XPO Inc (XPO) 2007 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Express-1 Expedited Solutions' fourth quarter 2007 earnings results call. (OPERATOR INSTRUCTIONS.) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Jeff Curry, President of Express-1 Expedited Solutions. Thank you. You may begin.

Thank you, Jen. Good afternoon, everyone, and thanks for joining our call today. We appreciate your interest in our Company. With me on the call today is our CEO, Mike Welsh, and our CFO, Mark Patterson. Also, on the call is Efrain Maldonado, Executive Vice President of our Concert Group Logistics, or CGL Division.

Before I turn the call over to Mike for his remarks, I would like to take note that this conference call might include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. The Company has based these forward-looking statements on its current expectations and projections as of today. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions that may cause the Company's actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements.

Factors that might cause or contribute to such a material difference include, but are not limited to, those discussed in our Form 10-K for the year ended September 31, 2006, as well in our filings on Form 10-Q. These filings can be accessed on the SEC's website located at sec.gov.

So, with that, I will now turn the call over to Mike. Mike?

Thanks, Jeff, and good afternoon to everyone. We are a historical point in our evolution as a Company, and I'm pleased to share the results of our fourth quarter with our investors and listeners today.

I'm also pleased that once again to be able to share some insight into our recently acquired [Asset Group Logistics] operations and the newly formed Bounce Logistics. Our momentum continues, and we are pleased to discuss our progress, and are proud of our ability to expand our Corporate footprint of premium freight services in the face of this soft economy.

Consolidated revenue grew to $14.1 million this quarter. This is an increase of over 32% from the same period in the prior year. Based upon this strong top line growth, our pretax income increased by over 55%, and we're very proud of that accomplishment. We've now completed nine consecutive quarters of strong top line growth with significant income from operations.

For the past several quarters, I've contrasted our growth with that of the general freight market. Once again, according to the data we have available, we've delivered exceptional results compared to those of many of our peers in the transportation sector. We continue to gain market share and, as Jeff will point out in a few minutes, we continue to attract independent contractors who are a fleet of value providers.

As I have stated in the past, this is a testament to our business model and our team of dedicated employees and the independent contractors. It's also a testament to the positive culture we have created at Express-1. This same culture is one of the cornerstones we've looked for in the value weighting acquisitions and other business ventures.

Recently we announced the formation of Bounce Logistics, nearby, South Bend, Indiana. Bounce is a startup requiring very little initial capital, but with the potential for a great up side. This operation affords our Company many new opportunities to offer additional transportation services and cross sell opportunities between Divisions.

Leading this operation, we are fortunate to have two industry veterans in [Kim Hines] and [Curt Ladow]. Both of these gentlemen have strong track records in the brokerage industry, and we couldn't be more pleased to have them aboard. They share our values and embrace the same culture we have in place throughout our organization.

Recently, we announced the acquisition of Concert Group Logistics. Over the past six months or so, our team has had the opportunity to work with CGL on the transaction, and it has been apparent that their culture is very similar to ours. The acquisition of CGL opens the door for Express-1 to introduce its expedite services to the 24 independent stations within the CGL network. Conversely, it adds a new element to the sales organization of Express-1, which can now offer more premium transportation services to our existing customer base, through CGL's network of independent stations and services.

I firmly believe the cross selling opportunities for our two primary operations, Express-1 and CGL, will be significant as we move into 2008. We have continued to invest in long-term opportunities during this soft period, and we are focused on further differentiating ourselves from the pack. With the purchase of CGL, our proforma 2007 revenues exceeded $100 million, but we're not stopping our quest or resting on our accomplishments. We're committed to growing our top line beyond $120 million in 2008, and we've continued to set the stage for a stronger 2009 when the economy begins to turn.

As most of you are probably aware, we've recently reached an agreement with a primary customer of our Express-1 Dedicated Division in Evansville, Indiana, and it allowed us to achieve a good level of profitability for that operation. We're pleased with our results in the fourth quarter, and are looking forward to a continuation in the periods to come. We have a good team in Evansville, headed by Brian Glaser, and we're proud of the hard work and attention to the service exhibited by our Express-1 Dedicated staff over the years.

