XPO Inc (XPO) 2009 Q3 法說會逐字稿

Greetings and welcome to the Express-1 Expedited Solutions Inc. third-quarter 2009 earnings 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, Mr. John Welch, Controller for Express-1 Expedited Solutions Inc. Thank you, Mr. Welch. You may now begin.

Thank you, Christian. Good morning, everyone, and thanks for joining us on our Express-1 Expedited Solutions third-quarter call today. We are always pleased to share information about our company.

With me on the call this morning is our CEO, Mike Welch; Jeff Curry, President of Express-1; Gerry Post, President of Concert Group Logistics; and Tim Hindes, President of Bounce Logistics. Also on the call today is our newly appointed CFO, Dave Yoder.

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. 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 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.

Thank you, John. Good morning, everyone. Over the last two quarters we have communicated our current corporate strategy. This strategy includes cost reductions, investments in our sales force, and a focus on maintaining our fleet of owner operators.

We realize that these strategic initiatives would be critical for XPO to prosper in the ever-changing economy and will position ourselves to quickly grow as economic conditions improve. We continue to believe that these initiatives make sense for us moving forward and we are encouraged to see the strategy generate positive results in the third quarter.

Our recent acquisitions of LRG International in Tampa, Florida, will help drive additional international growth within our Concert Group Logistics network. Both Henrik Jorgensen and Carsten Dahl are proven veterans within the international freight forwarding arena.

Late third-quarter growth in ground expediting has propelled Express-1 towards a strong finish in 2009. Bounce continues to produce solid top- and bottom-line revenue and profitability. I would like to thank our employees, independent station networks, and owner operators. Their efforts have made a huge impact within our company and have led us through these economic times.

Also I would like to welcome aboard Dave Yoder as our new CFO. Dave brings XPO valuable insight within the transportation industry and is well versed in all areas of the finance and M&A. Lastly, I would like to thank our Controller, John Welch, and his support team for leading us during our CFO transition. You and your team's attention to detail are both outstanding and appreciated.

I will now turn the call over to Dave. Dave?

Thanks, Mike. I appreciate the kind introduction. Let me start by saying how happy I am to be here and look forward to the opportunities at XPO.

As Mike just discussed, our strategy generated positive results in the third quarter. Overall revenues rebounded nicely in the third quarter as we experienced an 18% increase when compared to the second quarter. Two of our three operating segments, Express-1 and Bounce Logistics, saw increased revenues when compared to the third quarter of 2008.

Moving forward we cautiously anticipate revenues in the fourth quarter of 2009 to exceed fourth-quarter revenues generated in 2008.

Our overall gross margin percentage for the third quarter improved to 17.9% as compared to 15.9% in the same quarter in 2008. This resulted from margin percentage gains at both Bounce Logistics and CGL. Additionally, the increase in volumes at Express-1 contributed to the overall gross margin gain and Express-1 generated the highest gross margins.

As previously communicated, 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 are paid variably based on their completed runs.

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

Although selling, general, and administrative expenses increased by $136,000 in the third quarter of 2009 compared to the same period in 2008, we are encouraged that as a percentage to total revenue our SG&A costs dropped during the third quarter to 12.4% as compared to our year-to-date percentage of 13.9%. Two of our three operating units, CGL and Bounce Logistics, held costs for the quarter under 2008 levels.

The overall increase on a quarter-to-quarter basis resulted from three primary areas -- operating costs incurred with the acquisition of First Class Expediting, greater than expected healthcare costs associated with our self-insured plan, and additional labor costs associated with the pickup of business at Express-1 in the third quarter of 2009.

We anticipate our SG&A 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. Finally, as a result of these third-quarter improvements, net income has nearly tripled from the second quarter.

As we mentioned in our previous earnings call, our Express-1-dedicated operation has been presented as a discontinued operation due to its closure in February of 2009 and the historical financial results of this operation will continue to be reported as a discontinued operation. 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 strong. We continue to monitor our accounts receivable closely and have been fortunate to maintain our bad debt write-offs at historical levels with no material write-offs during the year. Receivables increased by approximately $3 million since the second quarter of 2009 reflecting increased business volumes during the third quarter.

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 continue to represent approximately 4% of our receivables as of September 30, 2009.

At the end of the third quarter we had available capacity on our line of credit of $5.5 million and we continue to be in compliance with all debt covenants. It is important to note that on October 1 the Company purchased certain assets and liabilities of LRG International and initially paid the former owners $2 million which reduced our line of credit availability.

