XPO Inc (XPO) 2010 Q1 法說會逐字稿

Greetings and welcome to the Express-1 Expedited Solutions, Inc., first quarter of 2010 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, Interim Chief Financial Officer for Express-1 Expedited Solutions, Inc. You may begin.

Thank you Diego. Good morning everyone, and thanks for joining us on our Express-1 Expedited Solutions first 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.

Before I turn the call over to Mike, I'd 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 material difference include but are not limited to those discussed in our Form 10-K for the year ended December 31, 2009.

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

Thanks John. We are excited to announce our Q1 2010 results. Our revenue from continuing operations increased 58% to $32 million, compared to $20 million in the first quarter of 2009.

Our Q1 2000 and net income is $834,000, compared to $5,000 in the same quarter of 2009.

Q1 of 2010 represents the strongest first quarter in company history. As Q1 progressed we saw stronger daily revenue and demand for our services. Each division recorded impressive growth compared with the Q1 of 2009. Express-1 led the charge with an astounding 83% increase in revenue. Bounce posted a strong 75% increase. And Concert Group Logistics logged a solid 34% increase in revenue.

Our focus on attracting and retaining quality sales and operations people during one of the toughest years in transportation history paid significant dividends. Q1 was a result of that initiative.

Our 2009 acquisitions of LRG International, of Tampa, Florida, and First Class Expediting, of Rochester Hills, Michigan, were also instrumental in our growth. LRG is already on the same operating system as CGL. Hats off to our CGL team for this quick accomplishment. First Class operations have also been integrated with Express-1. This has led to an increased efficiency of the fleet and improved customer service.

As many of you know, our CFO, Dave Yoder, recently resigned. Dave returned to a past employer in the private transportation industry. We are lucky to have John Welch fill the role of Interim CFO. John has led our finance team through multiple transitions and is well-versed in SEC compliance, along with a strong financial background. Once again, I'd like to thank John for his commitment to XPO.

I believe 2010 will be the strongest year in XPO history. This is due to our employees, our independent station network, and owner/operators. Their efforts have led us to this point and will continue to lead us to further growth and increased significance in the transportation and logistics industry.

I will now turn the call over to CFO John Welch.

Thanks Mike. Last year we told you that in addition to tightening our belts we were also committed to investing in our sales force, diversification, and strategic acquisitions. Our intent was to be prepared as the economy rebounded, and we believe that this strategy was right on track.

Revenues in the first quarter increased by 58%, compared to 2009 levels. Even when compared to a healthy 2008, our quarterly revenues represented a 33% improvement. As Mike already mentioned, this was a combined effort from all three operating units, resulting in record revenues for the quarter.

Our overall gross margin increased to 18% for the first quarter of 2010, as compared to 16% for the first quarter of 2009, due in large part to improved margins at Concert Group Logistics. We believe the improved margin will be sustainable for the remaining or of the year and is partly due to running LRG as a company owned station.

Additionally, we believe that improved margins have resulted from overall capacity shortages coupled with the improving economy.

We continue to be committed to our asset light model, which has served us well through good and challenging times.

Selling, general and administrative expenses as a percent of revenue have improved substantially, from 16% in the first quarter of 2009 to only 13% in the first quarter of 2010.

Overall, costs have increased by $832,000 between the quarters, but this is to be expected based on the additional operating costs of LRG International in 2010. In addition we incurred a one-time impairment charge relating to a CGL station transition in the first quarter.

As we look forward for the remainder of the year, we anticipate keeping our overall SG&A costs at approximately 13% of our gross operating revenues.

As a result of the above trends and our successful implementation of our strategic initiatives, we've generated net income of $834,000 for the quarter, as compared to $5,000 in the first quarter of 2009.

From a cash flow perspective the company generated approximately $1.9 million of positive cash flow in the first quarter, due largely to our strong financial performance. $1.4 million of these proceeds was used to pay down our line of credit during the period.

To ensure adequate near-term liquidity, we renewed our credit facilities with PNC Bank on March 31. This $15 million facility provides for a receivables based line of credit of up to $10 million and a term note of $5 million. Proceeds from the term note were used to pay off the $1.1 million balance of the previous term note, refinance $2 million utilized to acquire the assets of LRG in October of 2009, and refinance $1.9 million of the previous line of credit.

