XPO Inc (XPO) 2009 Q2 法說會逐字稿

Greetings, and welcome to the Express-1 Expedited Solutions, Inc. second quarter 2009 earnings conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder this conference is being recorded.

It is now my pleasure to introduce your host, John Welch, Corporate Controller for Express-1 Expedited Solutions, Inc. Sir, you may begin.

Thank you, Kathleen. Good morning, everyone, and thanks for joining us on our Express-1 Expedited Solutions second quarter call today.

We are always pleased to share information about our Company. With me on this call this morning is our CEO, Mike Welch; Jeff Curry, President of Express-1; Efrain Maldonado, Executive Vice President of Concert Group Logistics; and Tim Hindes, President of Bounce Logistics.

Before I turn the call over to Mike and the rest of the team, I would like to note that this conference may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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 December 31, 2008. So with that, I will now turn the call over to Mike Welch, CEO of Express-1 Expedited Solutions. Thanks, John, and good morning, everyone. I'm pleased to announce solid profitability for the second quarter of 2009. Our revised cost structure is beginning to show dividends. Additionally, the overall freight environment seems to be trending upward.

We anticipate further revenue growth in the third quarter compared to the previous two quarters. We continue to review growth initiatives. These include increased investment in our sales force to spur organic growth along with identifying and reviewing strategic acquisitions. During this difficult freight environment there may be unique opportunities to acquire quality companies.

I'd like to thank our employees and owner operators. Their efforts have made a huge impact within our Company and have led us through these economic times. I'd also like to congratulate Express-1 for receiving the ground expediter provider of the year award from Johnson Controls.

Lastly, our hearts and prayers go to the family of Bob Tracey. Bob passed away recently. He was a longtime Director of Safety for Express-1 and Bounce. He will be missed and we will continue his legacy and remain committed to superior safety throughout our Company.

I will now turn the call over to John Welch, Corporate Controller for Express-1 Expedited Solutions. Thanks, Mike. The second quarter of 2009 continued to be a quarter in which we addressed an economic recession that has severely affected the transportation industry. Although the recession has decreased our revenues by 25% for the quarter and 21% year-to-date we have been able to right the ship and generate a net income of $288,000 for the quarter ended June 30, 2009.

The net income generated in the quarter was primarily due to operating cost reductions put in place in the first quarter of 2009. We believe that the net income generated in the second quarter is sustainable for the remainder of the year and we are cautiously optimistic as overall we are beginning to see indications that volumes are picking up.

As in previous quarters, our asset-light model has served us well and continues to represent more than 95% of our total capacity. Asset-light means that we rely on transportation services that from a cost perspective are primarily variable in nature. These modes of transportation include independent contractors and brokerage partners, both of which is are paid variably based on their completed runs.

Although this model doesn't protect our overall gross margin in dollars due to volume fluctuation, it does insulate our overall gross margin percentage in that we don't incur costs for underutilized trucks or other capacity. Accordingly, our direct costs for cost of transportation decreased on a pro rata basis as compared to our revenue, but we were able to again protect our gross margin percentage on a quarter-over-quarter basis.

Our overall gross margin percentage continues to remain at approximately 16% compared to the 2008 quarterly and year-to-date figures. Selling, general and administrative costs decreased by $383,000 in the second quarter of 2009 compared to the same quarter in 2008. This reduction relates primarily to the cost reductions put in place during the first quarter of 2009.

The second quarter represented the first period in which the full impact of these cuts were recognized and reduced our overall SG&A expense from 16% of gross revenues in the first quarter of 2009 to 13.5% of gross revenues in the second quarter of 2009. We anticipate this percentage being further reduced as the economy improves and we gain additional efficiencies.

Our ability to manage our SG&A costs will continue to be a critical component of our financial strategy in 2009. The tax provision increased to 47% of income from continuing operations in the second quarter of 2009 compared to 41% in the same quarter of 2008 and relates to increases in state income tax rates and the recognition of additional non-deductible permanent tax items in the second quarter of 2009. We anticipate our effective rate to decrease through the remainder of the year as our net income rebounds.

