US Xpress Enterprises Inc (USX) 2006 Q1 法說會逐字稿

Good day everyone and welcome to the U.S. Xpress Enterprises, Inc. conference call. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Tripp Sullivan of Corporate Communications. Please go ahead, sir.

Good afternoon. Thank you for joining this U.S. Xpress conference call. . On the call today, will be Max Fuller, co-Chairman, Pat Quinn,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. Certain statements made in this conference call may be considered forward-looking statements within the meaning of section 21 E of the Securities Exchange Act of 1934 as amended and section 27 A of the Securities Act of 1933 as amended. You should consider carefully the risks and uncertainties described in our press release issued last night and various disclosures and filings with the Securities and Exchange Commission. The Company disclaims any obligation to update or revise any forward-looking statements to reflect actual results or changes in the facts affecting the forward-looking statements. I'll now turn the call over to Ray Harlin. Ray?

Good afternoon. We will briefly discuss the results of our operations for the first quarter of 2006 and following these comments, we will be glad to answer any questions. Consolidated revenue for the quarter increased 11.4% to $299.7 million.

Excluding the effect of fuel surcharges, revenue increased 5.6% to $262.4 million. Net income for the 2006 first quarter was $734,000 or $0.05 per share versus a loss of $2.1 million or $0.13 per share in the prior year first quarter. Let me now address a few of the key events and factors which impacted our results for the quarter. Xpress Global Systems reported an operating profit of $369,000, on revenue of $22.4 million, compared to an operating loss of $3.5 million, a revenue of $41 million in 2005. The decline in revenue reflects primarily the sale and exit from the airport to airport business in May of 2005.

As you may recall, we explained in our fourth quarter conference call that we anticipated that Xpress global would generate positive operating income following the first quarter which has historically been the slowest quarter for our transportation and distribution business. However, we were able to achieve positive operating income in the first quarter driven by Management's ability to successfully implement a new rating and yield management program, reduce overhead costs, and improve productivity throughout the organization.

As previously announced, we completed the acquisition of the majority interest in Arnold Transportation and Total Transportation by increasing our ownership to 80% from our original 49% interest. Accordingly, effective February 28, 2006, the results of operations from that date are included in our consolidated financial statements and truckload operating data. Included in our first quarter financial statements are $33 million in revenue and $1.8 million in operating income of Arnold and Total for the period from February 28 to March 31.

For the three months ended March 31, 2006, on a combined basis, Arnold and Total reported total combined revenue of $85 million and operating income of $3.3 million. In connection with the transaction to increase our ownership, we paid 8 million in cash, and our balance sheet debt increased approximately 130 million as a result of the consolidation of these entities.

Turning to our Xpress truckload operations, excluding Arnold and Total, revenues excluding fuel surcharges of $213.1 million, were slightly below the prior year quarterly revenues of $215.9 million. Operating income improved, excluding Arnold and Total, to $2.6 million versus $1.8 million in the prior year period as our rate per mile increased by approximately 2.5% while overall cost per mile increased by only$ 1.3%. We face a relatively weak freight environment throughout January and February, especially along the West coast. The freight environment improved as expected in March and to date in April except on the West Coast which continues to lag.

Although fuel prices were over 25% higher this quarter compared to the 2005 first quarter, the improvements in our fuel surcharge program largely mitigated the impact of the quarter-over-quarter increase in fuel prices. We continued to transition away from our dependence on the long haul solo business. For example, Arnold, with its focus on regional business, has never shrinked below 400 miles.

Within the U.S. Xpress truckload business, the revenue and gross rates in the quarter for our service segments are as follows: Dedicated revenue $51.5 million, growth of 10.1%. Expedited team $42.6 million, growth of 7.9%. Our expedited rail program, $27.5 million, which is 16.9% below last year's first quarter. And our regional OTR at $85.6 million was 5.8% below prior year quarter. At March 31, 2006, the average age of our over the road and trailer fleet was approximately 24 months and 60 months respectively.