Thanks again for attending. I am happy to be here and I will now turn the call over to Jeff Curry, our President of Express-1.

Thank you, Dave. I am pleased to say that Express-1 generated record quarterly revenues in the third quarter. Furthermore, sales in the month of September were the highest in the Company history as revenue was just short of $6 million.

Year-over-year we saw growth in our load count by almost 10% and our line haul revenue by 11%. The increase in our load count was outstanding considering that shipments from Ford, Chrysler, and GM were down by over 900 from last year's quarter. Total revenue for the quarter was slightly above last year as fuel surcharge revenue was down by $1.5 million and offset the healthy gain in line haul revenue.

Our international business made up of shipments with origins or destinations in Canada or Mexico made up about 22% of revenue in the quarter as compared to about 10% in last year's quarter. As a reminder, we opened our international department about two years ago and needless to say we are very pleased with the staff and the contribution they have made to our sales.

The purchase of certain assets and operations of First Class Expediting Services that occurred in January of 2009 also served to further diversify Express-1's operations in the third quarter of '09. This acquisition enabled us to enter a new geographic area specializing in short-haul expedites. As a division of Express-1 First Class contributed about $1 million of revenue in the third quarter of 2009.

By several measures the acquisition of First Class has been a complete success with a complete return on our investment in under just nine months. I would like to extend my gratitude to the employees of First Class and for all their efforts in helping to make this happen.

Express-1 has historically rebounded quickly from recessions as the expediting industry in general is typically one of the first benefactors of a recovering economy. In addition, Express-1's continued investment in sales has paid off as we have expanded our presence into other markets. Overall, Express-1's third-quarter revenues increased by 46% as compared to revenues in the second quarter of 2009.

As I mentioned fuel prices have declined resulting in corresponding drop in fuel surcharge revenues in 2009. For the three-month period ended September 30, 2009, fuel surcharge revenues represented only 10% of our revenue as compared to 20% in the same period last year. This is a favorable trend for Express-1 and the industry since fuel surcharge revenues are substantially passed through to our owner operators and don't flow to our margin or bottom line.

The auto industry also showed increased activity during the quarter and represented 30% of our revenue in the third quarter of '09 versus 27% of our revenue in the third quarter last year.

Express-1's gross margin percentage was 22% for the third quarter compared to 24% for the same quarter in '08. In the face of a soft and competitive expediting market our asset light model continued to perform well by protecting its gross margin percentage. We believe that our margin percentage will increase slightly in the fourth quarter as the economy continues to improve and available trucking capacity tightens thus pushing our rates higher.

Also in the quarter we saw a year-over-year increase in our brokered freight from 15% of our revenue last year to 25% in this year's quarter.

When business increases quickly brokerage revenue rises as we cover our customers' shipments. As we recruit more trucks to meet the demand our margin will improve as our cost of transportation will drop. Outsourcing freight also allows us to closely monitor freight levels and to keep our fleet size closer to the size we need to meet demand. It should also be noted that much of our international freight is handled through well-managed relationships with Canadian, Mexican, and Texas-based carriers.

Although selling, general, and administrative expenses increased by $257,000 in the third quarter compared to the same period last year, we are encouraged that as a percentage to total revenue our SG&A costs have dropped during the third quarter to 12.7% as compared to our year-to-date percentage of 15.8%.

The increase on a quarter-to-quarter basis has resulted from operating costs incurred with the addition of First Class, unexpected healthcare costs associated with our self-insured plan which should return to more normalized levels, and additional labor costs associated with a pickup of business in the third quarter.

Our sales and recruiting staff have done an outstanding job of helping us capture additional market share. When many of our competitors scaled back in critical areas of their businesses, we increased our efforts and investment in building our sales team. Our recruiting staff also did a great job of keeping up with the increase in sales as our fleet has grown and the composition of our fleet has improved as we added far more team-operated trucks.

The growth in our business continued to be handled safely as our inspection scores as tracked by the Federal Motor Carrier Safety Association compared tremendously to national averages. In 2008 the national average of drivers placed out of service was 9% while the most recent score for Express-1 was 4%. The national average for trucks being placed out of service in '08 was 33% and the most recent Express-1 score was an impressive 7%.

We have increased our market share in several ways, but investing in our sales force, purchasing First Class Expediting Services, and holding firm on the rate paid to our drivers were critical to our successful third quarter. Sales in October set yet another record and eclipsed the record sales from September.

