XPO Inc (XPO) 2011 Q1 法說會逐字稿

Greetings, and welcome to the Express-1 Expedited Solutions' first-quarter 2011 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, Chief Financial Officer. Thank you. Mr. Welch, you may now begin.

Thinks, Danielle. Good morning, everyone, and thanks for joining us on the Express-1 Expedited Solutions first-quarter call. We're 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 Heinz, 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, 2010.

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

Thank you, John. I am pleased to be speaking with you this morning. First of all, I'd like to thank all of our employees, owner-operators and station owners for a fantastic first quarter. As important, we continue to operate in a safe manner and we'll continue to emphasize safe driving.

For Q1 of 2011, revenues from continued operations increased by 31% to $41.5 million during the quarter, compared to $31.6 million in Q1 of 2010. During the same period, net income improved by 34% to $1,117,000 compared to $834,000 in 2010. Once again, all of our operating units posted year-over-year growth in Q1 of 2011.

We saw impressive gross margin dollar growth in CGL, Express-1, and Bounce. When taking out the effective fuel, we still achieved a 29% growth in gross margin dollars when compared to Q1 of 2010. Moving forward, we believe we are on-pace to hit all of our internal targets, and that 2011 will be our strongest year on record. XPO is poised for strong growth that will bring increased profits to our bottom lines. As always, I appreciate the support of our shareholders.

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

Thanks, Mike. The first quarter of 2011 has continued trends that we had seen for several quarters. These trends include revenue increases in each operating division; solid net income performance; and significant cash generation from operations. These trends have further strengthened our balance sheet and have positioned us well to invest in future growth initiatives.

On a quarterly basis, overall revenues of $41.5 million in the first quarter of 2011 increased by 31% compared to the first quarter of 2010. As anticipated, growth occurred in all three operating divisions. On a quarterly basis, Express-1 revenues increased by 28%; CGL revenues increased by 22%; and Bounce revenues increased by 92%. Our overall gross margin in the first quarter of 2011 decreased by 0.3% as compared to the same quarter in 2010. This was due primarily to the following two factors -- tightening national truck capacity and increased fuel prices.

First, let's talk about fuel. As discussed in previous calls, each operating division passes on increased fuel costs to its customers through the use of a fuel surcharge at Express-1 and through adjustments to our daily spot rates at CGL and Bounce. These additional charges are substantially passed through to our transportation providers who bear the cost of fuel.

From a financial perspective, this increases both our gross revenue and our direct cost of transportation by similar amounts, causing a decrease in our margin percentage as fuel goes up. On the other hand, gross margin dollars are not substantially impacted, in that similar mounts are added both to revenue and the cost of transportation for the increased cost of fuel.

From a capacity perspective, a tightening national truck capacity has increased our costs of transportation, resulting in slightly lower margins. This has been particularly true at Bounce, which relies totally on purchase transportation and the brokerage environment. We have been able to selectively increase customer rates to offset some of the increased costs. However, we have experienced some resistance in the market to higher rates. Moving forward, we believe this resistance to pricing increases will diminish as the capacity shortage continues and margins will improve.

Selling, general and administrative expenses as a percent of revenue improved on a quarterly basis for the first quarter of 2011 to 12.5% compared to 12.9% in the comparable period in 2010. Revenue growth continues to be a key in our ability to be more efficient with SG&A costs, as we have been successful in keeping our cost increases below our revenue growth levels. As we continue to grow, we believe this trend will continue to lower our SG&A costs as a percentage to total revenue.

Salaries and benefits continue to represent the lion's share of our SG&A costs, representing over 70% of this category. As a result of the above trends and the execution of our growth initiatives, we have generated net income of $1.1 million for the first quarter of 2011 as compared to $834,000 in the first quarter of 2010.

From a liquidity perspective, the Company continues to perform from a position of strength, as net cash flows from operating activities of approximately $2 million were generated during the first quarter of 2011. These cash flows, in addition to over $700,000 generated from the exercise of stock options, were used to reduce our overall debt load by approximately $2.8 million in the first quarter of 2011.

As communicated in previous calls, our asset-light model does not require the Company to dedicate large sums of cash towards CapEx -- which we expect, once again, to be less than $1 million for the year. The excess cash will allow us to further strengthen our balance sheet moving forward, and to invest further into our organic operations and/or potential strategic acquisitions. As of March 31, the Company has unused capacity on its line of credit of approximately $9.2 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 demonstrated consistent growth in both revenues and its bottom line. We are also pleased that these results are bringing returns to our shareholders. We believe that we continue to be well-positioned as we move through 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 & Company.