In summary, we are committed to deliver to our investors exceptional levels of organic growth, resulting in strong levels of profitability. Complementing this organic focus, we've now added a complementary business through the acquisition of CGL, and have also started Bounce Logistics, which we feel will be a significant contributor in future [calls]. We've grown to a run rate in excess of $100 million, and we think we have plenty of room for growth. We continue to be open in our communication and are focused on our long-term success.

I'll now turn the call over to Jeff to add more commentary on our Express-1, Inc. business segment. Jeff?

Thank you, Mike.

Our fourth quarter results for Express-1 were very solid. We saw revenue growth of 35% over the same period in 2006. Also, we saw improvement in our gross margin from our third quarter and saw the strongest improvement in margin in December, which I believe is an indication that recent cost containment efforts have helped offset the continued competitive rate environment.

Our fleet grew 46%, and utilization remained level with prior periods. Not only did our fleet grow for the year, but the composition of our straight truck fleet improved from about 9% of the trucks driven by team drivers at the beginning of the year to about 40% of the straight trucks driven by team drivers by the end of the year. The addition of team straight trucks helped drive-up our average length of haul and improved our ability to cover our customers' requests.

While we are continuing to work diligently to expand our fleet further, I am happy to report that our current fleet capacity provides us with the ability to meet our objective for double-digit growth in 2008.

Our sales have been bolstered by the addition of our International Department. We have developed strong relationships with both Mexican and Canadian carriers, and have branded our international service under the name BEST, or Border Expedite Solutions Team. We believe we offer the most comprehensive and effective international ground expedite service in the business. Our BEST Team tracks and updates shipments from door to door, providing our customers seamless North American border crossing. I believe our International Group will provide a large percentage of our revenue growth in 2008.

The automotive industry remains a big part of our sales, and we were pleased to become a primary expedited carrier for one of the large foreign automakers during 2007. Also, agricultural equipment had strong growth in 2007, driven primarily by a much expanded relationship with a major ag equipment manufacturer.

We continued to benefit from exclusive relationships with a major home appliance manufacturer, a major commercial printer, and a large logistics company that services many consumer staple businesses.

The economy remained our number one challenge in the fourth quarter. However, through a series of changes we positively impacted our margin. Through the hard work of our staff we grew at a rate significantly higher than rates reported by the expedite industry as a whole, according to data we have available from a leading industry source.

Each year the Express-1 staff comes up with a slogan for the year that is descriptive of the times, and this year our slogan is "setting the standard." With the growth of our fleet, the increase in our customer base, and a more diverse customer base, the formation of our BEST Team, and new cross selling opportunities with our affiliate, CGL, and Bounce Logistics, Express-1 is well suited to set the standard in 2008.

I'll now turn the call over to Mark to discuss our financial results in more detail. Mark?

Thanks, Jeff, and good afternoon to everyone on this call.

Our consolidated results were strong in the fourth quarter. Revenue was up 32% from the fourth quarter of 2006 and came in at $14.1 million. We continue to experience some rate pressures associated with the U.S. economy which compressed our margin slightly. Even in the face of this economy our total margin improved during the period, with gross margin coming in at $3.3 million versus $2.7 million in the same period of 2006. As a percentage of revenue, gross margin represented 23.4% of revenue versus 25% for the same period in 2006.

Our consolidated SG&A expense came in at $2.6 million for the fourth quarter, versus $2.2 million for the same period in 2006. As a percentage of revenues we continued to see improvements in our SG&A line items. For the fourth quarter of 2007 SG&A to include interest and other expenses, represented 18.2% of revenues versus 20.6% of revenues in the prior year. We continue to remain focused on controlling our back office costs.

Our consolidated income from operations, or pretax income, came in at $723,000 for the period, which represents an increase of 55% compared to the same period of 2006. We encourage our investors to focus upon income from operations and YOY comparisons for 2007 and 2006 due to the tax situation we've continued to mention for the past two years. We're pleased that 2008 will mark the beginning of what we feel are directly comparable tax recording practices on our earnings statement.

