US Xpress Enterprises Inc (USX) 2005 Q1 法說會逐字稿

Good day, everyone, and welcome to the US Xpress Inc. conference call. Today's conference is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to Mr. Tripp Sullivan of Corporate Communications. Please go ahead, Sir.

, Good morning. Thank you for joining this US Xpress conference call. On the call today will be Max Fuller, Co-chairman; Pat Quinn, Co-chairman; Ray Harlin, Chief Financial Officer; Jeff Wardeberg, Chief Operating Officer.

Before we begin, I'd like to cover the Safe Harbor language.

Certain statements made in this conference call may be considered forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended, and Section 27A of the Securities Act of 1933 as amended. You should consider carefully the risks and uncertainties described in our press release issued last night in various disclosures and filings with the Securities and Exchange Commission.

We disclaim any obligation to update or revise any forward-looking statements to reflect actual results or changes and the facts affecting the forward-looking information. I'll now turn the call over to Ray Harlin.

Good morning. I'd like to briefly summarize our financial results for the first quarter of 2005 and our outlook for the second quarter. Following these comments, we will be glad to respond to any questions. As you are aware, we preannounced our expectations for the quarter approximately three weeks ago. Although we achieved a 14.7% increase in revenue for the quarter we experienced a net loss of 2.1 million (ph) or $0.13 per share for the first quarter of 2005, compared to income of 800,000 or $0.06 per share for the first quarter of 2004. A number of factors contributed to the disappointing first quarter results. These included, in our truck loaded operations, we encountered a softer than expected seasonal freight environment, which persisted for us throughout the quarter. We believe factors contributing to this softness includes, in certain cases, customers who we had implemented significant rate increases within the last year were able to shift volume to other carriers or other modes during a seasonally soft first quarter.

The much improved service reliability of intermodal transportation has had a significant negative impact on the long haul truck load volume; and, finally, we were not able to increase volumes with either our existing customers or new customers enough to overcome the two aforementioned items.

While our truck load rate per mile increased 9.8% to $1.484 for the first quarter, it was slightly less than we expected and represented a greater drop from the fourth quarter rates than we had expected.

During the quarter, we encountered a very challenging environment for recruiting owner operators and drivers, despite a significant driver pay increase initiated during the fourth quarter of 2004. As a result, our average seeded track account for the first quarter was approximately 100 below our fourth quarter 2004 count.

The factors discussed above negatively impacted our total revenue, and our ability to cover higher operating costs in our truck load sector. Fuel prices reached record levels during the quarter and averaged over 30% higher than the 2004 first quarter. We estimate the impact of the higher fuel prices, net of the impact of fuel surcharges negatively impact our truck load operating income compared to the prior year quarter by approximately 2 million or $0.07 per share.

In addition to fuel as anticipated our cost per mile per driver pay and benefits increased by approximately 20% or $0.08.6 per mile primarily as a result of driver pay increases we initiated both in the first and fourth quarter of 2004.

Other revenue of our Xpress Global operations increased 19.2% to 41 million in the first quarter. We incurred an operating loss of 3.5 million in the quarter compared to an operating income of 230,000 in the first quarter of 2004. Results of this segment of our business continue to be negatively impacted by unsatisfactory margins in our airport-to-airport operations, in which we have not reached adequate revenue levels to support the cost of our national network.

Although we were disappointed by the results of Xpress Global, we are encouraged by the improving trends we experienced in the latter part of the quarter.

During the quarter, we continued to grow our expedited rail and dedicated contract operations, a summary of our truck load revenues by quarter for the quarter, excluding fuel surcharges and other miscellaneous revenue along with year-over-year growth percentages are as follows. Dedicated 46.8 million of revenue, an increase of 86%; expedited rail, 33.1 million of revenue 115% increase over the 2004 quarter; our expedited team generated 39.5 million, an increase of 23% while as planned we reduced our regional and over-the-road revenues to 90.9 million or a 26% decline year-over-year.

On a positive note, Arnold Transportation in which we acquired a 49% equity interest in December of last year experienced revenue growth in the first quarter of approximately 20% to approximately 51 million and an operating ratio of 95.5%. Included in our first quarter results is approximately $300,000, representing our equity in Arnold's first quarter net income.

Additionally, we recently reported the acquisition of a 41% equity into total transportation of Mississippi.

