US Xpress Enterprises Inc (USX) 2006 Q2 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'd like to turn over the call over to Mr. Tripp Sullivan of Corporate Communications. Please go ahead, sir.

Good morning, thank you for joining this U.S. Xpress 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. Certain statements made in this conference 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 in filings with the Securities and Exchange Commission. The Company disclaims any obligation to update or revise any forward-looking statement to reflect actual results or changes in the fact affecting the forward-looking information. I'll now turn the call over to Ray Harlin.

Good morning. This morning we will briefly discuss the results of our operations for the second quarter of 2006. And following those comments, Jeff, Max and I will respond to any questions that you might have. Consolidated revenues for the quarter increased 39.2% to 389.5 million. Excluding the effect of fuel surcharges, revenues increased 31.5% to 332 million. Net income for the 2006 second quarter was 5.7 million or $0.37 per fully diluted share versus net income, excluding the effect of a one-time charge of 2.8 million related to the sale of the airport-to-airport operations, of 1.9 million or $0.12 per fully diluted share in the prior year's second quarter.

Let me now address a few of the key events and factors which contributed to the significant improvement in earnings for the second quarter. The results of our turnaround of U.S. Xpress global operations accelerated during the second quarter. For the quarter, Xpress global had operating income of 1.7 million, while revenues of 25.6 million or an operating ratio of 93.4%. Compared to the prior year's quarterly revenue of 37.8 million and an operating loss of 5.6 million, which again includes a 2.8 million loss on the sale and exit of the airport-to-airport business. The execution by management of their plan of achieving improved on time customer service, better yields and approved cost controls; contributed to the much improved operating performance.

I would note that the second quarter has historically been the strongest quarter from a seasonal basis for our floor covering business. This quarter represents the first full quarter of consolidation of Arnold and Total results in our financial statements following the completion of the transaction on February 28, 2006 to increase our ownership to 80% in each company. On a combined basis, Arnold and Total contributed revenues, excluding fuel surcharges of 78.3 million with operating income of 4.8 million, representing a combined operating ratio of 94%.

On an incremental basis, Arnold and Total contributed approximately $0.05 per share in the second quarter, compared to their contribution in the prior year quarter. This was generally in line with our expectations and we continue to work closely with their management to implement cost and operating synergies consistent with our strategy for these entities of maintaining their separate identity with existing management. Operating income of our U.S. Xpress truckload operations increased 25.6% to 9 million versus 7.1 million in the prior year.

Revenues, excluding fuel surcharges, increased to 229.6 million, a 3.2% increase over the prior year quarter. The significant increase in operating income was driven overall by a 3.7% increase in our revenue per revenue mile and a lower percentage of empty miles. More specifically, we experienced improved performance in our over the road and solo fleets, which achieved significant improvements in rate per mile and percentage of empty moves. Although few prices were on average 28% higher compared to the 2005 quarter, the improvements in our fuel surcharge program largely mitigated the impact of the quarter over quarter increase in fuel prices.

Let me now turn the to the truckload metrics included in our press release. The truckload statistics for the quarter ended June 30, 2006, include both Arnold and Total for the full quarter, while 2005 statistics include only U.S. Xpress truckload operations. As the average length of haul of Total and Arnold on a combined basis is approximately 420 miles or some 36% lower than our U.S. Xpress truckload operations; their average miles per tractor per period will generally be less than U.S. Xpress's truckload operations. And their combined rate per revenue mile and deadhead percentages will generally exceed the U.S. Xpress truckload operations. For example, the combined average revenue per revenue mile, the deadhead percentage and revenue miles per tractor for Arnold and Total in the second quarter of 2006 was $1.76, 16%, and 21,455 miles respectively.

Focusing on the U.S. Xpress truckload operations only, our utilization improved slightly to 25,646 from 25,619 miles per tractor in the prior period. And our deadhead percentage declined to 10.68% from 11.24% reported in the second quarter of 2005. Our length of haul within the U.S. Xpress truckload operations was approximately 660 miles for the 2006 second quarter. If you exclude our team operations, the length of haul of our U.S. Xpress will be slightly below 500 miles in the second quarter of 2006.

