XPO Inc (XPO) 2010 Q4 法說會逐字稿

Greetings and welcome to the Express-1 Expedited Solutions, Inc. fourth-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 for Express-1 Expedited Solutions. Thank you. Mr. Welch, you may begin.

Thanks, Everette, 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; 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 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 known and unknown risks, uncertainties and assumptions that may cause the Company's actual results, levels of activity, performance or achievement to be materially different from any future results implied by such forward-looking statements. Factors that might cause or contribute to such material a 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 turn the call over to Mike Welch, CEO of Express-1 Expedited Solutions.

Thanks, John. I'm pleased to present our 2010 fourth-quarter results to you this morning. First of all, I'd like to thank all of our employees, owner-operators, and station owners for a fantastic 2010.

As important, we continued to operate in a safe manner during 2010 and will continue to do so. I'm proud of our owner-operators and our operations staff as they continue to emphasize safe driving.

For the year, revenues from continued operations increased by 58% to approximately $158 million during 2010 compared to $100 million 2009. During the same period, net income improved by 187% to $4.88 million compared to $1.7 million in 2009. Additionally, revenue in the fourth quarter increased by 31% to $41.6 million compared to $31.6 million in the fourth quarter of 2009.

During the same period, net income improved 36% to $820,000 compared to $601,000 for the fourth quarter of 2009. Once again all of our operating units posted year-over-year growth in Q4 of 2010.

CGL and Bounce were equally impressive in both top and bottom line growth. CGL's revenue grew over 58% for 2010 while Bounce grew over 93% for the year. We see unlimited potential for CGL and Bounce in 2011.

Express-1 grew at a rate of nearly 9% during the fourth quarter of 2010. Express-1's rate of growth was tempered due to a slowdown around November's election.

During this time, there was some margin compression in both our line haul and fuel surcharge revenue. Also, there were some increases in insurance which tightened margins.

These factors were short-term in nature. We expect our margins to remain in the 21 to 23% range for 2011. As the quarter progressed, Express-1's revenue strengthened.

For the year, Express-1 grew a notable 51%. Express-1 is poised to continue with its impressive growth in 2011, this made possible by our growing fleet that is strengthened by our heart rate high ratio of team drivers.

Moving forward, we believe 2011 will be our strongest year on record. Express-1, CGL and Bounce are positioned for strong growth that will flow to our bottom line. As always, I appreciate the support of the shareholders, I will now turn the call over to John. John?

Thanks, Mike. 2010 represented a significant rebound year for Express-1 as compared to 2009, significant financial improvements were made across the board in all three operating divisions. These included gross revenues increasing by 58%, our cost of transportation decreasing by 0.5% as compared to revenue, gross margin dollars increasing by over $10 million, SG&A expense to revenue decreasing by over 1.5% and net income improving by $3.2 million or 187%.

These improvements also brought returns to our shareholders as the market value of our stock increased by 100% during the year. These statistics are especially impressive when considering the fact that the automotive sector of our business is yet to rebound from the recession.

As we enter 2011, we believe we are well positioned or positioned well as 2010's strategy of diversifying our revenue base and maintaining our fleet at Express-1 have resulted in market share gains and momentum improvements that we anticipate continuing in 2011. On a quarterly basis, overall revenues of $41.5 million in the fourth quarter of 2010 increased by 32% compared to the fourth quarter of 2009.

As anticipated, growth occurred in all three operating divisions. On a quarterly basis, Express-1 revenues increased by 9%, CGL revenues increased by 42% and Bounce revenues increased by 95%. From an annual perspective, our margin of 17.3% in 2010 is an improvement from the 2009 annual margin of 16.7%.

This year to date margin improvement in conjunction with revenue volume increases has contributed to an additional $10.7 million of gross margin dollars on an annual basis as compared to 2009. On a quarterly basis, our overall gross margin in the fourth quarter of 2010 decreased by nearly 1% as compared to the same quarter in 2009 due primarily to significant growth in both our CGL and Bounce divisions, which traditionally generated lower gross margins based on their highly variable cost structure.