Together, these affiliated companies operate approximately 2,000 tractors, providing regional over-the-road and dedicated truckload services, primarily in the Eastern United States. From a balance sheet prospective, our long-term debt -- including current maturities of debt and securitization facility -- was 125.7 million at March 31, 2005 -- a reduction of approximately 24 million since December 31, 2004.

Our liquidity remains strong with over 100 million in available borrowings under our revolving credit and securitization facility as of March 31.

Looking forward, our freight demand in April has not, to date, shown any significant increase over what we experienced in March. As we stated in our press release for the second quarter of 2005, we now expect revenues for the quarter excluding the impact of truckload fuel charges to range from 265 to 270 billion and net income per share to be in the range of $0.18 to $0.26 per share. These results are based in part on an anticipated seasonal upturn in freight, fuel prices remaining at approximately the high levels of the first quarter of average safety and claims experience consistent with our recent history, our ability to retain sufficient drivers to modestly improve our seeded truck count and the expected material improvement and results of Xpress Global, compared to recent quarters.

As many of you are aware, our business had significant earnings leveraged, with each 1% change in our operating ratio impacting earnings per share in the upcoming quarter by approximately $0.09 per share.

Thank you and we would now be glad to respond to any questions.

(OPERATOR INSTRUCTIONS) Ed Wolfe, Bear Stearns.

Ray, I'm having trouble getting a grasp and hearing everybody's report whether April is really an uptick year-over-year because demands improved a little bit or whether it's just the calendar because the Easter comp is easier. You have any sense at this point? You said April really hasn't picked up. Did you see a little boost from the calendar and maybe demand hasn't picked up or has demand gotten worse? Can you talk to that a little bit?

The fact that we don't have Easter in this month helps, relative to last year.

But you said April over April you haven't seen a pickup vs. March over March, it sounded like. So I would say without that uptick things are probably worse in demand. Is that fair to say?

Worse than last year?

No. Worse than March.

I think it's about comparable to March for us.

But my point is that it's comparable to March and you have an easier comp calm because of -- is it comparable to March including the Easter or excluding the Easter funkiness in the calendar is what I am trying to say.

Excluding Easter, it's really looking at it on a weekly -- normal weekly run basis.

What do you think it really is? When we look back now it looks like everybody has reported that on the longer haul marker, you and Covenant were hurt a lot worse than the regional guy. What do you think it is about your marketplaces that has had this impact on you?

I will comment and then I will let Max and Pat comment. I think the long haul market is much more subject to diversion of freight in a soft period.

And diversion to where?

Diversion of up to intermodal. Diversion to reefer (ph) carriers, diversion to a lot of independents that like to operate on that long haul. Stuff that -- it's just excess capacity in that marketplace in the first three months of the year. And from a historical perspective, we have always seen diversion in the first three months. I think we saw significant diversion this year and I think it relates primarily that we were aggressive last year, given what we felt to be warranted price increases, especially for that cleaner freight that we hauled. That I know Dave Parker talks about all the time.

But he is right, we need to be compensated for that. You might want to comment now.

Yes, actually the biggest price that we increased rates last year was really in two areas. One, if you go back and look at the effect of hours of service and look at probably the large carriers and look at the year-over-year utilization, it looks like the effect was approximately 7%. The (indiscernible) has got an average of about 9% rate increase. Same thing with us. We push rates up in those areas for its second day type freight like 7, 8, 900 mile type freight.

We push those rates up probably more so than any other type of rate because we needed to cover the type of revenue that we needed for tying that truck up the second day. That's where we are seeing a lot of diversion of freight. That and also, like Ray said, the externally (ph) long haul stuff coming in at the port, especially in Los Angeles that's being moved over to intermodal.

In fact, we saw our intermodal grow 115% year-over-year. So we continue to say that long haul market continued to move. There is also -- this year -- less transactional freight probably in our numbers and probably what you would see at any point during last year.

Your tractor fleet was down 8 or 9%. What do you plan going forward if you think seasonality is going to come back in the business? How do you plan for the tractor (inaudible)?

We've got a pretty large push today to actually bring in more owner operators; and that is the big area that we had a lot of loss. Same thing on Company drivers. We are looking for more drivers to seat (ph) more trucks and our goal is to get this thing back on track.