As we mentioned in our previous earnings call, our Express-1 dedicated operation has been reflected as a discontinued operation due to its closure in February of 2009. For comparability purposes, the historical financial results of this operation will continue to be reported as discontinued operations. All shutdown activities with this operation have been finalized and we don't anticipate any further material financial impact from this operation moving forward.

From a liquidity standpoint, the Company's balance sheet remains healthy. We continue to monitor our accounts receivables closely and consider ourselves very fortunate to not have any material write-offs thus far in 2009. Receivables overall have increased by approximately $1 million since the first quarter of 2009, but this is more a reflection of business volumes increasing in June rather than receivable collections slowing.

As we mentioned last quarter, we no longer have any customers that represent over 5% of our outstanding receivables, and the combined total of the Big Three automotive manufacturers continues to represent approximately 4% of our receivables as of June 30, 2009. At the end of the second quarter, we have available capacity on our line of credit of $4.7 million, with no material capital expenditure plans for the remainder of the year.

Additionally, the Company continues to be in compliance with all of its debt covenants as of June 30, 2009. Thanks, again, for attending. I will now turn the call over to Jeff Curry, President of Express-1.

Thank you, John. Express-1's revenue decrease by 31% from the second quarter of 2008. Before fuel surcharge our revenue decreased about 17% from the second quarter in 2008. Fuel surcharge revenue dropped about $2 million, and revenue from the Big Three domestic automotive dropped approximately $2.2 million from the second quarter in 2008.

As a point of reference, the U.S. average cost of diesel fuel during the second quarter was $2.34 compared to $4.42 in the second quarter of 2008. Further reduction in revenue was mitigated through the growth in new accounts in our Mexico and Canada business that made up about 18% of the quarter's revenue versus about 7% in 2008. Our gross margin percentage remained at 23% for the quarter, despite the intensity of the downward pressure on rates.

Our cost cutting measures also began to take effect in the quarter as SG&A was at 16%, and $318,000 less than the second quarter in 2008. This quarter's performance was the further demonstration of the flexibility of our asset-light model and our ability to adjust and adapt to market conditions.

The credit quality of our accounts receivable remained very strong. Our over 60-day balances were well below 10% of our total AR. We successfully renegotiated credit terms with one large account to a much quicker payment cycle and kept other critical accounts within their agreed upon terms. Most of our new business has come from third party logistics companies and less than truckload companies.

We have a superior standing with most of the large LTL carriers that operate (inaudible) Expedite divisions. In the event the LTL supply chain is negatively affected by changes at Yellow Roadway we are well positioned to provide the needed service brought on by a quick drop in capacity. We also began to do work for the U.S. Department of Defense in the quarter, and saw that business increase towards the end of the quarter.

It should be noted that about 60% of Express-1's income in the quarter came in the month of June, demonstrating an improvement in demand and our cost structure. After the first six months of the year, a review of the First Class Expediting Services acquisition is very positive. This new Express-1 location has proven to be very strategic and puts us in great position to capture more of the domestic automotive business as it returns over time.

As you may recall, we paid $250,000 for First Class and through the first six months of the year we have generated about half the acquisition costs in cash through profitable operations. Additionally, First Class has become a strong source of business for the Express-1 trucks that cover loads outside of the Detroit metro zone.

The staff at First Class has also recently taken on the responsibility of being the primary point of contact for a new important customer for the Company. The strategy of having First Class specialize in covering the Detroit metro area down to Toledo and having Express-1 Buchanan cover national business has brought important focus to the success of this venture.

I'm also proud to mention that we did receive the ground expedite provider award for 2009 from Johnson Controls. Johnson Controls is a multibillion dollar company and a major shipper. This award was based on our level of customer service and on-time deliveries.

I expect the challenging expedite market to yield opportunities to continue to capture market share over time. I believe we are well positioned to navigate the challenges of the current environment and thrive as the market improves when capacity decreases and/or freight demand modestly increases. I will now turn the call over to Efrain Maldonado, Executive Vice President of Concert Group Logistics. Efrain?

