XPO Inc (XPO) 2009 Q4 法說會逐字稿

Greetings and welcome to the Express-1 Expedited Solutions, Inc. fourth-quarter 2009 earnings call. At this time, all participants are in a listen-only mode. A 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, Controller for Express-1 Expedited Solutions, Inc. Thank you, Mr. Welch, you may begin.

Thank you, Diego. Good morning, everyone, and thanks for joining us on our Express-1 Expedited Solutions fourth-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; CFO, Dave Yoder; Jeff Curry, President of Express-1; Gerry Post, 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 call 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 the 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.

With that, I will now turn the call over to Mike Welch, CEO of Express-1 Expedited Solutions.

Thank you, John. We are pleased with our Q4 2009 results. Our revenue from continuing operations increased 27% to $31.6 million compared to $25 million in the fourth quarter of 2008. The acquisition of LRG International met our early expectations, with revenue contributions of $1.9 million for the quarter.

Income also improved compared to the fourth quarter of 2008. Dave Yoder will provide the details shortly.

Our team executed our strategy throughout 2009. We were able to adapt to the extremely slow economy during the first half of the year. As business improved, we strategically added key sales and operational personnel throughout our organization. This decision will propel us through 2010 and beyond.

Our 2009 acquisitions, First Class Expediting of Rochester Hills, Michigan, and LRG International of Tampa, Florida, have paid immediate dividends. Their combined results exceeded our expectations in the fourth quarter and will continue to offer vital complementary services to our core business units of Express-1 and CGL. Bounce Logistics has matured into a key contributor of revenue and profit in 2009.

I would like to thank our employees, independent station network, and owner-operators. Their efforts have made a huge impact and have led us to a successful quarter and year. I believe our team is one of the most dynamic groups of people in the transportation industry.

With that, I will now turn the call over to Dave Yoder, our CFO. Dave?

Thank you, Mike. Good morning, everyone. Thank you for joining us on the call today. I will be reviewing the highlights of the fourth quarter and the entire year. After my comments, we will then open up the call to questions. As John mentioned, the presidents of our operating companies are on the call today and are available to answer your questions.

As Mike discussed, we experienced a 27% increase in revenue in the fourth quarter compared to 2008, with growth in all three operating companies. Of this growth, 71% was organic and 29% was attributable to the LRG acquisition. During 2009, we experienced sequential revenue growth in each quarter, with fourth quarter being the first quarter in 2009 with year-over-year growth.

Market conditions in 2009 were the most severe in the Company's history, yet revenue from continuing operations topped $100 million and represented a decline of only 8.5% from 2008. This is a noteworthy accomplishment, considering year-to-date revenue was down 21% at the end of the second quarter.

The strong finish was the result of the cumulative efforts of the sales and operations staff to expand and diversify our customer base, which positions us for growth in 2010. We improved our gross margin percentage in the fourth quarter to 16.3% compared to 16.1% in 2008.

The 2009 fourth-quarter margin is net of a charge of $400,000 for claims expense in the Express-1 operation that exceeded the Company's insurance limits. This was a first-time occurrence in the Company's history. The effect of this charge was a 1.3 percentage point decline in the overall gross margin percentage.

Gross margin percentage for the year also improved in 2009 to 16.7% from 16.3% in 2008, with both CGL and Bounce attaining approximately 15% improvement in their gross margin percentages. Selling, general and administrative expenses as a percent of revenue have declined through the first three quarters of 2009 from 16.2% to 13.5% to 12.4%. The SG&A percentage increased slightly in the fourth quarter to 12.8%. SG&A expense for the quarter totaled $4,036,000 compared to $2,977,000 in the fourth quarter of 2008.

The increase was attributable primarily to the operating costs of First Class Expediting and LRG International, both acquired during 2009, and related amortization and professional fees. In total, these operating parameters yielded an increase in income from continuing operations in the fourth quarter of 17% to $601,000 from $514,000 in 2008.