In anticipation of the introduction of the New England requirements in 2007, we will be taking the delivery of approximately 2500 additional tractors for the remainder of 2006 which will substantially reduce our fleet age and significantly delay our need to purchase tractors with the new 2007 engines. Further, we expect to take delivery of approximately 3700 new trailers over the remainder of 2006. For all of 2006, we anticipate net capital expenditures to approximate $110 million.

From a balance sheet perspective, our long-term debt, including current maturities in our securitization facility plus $312.5 million at March 31, 2006, versus 177.2 million at December 31, 2005. In connection with the Arnold and Total transactions, we increased our revolving line of credit in March by 30 million to $130 million and extended the maturity date to March, 2011. And we increased our securitization of the facility by 40 million to 140 million.

At March 31, 2005, our liquidity remained strong with over 100 million in available bonds on these two lines. Looking forward, we are encouraged by the performance of our Xpress global operations by the first quarter which has historically been a seasonal slow period. We would expect margins to improve somewhat over the remainder of the year, and we currently anticipate Xpress global revenues for the full year to be in the range of 95 to 100 billion.

With regard to our truck operations, the first quarter has historically represented our most difficult quarter due to a seasonally soft trade environment, especially in the long haul market, and generally higher operating costs. Typically the last three quarters of the year contribute a disproportionate share of our truckload operating profits. For the remainder of 2006, we believe we have the opportunity to improve our truckload margins on a year-over-year basis, assuming as expected, a continuation of the favorable freight market and constrained tractor capacity continues in the industry. This should allow for improved pricing and freight selection.

Additionally, we expect a significant increase in cost per mile we have experienced in recent years to moderate somewhat in 2006. Certain factors among others which would adversely impact our ability to achieve meaningful improvements in margins in our truckload sector, include a continuation of the run-up in fuel prices we have experienced in recent weeks, the inability to attract qualified drivers or the need for higher than expected driver pay increases, to react to market shifts in driver pay, a deterioration in our claims experience or a slowdown in the economic activity that negatively impacts the freight environment.

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

[OPERATOR INSTRUCTIONS]. Our first question comes from Justin Yagerman with Wachovia Securities.

Hey, guys. How you doing?

Good, Justin. How you doing?

I'm good. I wanted to get a sense of what costs you're referring to when you talk about costs moderating some year-over-year. I mean, generally we've been talking about an overall inflationary cost environment I think. I'm curious where you see things improving this year.

Well, what I was talking about, Justin, is the rate of increase will moderate from what we've seen over the last two years. If you go back about a year ago, or in December of 2004, we gave a substantial driver pay increase that continued throughout 2005, which drove up our per mile cost significantly. The last three years, the cost of tractors and trailers after they introduced the new engines on tractors and commodity prices have driven up the price of trailers, so we have replaced all the tractors from that point in time so we've eaten that type of cost over the last two years. The cost of fuel obviously has gone up rapidly.

Last year it was a significant increase over the year before. My comment assumes that fuel won't keep going at the rate that it's gone in the last couple of weeks. I think what we're saying is we'll see a moderation of the rate of increase which I think is reflected in our first quarter release where our overall rate went up 1.3%.

That's fair. I appreciate that. On Arnold in total, when I look out for the rest of the year, how should I be thinking of that? 33 million on top line this quarter. Uh think -- I think you gave a quarterized number. Would we be using U.S. Xpress type seasonality to extrapolate the growth in the quarter? Is there kind of a sequential growth rate that we should be thinking about?

Yes. I gave a full quarter sales on a combined basis for total in Arnold and it was $85 million on a combined basis. That includes fuel surcharge. Obviously they have seasonality such as we do. Theirs is probably not as large a degree as our seasonality is because they're not in some of the markets that we are in.

All right. So when I think about that -- I mean -- okay. I guess --

And if you'll look in last year's -- I don't have it right in front of me. The fourth quarter press release gives the annual volume for last year for Total and Arnold, total revenue.

They have tractor ads coming on? I mean, what's the fleet looking like at both of those operating units?

On Total and Arnold? Justin?

Yes.