At June 30, 2006, the average age of our total tractor and trailer fleet, including Arnold and Total was approximately 25 months and 48 months respectively. In anticipation of the introduction of the new engine requirements in 2007, we will be taking delivery of approximately 2,300 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 engine. Further, we expect to take delivery of approximately 3,000 new trailers over the remainder of 2006.

For all of 2006, we anticipate net capital expenditures to range from 110 to 120 million. From a balance sheet perspective, our long-term debt including current maturities and our securitization facility was 317.7 million at June 30, 2006. With stockholders' equity at 238.5 million, our debt to total capitalization at June 30 was approximately 57%.

Looking forward for the remainder of the year, we are expecting a solid freight demand environment. Further, we expect growth in capacity and the truckload industry to be significantly constrained due to the very tight driver market we are experiencing. This should allow for improved pricing and freight selection as the year progresses. Assuming these factors and given the success of the turnaround in our Xpress global operations, the positive results we have experienced at Arnold and Total, and the improving trends in our U.S. Xpress truck load operations, we continue to be optimistic about the remainder of the year.

However, certain key factors among others, which could adversely impact results during the remainder of the year include; A significant run-up in fuel prices from existing levels. The inability to attract qualified drivers, or the need for higher than expected driver pay increases to react to market shifts and driver pay. A deterioration in our claims experience. Or a significant slow down in the economic activity that negatively impacts the freight environment. With that, we'd be glad to open it up to any questions that you might have.

[OPERATOR INSTRUCTIONS] Our first question comes from David Ross with Stifel Nicolaus.

I just had a quick question about the drivers. It seems like you guys have done a good job keeping your trucks seated in the quarter. If you you could talk a little bit about maybe any initiatives you've had to obtain drivers or recruit drivers? And then also what your turnover has done year over year?

Frankly, we've kind of hit on time on all fronts. We've done quite a few things to attract drivers. As we've engineered the change in the revenue base, we've also engineered the change in our driver base. And ability to get drivers home more often. Some drivers are home every night, which wasn't the case say three or four years ago in our Company. We're running a lot more regional operations, a lot more dedicated operations. And in a lot of cases, drivers are getting home two and three times a week. That's -- the driver demographics has helped us a lot from that old long haul business model was.

That said, we also are trying to optimize our truck fleet fairly close. We do sell trucks out of our fleet. We do have trade agreements with some of the manufacturers to where we turn trucks in. Some of our trucks are bought through walk-away leases. And if we see that for some reason the driver market is getting too tight and we're starting to get excess some trucks, we turn trucks and don't take replacements, maybe not during that period.

So, due to the way we've put our purchases and trade deals together, we've got the ability to optimize our fleet. Now, we do think the driver market is extremely tough. We think it's going to get tougher because of the demographics as time goes forward. But we do think that our existing business model is very conducive to bringing good quality drivers in. And we've had a lot of successes in that area.

David, let me, at this time just, point something out. In the first quarter press release, the truck count that was included in that release included local and drayage trucks. And that's not -- has not been our consistent pattern. So in essence, the truck count that you see in the -- at the end of the period in June 30 and the one March 31, we essentially have approximately the same amount of trucks, tractors -- over the road tractors.

Okay. That's helpful. Also can you talk a little bit about driver pay? Have you guys implemented any pay increases recently or plan to do so through the second half of the year?

At this point we are looking at driver pay to see where we'd stand relative to our competition. We may have some market segments like in certain dedicated accounts, where we may have to do some pay increases in order to keep quality drivers. In most cases, at this point, and this could change almost in a quarter's period of time; but in most cases, we still felt like our driver pay is pretty competitive. And that doesn't mean that we won't do something later this year. But the big plus that we've got since we've got all of the different strategic business units, we may not have to do across the board pay increase. We may have to increase one segment or the other in order to sync up our driver pay. So, driver pay in the future will probably go up more on an incremental basis as opposed to across the board.