We've got modest goals for the quarter that ramp back up on seated trucks in the 75 to 100 range. And we have increased that by around 25% or so this quarter; and then we would like to add a little bit in the third quarter and fourth quarter also. We'd like to get back above 5,000. Some of those trucks, really some of that decline relates to -- we built up our local Andreas fleet to support our rail program. These are over-the-road trucks. So part of that (indiscernible) last year as we ramped up the rail program but we are below where we wanted to be in seated trucks at this point in time.

In terms of getting rates, I've heard from a lot of companies now -- private and public -- that maybe you took a little bit, in retrospect, too much too fast combined with who knew fuel surcharges were going to end up as high as they were? Do you go back at it this year and look at it differently and say, "Maybe we've got to get some rate but maybe we go at it a little less strongly or we go for one instead of two." Or how do you look at rates going forward?

I think that you got to continue to get rate increases (indiscernible) start, continuing to go up. If you look at the big effect last year, cost did increase but so did the change of hours of service. They had a pretty sizable effect on how all of us operate.

You don't have that one item this year. This year, it's got to go towards covering increased driver cost and equipment cost.

Where do you expect average revenue per mile net of fuel to be up by year end? What's the goal?

We still think it's going to be somewhere in that 6 to 10% range. The biggest thing that we are pushing at this point is to get the fuel surcharge to where it covers more of that fuel cost increase that we haven't been able to get covered in the past. That's the biggest push at this point to take a lot of volatility over earnings if we can get that done.

Right now where we are in April, are you actually getting some of the rate in the fuels surcharge? Are you not pushing it right yet? Are you going to wait a little longer for seasonality?

We got it a little bit during the first quarter, but we got some in April so far and as contracts come due we are pushing pretty hard to get rate increases and better fuel surcharge formulas.

So you're content right now, based on your recent performance of 6 to 10, that feels okay?

Yes.

Dan Moore with Morgan, Keegan.

Wanted to spend a minute on XGS. It strikes me as being pretty obvious that if this subsidiary were breakeven or sold or operating as just a carpet logistics business, that earnings would have been flat in the first quarter. And I'm just wondering -- and I'm not trying to be difficult here -- but I think it's safe to say that investors' patience with that subsidiary and analysts' patience with that subsidiary is pretty thin. I would imagine yours is, as well. I'd like to talk about what we can expect from this division moving forward; and at what point -- hopefully soon -- at what point do you hit a juncture where enough is enough? You sell it, you close it down, you take a charge, do whatever you need to because it's -- that's costing you probably close to $0.40 now.

Basically, our patience is wearing pretty thin on it also, Dan. I can tell you we looked at the cost to shut it down. We've looked at what we think the cost to fix it would be and get it to a point of profitability. And to shut it down would be a pretty sizable negative impact. To fix it, we think will cost us substantially less. And that's the avenue that we chose to pay. If you look at where we think we are tracking in March and as we get into the second quarter we think we are tracking substantially better. We are seeing some great improvements in that operation, (indiscernible) our reduction and cost we are continuing to grow topline which topline is really what it needs at this point. But we are seeing some pretty sizable improvements and we agree. Our patience is pretty thin with it, but at the same time, you look at the cost to shut it down it would be much greater than the cost to fix it. And that is assuming that we can get it fixed.

This may not be a question you're necessarily prepared to answer. But I'm going to ask it anyway. How much improvement do we need to see how that subsidiary before and you say, "You know what? We haven't improved it enough that we can sell it." Because in order for it to be a going concern and generate returns that cover its cost of capital you are talking about a -- not just improving the cost structure of the Company, you are talking about an enormous swing in the financial performance of this division.

Dan, this is Ray Harlin. The first quarter is a tough time to judge the performance of that division because it is, by far and away, the weakest quarter for both carpet and for airport-to-airport. The difference in revenue between one month to another month is -- you're talking $5 million, as much as 4 million plus difference from one month to the other. So you can see the first quarter is a very difficult quarter, always has been a difficult quarter in carpet and the airport-to-airport.

Can you give us a sense for how close you were to breakeven? Not to interrupt but -- in March?

Dan, I prefer not to get into -- we have not talked about monthly income numbers or talked monthly things, but I think it's fair to say that March -- and we said this in our press release as it relates to the performance of Xpress Global, we were encouraged by the trends we saw. And we've also said that we expect material improvement, substantial improvement in the outcome and that cannot happen without airport-to-airport performing at a better level than it has in the recent quarters.