Are you talking about Total and Arnold?

Yes. Exactly.

Total has increased their fleet to about 539 at the end of the quarter. They ran last year just a little over 500. And at Arnold, they're right around 1480 trucks. And that is somewhat consistent with where they were last year.

Great. And then on the tax rate, how shall we be thinking about that year-over-year as we go through the year? You guys had a 550 basis point improvement. I'm assuming that has something to do with the per diem program that you guys run. Is that correct? And is there a rule of thumb that we can use looking at --

I think, for the tax rate in the first quarter is reflective of what we expect for the full year.

I'll turn it over to somebody else. I appreciate the time, guys.

No problem.

And our next question comes from Rhem Wood with BB&T Capital Markets.

Congratulations on a good quarter. Did you guys notice any of the slowness of the big box retailers and do you think it's over at this point?

We did see some softness particularly out on the West Coast with some of our big box retailers. And that has, I think, continued a little bit into April, although we're not seeing the same type of slowness in April that we saw throughout the first quarter. So the answer to your question is, yes, we did see some. It seems to be mitigating.

But overall the environment seems to be picking up going from March to April?

That's what we're seeing, yes.

And how about pricing? You guys did well on pricing in the quarter. Are you noticing anyone being irrational with pricing?

We've encountered some of that behavior, particularly with all of the bids that have been going on throughout the first quarter. Fortunately we've got, I think, great relationships with our top accounts, and we've been able to overcome that to a certain degree.

And lastly what are you guys doing to improve utilization in the empty miles that kind of kicked up this quarter?

The main thrust of it is what I would call network engineering, and we're working with our customers to identify power lanes that we can put our trucks on that are consistent day in and day out movers so that the drivers know how many miles they're going to get per week, when they're going to get home, and the Company knows those things as well as the rate level so that we can build a successful regional OTR franchise in our solo business units.

Thanks so much. Great quarter.

Thanks.

And we'll go next to Chaz Jones with Morgan Keegan.

Hi, guys.

Hey, Chaz.

Nice quarter.

Thank you.

Maybe if I could revisit the tractor question in terms of looking at the full year. Came in at the end of the quarter a little below 7400 units. Are we to expect much tractor growth looking out to the next three quarters for kind of the combined fleet now?

I think it would be our hope, but as you know drivers are very difficult to come by. That we would increase that by 2 to 300 as we go through the year. Can we do that? I don't know. But that would be our objective.

So at this point not really any issues on the seated truck side?

No. We've held our own, but it's not -- the driver's market is still very tight.

And then looking at Total and Arnold, certainly you've talked about synergies in terms of financing and equipment purchasing. Are there going to be any, I guess, moves going forward in terms of eliminating back office or administrative type functions at either of those 2 companies that could also result in some cost savings?

Chaz, we're looking at all areas for cost savings with the Management of each of those companies. And in some places they may do some things we're doing here. At this point in time, we have no plans to consolidate a lot of functions. It's more of we'll use all the people doing different things. Can that change over a period of years? Yes, that could change. But right now we have no plans.

And then I think in the past when we've talked about where Xpress Global could get, I think 4 to 6% type operating margins were thought to be achievable at that unit. Has that changed? I guess if maybe you could comment on how quickly can we get there at this point given the level of improvement in the first quarter?

Well, the level of improvement was encouraging, and we think Management's done a very good job of getting that Company to back to where it should go. And in its history, it's running margins that you discussed, but we'd like to see some more progress before we start putting some numbers together like that.

Okay. Now, is that margin improvement still largely a function of rate increases, yield management, and any additional cost savings?

Yes I think they've done a good job of getting our overhead to the point where it's the right overhead. So now it's on yield management productivity at the dock level and then increasing volumes that make sense at certain locations.

And part of the issue with Xpress global, the concentration in the floor covering industry, and we've all heard about building slowing down, if it actually does, it could have a big impact on that operation. So we're being pretty cautious there.

Sure. And then, Ray , you outlined some average equipment ages. Even the replacements that are planned here. Where should that take the average age of the fleet as we enter '07?