Additionally tightening truck capacity in the marketplace has increased our cost of transportation in general, resulting in slightly lower margins. We do believe that in 2011 we will be able to selectively increase pricing to increase our margin percentage going forward.

Selling, general and administrative expenses as a percent of revenue improved on an annual basis during 2010 to 12% as compared to 13.6% in 2009. This improvement was made even as we reinstituted some of the employee benefits and other costs that were eliminated during 2009.

Revenue growth has been key in our ability to be more efficient with SG&A costs as we have been successful at keeping our SG&A cost increases below our revenue growth levels. As we continue to grow, we believe this trend will continue to lower our SG&A cost as a percentage of total revenue.

On a quarterly basis, overall SG&A costs as a percentage to revenue have also decreased. SG&A costs as a percentage of revenue equaled 12.2% in the fourth quarter of 2010 as compared to 12.8% in the fourth quarter of 2009.

Overall dollar increases in the quarter of $1,026,000 relate primarily to additional salaries and benefits required to handle the volume increases we have experienced from quarter to quarter. As mentioned previously, we anticipate making incremental improvements to our SG&A expense as it relates to our gross revenues.

As a result of the above trends and the successful implementation of our strategic initiatives, we have generated net income of $820,000 for the fourth quarter of 2010 as compared to $601,000 in the fourth quarter of 2009. Year-to-date net income for 2010 is $4,888,000 as compared to $1,705,000 in 2009. This represents income per share in 2010 of $0.02 per share for the fourth quarter and $0.15 per share for the year.

From a liquidity perspective, the Company continues to perform from a position of strength as net cash flows from operating activities of $1.8 million were generated during 2010 even as the Company used $6.7 million to fund accounts receivable growth during the year. Our asset light model continues to help our liquidity position as we invested only $811,000 during 2010 on property, plant and equipment, most of which represents computer hardware and software. Additionally at year-end, the Company has unused capacity on its line of credit of approximately $6.8 million and is in full compliance with its debt covenants.

In summary, strategies implemented over the past two years have created positive trends as the Company has emerged from the recession of 2009; higher revenues, better margins, lower SG&A costs as a percentage of revenue and correspondingly a higher net income. We believe that we continue to be well-positioned as we enter into 2011 and we look forward to continued financial success.

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

(Operator Instructions) David Campbell, Thompson Davis.

Just wanted to ask John if you could give us an idea of what your tax rate would be, tax rate and interest expense might be this year, interest versus the $205,000 from last year?

Well, our tax rate is about 39.5%, David, so that is obviously a combination of our federal and state rates. And interest should be going down.

We're going to have some interest accrued on some earnout payments. I don't have that number in front of me. In general our debt service will be going down, so our interest will also be going down correspondingly. It certainly shouldn't be a material figure in 2011.

You mean the decrease shouldn't be?

Correct.

Despite the fact you paid off a lot of debt in the fourth quarter, right?

Right, but we have some earnout payments that we're making that we have to accrue interest on also with the LRG purchase. So that will be some additional interest that we haven't had in the past. So in conjunction with the decrease on our debt, I'm not anticipating any material decreases in interest.

Okay, and in the Concert Group, I wondered if you could give us an idea of what the growth was in the fourth quarter I guess excluding LRG, but of course LRG I guess is integrated, so I'm not sure that is a good question. Maybe the best way to do it is to give us some idea what your international growth was, what your international revenues were in the quarter compared to the third quarter or compared to a year ago or both.

Sure, Dan, can you respond to that?

Yes, David, for the fourth quarter, LRG contributed, of the $5 million increase, LRG contributed about $1 million and the rest came from our branches. Our mix last year -- well, for the quarter was really the first time that we saw the international business larger than the domestic business and those percentages -- we were like 48% domestic and 52% international for the fourth quarter for the first time.

And for the year, we were right around -- flopped the other way around, international was 52% and domestic was 48%. But as we said the last time, we see many more opportunities on the international side. When I look at our pipeline reports from our sales groups, there are a lot of international opportunities.