Net income for the period came in at $457,000 or $0.02 per share on a fully diluted basis. This compares to a net income of $1,594,000 in 2006, with EPS of $0.06 on a fully diluted basis. Please keep in mind that our operating income was up over 55% in the fourth quarter of 2007 versus 2006, and that the change in net income is due to the recording of an income tax provision in the current period versus the recording of a $1.1 million tax benefit in the 2006 quarter.

I would also like to point out that we have not paid a significant amount of cash for income taxes in 2007 due to our net operating loss carry forwards, or NOLs. We believe our current federal net operating loss carry forward has declined to approximately $5.4 million as of December 31, 2007, and we do not anticipate paying a significant amount of income taxes until these NOLs are utilized. This should occur sometime in late 2008 based upon the pretax run rate we now have in place with our consolidated operations to include CGL.

For the full year our revenue topped $52.7 million, representing an increase of more than 25% over the prior year. Our gross margin came in at just over 24%, with SG&A to include interest and other expenses at 17.8% of revenue. Our resulting income from operations was $3.5 million, which is an increase of over 30% from the 2006 level, while our net income was $2.2 million, with EPS of $0.08 on a fully diluted basis.

When comparing our net income between the years, please keep in mind the discrepancy created by the recording of a tax provision in 2007 versus a tax benefit of over $1.1 million in 2006. Overall, we believe 2007 was a good year in a down market.

Within our business segments, Express-1 and Express-1 Dedicated in Evansville, we experienced growth. As Jeff mentioned, Express-1 revenues grew by 35% to $12.8 million in the quarter. Along with this growth, Express-1 delivered a margin of 23.4% and reduced its SG&A expenses to 15.5% of associated revenue. The result was income from operations of $1 million for the period.

Within Express-1 Dedicated revenue increased by 10% to $1.3 million, while margins improved to 23% of associated revenue. Complementing the improvement in margin were improvements in SG&A costs, which came in at 11.8% of revenue for the quarter, resulting in income from operations of $146,000 versus a loss of $27,000 in the prior year.

Our Corporate expenses, which include the costs of our executive officers, board of directors, public company expense, audit, legal, interest and other expenses, came in at $438,000 versus $425,000 in the prior year.

The ability to hold these relatively flat resulted in a reduction in these costs as a percentage of revenue, representing 3.1% versus 4% in the prior year. We continue to focus on holding these costs down, even while we have implemented Section 404 of the Sarbanes-Oxley Act.

Our cash flow remains very strong, and our line of credit was paid-off prior to December 31, 2007. With the exception of less than $100,000 of debt associated with some capital leases, we entered the CGL acquisition debt-free. Our asset light model generates a significant amount of cash flow, and we believe that will allow us to quickly retire the CGL acquisition debt.

We remain committed to a low level of capital investment and managing the collections of our accounts receivables. Our 2007 capital expenditures totaled less than $500,000. Our working capital as of December 31, 2007 had increased to $3.6 million with approximately $800,000 of cash in the bank. Our DSO, now at 37 days, has declined by more than 9 days from the level of one year ago. We're continuing to push-back office improvements that will both reduce our costs and allow us to handle growth without a significant increase of headcount. We're very proud of the efforts of our Support Department and encourage their quest for excellence.

As you are all aware, we recently purchased substantially all the assets of Concert Group Logistics. To complete that transaction we entered into a new line of credit with National City Bank. Our line contains a $3.6 million term note and an $11 million receivables base line of credit. The weighted average rate for this debt is a little over 5%, which we feel is very favorable. At closing we borrowed $9 million on this facility and issued 4.8 million new shares of XPO common stock. While this has significantly changed our capital structure, we're confident in our ability to reduce or retire this debt in the next 24 months.

CGL represents a major acquisition and changes our financial model somewhat on a prospective basis. For 2007 CGL posted revenues of over $47 million with an adjusted EBITDA of approximately $2 million based upon our calculations. CGL's gross margin is lower than that of our other XPO operations, primarily due to their practice of recording commissions paid to their independent agents within their direct costs. This is common within their industry niche, and we do not anticipate changing the practice going forward. CGL's gross margin is approximately 10% to 12% of revenues on a quarterly basis.