Okay. And then shifting to the demand side a little bit. Can you talk about how demand trended through the quarter, what you're seeing now in July? And then if customers are telling you anything different than it's going to be normal freight season with freight picking up here as we get into September/October?

David, this is Jeff Wardeberg. I'll respond to that question. In April, the second quarter, I would term demand as not very good. Starting about mid-May we saw demand pick up. That continued through the month of June. And I would say overall for July, demand has been pretty good, except for the West Coast market, is where we're experiencing some problems right now.

The West Coast market being long haul transcontinental or which lanes off the West Coast or just the regional West Coast markets?

We're seeing it in the long haul market and in the regional market out there.

Okay. And last question. On CapEx, you said that you were going to have some kind of pre-buy this year to position yourselves for the '07 engines. What are the implications for 2007 CapEx?

2007 will be significantly below 2006 CapEx, David, we haven't put a final number to it. But we will be bringing in probably less than a 1/3 of the tractors that we've brought in this year.

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

Hi, guys, congratulations on a good quarter.

Thanks, Tom.

Several questions. Number one, as your profitability hopefully continues to improve, will the tax rate likely drop below the 43% rate any time soon?

As profitability improves beyond what we expect then that would drive the rate down, yes. That's correct.

Specifically, should we --?

I would not model a change in tax rate.

Yes, I left it the same but just in case you knew something. And then secondly, the general expense line as a percentage of revenues was about 3% down from 4%. Normally, I wouldn't pay attention to that line item. But what was responsible for that?

It's primarily expressed airport-to-airport operations, we still had a significant amount of G&A costs related to that in the prior year quarter.

Okay. So, should we think about that as a 3% line item? In the quarter since XGS went away, it was still a little bit higher, 3.5% or so. 3% was pretty low.

This quarter should be pretty representative of what the ongoing run rate should be.

Okay. All right. And then, Xpress global had a huge quarter but it's also been very volatile over the years, even excluding the old airport-to-airport. Are you comfortable in terms of us starting to view that as a Company that can consistently make $1.5 million a quarter?

Tom, I think the way to answer that is we are comfortable that we have a good solid operating business with good management and a good business plan. As I said, the second quarter is seasonally, for our business, the best quarter in that business. So that being said, the second quarter is usually the best, third is next to best, the fourth falls off because of Thanksgiving and Christmas, and the first quarter is always the struggle. We think the margins in that should be in that 5% plus range on an ongoing basis.

Okay. How much of a drop-off have you typically had from Q2 to Q3 in carpet hauling?

Yes, it's been so long since we were a pure carpet hauler. We've changed our business. I'm going to refuse to answer that question because I don't think I know for sure. And it's primarily a drop-off because of July. July is a slow month.

Sure.

Because of the shutdowns in the factory and then it picks back up as we go into August and September. So, I think we might have a slight drop-off in revenue from what it was in the second quarter.

Okay, and then, let me look one other thing I was looking at. Maintenance. Operations and maintenance as a percentage of freight revenues. So not total revenues. Even though it was kind of flat year-over-year at 7.5%, that's up from the last couple of quarters, which were more in the 6.5 region. Was that just related to prepping some trucks for trades? Or was there anything else there that would lead us to believe that could continue to be over 7%?

Well, I think it's probably a mix type question and I'm going to say this and maybe follow up with you later. But Arnold and Total included in the quarter, you have Arnold that is a higher percentage of their revenue, probably tolls and things like that, because of their operations in the Northeast. Our tolls are going up because of our operations. We've got -- so I think it's primarily a mix and that's probably more indicative of what you'll see going forward.

Okay. All right. And then, let's see if I had anything else here. I just wanted to make sure I understood that answer you gave on the ending truck count. Because it showed a sequential decline of 464 but you were talking about the truck count now includes drayage and local trucks. That would seem to me that you added some trucks to that number, which might have led to that being more of a sequential increase if you're including some new categories in there.