Good morning, and thanks, Jeff. After revenues seem to have stabilized during the months of April and May, we experienced an unexpected decline in June ending the quarter with slightly under $10.2 million in revenue. This was 30% less than the same quarter in 2008, and 15% greater than the prior quarter. Year-to-date revenue is $19.8 million or 21% less than 2008 revenue for the same period.

As predicted during our last call, gross profit margin increased by almost 10% during the quarter. Gross profit declined by 24% during quarter two and was down 17% year-to-date. Gross profit margin improvements through a combination of shedding low-margin, high-risk business and enhanced technology and training have allowed us to maintain higher profitability at lesser revenue.

Historically, June has been our best revenue month, however, the loss of several major customers at the end of 2008, clients who have had seasonal surges during quarter two, combined with a temporary slowdown of several major client projects for the summer contributed to the quarter end decline. These projects are expected to start up again during quarter three.

Internal growth from stations that have been in the network for more than one year declined by 30% from the same period in 2008 while new stations offset revenue losses from closed stations. We continue to work with a number of stations to add and train new sales professionals. During the quarter, we closed two independent stations in Hartford and Philadelphia due to inactivity and opened a new location in Phoenix.

This location is owned and operated by an individual who has been a proven salesperson within CGLs for many years and we believe this market will experience good future growth. The effort to recruit new stations continues in spite of the economic obstacles. At quarter end, we operated through 25 independent stations as 2008. The top 10 clients represented 38% of revenue for the quarter and the same percentage year-to-date. We had six new entries into the top 10 clients listing during the quarter. These are existing customers that have increased the amount of revenue year-over-year.

Active clients, those clients having transacted business with us during the previous six months, dropped slightly from the prior quarter and same as quarter two 2008. While client growth has slowed we continue to hold fast to our current client base in anticipation that their volumes will increase as the economy improves.

International revenue increased by 20% over quarter one to represent 30% of total revenue for the quarter. This is 10% less than the same quarter in 2008, demonstrating that our initiatives taken late last year to provide sales and operational training for international are taking hold.

The impact of the actions we took in March to reduce our general and administrative expenses were realized during the quarter. G&A expenses for the quarter were 10% less than quarter one and almost 29% less than the same quarter in 2008.

We continue to closely monitor our operating costs to ensure that we remain profitable regardless of business levels. However, we continue to invest in our systems to support our independent station network and their customers. Our versatility of services provided and ability to utilize our sister companies Express-1 and Bounce gives us the ability to retain and gain new clients regardless of geography and they type of transportation required.

With the well publicized struggles of the major transportation companies we feel our non-asset-based structure and devoted employees will allow us to rebound quickly as business conditions improve. Thank you for the time and I will pass the call to Tim, President of Bounce.

Thank you, Efrain, and good morning, all. As I indicated in prior calls, we remain focused on growth and executing growth strategies. Both our inside and outside sales model has tested well, and we are moving forward with planned growth in that area.

In this quarter, we will also develop a marketing plan designed to polish our brand, so to speak. In the last 16 months, we have serviced over 10,000 loads for literally hundreds of customers without a single claim or incident, and quite honestly we need to get that story out. Some statistics for Bounce Q2 2008 versus Q2 2009, I'll share our revenue, was $2.23 million Q2 this year compared to $1.04 million, up 113%.

Gross profit dollars were $359,000 this year compared to $131,000 same period, that's up 174%. Gross margin as a percentage of revenue was 16% this year, compared to 13% last year. Operating income was $86,000 this year compared to a net loss last year of $67,000, up 228%.

Contributing to revenue we had over 300 customers supporting Q2 2009 revenue. Same period last year was 174. I thank you for your time and attention and your interest in the Company, and, Mike, I'm going to turn the call back over to you.

Thanks, Tim. Operator, we can open up for questions, please.