The continuing positive trend of operating results reflects the strategies we executed throughout 2009. In conclusion, the challenges of the 2009 market conditions were met head-on. Early in the year, cost reduction measures were implemented and our asset light model allowed direct expenses to be reduced quickly to preserve gross margin percentages.

The diversification and expansion of our customer base contributed to a strong finish and recovery of revenue later in the year. We were also able to complete two important acquisitions. Our actions in 2009 demonstrate our adaptability, and we look forward to the opportunities of 2010 and beyond.

At this point then, I would like to turn the call over to Deigo for questions.

(Operator Instructions) David Campbell, Thompson Davis & Co.

Good morning, everybody. I think it is important that we get some better feel for how the business was performing during the quarter sequentially by month, and then some indication of what you think about first quarter's March business since that is usually and always is the key month in the first quarter.

David, this is Mike. I think overall, we had a consistent revenue growth when you look at the months -- or not growth but revenue distribution between October and December. We did have one month that just blew everybody out of the water. It was real consistent, which we think is a good trend.

And as far as March, you are right, it is a key month. It is the biggest month of the first quarter traditionally. And what I can tell you right now, and we are prepared to say, is the economy is much stronger than the first quarter of 2009. We are very, very pleased with the way we are getting out of the gate, and I think you are hearing that from most of the transportation companies. And we expect that to continue in March.

Okay. Do you have any earnouts in 2010, potentially?

Yes, we have the LRG earnout of $450,000, and that is based on gross margin dollars. That would be -- hopefully, we believe that will be met by our LRG team.

And that is payable in fourth quarter?

Dave, do you have that handy?

David, it is actually payable in the first quarter of 2011, and in addition to that earnout that Mike mentioned, we also have a final payment due on the purchase price of $500,000 that is due in October of 2010, the one-year anniversary of the deal. That was just part of the original purchase price that was a deferred payment.

For what company, I am sorry?

Oh, for LRG.

Okay. I will let someone else ask some questions, but I wanted to see if you feel like you had to do anything with the insurance costs and premiums because of this claim in the fourth quarter?

This is Dave. David, with our insurance premium and the coverages we maintain, we always look to the Company's history and make a determination on appropriate level of coverage. So we maintain our costs commensurate with the risks that we assume.

This was a one-time occurrence, first time in the 20-year history of Express-1 where we have had an accident that was severe enough that it pierced those layers. So we feel comfortable and confident with the insurance coverages we carry.

Naturally, this is a more recent claim and that will be considered as we go through analyzing the coverages that we need going forward. Jeff may have some additional comments related to our safety record if you would like to contribute that, Jeff.

Yes, I think Dave answered your question accurately, but I would say in this particular case, there was no driver or dispatcher errors, there were no tickets involved or issued. It was just strictly an unfortunate accident.

We measure four different areas in our safety area, and all measurements are very, very strong and trending very strongly. Our safe stat scores measured by the FMCSA, Federal Motor Carrier Safety Association, in terms of driver and vehicle out of service, as that is detected when they go through the scales, is well, well, well below the national average.

So all of our statistics are very strong. As Dave said, this was the first time in the history of the Company that we have pierced the liability limit, and it was just an unfortunate accident.

The last question is given the $400,000 in your Express-1 gross margins, the SG&A is a number of $4 million. There is nothing unusual in there. That is a quarterly number that will continue in 2010; is that correct?

In the quarterly number, one of the biggest reasons that that is higher is because we had the two acquisitions that have operating costs for the full quarter. In that number, there is about $120,000 of amortization expense related to one of the independent owner stations at CGL that would not be recurring, but the rest of it would be typical.

Okay, thank you very much.

Rich Murphy, Cross River Capital.

One question on the 71% organic growth, I missed. Was that revenue growth quarter-over-quarter?

That is correct.

So the 71%, I guess that is about -- there is about $11 million odd in revenue growth, so $8 million was organic and $3 million if you just do rough numbers was --.

It is year-over-year. Maybe I didn't understand, Rich. It is year-over-year growth.

Okay, year-over-year. Okay.