Related to the treatment of commissions, however, CGL's SG&A costs are significantly lower as a percentage of revenues than those of our other operations and represent approximately 5% to 8% of consolidated revenues.

As a result of the CGL acquisition and to clarify our targeted operating model on a forward basis, our 2008 guidance calls for revenues to be in the range of $120 million to $125 million, our direct costs are anticipated to represent approximately 83% of consolidated revenues, resulting in a consolidated gross margin of approximately 17%.

Selling, general, and administrative costs excluding interest expense should decline to approximately 11% to 12% of consolidated revenues, with resulting income from operations of between $6 million and $7 million.

Net income is anticipated to be between $3.7 million and $4.2 million on a full year. EPS is expected to be between $0.11 and $0.12, which represents an anticipated increase of between 37% and 50% over full year 2007 earnings.

Once again, I want to point out that while we accrue state and federal income taxes at the combined rate of approximately 39% of taxable earnings, we'll use very little actual cash for tax payments in 2008 due to the existence of the $5.4 million in NOLs, we've previously mentioned. For the full year we anticipate interest expense to be less than $600,000, with depreciation and amortization of around $1.5 million, pending the outcome of an independent valuation on the acquired business.

We are pleased with our results and proud to discuss the stage we've set for 2008 and beyond. With that, we're pleased to answer some specific questions at this time.

(OPERATOR INSTRUCTIONS.)

Our first question comes from the line of [Mike McCaraden] with Cross River Partners. Please proceed with your questions.

Hi, guys. Mark, I was hoping you could talk a little bit about -- I haven't had time, I know you went through the numbers just now, but plugging in the SG&A number for the fourth quarter, it's, you know, $300,000 or so higher than sort of the run rate the last three quarters. Was there anything specific in that, or is it just a result of the growth?

There's nothing specific that I can point to in that. I think it is just a result of growth. We have increased our headcount slightly in the last two quarters of the year to position ourselves to handle the growth in our fleet and the growth in revenue that we anticipate for the full year of 2008. Unfortunately, we can't just hire people at the last minute, it takes some training and education to get them up to speed to manage our call center, so if anything it would be a slight increase in headcount as we ramp-up for our 2008 operations.

And that's headcount related to sort of the internal sales force primarily?

Yes, the customer service people that operate our internal sales force at Express-1.

Okay, great. That's helpful. And, Mike, I was wondering if you had any just comments on sort of -- I know you've been spending a pretty good amount of time on this acquisition, and just sort of where with the operating of Express-1 just sort of where you see yourself sort of spending your time in '08?

I think working both with Jeff and Gerry Post, and also Tim Hines over at Bounce, and Brian Glaser over at Express-1 Dedicated. We now have four operations that will be profitable and running together, so I'll be working with those Presidents. Also spend a lot of time on the sales side of it, working with some of the bigger Corporate accounts within these Companies, and probably as importantly working at possible acquisitions going forward, working with the shareholders.

As we speak today, we're at the BB&T Transportation Conference. We're going to be giving a presentation tomorrow about our Company, and really we feel like we're starting to build a decent Company, and what we want people to know is we have to get our name out, so we're going to spend a lot of time doing that this year, also.

Okay. And then just a last one from me for now is on the sort of housekeeping note, as far as the reporting goes in '08, do you plan on breaking out the Bounce and CGL sort of operations similar to the way you do the Express-1 core and brokerage and Evansville, et cetera?

Yes, we will create segments for each of those independent companies. They are managed independently, and will all be considered reporting segments, even though I think on a combined basis Bounce and --

Express-1 Dedicated falls below the reporting threshold. I think it's easier for the world to kind of see what we have when we do break it out, so we'll continue that practice going forward.

Great. I definitely agree with that sentiment, Mark, and I appreciate you guys doing that. Thank you.

Thank you.

Thank you. Our next question comes from the line of Tony Tristani with Astral Capital. Please proceed with your questions.

Hi, yes, good afternoon. Thank you for taking my call. A couple of questions. On the CGL, you had your call last week, but were they at about 20 stations now across the country?

Approximately 24 stations (inaudible).