Thank you, sir. At this time, we will be conducting a question-and-answer session. (Operator Instructions) One moment while we poll for questions. Our first question is coming from David Campbell of Thompson, Davis.

Good morning, Mike, and everybody. How are you?

Good, how are you, David?

Fine thanks. Why was the corporate costs up in the second quarter compared to the first?

Okay. Yes. We have quite a few extra costs or costs that weren't -- that we didn't have in 2008, but I will pass it over to John to give you detail on that. Yes, David, we said right off the get-go when we were making these cost reductions that we didn't really cripple what we were trying to do as a Company. And, in fact, in some areas we had to increase costs and in -- on the corporate side, though, those increased costs included merger and acquisition costs of trying to locate, identify and review appropriate candidates for merger and acquisition.

We had some legal fees associated with that activity including legal fees with the actual acquisition of First Class. And 2009 also represents the first year in which we will be -- our Sarbanes-Oxley testing will be attested and audited by Pender Newkirk. So there are some costs associated with that audit, also running into the first six months of 2009.

We did go through those, we were expecting this question from you. And hopefully we answered it for you.

Yes, certainly -- certainly -- sounds like they won't continue. Doesn't sound like $500,000 is a quarterly cost going forward.

That, I think it will be down somewhat, I know the cost in the last couple of months have moderated. Certainly the legal fees associated with Fist Class won't be here. We could have additional legal fees of merger and acquisition costs if we identify a candidate. So it's possible it will go down, but can't guarantee that.

Yes. I understand. It would depend on M&A. And the Concert Group revenues in June must have been disappointing. I mean, you didn't know that these projects were going to be canceled?

Yes. David, I will turn that over to Efrain, but, yes, it was much slower than anticipated and for the first four or five months Concert Group's revenues stayed very, very steady and really wasn't hit by the downturn as severely as Express-1, and in June it sort of flip-flopped a little bit and -- Efrain, you want to comment more on the customers and the projects?

Yes. While we did anticipate a slowdown in some of the projects, I guess the projects did slow down a little bit more than we had anticipated.

However, it looks like in July some of these projects have begun to pick right back up and we anticipate that the third quarter, those projects will bring the revenue levels up slightly again to what we were experiencing back in April and May.

Right. Mike, you mentioned that the business overall is -- looks like you may have sequential growth in revenues in the second to the third, does that include Concert Group?

It's the combine between all three companies. We certainly, like Efrain said, Concert Group is seeing a shift in increased freight that we've noticed in the past few weeks. Express-1 and Bounce has seen a noticeable difference in the run counts and opportunities over the last month to two months.

Sort of unexpected, especially we were coming into July wondering what was going to happen. So it was, overall we are pretty positive about how the year is going to finish.

What was cash from operations in the second quarter?

Cash from operations was basically zero after all the adjustments. So we had net income of $293,000 for the quarter, and after all the adjustments for the current liabilities and assets basically hit zero.

Right, so there probably was some use of cash to support were -- receivables because they were up.

That's correct. That's correct.

That's a good sign, though, that you're ended up with June -- despite Concert Group, June was, sounded like a pretty good month.

Right, right. Correct.

With the receivables up like that.

Correct.

So did you have CapEx in the quarter? That's why you ended up without paying down any more of your line of credit. I guess you decided to put off paying off some line of credit?

Yes, we did have, we've held our CapEx down to $47,000 for the year. So through six months we've only had CapEx of approximately $50,000 . We anticipate that not exceeding a $200,000 for the year, David. So we've certainly controlled expenditures with our CapEx as compared to last year at this time of almost $700,000 in CapEx.

The line of credit, will you resume payments on that in the next quarter?

That, we anticipate that going down. Of course, we are running projections monthly as our activity becomes actualized. But it appears that our line of credit will be moving down as we regain profitability throughout the year.

And you went too fast on the international revenue section of the Concert Group. I heard it was up 20% year-to-year, is that correct?

Yes. That's correct.

And but it was -- it was 30% of revenue?

As a percentage of revenue it's 30%. Correct.