Right, right.

So I've got to look at it slightly differently. And the $400,000, not to harp on that but if I back that out then, would it be fair your operating margin goes from about 3.5% to 4.8%? Looking out as Mr. Campbell was trying to push that button, is 4.5% a 5% operating margin something you guys target going forward in a more normalized environment?

Yes. Rich, that is certainly in the range of what we have done when we are operating on all cylinders, which we feel we basically have done the last few quarters. But yes, that is a good overall number.

Okay, so if I stick in that. Then finally, just on trends in the overall industry, we have gone through this severe recession. There had to be some type of shakeout with regards to expedited freight and freight in general. Are you seeing opportunities M&A wise, or are you just getting -- is your fleet growing?

I think it is sort of both. I think number one is there is always the M&A opportunities. You look at First Class which had a great reputation of service. And really they were in the wrong place at the wrong time, which gave us the opportunity. And I've told some people it's been basically a grand slam for us.

So that some of those may occur, we keep our eyes open. We are not thinking there is a lot of First Classes out there, because it was so good. But there are some good ones out there that could make some sense. And as far as the other piece, we think -- and Jeff can comment more -- is that we have been able to keep our fleet stable or even starting to trend upward, where our competitors have seen their fleet erode quite a bit.

Jeff, do you have any more thoughts on that?

Well, you had said -- your question was, is there are any shakeout, right, Rich?

Yes.

There is no doubt about it. I think there is some M&A probably potential out there, but I think you can see that we have grabbed some significant market share. We had pretty stunning growth in the fourth quarter, especially if you compare it to our first quarter on the top end. And there is some talent that was available in the market from some of our competitors that we have grabbed onto.

I think there is some significant attrition with some of our competition, and we know that we have greatly diversified our business mix as a result. Who would have thought that we could be well under 20% automotive and grow the way we did. It is pretty phenomenal from my viewpoint being in the business.

Two years ago if you would have come to me and said, hey, you are going to be below 20% auto, I would say, well, I better get back in banking or something, the previous career. But it has been good, and a lot of this new business is retail-oriented, and that I think further drove our increase at Express-1 in the fourth quarter. Because we had a little bit more of a retail influence in the fourth quarter and not so much automotive, which in the old days towards the end of the fourth quarter would have started to wane a little bit.

I mean, the number is startling at $16.9 million, and then you've got two easy comps coming up in the next two quarters, March and June. Can you elaborate on -- you said retail and stuff. Is it brokerage? Are you starting to see -- is the margin going to start improving as volumes tick up?

I guess what I'm trying to get at, is the industry consolidated to the point where you're going to be able to see some nice margin improvement as well as a little bit of revenue tick-up at the Express business?

I think when you look at all of our companies, Rich, I think we feel margin hit bottom probably in the summer of last year, and it is going to be a slow climb out from that bottom, but we don't believe it is going to go lower. We believe that over time as capacity tightens and the economy increases that it will go up, but it is more of a when than an if.

Good job. It is nice to finally be out of the deep recession, so keep the revenue growth going, guys.

(Operator Instructions) John Janick, National City Bank.

Good morning. Just a couple of comments if you could elaborate. We did the LRG acquisition in the beginning of fourth quarter, and that provided some growth in the CGL line. The next thing you expect to see was that you start to see some synergies with some of the CGL stations in LRG. Can you talk a little bit about whether that is starting to happen?

Then the second part of that is CGL has a relatively broad geographic base. And are any of those stations in severely impacted areas where we will start to see some pickup as we move into 2010?

Gerry, do you want to talk about that a bit?

LRG, we are in the final stages of fully integrating them to the CGL network. The last piece is getting them onto our technology base, which we expect to be done by the end of the first quarter, and that will basically roll them into the Company.

Hendrik Jorgensen who was principal at LRG is now our VP of International, and he is starting to help develop the rest of the network, particularly on the international import side which we have a strong emphasis on this year. So we expect that we will be able to leverage his experience, his operation down in Florida, and his overseas network, and look for some pretty good increases on the import market which is coming out of it pretty strongly. So import air, import ocean, will be good for us.

