XPO Inc (XPO) 2010 Q3 法說會逐字稿

Greetings and welcome to the Express-1 Expedited Solutions Inc. third-quarter 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 of Express-1 Expedited Solutions Inc. Thank you, Mr. Welch. You may now begin.

Thank you, Josie. 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; Dan Para, 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 a 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.

Thank you, John.

We are extremely pleased with our 2010 third-quarter results. We achieved record results both on the top line revenue and bottom line net income. For the quarter revenue increased by 70% to $44 million compared to $26 million in the third quarter of 2009. Additionally, year-over-year revenues increased by 70% up to $116 million compared to $69 million in the initial nine months of 2009.

All of our operating units posted notable growth in Q3. CGL grew at 108%; Bounce 85%; and Express-1 46%. Our growth was impressive when compared to many other companies within our industry. Increased focus on core accounts at CGL has paid immediate dividends, which has resulted in strong revenue growth at many of our CGL stations. As we marked the first anniversary of our purchase of LRG International, we continue to be pleased with its revenue growth and its high quality operations team. We are optimistic that LRG, now known as CGL International, will grow and continue to make a positive impact within XPO.

Bounce continues to grow and boost profitability. Our focus on increasing our customer base and shipments per customer have been effective. As Bounce continues to mature, we are seeing a more diverse customer base.

Express-1 has also continued to expand its base of customers. Major accounts acquired in the last 24 months have driven growth and market share within the expedited market. New initiatives like temperature-controlled shipments and Department of Defense work will continue to augment our customer base in 2011 and beyond.

I would also like to thank our employees, independent station owners, and our owner operators for their tremendous efforts. This is a great concert for our team who has been instrumental in delivering quality solutions to our customers. Obviously we are very excited about the remainder of the year and look forward to a strong finish in the final quarter of 2010.

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

Thanks, Mike. The third quarter of 2010 represents our fourth consecutive record quarter from a revenue perspective. We are quite proud of these results, especially in these unsure economic times. We continue to be excited about the execution of our strategy laid out in 2009, which has enabled us to thrive thus far in 2010. As we've mentioned in the past, our strategy of diversifying our sales base and maintaining Express-1's fleet during tough times are paying big dividends. Our third quarter has continued the trends that we established during the previous quarters. Trends that include revenue growth, margin improvements, and SG&A expense reduction as a percent to total revenue.

Overall revenues in the third quarter increased by 70% compared to 2009 levels. This robust growth has occurred at all three operating divisions and appears to be a trend that will continue into the fourth quarter. On a quarterly basis, Express-1 revenues increased by 46%. CGL revenues increased by 108%, and Bounce revenues increased by 85%. As Mike mentioned previously, our strategic acquisitions and increased focus on international freight have contributed nicely to our revenue growth and continues to complement our overall transportation service footprint.

Our overall gross margin remained at 18% for the third quarter of 2010 as compared to the second quarter of 2009. From a year-to-date perspective, our margin of 18% is an improvement from the 2009 year-to-date margin of 17%. This year-to-date margin improvement, in conjunction with revenue volume increases, has contributed to an additional $9.4 million of gross margin year-to-date as compared to 2009. We continue to be cautiously optimistic that the improved margins will be sustainable for the remainder of the year and that our asset-light model will continue to serve us well.

Selling, general and administrative expenses as a percent of revenue have continued to improve from 13% in the third quarter of 2009 to 12% in the third quarter of 2010. Overall costs have increased by $1.9 million between the quarters, but this is to be expected based on the additional resources required to handle the increased volumes in addition to reinstituting some of our employee benefits that were trimmed back in 2009. Additional salary and benefit expenses represented $1.3 million of the overall increase.

We continue to be proud of the fact that we have been able to add employment opportunities for individuals in our communities during these trying times. As we look forward to the remainder of the year, we anticipate keeping our overall SG&A costs at approximately 12% of our gross operating revenues. As a result of the above trends and the successful implementation of our strategic initiatives, we have generated net income of $1,730,000 for the third quarter of 2010 as compared to $811,000 in the third quarter of 2009. Year-to-date net income for 2010 is $4,068,000 as compared to $1,104,000 in the comparable period in 2009. This represents income per share in 2010 of $0.05 per share for the quarter and $0.12 per share year-to-date.

From a liquidity perspective, the Company continues to perform from a position of strength, as net cash flows from operating activities of $203,000 have been generated year-to-date even as the Company has used $8.8 million to fund revenue and accounts receivable growth during the year. Our asset-light model continues to help our liquidity position, as we have invested only $482,000 during 2010 on property, plant and equipment, most of which represents computer hardware and software.