Mostly in airfreight or do you see it in sea freight as well?

Both, I think if I looked at the complete pipeline, I would probably say more than half of it is sea freight.

Dan, can you explain the difference between just LRG international revenues and our total international revenues?

As a percentage?

Yes, because we show those increasing. I'm not sure David understands that there is more to international revenues than just LRG.

Yes, if we put a number to those percentages, if we looked at last year, of the $27 million of international we had, about $12 million of that was LRG and the rest came from all of our other offices.

Right now we have two branches that are strictly international, which were the LRG offices, which we call CGL International now, and the other 24 offices really generated more than 50% of the international business. And we continue to see that increase because now that we have LRG, we have many more opportunities because of their additional buying power and expertise to assist our other offices around the country with other opportunities. So we see the other opportunities coming from the non-CGL International offices as continuing to increase proportionately.

Right, was that a factor in the acquisition of the new agents in Philadelphia?

That Philadelphia office probably has -- they probably have a little more international business than they have domestic. It's probably a 60/40 mix.

Right, right, right. And on the Bounce division, can you give us some idea where the growth is coming from? Is this new customers or was this a seasonal increase in the third and the fourth quarter? What is going on there?

Tim, you want to handle that one?

Sure, it's growth in customer base. We're really excited that a lot of the sales strategies we put together probably eight, nine months ago really are paying off. We are seeing -- we're servicing twice the number of customers that we did same period last year and it continues to grow. We are hitting a good stride.

Okay, that's great. In the Express-1 division in the fourth quarter, was the revenue problem in all the branches or related to just one or two branches or was it a -- one or two types of businesses? What happened that all of a sudden it wasn't very good?

Jeff, do you want to comment?

Sure. Now, David, are you comparing that to third quarter then? Is that what you are (multiple speakers)

Third quarter, yes.

Yes, yes. Because we did show some growth year over year and I think the fourth quarter and the prior year was a pretty good quarter too. So that's a pretty good comparable.

We had some pretty good business in the third quarter too, David, that was brought on by the extraordinary events down in Mexico. That is the nature of our business.

We take advantage of those types of things. And we never know what quarter they're going to hit.

But that probably accounted for 1.2 million to 1.5 million for the third quarter, which when you compare the third then to the fourth, it kind of makes it look like a more dramatic drop. So that primarily was a big part of the comparison that you're taking a look at there.

Okay, and in 2011, what happens -- or how much -- 2010 salaries and benefits was related to profit-sharing, bonus accruals that type of variable compensation. What happens in 2011?

John?

Well, it really depends on how we perform in 2011. Certainly that percent of our compensation was zero in 2009 and was a significant component.

I think when you take a look at sales incentives, other division incentive compensation, discretionary bonuses in 2010, that was about $1 million, David. Certainly it depends on how we perform, but we have raised the bar again in 2011. So we're going to have to have some pretty good numbers in 2011 to hit those numbers again.

Right, right, right. And I'm estimating salaries and related costs at $3.1 million in the fourth quarter. You'll have that in the 10-K, I guess.

Correct.

Is that roughly correct?

It will be in the 10-K. I don't have those numbers right in front of me.

Okay, if someone else has any questions, let them ask. I'm interested in the January/February revenue growth, how it looks.

One of the things we did talk a little bit about the BB&T, we think for the first quarter, we have seen strong business volumes. We're very, very happy with the start of the year. And I think one of the things we look at as a group historically, our targets started growing the high teens to low 20s year over year and that's something we certainly believe we can do this year also.

Okay, that's -- if someone else has any questions. Thank you.

Rich Murphy, Cross River Capital.

Just a question on Express-1. The margin in the fourth quarter dropped. I understand the revenue drop. Can you just give some granularity around the margin decreased, operating margin you talked about?

Sure. Jeff, do you want to handle that or do you want me to go over that?