And you mentioned the rollout schedule, is that like 4 to 6 per year? And do you guys think you can accelerate that now, maybe if you have more capital, or is it just a matter of finding the right people and geographies?

Well, Efrain, do you want to handle that one?

Yes, we've been adding on average anywhere between 3 to 6 independents a year. Really the cost of capital to add any additional stations is minimal. It's just finding the right person in the right market to add to our network, and we're at a point where we need to feel comfortable with those individuals before we consider adding any additional participants.

Okay. So I mean is there significant growth in the existing 24 stations? Is your model, obviously, grow the revenue at per station and then roll-out 15% to 20% more stations, is that how you're growing that 30%?

Correct. Yes, basically, the internal rate, the internal growth on our stations that have been with us for over a year, anywhere between 12% and 15%, and on average YOY we've been for the last two years 29% YOY combined.

Okay. Thank you. The next question is I guess for the Express-1 guys, you mentioned that there was some up side potential from cross selling, can you talk about that? Is that through the new geography, I mean just from the CGL, you'll be the express business for CGL, but is it also the new geographies can help you recruit drivers in geographies where you aren't now? And then can you talk about, you know, as you get further along where the cross selling opportunity is between the two businesses?

Tony, this is Mike. I think what you're going to see is the CGL offices have another arrow in their quiver. They are going to be able to sell, expedite it. Currently, a lot of the agents already sell expedited freight. In fact, one of our major competitors was one of their bigger suppliers last year, so we feel that we're going to garner a big piece of that business automatically.

Wow, that's pretty good.

But we also feel that the ability to sell, we're going to tailor our software to the agents, so they have something else they can offer their customers. Now, we also believe they are spread-out geographically much better than our current sales force, so that will give us better name recognition throughout the country, and probably even on top of that is the cross docking abilities with other agents that are spread throughout the Company or throughout the country, that will even give us an upper hand operationally from what we have today.

That's interesting. Thank you. And the last question I've got is for Mark, on the NOLs, I guess sometimes there's a limit if you do acquisitions and stuff, a limit to how much NOLs you can take in a year. I mean have you reached that limit, or I thought you had maybe $3 million or $4 million of NOLs to go in 2008, is there any limitations on that or you think you'll just burn those this year?

Excuse me. No, we haven't acquired any NOL with CGL, so I'm not to be naïve, but I'm certainly not aware of a limitation on using it within the existing business. We think that Express-1, Inc. will generate enough earnings to utilize the NOL. We don't anticipate any of it being necessarily limited or expiring in the future, so we were pretty pleased that we still had $5.4 million and we certainly anticipate using it in the next 12 to 18 months.

Okay. All right. Well, thanks a lot guys. I appreciate it.

Thank you.

Thank you.

(OPERATOR INSTRUCTIONS.)

Our next question comes from the line of [Bruce Lahaley] with [Wilson Davidson Company]. Please proceed with your question.

Yes, the question I had was you were debt-free at this point or your line was down, you paid-off the line, but there was $600,000 in interest and I assume that has to do with the interest on the acquisition; is that right?

Yes, Bruce. This is Mark. We were debt-free, we had about $800,000 of cash in the bank as of December 31st. We went into the acquisition of CGL debt-free and with cash. We borrowed $9 million at closing, and we anticipate recovering some cash in the working capital formula that we put in place in the acquisition, so the interest that we're talking about is interest on a prospective basis after borrowing $9 million to fund the CGL acquisition.

And you expect that you'll pay off that entire amount in the next 24 months; is that correct?

Yes, we certainly do, and our interest rate is actually -- it's due to be reset at the end of the first quarter, and LIBOR rates have dropped a little bit more so we should be under 5 at the time of our next reset, unless something happens to stimulate interest rates between now and then.

Were there hard assets that were purchased with that $9 million or is that kind of a blue sky number?

Well, it's not necessarily blue sky in that CGL has had a very strong track record of generating $1.5 million, $2 million worth of EBITDA for the last several years. We feel very confident that Efrain, Gerry, the people at CGL are going to continue that track record of success in the future, but as far as fixed assets go in the acquisition I would say that we got probably less than a half million dollars and we got some receivables. I think net working capital, it's about $3.2 million, so if you want to call the rest of it blue sky, I guess you can, but we certainly feel that we bought a viable business and it's not really a stretch.