I guess what we've said in our press release and we believe that that the trends that we saw and the actions that were taken following into the fourth quarter and into the first quarter to reduce our costs and get a better handle on our purchase transportation costs was important to hit that to where it needs to be. So all that's a way of saying we see some encouraging trends. We expect it to get better but we are not going to sit and let this thing bleed for the rest of the year and into next year. That is not our plan.

I will ask one other question on XGS and then I have one or two others I would like to at least address before turning it over. Max, Pat -- it sounds like, then, you might be willing to stomach another quarter of albeit improved but substandard performance. Is that probably about all you'd be willing to stomach at this point?

I think it is hard to answer that. We think, like Ray has indicated, we think this next quarter is going to look quite a bit better but I would hate to sit there and put it on the line to the customers and to the employees of that operation and say, "You've got one quarter." Because they've obviously got -- lost headway that they've made. We are seeing some extremely positive trends. But at the same time I would hate to put a price on their head.

Fair enough. I guess we'll just have to see what the second quarter holds. Maybe just to readdress your guidance. You talked about $0.16 I believe. Was it --?

18 to (MULTIPLE SPEAKERS)

$0.18 to $0.26. Can you talk to us about your revenue per mile assumptions? You talked about revenue but can you give us a sense for what we ought to be thinking about as it relates to revenue per mile assumptions in that range? With respect to cost, I know your operating leverage can create some fairly significant swings in earnings but are there any cost factors that could really take you to 26 or 18? And I guess, last but not least I'm hopeful that the guidance that you are putting out here is obviously guidance you feel pretty comfortable with.

The answer to the last question is yes. We feel comfortable with that guidance. As far as rates, we don't expect that a large increase over the first quarter average rate which was around $1.48. We expect that to go up a couple of pennies throughout the quarter and that's built into those forecasts. As far as costs, we do expect better utilization in the second quarter than we would have in the first quarter so you'll see some of our cost on a per mile basis improve in the areas, such as maintenance and many of our picked cost areas.

Obviously fuel has been forecasted to stay at very high levels to the extent we were successful in the fuel surcharge program we got going, that would be a positive factor to the extent we can increase our seated trucks beyond what we put would be a positive factor.

So I think there's positive, positive -- but I don't think we have been overly aggressive in that forecast.

John Larkin with Legg Mason.

Just a little question on Xpress Global. As I recall you lost about 4.5 million in the fourth quarter then the preliminary guidance for the loss in the first quarter was about 1.5 million. Then, most recently, more like 2 million and now you end up losing 3.5 million there. Can you give us a sense of or why the number got substantially worse in the $0.02 of guidance that we were provided?

As you recall the 1.5 million to 2 million was early in the quarter. As we talked about, we made a lot of changes in the quarter early in the quarter to bring down our cost. Our biggest cost, obviously, is our purchased transportation line item. And that involves rearranging your network and controlling your network and the percentage margin depends on how much volume we put through there.

So there were a number of different factors that impacted that. Plus we get impacted on the purchase transportation by the fuel cost situation. So there were a number of factors, John. And we just didn't get to where we thought we would get to from a cost standpoint.

Now I will say that, in the latter part of the quarter, we started to see the trends that we expected to happen a little bit earlier. But the key is, and this is what we have tried very hard to do is get our fixed overhead in line and then maximize or minimize the cost of our network to allow the margin to improve. And that has been the whole focus, especially in the airport-to-airport spot.

It took six weeks longer than what we initially thought.

Are you willing to comment on when you think that division might break even?

I think we -- we're going to stay away from that, John, for the time being because I guess we want to show it vs. say it.

Also the truck count drop, I guess, took a few of us by surprise. On the one hand, it looks like the average per count was down 8 I think .4% yet you said you had 100 less seated trucks. How do those two numbers dovetail together? Would seem to me that --?

Yes. Those are two different periods. The 8% is year-over-year first quarter to first quarter and as you recall the second half of last year the truck count was coming down. The 100 seated trucks relative to the first quarter versus the fourth quarter. So one is the seated truck count and the other is truck count. And what we've done, too, is our fleet is much tighter. In other words, it's not that we have unseated trucks because we have moved trucks out to keep it as close as possible to our seated count. So I guess part of the 8% is getting a little tighter seated trucks -- I mean a little tighter from how many trucks we had vs. seated trucks. The other is, the loss of the younger operators that occurred throughout last year. And the 100 is we did not anticipate having 100 trucks less seated in the first quarter than we had in the fourth quarter.