As of March 31, our balance on our line of credit was $1.5 million, and our term note balance was $5 million. Both credit instruments include variable interest rates tied to LIBOR. The credit facility carries a maturity date of March 31, 2012.

Overall we believe that the best is yet to come in 2010, and we continue to be optimistic as we look forward to the remainder of the year.

At this point I will turn the call over to the operator for questions.

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

Thanks for the good results. I have some questions, but first I have a comment. I think maybe what you really should do is have an IPO like Roadway -- not like Roadway, like Roadrunner, which is coming today at four times net revenues. That would make you grossly overvalued at about $4 a share. Not a bad strategy.

(laughter) Good point. That's not a bad strategy. There's quite a few of those we could do that with, couldn't we?

(laughter) Those poor guys that brought Roadrunner at this price is unbelievable. But anyway, good thing I'm not an underwriter.

The thing is, you mentioned the gross margin at Concert Group is so good, and I agree it's good. But I thought that gross margin at Express-1 was what surprised me. And it was -- seems to be -- it was a whole lot better than the fourth quarter. Is there anything -- the fourth quarter had that charge in it, though; that's right. But is that sustainable, that margin, at Express-1?

Jeff, do you want to talk about that, or do you want me to?

Sure. And you can too, John. I certainly think it is, absolutely. We are seeing the market for capacity is tremendous. Capacity is drying up. Our demand seems to be way up, and that would I think indicate that rates should rise. So yes, I think it is sustainable.

(multiple speakers) And I think we've got a couple different factors there. I think the factor working against us slightly -- as capacity tightens, we use more fuel and fuel prices go up, our fuel surcharge revenue goes up, and as you know, that's primarily a pass-through, so that hurts our margin a little bit. But we anticipate being able to increase rates somewhat to offset that.

Right. (multiple speakers) I think you mentioned (multiple speakers)

And you were right too -- you were right on that write-down too in the fourth quarter of insurance costs too. So that's a good pickup there.

Yes.

Also David.

Right. I think you mentioned Mike that you -- that the Concert Group -- or the overall margin was helped by capacity shortages. I don't understand that. Normally capacity shortages would cause a short-term problem with gross margins going down before you can raise rates. But it didn't seem to do that. Is it --?

I think in our niche it certainly helps us because we are the go-to when somebody can't do something because of capacity and price becomes less of an issue. I think really when you look at Concert Group or Express-1, or Bounce to some extent, that sometimes we are the last resort to move the freight. And that's where it moves down the chains to a premium provider. So that may be part of it.

We don't have that capacity squeeze on our own trucks on Express-1. We can control our costs with our own trucks. When we are going out to the market to access capacity, then we have that squeeze. But with our own trucks, in theory, increased capacity increases demand, and then we can raise our rates on the Express-1 side with our own trucks.

Yes. Well, you call them your own trucks. They are the owner/operators' trucks?

That's correct. They're running under our authority -- would be a better way to describe that.

Yes. Right, right, right, right. And as far as SG&A is concerned, you said you're going to try to hold it to 13% of gross revenues. I'm surprised you could do that. It seems to me that you're going to have to add some personnel now, finally, as the business gets bigger.

Yes, we are certainly going to be adding people as it continues to grow, but our revenue is also growing in proportion to that right now.

Yes. Okay. And just -- I'm sorry to take -- just a couple of more questions. I have a $1.3 million charge in the fourth quarter in cash flow -- working capital, for working capital. I can't figure out what that's for. Is that something you mentioned earlier on other calls? -- that this be some cash flow charge in the fourth quarter for some payment or something? I don't --

Well, we had an insurance charge last quarter. So (multiple speakers)

Fourth quarter 2010.

2009?

First quarter.

Yes, the fourth quarter this year. There's nothing unusual that you know of out -- right now that you had to pay in the fourth quarter of 2010?

Well, we have an earnout with LRG (multiple speakers)

Yes. That would be -- that wouldn't be in (multiple speakers).

That wouldn't be in operations. I'm not sure what you're referring to.