It should be, as we enter '07 and take delivery of all the pre '07 tractors -- we should be hopefully in that 15-month category, 14-month.

Will it alter the average age of the trailers at all?

Trailers will come down slightly but not a lot.

Okay. I guess one last question here. Given your outlook, what we know with the economic environment, opportunities to improve profitability moving forward, how quickly do you think we'll be able to maybe whittle down some of the debt that's come on with the acquisition?

Chaz, our --

Or is that even the main I guess priority of cash at this point?

The main thrust this year -- obviously this is a big year for CapEx to put us in position, so we would expect to start reducing that debt next year.

Okay. And then one more if I could. Are there any specific opportunities I guess in the regional OTR side outside of pricing increases and maybe getting some additional lane density to drive improvement in that area of the business?

What I would tell you is it's still the basic fundamentals that we need to do a better job of executing on in that business segment for our solo group. We've got numerous programs in place to get that done and feel confident that that's going to happen throughout 2006.

That's all I had. I appreciate the commentary, guys. Look forward to the rest of the year.

Thanks, Chaz.

[OPERATOR INSTRUCTIONS]. We'll go next to Tom Albrecht with Stephens, Incorporated .

Can you hear me?

We can. Go ahead, sir.

I missed about the first five or six minutes, and I don't know if you covered this. I was wondering with your average length of haul now at about 623 but you only had the consolidated results for about one month, what's sort of your new run rate length haul with two regional companies consolidated now?

It should be a little bit below 600.

So if I kind of think 580, 590 that's at least in the ball park?

Yes. Just to give you a breakdown on the relative length of the haul -- and there's some shifting going on with our business, but total is in that 700, 687-mile length of haul. Arnold runs 350 to 380. They range in that thing. And we are running right now around 660.

Okay. And then, as we go forward, are you going to have a separate line item for revenue and operating income for kind of the Xpress regional group or is it still going to be in all of truckload?

You're talking about the regional operations? Yes. I didn't know if you were going to create a line item for Xpress regional or -- We're going to keep it in the OTR regional because right now they operate together and are managed in many ways together. So right now that'll stay the way it is.

And then on -- you mentioned some of the business activity that has occurred in the first quarter and still overhangs the second quarter a little bit. Has there been an increase or even a decrease in the demand for dedicated, having gone through this soft patch or whatever we want to label February and part of March.

We've seen a decline in the dedicated demand as we've gone through the soft patch. I will tell you that their sales waterfall pipeline report is pretty flush with opportunities, but throughout the first quarter we did see a decline there.

In your opinion, as you interpret the market, was that just foolishness on the part of some customers, or is that a function more of the fact that there is a little bit of capacity growth this year. As you know, I'm on record as saying capacity growth is going to outstrip demand by about 2% this year. I'm just kind of wondering how you interpret that.

My view of it is I think that there was capacity available in the first quarter and therefore the shippers didn't pursue dedicated business opportunities as aggressively as they had the last couple of years.

And then I came in right on Chaz's comments. So did you specifically provide a profit target for XGS or because of what's going on with housing and that you're uncomfortable with setting some targets or goals for us?

Tom, what we said was we expect the revenues to approach -- in the range of 95 to 100 million, that we were encouraged by the profitable operations in the first quarter and expected the margins to improve somewhat as we go throughout the year from what they were in the first quarter. And Chaz was commenting that historically we've achieved margins in that operations in the 4 to 6, 7% range. But we're early in the improvement there, and we did not give any specific guidance other than that.

And then, as you examine April so far -- we've had 20-plus days -- are your key daily metrics, whatever you look at, whether it be miles per truck or load count, are they up year-over-year? are they just down less than they were earlier in the year?

One thing you've got different is you have Easter that occurred in the middle of April of this year and it occurred end March last year. April got started off very strong, stronger than it was last year. And then we had Easter, so I guess I'll wait and see how it goes the next couple weeks. But that's kind of ahead of us.

And then you didn't provide any other guidance, financial commentary, did you, besides the XGS?