I know 20% -- but it was down versus something you said, it was down versus something?

I'm trying to find it here. Hold on one second. It was 20% higher than quarter one.

Oh, versus quarter one, right.

And 30% of total revenue for the quarter, it was 10% below last year's 2008.

Okay, I got it. Right, right, right. A lot of that is just rate reductions and so forth. Lower rates and so forth?

I think it's a combination of lower rate, lower rates and lower volumes, slightly lower volumes. However, as a percentage of total revenue it has increased.

Right. I will let someone else have it, thank you very much.

Thanks, David.

Thank you. Our next question is coming from Rich Murphy of Criss River. Your line is live.

How are you doing, guys?

Hey, Rich. Good.

The receivables, are you -- when do we expect -- should we be getting a big chunk of cash coming in in the next month or so from the --

John, you want to handle that one? No, our AR days are running pretty much where they've been over the last year or so, running mid to high 40s with our AR days. I'm not sure exactly where you are coming from on that, Rich?

I'm wondering if there has been a push of new business that your receivables have stacked up a tiny bit, that cash would come in. You would see that cash in the cash flow statement?

Yes. Sure, sure. We will certainly see that as we continue to grow, our AR will continue to grow and our cash receipts will increase.

Certainly that will, we are not anticipating too many bad debts, hopefully, at this point, knock on wood. But certainly as business grows our AR and our cash receipts will increase.

What is the use of that cash? I guess, is it -- now that the cost cuts are behind you, is it going to be just a pay down the debt, you mentioned acquisitions in your comments, are you seeing acquisitions out there?

Rich, I think overall our strategy has always been to pay down the debt when we have the cash and when that comes in. As far as acquisitions, we are looking, we look at a lot of different companies, as you know. There are some quality companies that seem to be out there that maybe wouldn't be in play in previous years that are now.

But, again, we've always been a pretty conservative and cautious when we look at those opportunities. But there is certainly more out there than there has been in the past and what I would call good companies with good reputations.

Do you think a spike up in business activity will take those opportunities away or what's -- is the industry smaller today than it was six months ago?

You know what, that's a good question. I think it's always possible depending on individual sellers' frame of mind. That's a possibility.

But on the other side of the coin, I think more of the possible tuck-in acquisitions, they have had some real tough times, much tougher times than Express-1, XPO, and because of that, I think they don't want to go through it again. So that's one of the things we are seeing out there. I think also people are afraid of -- whether it may sound silly but the capital gains tax rates that may be in effect in future years compared to where it is now. There is a lot of different motivations.

Again, you talk to a lot of different people, you meet a lot of different people. The best thing that's coming out of it is increased business relationships, at the worst, when you are out there talking to some of these people. But all in all, there is much more interest in discussions than in the past.

Okay. And just given the cuts that have gone on, if business does resume, I mean, we are not looking at maybe pre-October levels, but even if it gets back to some kind of normality -- is Express-1 able to get back to $11 million type run rate? That's a Jeff question. Where are we on the owner operator levels, how quickly can we get back to $11.5 million, let's say, or $11.3 million a quarter?

Yes, Jeff, I'll let you answer that one.

I think we are pretty well set up for that. Our fleet count is down as you would expect with the load count having dropped over the last few months. But once the load count picks up, as we've seen in June and now July, the owner operators, the word gets out pretty quickly and the fleet starts to stock back up appropriately.

So, and then we have to get real good at the brokerage side of the business which we are really focusing on right now. The brokerage component of what we do really sort of bridges the gap between the amount of time that we need to build the fleet back up to handle the new resurgence in business. We are doing a lot of focusing on that.

We've done some pretty critical things there that I think are going to help us handle the increase in freight. And so I do see that we will have an ability to get back up to higher levels, and we've seen it in June and we've alluded to the fact that July was surprising as well. Looks good.

And I think, Rich, I want to point out one of the things that we are seeing with some of this growth, it's not necessarily 100% the economy is turning around. I think the sales departments have done a fantastic job. We know for a fact we've taken some market share from some major companies. So the good news is there is still opportunities to recruit drivers because this increase isn't just because the economy is getting better.