Yes. Okay. Well, it's my mistake then. It's a good mistake to have. (laughter)

And I think that the question is how much the revenues can grow, obviously. You mentioned that on a sequential basis they seemed to be getting better on a daily rate right through the end of the quarter. Is that the way to describe that?

Yes.

Presumably, end of the quarter was more sales per day than you started?

Yes. They -- we -- especially the second half of the quarter.

Yes. Right, right. Okay, thanks. I'll let someone else have it.

(Operator Instructions). Rich Murphy, Cross River Capital.

I think that $1.3 million, just to clarify, was in the Q is accounts receivable, and it was partly due -- you say partly due to 2009 economic recession. That might have been what David was referring to. Do you guys --

Yes, it could be.

I'm wondering, what is that?

You're referring again to the --?

It's -- in the Q there's a $1.3 million in accounts receivable, partly due to the 2009 economic recession. You had a cash -- you paid -- I guess you got -- it was -- I guess you got receivables that must of come in, would be the (multiple speakers) oh, I can talk you off-line about that.

The other thing, just from a segment standpoint, what -- where is the growth in Express coming from in terms of segments? You're broadening a geographical area? Or is it different industry groups you're seeing strength out of?

Jeff, do you want to --?

Yes. Yes -- to both of those really. In fact I was looking yesterday at our business mix, and I went back to 2006. And in 2006 50% of our business mix at Express-1 was automotive related. So it's -- half of our business was automotive related, and that would be tier one, tier two and so forth. And currently our first quarter 2010 is about 24%.

So clearly we've grown, and then we've made up for the reduction there in automotive. And a good chunk of that growth has come in life sciences, about 10% of that. We barely even measured that last year. So there's been significant market gain in other segments.

And obviously we added to our sales force. The downturn last year really gave us access to some tremendous experienced people, both on the sales side and a few over in operations side that affect customer relationships. And I think the way that we attacked the downturn last year is really starting to pay dividends now.

And the auto on a dollar basis, is that -- are we back to near where we were before the crisis? Or is it -- on a percent basis you said that it's 24% and it used to be 50%. But has that -- is there a lot more room for that to grow?

I believe auto could grow, sure, yes. We have first-class expedite over in Detroit, and that's a primary focus of theirs. They are well-suited to pick up some substantial additional business that's automotive-related. We certainly have room to pick up more there as auto comes back. So sure, that could grow. But I certainly feel that other segments that we've kind of laid anchor in will continue to grow as well.

And on the transactional basis, as far as the number of shipments with the automotive companies, specifically the big three, it's still down significantly from the top sort of -- Jeff, you were doing, what, 100 expedites a day.

Yes, yes, we are down, gosh, at least 60%, 70% from when we were at our peak.

That's actually good. That means you've grown your business in a lot of other areas (multiple speakers)

Absolutely. Absolutely. I got to -- hats off to the sales force, they've done a great job.

Do you have -- just on Concert, in the -- you talk about margins getting back to continuing to improve. The operating margin, is it -- you say Concert's [done] 3.5% with 3.2%. Explain -- just because I'm not familiar with the Minnesota situation, does that improve margins going forward? When I look to model out Concert, do you get back a 2.5%, 3.0% operating margin? How should I look at that?

Do you want to take that, Gerry?

I'm not sure I quite understand the question.

Well, I guess there's been a change from a company owned franchise owned in Minnesota, and that you (multiple speakers)

Oh, from an independent to a company owned operation?

Yes.

Yes, yes. Okay.

So the dynamic there, what -- does that improve margins? And going forward (multiple speakers)

Yes, it would improve margins as long as it's a company operation, provided it's successful, which it has been. It would also add to our G&A costs proportionately too. So --

Minneapolis is not a significant -- when you figure the percentage of the total revenue that CGL provides, so I think the margin increase is LRG, because if you remember, we purchased LRG as our international flagship, if you will, in the fourth quarter of last year. And now they are really integrated well into the business, and that's probably where you are seeing most of it. And I think John hit on that earlier in his script. That's the difference.

So where do you see the margins I guess on an operating basis settling in? Is it 3.0, 3.5? Is there still -- I'm asking if there's more leverage in this model. That's the basic.