Does any of that, what we're sort of referring to as "blue sky," is that -- will that hit earnings and amortization over the next [while or two], or no?

Some will, I can't tell you how much. We have an evaluation expert coming in at the first of March to specifically look at it. Certainly, the SEC would like for most of it to be an intangible and hit the income statement, but it's going to come down to how much value do we place on the network, how much value do we place on trademarks, how much value do we place on the business. And I'm not a valuation expert so I'm not going to pretend to tell you, but I think there'll be some amount of amortization in 2008 and going forward on some of the intangibles and the rest will be goodwill.

Did you -- I think I heard you say that you're going to, what was it, a trade show or something to get a -- kind of get out there on the sales side of things, is that -- did I hear that correctly? I mean --?

Yes, Bruce, right now -- this is Mike -- we're at the BB&T Investor Conference, and that is aimed at publicly held transportation companies. So we will be presenting tomorrow afternoon.

What about -- do you have any companies that are brokerages or otherwise that are following the Company and doing analysis of it, and so on, or anything on the investor relation side?

BB&T is showing interest, and we're going to have meetings with them this week, yes.

What does BB&T stand for?

Bankers Trust.

Oh, okay, okay, okay. All right.

They're the number one transportation guys out there when it comes to their investment (inaudible).

Uh-huh. Okay. That's all I have.

Thank you. Our next question comes -- we do have a follow-up question from the line of Tony Tristani with Astral Capital. Please proceed with your questions.

Oh, yes, thank you. I assume in your proforma, that you're keeping the Express-1 somewhere around the 24% gross margin. What environment do you expect in the future to where you'll start getting a little pricing power in the core Express-1 business, and maybe get back to the -- your historical 26% or so gross margin? What signs should we look for, you know, obviously, an improved economy, but can you maybe go a little bit deeper into that, where -- what kind of environment you'd have a little bit more pricing power? Thank you.

Yes, one of the things, Tony, is fuel prices. Our gross margin has been eroded by the higher fuel prices. If we have fuel prices that (inaudible) in 2006, we're really very similar. I think we've done a fantastic job in a down market, which started in 2006, through 2007, keeping the margin. So I think fuel is a big factor, obviously capacity is a factor, so when the economy heats up, there's a lack of capacity, we will hopefully see some price increases. We're looking for that to, you know, 2008 we're not projecting much of that as far as the economy heating up.

Okay.

For us to grow, the percentage that we plan to grow, it's by taking market share.

Uh-huh.

We're confident in our management teams, in the systems we've built to continue to do that.

Okay. And so like moving forward, our initial leverage we'll see in the income statement, hopefully, will be the top line growing faster than operating expense, you can improve your operating margin that way, and then maybe a little further down the line, '09, if the economy does heat-up again maybe get a little better pricing, a little bit of pricing back?

Correct.

Is the way we should look at it. Because I thought on the fuel that most of that's recouped with surcharges, the fuel surcharge, the drivers' charge?

Yes, it is, but it's impossible to give you an exact number.

Okay, okay. And next question, the last question, for Mark, in your $0.11 to $0.12 EPS number then, are you assuming some estimated amount of goodwill amortization in there or is that going to kind of come later and this $0.11 to $0.12 is kind of non-GAAP add-back with the (inaudible) that you're going to have to maybe take?

Well, I certainly included some when I made the projection. I don't want to speculate as to whether or not I included enough.

Right, okay.

We'll let you know if I didn't include enough at the end of the first quarter.

Okay. So there's an estimate in there, okay.

An estimate in there.

Okay. Thank you very much, guys.

Thanks.

Thank you. (OPERATOR INSTRUCTIONS.)

Gentlemen, it appears there are no further questions. Do you have any closing comments?

Yes, I'd like to thank everybody for taking time to participate with us today. We are committed to building the right foundation for long-term success of our Company. We certainly look forward to sharing our results with you in the next few quarters to come. We're very, very excited about where we are heading in 2008. So, with that, I thank everybody for attending the conference.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.