As of September 30, 2010, the Company has unused capacity on its line of credit of approximately $5.5 million and is in full compliance with its debt covenants.

It's also important to note that the Company, which fully utilized its federal tax net operating loss carry forward in 2009, is now utilizing cash to fund its federal tax liability. For the first nine months of 2010, the Company has paid over $2.5 million in federal and state tax payments.

In summary, the third quarter of 2010 continued the positive trends that we've seen since emerging from the recession in 2009 -- higher revenues, better margin, lower SG&A costs as a percentage to revenue and correspondingly a higher net income. Overall 2010 continues to be a banner year for Express-1 Expedited Solutions, and we continue to believe that we are well positioned to meet the ongoing challenges in the transportation industry moving forward.

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

Thank you. We will now be conducting the question-and-answer session.

(Operator Instructions)

[Wilton Burnett], private investor.

Good morning, gentlemen. First of all, congratulations on the quarter; well done.

I wanted to touch a little bit on your CapEx moving forward. You mentioned you guys only spent about $400,000 over the course of the last year, I believe. What is it going to look like moving forward?

Do you want me to handle that one, Mike?

Yes, we talked a little bit about our possible expansion and our growth, too, in the facility in Buchanan, John.

Yes, the one thing we are looking at, right now we are going through our budget for 2011, and we are looking pretty much at the same CapEx that we have this year. We are thinking probably $100 million for computer equipment. A lot of that is satellite equipment for our trucks and just ongoing computer infrastructure purchases.

The one thing that we are probably going to do next year is spend about $500,000 additional CapEx on expanding our Buchanan facility for operations. For the type of growth that we've had here in 2010, it looks like we are going to have to expand our operating, which is primarily our dispatch area, to put some additional personnel in there to handle our growth.

Okay. Excellent.

So we are probably looking at total, something under $1.5 million for CapEx for 2011.

Okay. Great. Thank you very much.

David Campbell, Thompson Davis & Company.

Good morning. You had good numbers, but I don't see how you can continue to get net revenue growth. Sequential net revenue growth from second to third quarter was $900,000, and you used $600,000 of that for increased general and administration expenses. I don't know how if you can keep on doing that, your gross margins are going to be -- the percentage of net revenues aren't going to go up, they may go down. So I'm trying to figure out just what's going on. How much of the $600,000 was related to profit sharing, which, of course, the employees deserve but still, you should be working to higher gross margins -- gross profit margins.

You are talking about gross margin or margin after SG&A, David?

Profit margin.

Profit margin?

I don't like -- you know, $900,000 increase in net revenues. You know, you can talk about gross revenues all you want, but net revenues pay the salaries and related costs.

Yes, that's cash in the door, right.

So I'm trying to figure out what's going on. I mean, that $600,000 increase every quarter?

I am trying to figure out what numbers you looking at, David.

I'm looking at the net revenues, $7.2 million in the second quarter, $8.1 million in the third. That's up $900,000. And general and administration, $4.6 million was $5.2 million in the third, a $600,000 increase.

Okay. Oh, from the second to the third?

From the second to the third.

Yes, yes. Well, I think we've addressed that in the Q, David, where we are really increasing our staffing; you knew that. And we are also reinstituting a lot of the benefits that we carved away last year. There is the 401(k) match that was gone last year. We've had pay increases this year; we didn't have pay increases last year. We are having a solid year this year, so we have bonus accruals included. So those are primarily the costs that we're looking at in addition to the additional employees that we have on staff to handle the increased business.

Now, we wouldn't anticipate these type of increases moving forward, but when you compare 2009 to 2010, from a salary and benefit perspective, you are going to have an abnormal increase just because we scaled back some much in 2009, and we are reinstituting those.

Yes, just the 401(k) match and the bonus accruals.

(multiple speakers) -- and pay increases and additional employees.

Yes, I think, David, we were so skinny last year, getting that group back up to where we needed to be, especially with the growth over '09, even this summer we were seeing some weakness in our customer service department from just lack of people. So we have boosted that up so we can handle these levels. And like John said, we feel we are in very, very good position for next year based on our employee count and where we are. So it was trying to catch up with that onslaught of business that we didn't necessarily expect to grow that greatly in Q2 and Q3.

I means it looks like based on your 12% forecast of general and administration as a percentage of gross revenue, it looks like that's going to go up another $500,000 to $600,000 in the fourth quarter, the G&A costs.

The SG&A?

Yes.

Well, that's a possibility, but we hope to maintain that 12%. We should be around 12%, which we feel comfortable with.

Yes, well, that equals -- based on my gross margin revenues, that equals about $600,000.

Right, right.

Hopefully, hopefully you won't have that much of an increase next year. As you say, some of it is catchup this year.