I can handle it and then you can add -- jump in if you would like, Mike. Rich, the quarter was a little softer than we had expected, so we had some rate compression. I think we noted that we had some insurances for the owner-operators, collision insurance and the occupational accident insurance if they hit us.

We took it on the additional cost we took on. We didn't want to pass it on to the owner-operators quickly and abruptly.

That accounted for some of the margin compression. We had our two largest customers that we had to make a rate adjustment on one. That became a much larger component of our business. And then another one made some changes in the way that they pay out fuel surcharge that was very dramatic.

I will tell you this. We got a complete handle on exactly what happened there. We made the adjustments with rate on the customer that became a larger component of our business.

That's kind of -- that half ironed itself out. The other customer that made a change in the way they paid fuel. We have a complete handle on that, so we understand exactly what is going on there now and know where we are heading with that. So I feel very, very confident in the gross margin range that Mike had mentioned, the 21 to 23 I think it was (multiple speakers) very achievable.

Is there still leverage in the gross margin, say 21 to 23? You get some of those -- some of that money back in the next couple of quarters, typically the last three quarters are down 22% and 24.8%, gross margin especially.

With continued -- I guess I'm asking this continued revenue growth, where does that margin -- I mean that's a healthy margin obviously. Is the 21 to 23 kind of target -- could you go to 26? I'm trying to get a feel for 2011 if you do have revenue growth which it sounds like may in that business.

Rich, I would say the 21 to 23 is what I would go with if I were modeling it. We certainly have the ability to improve upon that and hit on the high end of that range. I don't have any doubt about that.

We are servicing a much larger customer now which the good news is that helps us keep our fleet busy, helps us grow the fleet. Owner-operators want miles because that equates to money for them.

And with the larger customer base, we are able to keep the trucks and the wheels rolling. But of course with that comes some margin challenges because the larger shippers demand pretty competitive rates.

We are providing excellent service. We're in a really good position we think with all of these shippers. So I think we have got an opportunity to get a fair rate.

Also temperature control division, Rich, is showing a lot of promise. It's in its infancy but it's showing -- there's apparently a lot of demand out there for what we are going to provide and we are seeing some real promise there.

Finally, just from a customer standpoint, is there any new customers that you guys are taking on? You talked about gaining market -- Mike, you talked about gaining market share.

Is there anybody in particular -- I know the US government was a big customer -- has become a big customer. Anything else of interest that is out there?

Absolutely, I mean, I wouldn't give you the name because I know who listens in on the conference call. But our pipeline -- and I'll put it this way -- is very strong.

We do have some foreign automotive. We have got Volkswagen and BMW that have moved plants. All my competitors know that too.

But when they move plants and start new facilities, that generally creates more expedites than normal. So we have got some of that going.

And the temp control arena, that's all brand-new business for us. Mexico has been a real great contributor for us. It's been about 20% to 25% of our revenue, and I think we are just scratching the surface on Mexico.

In fact we had a large customer call yesterday and say I want to talk to you about Mexico. So I think we've got some great potential with some new customers.

And we have lost no particular customer. The market softened a little and we got less from some of the customers, but there's been no notable losses whatsoever.

Great.

Tim and Dan, do you guys want to talk a little bit about pipeline to think that's one of the exciting things we have going on.

Rich, on the Bounce side, we've got a great pipeline. We measure the niche of a customer base we're going at, we have identified how big that pie is in terms of number of clients available.

And since we have been measuring that, we started with 4% of that group, that study group, active and over a period of nine months, we were able to take that from 4 to 10. So we're still seeing new accounts, probably to the tune right now of about 20 new accounts a month for us in that sector. So that's -- we're very excited about what we are seeing.

Have you seen that -- is that all just new greenfield business or are you starting to see some synergies with Express-1 and --

That's primarily -- it's greenfield.

Dan, do you want to comment a little bit on the CGL pipeline?

Yes, this is Dan Para with CGL. Obviously from an international standpoint, we have as I said earlier a lot of opportunities in the pipeline.