As far as our network in general, yes, we were impacted in some of the major markets in particular, and we have made some changes. I think Dave mentioned a change we made recently at the end of the year in a major market. We are looking at trying to either add additional sales in these markets or make ownership changes in the people that represent us. But we definitely need to boost up the major markets, particularly as it relates to international transportation.

That will dovetail real nicely for LRG then.

Yes, LRG who was strong on import and ocean complemented us, because we were primarily export and air.

Okay. Thanks, guys. Good quarter.

David Campbell, Thompson Davis & Co.

Yes, I wondered if you could give us some numbers on the international growth, what the revenues were in the fourth quarter and for the whole year, I guess the gross revenues?

Gerry and Dave, do you want to talk about that?

For LRG, it was $1.9 million in the fourth quarter, so that represented a full quarter of revenue from LRG. And then in terms of a split within CGL, do you have those numbers handy, Gerry?

I might have to do a little calculating here. For the year -- I have the year handy -- as far as international for CGL, excluding the LRG portion, was just over $11 million out of $39 million. So roughly, what, 30%.

$39 million out of Concert Group, yes.

Yes, and kind of looking into this year, we are expecting our international business with LRG for the full year to be in excess of 40% of our business.

Right, right. And imports are kind of -- until recently, imports really haven't been doing anything, international imports. Airfreight imports particularly, it seems like most of the growth has been in exports, but are you seeing anything different in the first quarter?

Well, as I said as far as the CGL portion, we really didn't do a whole lot at all with imports. So for us, any additional business we can do in import is a growth for us. But we have seen, particularly with the cutbacks in steamship lines and services, that market is tight. And we just came off the Chinese New Year, so there was a lot of opportunities there. But we see the import side for our company being a good growth for us this year.

Well, it is also hard to get capacity in some markets, but you are not finding any margin squeeze in the international business?

No, actually, we have been holding pretty well with what LRG historically had been running at for a margin on it. That margin has been staying. And our focus is on customers that are depending on the market, small to medium-sized customers, customers that are not pressuring so much on high volume. So we are still able to maintain a good margin on it.

And what about the rest of Concert Group; the Company didn't do that well for most of 2009, but do you think it is going to do better this year?

Yes, sir. We have a new VP of Sales that joined us late in 2009. He has hit the road strong and has brought business into the Company. We have made some changes in some of our major markets. Yes, we are also going to add some company sales on a regional basis. So we are expecting to be pretty aggressive this year.

Last year we kind of sat back, focused mainly on maintaining gross profit. I think while our revenue dropped off, we were somewhat successful in making sure at least from a gross profit standpoint that we didn't see a significant decline. And this year we are going to hit it pretty hard about growth again.

Right. Someone mentioned, I guess it was Mike, you mentioned the new retail business that the Company has obtained to offset some of the downturn in auto. But the retail could be very fourth-quarter peaked.

David, that was Geoff talking about it, but what he was trying to point out I think is it is a sector that we have really never participated in. So anything we do in retail on the Express-1 side of the business is bonus revenue. And we've basically been introduced to a new market, and we are very successful. So that is part of the overall business mix that has helped us recover from the severe loss of automotive freight.

So you're not worried about a dropping off in the first quarter?

No, no.

Is seems to offset, David, the volumes that we get from more customary commercial business that we were more accustomed to in the past. So it sort of evens out a little bit the seasonality that we have seen in the past, but I like it from that standpoint as well.

Now if automotive picks up, which all indications are that it will from where it was at last year, then we are really looking at some significant opportunity.

Okay, thank you very much.

Ladies and gentlemen, there are no further questions at this time. I will turn the conference back over to management for closing remarks.

Once again, we would like to thank everybody for taking time to participate in this conference call, and we appreciate the support many long-term shareholders have had. And we feel very, very strong about the direction that we are heading. Again, thank you and have a great day.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you all for your participation.