Yes, in fact, most of it is catch-up -- well, I shouldn't say that. Most of it is due to just the increased employees that we've had to take care of the business now. But there is a substantial amount in there for some of the benefits that we carved out and the pay increases that we've put in this year because we didn't the year before and the bonus accruals.

Right, right. Okay. Well, I will drop that for now, but the Concert Group has great numbers. How much of that growth in the third quarter or how much were the international revenues in the third group of the total gross of the Concert Group?

Dan, do you want to talk about that in international?

Yes, Dave, our mix of business for Q3 was 55/45. 55% was domestic and 45% was derived from our international revenue.

International revenue is a combination of sea and air?

Yes, yes, the international sea and air, right now air is about two-thirds, ocean is about a third.

Right. So you're getting a lot of growth -- what was IGL -- I can't remove the name --

LRG.

Yes, it gave a lot of growth there beyond what you acquired.

Yes, LRG had nice gross for this year, and the other opportunity that we see, David, is also the international opportunities that we are getting from our regular offices, quite frankly, the non-CGL international branches. So they have more opportunities. In some cases our branches will help them secure the business, but the relationships and stuff still belong to the local offices. So it's really been a combination of growth from CGL International, our Tampa/Miami branches and from the opportunities we have been able to garner from our 23 domestic offices.

So your so-called bundling services?

Yes, exactly.

And capturing an increasing share.

Absolutely, going to our current customers and asking them for other services they may need from our companies.

Well, it's great execution. It's certainly working.

In the Expedited services, a lot of people talking about -- talking analysts, talking about slowdowns and downturns and not a very optimistic outlook, especially for truckload. Do you see any of that at Expedited, or is it revenue growth pretty consistent across each of the quarters, each of the months?

Well, Jeff, do you want to comment on that?

I'm not sure I grabbed it all. David, did you say that you've heard that it's going to slow down or --?

Yes, yes, I've heard some companies disappointed with September-October business levels, I'd say particularly truckload. But I don't follow them all (multiple speakers) -- certainly some less than truckload (multiple speakers).

Well, we certainly didn't see it in the quarter. We've benefited from, I think, a good mix of business. Our business and the mix of business from the different several thousand customers we have varies from quarter to quarter, and I think we had a good mix in that quarter.

There are some things coming down the pike that might really affect things. The CSA 2010, it is the new driver safety criteria that it is supposed to kick off here very shortly. There are estimates that's going to take some drivers out of the market, and that may negatively affect some of our competitors.

Our Mexico service is increasingly well accepted by our customers. We think we are going to grow that as well. We've been able to raise some rates.

We will have some pressures on driver pay going forward, but we want to grow the fleet. So I think that all-in-all will be a positive.

So third quarter looked very strong. I would say that fourth quarter, obviously we don't comment too much, but I would think that it's going to be pretty strong in comparison to what we did last fourth quarter, which was when we started to come out of the terrible downturn that we saw in '09. We came out in the fourth quarter, and I think we will compare favorably to that quarter.

Well, third quarter came out, too.

Yes, third quarter did, too.

So, but normally there's a seasonality, normally your fourth quarter is better than third. Is that --?

Yes, I think that's debatable. Nowadays, David, I think in the old days it was pretty much guaranteed, most even the trucking companies now will tell you, the fourth quarter is not like it used to be compared to the other quarters. I think there is a leveling out between the quarters now, which ultimately we believe is good. The Christmas season rush is probably less significant, maybe because of gift cards or some of the other things that you hear, but 10 years ago I would've answered, "definitely yes." Now, it leveled out between the third and fourth. Obviously the first is generally the weakest, but then after that it's pretty equal.

You still had a lot of plant shutdowns and stuff like that in the third quarter, for holidays, didn't you?

Not as many as we've usually had. We saw some not like in the past, no.

Okay. Well, I will let somebody else have it. Thank you.

[Robert Nugent, Casana Capital].

Easy question for you. What were the LRG revenues for the quarter?

John or Dan, I don't know if you have that handy?

We've got them here somewhere.

And while they were looking, am I correct that fourth quarter last year had a full quarter of LRG in it, so that you have now fully lapped that acquisition?

Correct.

Okay.

October 1 of last year was the close date on LRG.

Okay. And those are all my questions, so I will wait for the number.

Revenues for LRG in the third quarter was $4 million. That represented about 21.5% of CGL's third-quarter revenue.

Great. Thank you, guys.

And Robert, like what Dan commented on, not only are we seeing the growth at LRG, which is now CGL International and great growth, but we are also seeing growth around throughout the system.

I got that. I'm expecting the growth in everything else. I am just pleased that LRG is turning out to be such a homerun for you. Great job.