And where we see most of the opportunities is really in some of the core businesses that we are very involved in now like asset retrieval. We see more opportunities on the manufacturing sector which is nice for us because that hasn't been so.

And the other two really are some retail opportunities and pharma opportunities. That's kind of what we see in our pipeline currently.

I want to give our CEO Mike Welsh a hand. He's helped us find a couple of wonderful opportunities too with our VP of Sales.

So all of us really work together very nicely and very closely now on many opportunities, and so we changed our model a little bit last year. We talked about it at the previous conference call about having four regional sales directors.

And now as of March 1, all four of those people will be on board. So we put a little more muscle in the field to make sure that we are continuing to grow the customer base, grow the office base and to keep that pipeline full, quite frankly. So we have put some more resources in the field.

And, Dan, the international and domestic margins, are they pretty much the same in pricing?

No, if you broke out both sectors, the domestic business nationwide is probably in the 25 to 28% range, and the international piece is probably in the 15 to 20% range. And John has mentioned earlier, it's a little more complicated, but our model with the LRG acquisition, now CGL International, their margins are less, our G&A goes up because it's now a company office, but the margin potential is actually larger because we're not sharing a significant portion of those dollars with a contractor.

Great, that's huge. All right, well thanks, guys. Looks like 2011 is going to be another good year.

Robert Niewijk, Katana Capital.

SG&A as you continue to grow revenues, can you talk a little bit about the kind of leverage you can see in SG&A line?

I don't know if we have a magic bullet there, Robert, but we know historically as we have been able to grow as a Company, our SG&A costs haven't grown at the same extent as revenue. Dan Para has got this plan at CGL that's pretty simple that works pretty good. He says well, whatever we can increase gross margin by, I don't want SG&A more than 50% of that.

Now I really don't care what those components are for Dan, and I don't think he cares with his people -- I don't know if he does care. But that works pretty well for Dan.

And as we grow, it's certainly easier to not increase cost versus a company that's not growing that has to cut costs in order to reduce the SG&A cost as a percent of total revenue. So we don't have a magic bullet, we've seen the SG&A go down as our revenues have gone up historically.

We intend to grow. We are a growing company. We anticipate that happening long term and we anticipate seeing SG&A go down.

I'm not sure what the potential would be for SG&A. We're at about 12% now. Could we get down to 9% at some point? I suppose it's possible.

We are certainly not anticipating that type of jump on an annual basis. But if we could bump it down a half a percent per year for the next three or four years, that would be great.

Great, in your prepared remarks, you mentioned something about price increases but I either missed a detail or there wasn't much there. Could you just elaborate?

I can probably let the guys speak to that. We talked about selective price increases, so I don't know who wants to take the ball from me on that one.

This is Dan at CGL. Because of our independent contractor model particularly with the domestic side of the business, the offices because the bulk of their money comes from watching the profitability, they do this on a weekly basis, quite frankly. On the international branches that we have, we are -- quite frankly we're approaching some of those customers to increase the margins this year. We built a nice base of business with our branches and we're hoping to see some price increase with those customers.

Jeff, do you want to talk a little bit about where you are with price increases in 2011?

We've already started with some. We've kept a close eye on it every month for the last couple of months.

We have instituted some price increases. Everything we hear for what we do, the service we provide, the market's pretty bullish. I think the good news for us is that 2009 as bad a year as it was for everybody, we really survived that year handsomely and were able to keep our fleet intact.

And I think from what we're learning, a lot of our competitors really got hit pretty hard in 2009 with fleet size. We've come out of this being one of the larger expediters now and the straight truck component of our fleet rivals really any carrier out there.

In fact, I was talking to a large customer yesterday about that. We have quite a few teams within that component of our fleet, and the straight truck is really the essence of what an expediter does.

A lot of that freight is hauled on a straight truck. And when you have a team, that gives you a lot of potential. So I think that our fleet and our services as things heat up in 2011 which we hear they are going to are going to be in pretty good demand which should correlate into some higher pricing.