I hope I didn't misstate, the first quarter included drayage and local trucks.

And the second did not?

And the second did not. If you pull out local and drayage trucks then you end up about at a flat number.

Okay. All right.

That was the first quarter that we put Total and Arnold together. And that number got put in there and should not have.

Okay. All right. And then I know your comments have been positive and your performance is backing that up. But I don't know if it's the shell shocking everybody's getting in the stock market this week or what but you're using words like solid and that. And I personally believe we're going to have a pretty good peak season. Do you believe rate performance could accelerate from what you've seen in the first half of the year?

I think on a pure statistics, I don't think you'll see significant acceleration on the year-over-year basis. I think you'll see incremental improvement in rates from a quarter -- from this quarter going forward because there's still the ability to get rate increases and there's still the need to get rate increases. And the spot market improves usually throughout the third into the fourth quarter. Now, the only caveat is, when you've got a year-over-year comparison, last third and fourth quarter spot market was -- is stronger than it probably has ever been. So, I think you will see continuing price increases flowing through the truck load people on an incremental basis from what it has been. We think right now it's a positive environment.

Okay. Yes, no I do too. I'm hoping there's just a disconnect for these couple of weeks here. Okay, well, that's all I had. Keep up the good work.

Thank you.

And we'll go next to Justin Yagerman with Wachovia.

Let's see, I don't even know where to go here. When you're looking at your core business, can you talk a little bit about where you are in the different divisions and how they've been performing? I especially would like a little more color on intermodal and how that's been going in the quarter. I know you guys have experienced a little bit of issues there. And just the general trends of trailer on flat car versus container on flat car and how that's playing out?

Well, we don't do container on flat car at this point. What we do is primarily an expedited product, which is the TOFC. That business is more of a surge type business. It's been decent. It's not as good as what it has been in previous years.

I think part of what's happening on long haul market, a lot of international containers are moving through the ports of Las Angeles and places like that on track where they're going inland. So, the truckers and the people that have domestic containers for the most part are not participating in those types of moves like we have in the past. Now in the regional markets, I think we're having a lot of success there. Probably the biggest improvement we've had in the extra use probably has been in our regional solo markets. We continue to do extremely well and our teams. And I think probably one area that's under some pressure at this point is dedicate. And I think we've got some improvements that we can do there but it's been under pressure probably the last quarter or so.

What's the issue at dedicated that needs fixing?

Well, it's not that it needs to be fixing, it just needs to be -- the process needs to keep up with cost increases.

Yes, Justin, dedicated is still performing but it's got some margin pressure on it because of some older contracts that need repricing given cost pressures. From a revenue standpoint, dedicated again year-over-year has grown about 6% to 7% in the current quarter. We've had some growth in our team business. And this is pure dollars and miles.

Sure.

And our rail operation is about flat with the prior year quarter. And then when you convert that into them, we've had a slight decline in the trucks that have been in that solo market. That's kind of how it will go down. But on a general basis, our mix within the U.S. Xpress fleet, our mix of business has not changed dramatically from what it was on a breakdown of total revenue quarter over quarter.

How do these four different divisions rank in terms of profitability right now?

We have never reported direct profitability from -- for each of these because of all of the allocations that we have to make in them. We have always said that dedicated has been a major contributor in the past. And rail has been a major contributor in the past. And teams have been contributor. And solos are the ones that are dragging on profitability.

Okay. You talked about the seasonality of the XGS business and how you would expect a drop-off in -- at least a slight drop-off of revenue in the second quarter. How does that translate -- in the operating leverage in that business, how severe is that? And should we be thinking that this is kind of the proper run rate for the OR for this business or can it get better or worse? Obviously, on less revenue it's probably getting a little bit worse if anything. But how should we be thinking about it?

