We chose to take the slower approach and build the market and keep the rates up as opposed to try to drop them overnight. Which we think is a more prudent way to do it. If you really net out the airport-to-airport with the truckload operation, we're not losing money, we're at the breakeven point. But if you look at airport-to-airport, itself, without truckload contribution to U.S. Xpress, then, yes, it's losing money.

Update, I know there was some allusion at the beginning of the call to a rumor we'd heard there had been a change in the hours of service. I'm looking at the U.S. Court of Appeals, just for everybody's information, U.S. Court of Appeals in the District of Columbia, so this is D.C., has vacated hours of service. And remanded it back to the FMCSA. So as of now, hours of service has been repealed, at least temporarily.

That sounds good. We'll have to see what the net effect will be.

Good luck, gentlemen.

Thank you.

Once again, it was star 1 for any questions on your touch-tone telephone. Again, star-1 for questions.

Gentlemen, at this time -- I'm sorry, we actually do have one more question. Michael Latronica, Excalibur Group.

Hey. Good morning, Max, how are you?

Good. How you doing?

Doing real well. I wondered if you might have any comment about the fuel economy on the new engines and your experience with the trucks, now that they've been running for a bit and what you see looking ahead to the 2007 trucks?

Actually, almost all the engines that we brought out initially we're seeing between a 9 to 12% loss in fuel economy, and that was a programming issue with the auto shift transmission. We've been able to make changes, and at least initially it looks like some of that has brought that degradation back into the 5 to 6% range, and those are initial numbers. I don't have a lot of fact behind that because we just made the changes over the last 60 days on some of the trucks.

If you look at the 2007s, we're being told that the issues are going to be pretty well minimized going into that engine, it's going to be more EGR, probably fuel mileage will degregate (ph) 2 to 3%, and this is what they told us last time, and it ended up being double, and they're saying the additional cost of the tractor is going to be in the $4 to $5,000 again.

So it's going to be deja vu all over again.

Yeah, so I guess I predict a big pre buy by everybody.

Yeah. I would tend to agree with that. You were getting a lot of error codes at first with the engines, which were taking your trucks off the road for a bit. Are you still getting that problem?

We're getting it with the Detroit engine, not so much with the Cummins or the Cat or the Volvo.

That's all I had. Great quarter, guys. Keep it up.

Thank you.

Gentlemen, at this time we have no other questions standing by.

I want to thank everybody for participating in the call.

Thank you.

Ladies and gentlemen, this will conclude today's teleconference. We do thank you for your participation and you may disconnect at this time.