Okay, great. Last question and just to verify, am I correct this is -- fourth quarter was the first quarter where you have lapped the LRG acquisition, there's no revenue growth in there except organic? Is that right?

Correct. We purchased LRG in October 1 of 2009.

(Operator Instructions) David Campbell, Thompson Davis.

Yes, I'm curious about the auto business because you keep saying that -- and I've heard this before in other quarters -- that the auto business is not recovering. But auto sales and manufacturing were up last year. What does it take to get the -- your auto business up?

Jeff, do you want to --

You know, I think part of the answer there, David, is much more of that manufacturing is taking place in South America and they're not manufacturing as many automobiles in the states as they used do.

So if the overall count it up, it's happening down in South America. And what you'll see then as I think like we have seen the growth in our Mexico business, I think that's a direct result of what's happening with automotive.

As I said earlier, we looked at Volkswagen and BMW are opening up new plant locations, we expect that to contribute to some automotive growth. And we are doing quite well with Ford and Chrysler.

Really what's worked out well with Chrysler is we're able to service them through our new Detroit office which was formally known as First Class, and that office has done an outstanding job of providing service for Chrysler.

To add to that, David, I think as a percentage we're starting to see -- I mean automotive is certainly stable, and Jeff hit on the Mexican amount of business. What the automotive manufacturers did, they also closed a lot of their far-flung plants and they've really looked at their supply chain and I think they've tightened up the distances which at one time it was bordering on ridiculous.

So I think their efficiency has improved. And you know as we look forward, we see nothing but positive gains there. But if you go back to the Wild West which was where they shot an expedite out like it was gum out of a gumball machine, they're a little bit more conservative than they have been in the past watching their costs.

And David, Dan at CGL, Jeff gave us an opportunity on the border last year and we saw significant growth with automotive customers in San Antonio last year.

Okay, and I wanted to ask about the shares in the new version of your report. Yesterday you had 34 million in fully diluted shares in the fourth quarter. That's like -- I assume that's the effect of the stock price going up and more options in the calculation?

That's correct. Mainly because of the stock going up David. That causes more shares to be diluted.

Right, right. That's a factor as we looked at this year. Is there any potential for new concert group acquisitions like Philadelphia in 2011? Is it hard to predict or do you have any kind of a pipeline of people that you're talking to or that just happens to come up when it comes up?

David, Dan Para. We have a pipeline but the successes that we have, it's much more difficult to attract an independent contractor who has a larger volume of business. But you know Dominick Muzi, our Executive Vice President and myself, we spent a good time of our yearly plan spending time with potential independent contracts. So that's one of our lifebloods to do that. So, we are excited and we hope we'll be able to open a couple more offices this year.

You might want to comment too, David, what Dan and Dominick is the -- they're not about putting pins on the map. It's attracting quality independent station owners and we're very, very excited about Philadelphia and the quality and the type of business they bring to us.

That's -- really it does -- it's a lot less expensive probably than buying another companies. That's another way to look at it, isn't it?

I tell Dan to bring one Philadelphia in every week, but he hasn't listened to me yet. Right, Dan?

I wish I could meet your expectations.

That's okay, just keep going. That's fine. One a quarter is fine with me.

You got it.

So Express-1 is looking for a better first quarter than fourth quarter. Is that the way to read it?

Sure, we are definitely looking for a better first quarter. We're looking for a better first quarter in all of our operating divisions.

But the other divisions had good fourth quarters, so the other one has to get better than the first.

Well I think we can all improve, David, but certainly there is an opportunity for Express-1 and Bounce and CGL to improve.

Right, right, right. Okay, well thank you very much. That's about it for me.

Ladies and gentlemen, we have no further questions at this time. I would like to turn the floor back to management for any closing remarks.

Well once again, we would certainly like to thank all of our shareholders, employees, station owners, owner-operators for their support. We feel very, very good about 2011. We're done celebrating 2010 which we were very happy with. But going forward, we see a lot of good things happening. So with that, I say thank you and good morning.

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