(Operator Instructions) Rich Murphy, Criss River Partners.

With the -- you mentioned diversified customer base a couple of times in the Q. Do you have any new clients that you could throw out there that there are substantial -- (multiple speakers)?

No, Rich, we certainly don't want to put them out there for our competitors. You know, we've seen a lot of growth, as we've talked before, working with some of the 3PLs. We've seen a lot of internal growth at CGL, as Dan talked about a little bit earlier, about bundling and going back to our customers and offering them more services.

We haven't seen a tremendous or any real growth in automotive. So that's still been a down area for us, with the exception of the international automotive. But we really don't like to get into specific accounts and what we're doing.

You used to talk about the percent of business that was auto. Is that something you guys have on the tip of your tongue?

Yes, we for the year consolidated -- John or you guys might remember what that number is; we just looked at that. In the ballpark, what is that? The 12% to 15% consolidated?

It is quite a bit less than what it's been historically. I don't have those numbers right in front of me, but we think that's a nice potential moving forward, as the auto rebounds. Because auto has been so poor for us. It really hasn't come back in any substantial manner. So, as we move forward, we certainly think that's potential growth area for us.

Okay. That's great.

The margins, you did add some employees. As David was kind of breaking down there, what is the leverage on the margin side as you go into the next -- say you get back to normalized revenue growth; do you envision the operating margin, which was, I believe, 6.6% for the total company this quarter -- is that, that's a healthy margin -- is that something you see at steady-state margin, or do we have more leverage than that?

Yes, think there's leverage in some economies of scale as we continue to grow.

I think where we were, Rich, we were so far down, and we cut to be effective in 2009. So we had a quick buildup, and like I say, we are happy we could bring people back. We are happy we could hire new people. But looking forward we are in a much better position for growth than we were this year. So we feel pretty good about that.

My final question, I actually had heard something opposite to what David mentioned. I've heard about the impending driver shortage in the trucking business and actually a lot of cutbacks in the number of trucks out there. Are you seeing that? Are you seeing any -- are we on the front wave of the pending driver shortage?

Let me pass that over to Tim. Tim deals with the truckload carriers. Obviously Tim has seen a lot of growth, and we will get his opinion on that.

You know, we are seeing a shortage out there, but it is somewhat masked right now with the economy, with the current state of the economy. So we expect that any heat up is going to expose itself, that shortage is going to expose itself, and that's without the CSA 2010 impact. So your read is accurate, I would say.

And since I've got you on the phone here, Tim, your margin popped up to 4.5% operating margin. It seems to be going up at a nice -- that was the biggest pop in margin throughout the business. Where does that margin settle out in your opinion?

It is hard. That's somewhat of a tough question because you have to remember we are still in our growth stages. So, when is that maturity? Is that 18 months, 26 months? You know, we certainly feel that we've got a good run at growth right now, and the last thing we want to do is kind of slow that growth and be too conservative in our growth strategies, if that makes any sense.

That makes sense. I'm just wondering, on a more comparable -- like what kind of margins does your business run at, in a normal -- when growth is normal versus accelerating? I understand the acceleration you are adding in revenues and people. But -- (multiple speakers) Is it a 4.5% business? I mean -- (multiple speakers)

No, it's north of 4.5%. If I were to throw number out, it would just be a guess, and I don't want to do that. We have done some modeling, but every time we do the modeling, we also model, "okay, what do we want to do on the growth stage?" So we believe certainly there is opportunity for improvement there, and we should see that improvement as we mature.

That's all I got. It was a tremendous quarter, guys. As you know, I've been following this Company for about six years. So this is by far the best quarter I have experienced, so congratulations.

Thanks, Rich.

Thanks, Rich.

Jack Morbeck, First Washington Corporation.

Yes, do you have any color on the block of stock that showed up last week in the marketplace? I think that was (multiple speakers) interesting.

Yes, you know what? We don't. We are not privy to that information unless it is filed, so we really don't. Obviously over the last -- since July 1 I think our stock was around $1.25. There's been a lot of movement and I think a lot of excitement about transportation as a whole and certainly our Company. But we would like to know, but we really don't. So I wish I knew more.

Thank you.

There are no further questions at this time. I would now like to turn the floor back over to management for closing comments.

Well, again, we appreciate your time being on this conference call. We also appreciate, as Rich mentioned, a lot of our long-term shareholders that have stuck with us. We are starting to see some of the fruits of our labor as we continue to grow. I'm very proud of all of our operating units, all of our employees and think they do a tremendous job. That's some of the reason I think you are seeing the results that we've seen today.

So, with that, I would like to thank you and wish everyone a great day.

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