It's we are taking some market share. We certainly believe that and by doing that it makes us -- enables us to recruit much more effectively. And Jeff's point, word of mouth is the best recruiting advertisement we could ever have.

Absolutely. So skipping over to CGL, is Concert -- and Efrain, you might be able to answer this, what's the morale there? Is it, since these guys are heavily incentive, business is down so much do you worry about stations you closed, too? I mean, how quickly can you just open two more? How do you operate in an environment like this be with a slightly different business model?

It's kind of, we continue to establish relationships. We are consistently looking, continuously looking for new opportunities in markets where we don't have an independent -- the morale in freight forwarding, in general, we are not the only Company that is down. Everybody out there is down and everyone is just kind of waiting for this thing to turn around.

CGL, we still believe that there are some opportunities that are going to be presented to us because of the down economy, and these opportunities aren't only limited to new IPs, they could be also new sales professionals, maybe even some operational support from some of our competition or just professionals in the industries that could provide us some help down the road. We are consistently looking, people are kind of just waiting to see what happens.

And that Phoenix operation is that type of situation where you found a professional who -- ?

That's exactly. We had a sales professional that's been with the Company pretty much since inception. He teamed up with an operational person down in Phoenix and opened up a station. We are starting to see some activity there.

So that's a good example of what the economy is going to bring us as far as some of these people out there looking for opportunities. We feel that these opportunities are going to continue to come.

Okay. And you have 25 stations right now?

Correct, 25.

Is there a goal for how many stations you want to have year end?

For year end, not really. We are just looking for as many opportunities that we feel are good opportunities, solid opportunities that we would be willing to establish.

Okay. My last question is on Bounce. The margins now are back up to around 3%, at 3%, somewhat of a loss, though small number, is the margin on that business more like the Express-1 margin at the end of day, so we could see another 5% maybe in leverage in that business model?

Rich, you're speaking in terms of the gross profit, is that accurate?

Correct. I'm looking at the operating margin at about 3.9%. So $273,000.

As we grow (inaudible.)

We could look at gross, I guess.

When we look at gross it's a different model, gross that we are -- (inaudible.) (no audio)

Hey, Rich, I think we are having problem with Tim's --

Oh, okay. I'm sorry.

We will come back to you and Tim.

You hear me now?

Yes.

Okay, I apologize, guys. My phone cut out for a second. Rich, we are -- what you will see is our gross profit in a good time, a good economy is going to range between 17% and about 22%.

We did get some gain from last year. We are seeing some, obviously, some margin pressure like everybody is feeling. But in terms of the margin as a percentage of revenue, compared to the expedited industry, it's night and day. We don't share the same type of margins that they do.

Okay. All right. Thanks a lot, guys. Great quarter.

I know it's been a tough six months starting last October. So you guys, hopefully, take some more market share. And get this thing back to the revenue numbers we enjoyed before last October.

We are working on that, we can assure you that, Rich, thank you.

Good job, Mike.

Thank you. (Operator Instructions) Our next question is coming from [Robert Newick] from [Cantanna Capital.]

Hi, there. Just one quick follow-up on what's already been asked. Driver count for the quarter, was it, you can give it to me either versus last quarter or year-over-year versus the peak.

We really don't give specifics for that, Richard, just because of competitive reasons, but we -- it's definitely, it is smaller than it was in our peak in October. But it is definitely sufficient to continue growth throughout the rest of this year.

One of the things we are seeing is with the driver count in this latest uptick in business that the drivers are doing very well with loaded miles and revenue.

Okay, and everybody else asked anything else I had.

Thank you.

(Operator Instructions) Gentlemen, I'm show no further questions in my queue at this time.

Well, thank you, everybody. We certainly appreciate your time today and your support of our Company and we feel very confident that the next couple of quarters are moving in the right direction and look forward to the next conference call. Thank you.

Thank you, ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time.