Yes. I think as we get -- certainly as the economy continues to heat up, we are going to see a potential for increased margins there. Right now it's been at 3.5 to 4.0. If you look into that number, I think you're in the ballpark.

Yes, and the margin that we were speaking of before was the gross margin, so it's really a shift between direct expense and SG&A expenses I think. As Mike said, though, because CGL is slightly less variable in nature, that in good times we have a lot more potential to generate larger volumes to the bottom line.

Finally, just seasonality. Having followed the company for a while now, the first quarter tends to be weaker seasonally. Is that -- have you seen that? Or is there any dynamic that, since you've changed different segments in the Express-1 business that -- or (multiple speakers)

No. I think historically, first quarter is -- in transportation is certainly one of the weakest, if not the weakest. Especially when you move out of the first month and a half or so of the year, I think everybody is a little bit slower. But outside of that, March historically is always a good month, so I think you see it -- you see the -- everyone get back to business in late February and March.

And I think it's tough to look at historical levels too. Based on our 2009, obviously that was a statistical outlier for us. And we -- coming out of 2009, we weren't sure what to expect, and inventories were low, and I think that helped our volumes quite a bit too, because once it did start cranking, we really felt the impact in a hurry.

Well, I mean it was a great quarter. If you take out the fuel surcharge, you actually grew 72% in the first quarter in the Express business. So --

Yes, yes.

-- that's was a great first -- very good first quarter. I'm very impressed with your cost containment. So good work, you guys. Keep it up. Thanks.

David Campbell, Thompson, Davis, & Co.

Just a couple of things I forgot. The tax rate has been over 40% for the last couple of quarters, including the first quarter. So how do you see the tax rate for the year?

We believe the tax rate is going to stay pretty consistent. We are getting hit pretty hard with state tax rates increasing. As we are all well aware, many of the states are having financial problems, that's resulting in state taxes going up.

We've seen a -- over the past year we've seen our Michigan state provision more than double, and close to triple, based on the new Michigan business tax. We do a lot of work in Texas on the Express-1 side. That's another state where the tax rate is very high and not based on income. So we are definitely feeling the pressure from the states as far as state taxes are concerned.

So you would assume 44% for the year?

Probably 43$ to 44%, yes.

Right. And LRG, as you mentioned, had a great quarter. What was the international percentage of revenue for the Concert Group in the first quarter and fourth quarter? (multiple speakers) percentage international revenues?

Gerry?

Let me quickly get that here for you.

It added $2.1 million first-quarter revenue; is that correct?

That's correct.

Overall our international revenue in the first quarter was about 44% of our total revenue.

Of Concert group revenues?

Yes.

How about the fourth quarter last year?

Don't have that handy here. But I would think it would be roughly the same.

Right. Okay. And it's still largely sea freight? Or is that a good mix of sea and air?

It's a good mix of sea and air. Right now it's almost half-and-half, a little bit more towards the air cargo.

Right, right. And it's primarily in the export markets? Or is it also imports?

It's also import. The import actually is with LRG. A significant piece of their business is on the import side, so that's shifting the balance a bit. But it's still -- the majority is export.

So the imports seem to be growing faster than the exports?

Well it is, as a result of LRG, yes.

Right, right, right. And it's largely exports to Europe? Or is it across-the-board (multiple speakers)

It's all over. We do a lot of business to Canada, and Canada is considered international for us. So that's our single largest market. But it's all over the world.

Right, right. Well Mike, I wish you could find some more LRG's. That would be very good.

Well, we're always look around. You saw me at that last conference, so --

Yes, I know. You had some candidates down there, that you know more about than I do. But anyway, thanks. I guess that's about it for me.

All right. Thank you David.

(Operator Instructions). There are no further questions at this time. I will now turn the conference back over to management for closing remarks.

I'd just again like to thank our shareholders, everybody on the line, for your interest in XPO. We feel like 2010 is certainly moving in a very strong and the right direction, and again, I'd like to thank all our people for making it happen. I think they've done a fantastic job, and we hope to continue to produce.

With that, I will say goodbye, and have a great day everybody.

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