One thing I caution, is we have a lot of programs ongoing in that business and we're doing a lot of things. The management has done an excellent job from a cost standpoint. And they had a very good quarter. We would hope that those types of margins can continue with some squeeze in the fourth quarter and some squeeze in the first quarter because of volumes. But we want to continue to play it out before we take it to that extent. But again, we would expect in the third quarter that margins be at least in that 5% range.

Okay. Looking at the 2,300 additional tractors you're taking on in the second half, how many of those are adds and how many of those are trade-ins? Are you going to be adding any capacity in the next quarter or two?

All depends on the driver situation. We have the ability to keep from trading -- we could trade one for one and sell tractors to absorb that 2,300. If we have a dedicated contract that requires incremental drivers or we can add incremental drivers in profitable segments or regions, then we certainly will try to do that.

What's your goal with the age of the fleet by the end of this year?

Shooting for in that 15, 16 category.

Are you going to be parking any tractors?

No. No. we're not taking them in advance of when we think we can trade them out.

Last two questions. I just wanted to just get your sense if you've been testing any of the 2007 engines and what you've been seeing? And then when your guys' insurance comes up and what you're seeing going on with that?

I'll answer the 2007 question. We do have I think six or seven trucks with the '07 engines. The problem is that most of them have less than 20,000 miles on them, at this point. So, we're just now starting to get visibility of what those engines may do. The other problem with those engines, in a lot of cases, these are what they call survey engines and not production engines. And a lot of times a production engine will come in with different software than maybe what your survey engine does. So, even if we saw real positive results with these, we'll probably still be a little bit of gun shy about ordering a large number of those engines until we see what the production engine does.

Are you running them with ultra-low sulfur diesel?

Yes we are.

Are you seeing any degradation in the mileage from the energy content in that? Can you tell if that's going on?

We are seeing a degradation, it's around 3% to 4%. But we're not sure how much of that is the ultra-low and how much of it is the engine. But keep in mind, 20,000 miles and less on them is not enough to really tell what the engines are really going to do. That's just an initial figure. Most new engines, fuel mileage is not as good initially as what it is when you approach 50,000 miles.

Sure.

On the insurance side, Justin, no. Renewal is September 1.

And just remind me of what your self-assured retention is right now?

On liability is a $2 million deductible.

What's your general sense of the market out there right now? We've been hearing that things have maybe loosened up a little bit there.

I think that's a fair statement but we have not gotten any market indications at this point in time.

All right. I appreciate it, guys. Nice progress on the quarter.

[OPERATOR INSTRUCTIONS] Well, I'm sorry we do have one more question here from [Vladimir Delkoff] with V Squared Investment Management.

If you could talk about the cash flow, what are the levels of free cash flow for this year and next year as well as the use of it? And what is it that you're doing on the share repurchase, if anything? Thanks.

Okay. As far as share repurchase, we have not been active in the market over the last quarter for the share repurchase. As far as free cash flow this year, we have not put out a forecast for cash flow for the full year. So, I'm going to pass on that at this point in time.

Did you have any other questions, sir?

No, that's it, thanks.

Thank you, sir. And we'll now go to a follow-up from Justin Yagerman.

Hi, guys, just one quick question, sorry. I wanted to get a sense of gains on sales in the quarter from leased and equipment sales and how that impacted the quarter if at all?

They were approximately $720,000 and that was comparable to what we had in the last year's quarter.

Is that because you guys have been trading in leased equipment? Or is that just a factor of keeping a normal trade-in cycle?

Yes, we're just keeping a normal trade-in cycle. And the trade market is good as it has been over the last year or so, the sales market.

With all of these tractors coming on in the second half, do you think that that's something that could accelerate?

I'm not counting on gains for the second half of anything higher than what you see in that second quarter.

Okay, thanks a lot, Ray.

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

I just want to thank everyone for taking the time to attend our call and we look forward to next quarter. Thank you.

And ladies and gentlemen, this will conclude our teleconference for today. And once again, we do thank you for your participation and you may disconnect at this time.