Express-1 now more than ever offers best-in-class expedited transportation service. From Canada through all points in the domestic US and Mexico we offer door-to-door service automatically tracked from origin to destination 24 hours a day/seven days a week. The addition of First Class Expediting Services has also greatly expanded our service in the very important Detroit Metro market.

We feel that Express-1 has become a critical vendor of expedited transportation services to any company that has premium shipping needs. We continue to diversify our business and our varying revenue stream has expanded which helped fuel our great quarter.

I will now pass the call over to Gerry Post, President of CGL.

Thanks, Jeff, and good morning, everyone. CGL continues to see revenues decline compared to prior periods primarily due to the general economic situation and resulting drop in shipping.

Revenue declined 38% in the third quarter compared to the prior year. However, recent trends are more positive as we experienced as we experienced an 18% increase in September's revenue compared to August. The decline in revenue was partially offset by an improvement in gross profit percentage of 10.3% compared to 8.5% in 2008.

We continued to experience improved gross profit margins as a result of the creativity of our independent station network, maximizing profits by focusing on specialized transportation services with higher margins, and taking advantage of the excess capacity of the carriers we used to reduce purchase transportation costs.

During the quarter we opened a new station in the South [Penn] market. We believe this station will capitalize on the good reputation of Express-1 in the area and contribute to our future growth.

We also made ownership changes in our Atlanta and Minneapolis stations in order to strengthen our future sales efforts in these important markets. We will continue to address opportunities to improve our performance through opening new stations, changing ownership, or closing underperforming stations.

As mentioned, we saw business improve toward the end of the quarter as customer projects dormant during summer months started to come back. This included clients whose volumes had dropped significantly during the past year, particularly in the automotive sector. We see this as a positive sign for the future.

International revenue in September rebounded strongly and it was our best month this year for international air and ocean revenue. We expect our international revenue to outpace our domestic revenue growth going forward, especially in light of the LRG International acquisition in early October. As a company-owned operation we will realize a higher gross profit on this business as we don't share profits as we do in the independent station network.

In the quarter we have parted with our vice president of sales, but I am pleased to announce that we have hired a new vice president of sales who joined the Company just yesterday. He is a highly qualified individual from the freight forwarding industry with both domestic and international experience and held the same position with a competitor. This individual, along with our new vice president of international from LRG International, strengthens our management team and will provide the future impetus for our revenue growth.

Our selling, general, and administrative expenses during the quarter remained basically the same as the previous quarter and 11.5% less than the same quarter in 2008. However, expenses included a one-time severance for the previous vice president of sales. Excluding that payment SG&A expenses were 10% less than quarter two and 21% less than quarter three in 2008.

Our control of operating costs and the sacrifices of our employees have kept our operating profit margin relatively stable through these challenging times. We believe that the worst is behind us. And with the addition of our new vice president of sales and the changes within our station network that we have made and will continue to make, we have been given renewed momentum.

With the LRG International business and staff we are well-positioned to grow our international services into the future.

Thank you for your time and I will now pass the call to Tim Hindes, President of Bounce Logistics.

Thank you, Gerry, and good morning, all. I am pleased to be with you this morning and I am going to cover some highlights that pertain to Bounce Q3 '09 versus the same period last year.

Q3 '09 revenue compared to same period last year was up 2.1%. We also couldn't be happier as we look at several of our key metrics. Load count was up 34% and number of active customers was up 21%. Our operation today is managing 34% more volume with 10% less G&A. We are poised well with a lean model and a growing customer base.

We are also pleased with our team's ability in these difficult times to be able to improve the gross margin from 13% to 17.4%. This improvement, coupled with our ability to reduce SG&A, supported operating income margin of 6%.

Going forward our focus remains on growth and we believe the timing is right to continue growing our customer base. Our intention is to position ourselves so that we can as many customers as we can during this period where we believe customers are taking time to shop. We anticipate emerging from this period with a strong growing customer base that have more loads to give us and we expect higher rates.

Conditions are indeed favorable for continued growth and success. I thank you for your time and attention. At this time I will turn the call back over to Mike. Mike?

Thanks, Tim. Appreciate it. I will now turn the call over to the operator for any questions. Operator?

(Operator Instructions) Rich Murphy, Cross River.

Good morning, guys. The question I have got is on the LRG acquisition. It looks like you broke out $75 million in revenue for the first nine months; $1.4 million in net income. If there was a big downward -- obviously with the recession at $2.7 million in 2008, 9 months.

So where does that business operate typically? What has historically been their run rate? Is it a big growth model that has just kind of stalled and went down or can you give some granularity around those numbers historically?