No.

I think that's all that I've got at this point. Thanks, guys.

Thanks, Tom.

[OPERATOR INSTRUCTIONS]. We'll go next to John Larkin with Stifel Nicolaus.

Hello everybody.

Hello, John.

Just wanted to maybe have Pat, if he's the appropriate one, to dig a little bit into this softness on the West Coast. I think somebody mentioned the inventory adjustments that some of the big box retailers have made. There's been some talk of Chinese New Year, Easter moving around to different times during the first few months, maybe a big shift in traffic through the Panama canal. Is this going to be kind of a permanent exaggerated seasonally the first quarter that we're going to have to deal with which would make it even more important to accelerate the rate at which you're diversifying away from that?

I think that's exactly right. We've got people moving containers even more inland, people that are shipping through the Panama and bypassing the West Coast ports. Yes, I think that's now pretty well engrained. I think you're going to see the difference than we traditionally have seen on the West Coast because of that, particularly the first half of the year.

Now, with TTM and Arnold, I guess you're pretty well-positioned there in the southeast for what ought to be more truck oriented traffic out of those ports along the southeastern coast and along the gulf coast?

Definitely.

See that's a big plus I would guess. Also I was a little surprised to see the intermodal revenue dropping. I think Ray said almost 17%?

I think that reflects the West Coast softness.

I know if the past you've talked about how they've sort of jacked the rates up to the point where it doesn't make economic sense in some lanes anymore.

And we have been more selective this year in certain lanes, too, that may have made sense last year, don't make sense this year that make sense in the past that don't make sense now. But I think primarily it as a West Coast phenomenon.

I think you're right that the railroads have been pretty aggressive in raising rates and put us out of being competitive in some lanes, so we've taken less freight in those lanes. The other thing, if you haven't noticed what BSF and I guess NS has done is they created what's called inland ports. BSF is building a large facility in Chicago. NS has built a large international facility in Columbus, Ohio.

And you're going to see more of those being built in what they're calling the inland ports. That's where a shipper may have something that comes all the way from Asia on an ocean container, and it actually goes all the way to that inland port, so it's not being deconsolidated in those western port cities. That's going to have a big effect on the typical California long haul market that U.S. Xpress used to be so big in.

It's good to understand that a little more clearly. Also wanted to talk a little bit about the availability. I think Ray said that there was something on the order of 100 million of availability under the two lines. And I was just wondering if there were any other covenants that you would come close to as you go through this accelerated CapEx program in advance of the '07 engine emission rules changing.

No, John. As you know, we've just amended our lines of credit, and we -- obviously feel comfortable with the covenants and with CapEx and the numbers we used to do that.

When you say availability, it's all available to you?

Yes, assuming that we're operating at the performance levels we expect, yes.

And then just one last question on the driver situation. Literally everybody that we talk to suggests that it's getting worse instead of better especially as you get out into the summer season when construction and other activities pick up. Is that what you're seeing or are you feeling like you've seated the correct percentage of the trucks going into the peak season here.

John, I think that's kind after traditional think every year that you get construction, some of the summer jobs and different things that compete with it, so you always see kind of a tightening of the driver market if you will during that period of time. And I expect that we'll see that this year.

But you haven't seen it so far?

Not in an extraordinary amount. It's about normal and expected.

What percentage of the fleet is unseated currently that, all things being equal, you would have liked to have seated at this point?

We generally keep it pretty tight. We normally run 150 -- somewhere between 135 to 175 trucks, and that includes wrecks and things like that.

And trades and service and everything.

So that's been kept in check here the last couple of months?

Yes.

Alrighty. Best of luck for the rest of the year.

Thanks, John.

And, ladies and gentlemen, at this time we have no further questions. I'd like to turn it back to Mr. Harlin for any closing remarks.

We thank everybody for listening to our quarterly call, and we look forward to talking next quarter.

Ladies and gentlemen, this does conclude our conference call for today. Once again, we thank you for your participation, and you may disconnect at this time. This concludes the conference call.