And what was unusual -- and I think this reflects how difficult the market is out there -- is that normally we will lose some drivers between Christmas and New Year's during the holiday season and then during January, we will normally get those back, plus some. That did not occur in the current year.

How much of the driver shortfall in the first quarter do you think could be attributed to the freight demand being soft which, probably negatively impacted their miles. And I know a lot of drivers when they are not getting the miles will tend to look for another company that perhaps can give them the miles. Do you think that had a lot to do with it?

That always -- in fact, the ironic thing is our turnover has been -- our retention level has been pretty good in the second half of the quarter. So I can't definitively say that always has something to do but normally that will drive your turnover up. The difficult part is really bringing in -- it's been a very difficult recruiting season when it comes to owner operators and drivers.

One longer-term question. Given the amount of operating leverage baked into your income statement -- obviously the numbers are very sensitive to minor changes in the operating ratio assumption. As you look out one, two and three years out, I mean do you have sort of a corporate target as to where you would like to see the operating ratio go and a general roadmap for how to get there that you can share with us?

We've always said that as the fifth largest truckload carrier and positioned the way we are in the industry and with the changes that we have made to the Company to not be so dependent on the long haul and those changes continue on, that we should be having an operating ratio that is consistent with our key competitors. And that would mean in the low 90s and high 80s. Now we know what it's going to take to get there and those factors include the right freight, the deadhead (ph), the efficiency of your truck, the utilization and that's what we will be working on the rest of this year and that's what will drive the profitability.

(OPERATOR INSTRUCTIONS) Nick Farwell with Arbor Group.

I noticed that your intercompany revenues increased both sequentially as well as year-to-year. So what to what degree does this perhaps represent the lower brokerage or at least the lower utilization brokerage? And therefore higher utilization and availability of your trucks to be used in logistics or are there other reasons to account for that?

Year over year relates to the growth of Xpress Global -- that primarily is line haul that we performed for Xpress Global in the carpet side and to a certain extent the airport-to-airport side.

We would normally expect it to come back in the fourth quarter and third quarter, when it's busy, we try to use our trucks on other freight for our customers. And then in the first quarter it helps us to keep our trucks busy in some cases. That's what drives that.

So this is a normal seasonal pattern, is what you are saying? Sort of higher utilization because the truck brokerage business was perhaps seasonally this year lower than it was last year? I am just wondering if there is a change in strategy in terms of your truck utilization?

No.

Or fleet utilization. Excuse me.

No.

The second thing is I didn't hear or see a breakdown between your owner operators and Company drivers. You just mentioned that owner operators were down, sequentially.

Yes the ending numbers were for owner operators. We had 527 at the end of the period. For Company-owned, we had 4387.

Ray, do you have the comps for the fourth quarter -- by any chance -- there?

Sorry, I do not. I don't have them handy. But we are down on owner operators from the fourth quarter.

So Company would be -- you're guessing that 100 differentials virtually owner operators?

I shouldn't say because I don't have the numbers right in front of me; but that would be the (MULTIPLE SPEAKERS)

The preponderance of it. Some time ago if I recall the board authorized a share repurchase. I think it was $10 million. Given where the stock is trading currently, is that an authorization you might think you may be interested in repurchasing stock at current prices?

Nick, we have not go back to our board to discuss going forward with that. Obviously, we believe that would be a good investment from that standpoint, but we also are planning for the future of growth in everything so we need to discuss that with our board before we respond to that question.

Last thing I wanted to ask. I, perhaps, noted incorrectly; but the total miles you gave us when you broke down the truck revenues. Was regional and over the road -- was that No. 95 9 rate?

90.9. That was revenue. That was not miles.

I'm sorry, I meant revenues.

90.9.

Somehow that didn't add up to my 215. Was it 46 8 --

No, it will not add up because that's really just -- that excludes some miscellaneous revenue that comes through our P&L. So that's really just the line haul revenues.

And there are no further questions at this time, Mr. Harlin. I'll turn it back to you for any closing comments.

Thank you, everyone, for attending our conference.

Thank you. That does conclude today's conference. Thank you for joining and have a great day.