Rich, this is Mike. Historically, we look at -- LRG has lost some of the same international volume as far as percentages, some of the bigger guys like Expediters. So international was down in 2009 probably, depending on who you talk to, anywhere between 20% and 30%. The previous year they were well over $10 million in revenue in 2008.

Okay.

I don't know -- you mentioned $75 million. I am a little confused there.

Yes, you break out in the subsequent events in the 10-Q operating revenue was $75 million -- I have got a cold so I apologize. Am I looking at that wrong in the table?

Yes, that is correct.

It went from $97 million to $75 million and net income went from $2.7 million to $1.4 million, which I mean it looks like you got a great deal on the acquisition.

Those are pro forma numbers, Rich, so those are numbers including our numbers. So that would be our results plus LRG's pro forma results.

Okay.

So, for example, this year the LRG component of the $75 million is $6.7 million in revenue and $600,000 in income before taxes.

Got it. Okay.

In the previous year it was somewhere over $10 million. I don't have the exact numbers.

For the nine months?

For the nine months, yes.

And the other thing just on a housekeeping note, the gross margins for the Express-1 business was 24% that is ex-fuel surcharge I am assuming?

That includes fuel surcharge, the impact of the fuel surcharge.

Okay. You said a slight uptick potentially fourth quarter, again ex-fuel surcharge. So we just keep the fuel surcharge the same going forward?

That is correct.

Finally, the receivables. What is the conversion cycle for those receivables? Should we start seeing that cash come in this next quarter?

Yes, typically for us the fourth quarter is a good cash quarter for us. If you look at March and June and September, those are usually pretty busy months for us and usually end with a flurry of activity. December, on the other hand, typically get slow around the holidays so we will be collecting cash and paying off debt. So typically at year-end we would see some positive cash flow.

Okay. And basically on the debt side I should add about $2 million to the debt, the number we see in the Q?

That is correct.

Okay. Great, guys. Great quarter on the Express-1 business at least. Hopefully, we will get it back -- all parts moving in the same direction. Thanks again.

David Campbell, Thompson Davis & Co.

Good morning, everybody. I wanted to ask you what the September Express-1 revenues were. You mentioned $6 million excluding First Class. What was the increase from September of '08?

Jeff, do you want to handle that?

I don't have those exact numbers there, John.

I don't have September of '08 numbers available. I would only be guessing, Dave, at this point. I would say it was up at least $0.5 million from September of '08.

Don't have all of the numbers in front of me to real accurately --

That is okay. That is okay. The important thing is there was an increase which is great. And then you mentioned October up from September so you must have a pretty good idea what the fourth-quarter revenues are going to be for Express-1. Willing to share any guesses?

No, I do feel very good about the fourth quarter. Obviously we gave you a clue there on October. You will see some normal seasonality built into the November and December, but I feel pretty strong about the fourth quarter and how we are going to come in.

I think we will compare very favorably to last year, that is for sure.

Yes, it gets easier in November, doesn't it?

Yes, that is the benefit of last year, right.

Well, there are some very strong international numbers coming up as well that should help LRG in the fourth quarter, which is largely a sea freight business. Is that correct?

Gerry, you want to handle that?

They are both air and sea; 60% import, 40% export on the air freight side. I would say air freight is probably about 30% of their business.

Okay, 30% is air. Right. And are there any synergistic cost benefits at putting these two companies together? Are you pretty much just added all the costs from LRG?

There will be some slight synergies on the savings end. They ran pretty lean as we do in CGL, so there isn't a lot of opportunity where we can eliminate folks. We have probably one or two redundant divisions that will be phased out as they get integrated.

Switch to CGL, it looks like CGL is also beginning to recover with September revenues you said, I think, up 18% versus August. Will that tell the same kind of growth in October?

October follows the same trend. I don't know if it's the same percentage, Dave, but it was an increase over September.

Right, right, right. So it looks like -- and certainly Bounce is doing well. Mike, any guesses for the whole year in terms of profitability?

Well, we are very optimistic with the strong surge in the latter half of the third quarter. We are certainly optimistic about the start of the fourth quarter so we feel the fourth quarter has a good chance of certainly being our best quarter.

We are just excited with the direction and the momentum that we have. So we are not really prepared to say here is where we are going to be, but it's certainly going in the right direction, Dave.

Right, right, right. Okay, well, thank you very much and I appreciate the help. Good quarter.

[Robert Newjic], Katana Capital.

Good morning. Can you give me the dollar number for fuel surcharge?

The dollar amount for the quarter and year to date, I don't have those numbers available so I would only be guessing. So I can't give that to you.

Okay, I will e-mail you for it. You said it was $1.5 million less than last year. I am going back to your first-quarter '06 and then I strip them out to get expedited revenue.

You were just at your highest quarter. You were significantly above your best quarter ever. All of the data I see still shows rail and freight volumes down double digits year-over-year. I know this lets you brag, but what is going right? Where is all this revenue coming from?

Jeff, do you want to --?

You know, I go right back to what I said in my script. I really think that we invested while others didn't and I think maybe you call it luck. I don't think so I think we knew what we were -- we invested at First Class. We saw some opportunity there and lo and behold that paid off. By the way, we inherited one heck of a super staff over there also.

Then we have invested in sales when we know some of our competition actually cut back there. We have got a very strong sales force right now, second to none. And then at the same time the word gets out with the owner operators and they like to work with a winner. I think we are a winner.

We are also looking at some new markets and I think they know we are not afraid to try things. We are not going to bet the farm, but we are also not afraid to try some things. As in the case of international that was nothing a couple of years ago and now look at it. So things are pretty positive and we feel pretty good about heading into 2010.

Okay. Well, happily that is my only question today. Thanks.

John Janick, National City.

Nice job on all the operating divisions and welcome aboard, Dave.

Thank you, John.

Just a question and we have touched on -- I have heard a couple of comments with the acquisition of LRG and their focus on international, the international revenue pie at Express-1 was up. Gerry talked about increased international business for CGL.

Do you have a feel for how big of a piece international is going to be as we get through the fourth quarter and into 2010? It sounds like that is going to be a fairly significant piece of the revenue pie.

John, this is Mike. I think when you look across the board, especially with CGL and Express-1, it's a continued growth area. With the LRG acquisition I think it's going to be -- the potential for future growth is huge and that is really the reason we really looked at LRG.

The best part about them is not only are they an international company, they are solid operators. And I think a lot of you guys know that is what we look for; people that really know what they are doing, people that are really into the business. So I think that is going to be able to spur us greatly.

We are not prepared to give any guidance as far as numbers, but we see continued growth and somewhat unlimited growth internationally as we move forward.

Well, I think that is a good spot to be in. Nice job, guys.

Thank you.

Rich Murphy, Cross River.

One more question. The fourth quarter, if you start to get the momentum going and as people have expressed with Express-1 (inaudible) it looks like revenue could be up 40% year-over-year in the fourth quarter if my model is correct and cash flow could be attached to that $2 million to $1.5 million a quarter.

What do you do with the cash? I know you said you are going to pay down debt, but you have all this receivable money coming in. Could you just give a -- from a shareholder standpoint what the use of the cash is going to be?

Yes, Rich, primarily our strategy is to pay down debt as long as we have debt. That is one of the things we look at. Right now that is our primary option with the cash is to pay down debt. I know we have talked to a lot of different investors about what are you going to do with it. And I think as far as our Board of Directors they are very conservative, as I am, and what we would like to do is just lessen our debt and have a lot of cash for future growth, future possible acquisitions.

If you look at a tuck-in acquisition like First Class, you look at the acquisition with LRG, all those acquisitions were financed within our bank line of credit. We were able to do that because we are very focused on not accumulating a lot of debt, so that would be the number one use of that cash.

And is that a six month -- I guess you can't predict future cash flows to any level of certainty, but your business is a lot bigger now, you have got a lot more revenues. Hopefully that results in, as margins improve, a lot more cash flow.

It does not. And I think also you see as revenue increases we also see a lot of use of cash on receivables too, because when we see this strong growth we are using cash to fund the receivables and those things also.

Well, you know I am a fan of a stock buyback any time.

The closer we get to having less and less debt those are the things that -- some of the options that we will always look at as we get closer to being debt free.

And that is just -- I know that is a late probably 2010 story but it's something I would approve.

Well, it's nice that it's improving that you can even talk about that, right?

Yes. Take care, guys.

Mr. Welch, there are no further questions at this time. I would like to turn the floor back over to you for any additional comments you may have.

I would like to thank everybody for taking time again today for the call. We certainly appreciate your support and look forward to building on this momentum. We are very pleased, I am very pleased, with the management team and all the employees, the independent station network, and our owner operators that make this possible.

With that, again, thank you for your time and have a great day.

Ladies and gentlemen, this does conclude today's conference. You may disconnect your lines at this time and thank you all for your participation. Have a wonderful day.