Thank you very much for taking my questions and thank you for having another good quarter. Express-1's revenues, obviously, came back sharply from the temporary problem you had in the fourth quarter. On the other hand, I was thinking that salaries and accruals might be going down from the level of the fourth quarter. Sometimes that's a good indication. Sometimes that means that you see big growth ahead; therefore, you wanted to make sure you had the employees needed to handle that growth and also needed them to be fairly compensated.

Am I reading this right? Or is there something extraordinary about the first quarter salaries cost, which you haven't reported yet, but I assume we're flat from the fourth?

David, I can speak to that. I think you're right on both cases. We have positioned ourselves for strong growth, for continued strong growth throughout the year. We're also sort of fully loaded on anticipated bonuses and accruals for the first quarter of this year compared to last year.

We feel very strong, as I stated in my earlier comments, that we are going to hit all of our internal goals. So, I think you hit it right. It's both -- it's the increased business plus we're expecting to get our goals and we have our bonuses accrued.

So, what is that -- you get the confidence about the growth; you should be getting it from revenue growth in March and April. Can you give us some idea what that was in March and April?

I can tell you, March was very strong; certainly, the strongest of the quarter. We saw a gradual buildup, but we finished March very strong.

You're talking in terms of growth rates, right?

Yes.

So that's part of the reason for your optimism, obviously. And where is the growth rate improving the most? At Expedited, Bounce, or Concert Group?

I think it's pretty consistent. Really, when you look at everybody across the board, we're seeing some good potential for the year. And when we model it out, we see strong growth for all three units.

What can you tell me about international growth at Concert Group, revenues this (multiple speakers) --?

Dan, you want to handle that?

Hi. Good morning, David. Dan Para. Actually, when we were putting the statistics together, I was a little amazed at our mix is almost identical to what it was last year. So the mix right now is still in the 54/46 range between domestic and international.

International was very strong the fourth quarter and the more international business we have, obviously, doing business in Asia impacted it a little bit the first quarter because of the Chinese New Year, which pretty much shuts things down for a couple of weeks. But it also -- we see a lot more international opportunities coming out more in April and May now that the Chinese New Year is over with.

So there isn't -- you haven't seen any slowdown, in your case, in Asia, either in March or April?

No, not at all. As a matter of fact, in our network because of -- our network of 24 domestic offices, as I said in probably my previous calls, we're seeing more opportunities coming from our non-branch offices. In our network -- we call the branch offices Tampa and Miami that are pure international offices -- we're seeing more and more opportunities coming from some of our domestic network as well.

So there is a chance that that mix will shift gradually during the course of the year to more international and less domestic?

Yes, I would guess by the end of the year it will be probably half -- 50/50.

Right. And there's no implications for gross margin from the shift?

Not that I see at this point. I think from a buying power standpoint, I think it will get better the more, obviously, the more business we have. But right now, I think we're going to -- we're always looking for margin improvement, quite frankly. We'll probably see a little bit by year-end, but right now, we're focused on continuing to grow the opportunities that we have.

And remember, David, about half of our international business comes from company-owned branches. So that margin, by definition, is a bit higher.

Right. Okay. And I have one more question and then I'll let somebody else ask. And that is the gross margin at Express-1, do you think you can hold it at the -- I think it was around 21.5% -- do you think you can hold that, even though fuel prices are up and capacity is tight?

Yes. David, this is Jeff Curry. As you recall, we had about a 19.5% gross margin in the last quarter that we had talked about. In fact, I think you ended the call asking if you thought we could rebound in the first quarter. We did -- got it up to 22%.

John had answered the question that he felt like 21% to 23% was about the right range to look at, and I agree with that. We hit right in the middle of that. Of course, we're always in favor of exceeding our goals and going towards the top end of any range that we give you. I think that the gross margin that you witnessed for the first quarter is definitely achievable -- even in the light of what we're seeing with fuel.

Some reports have fuel going down somewhat here in the summer months, which will be nice for our owner-operators, but I don't see that dragging that margin down any. We have continued to see some rate increases in the right areas. Some of our other business units that really haven't hit full stride yet could offer us some additional opportunities in margin. But I think what you see in the first quarter is probably a pretty good barometer, at least on the margin side, what you could see the rest of the year. And we'll strive to continue to hit the top end of that range that John gave you on our last quarterly call.

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

Rich Murphy, Cross River.

Any -- the Japanese situation, did that impact you guys at all from a manufacturer standpoint?

Jeff and Dan, you guys both probably (multiple speakers) --

Rich, this is Jeff. Yes, not tremendously so. We have a wide range of customers -- I mean, thousands. But there has been some impact. Some of our major customers have seen 30% to 40% what I'm going to say are temporary reductions, as they scramble to find the parts suppliers that they need.

The good news there is, is it hasn't really impacted those greatly. I think it's been modest at best. And typically, when they do start production back up and they find the suppliers they need to get the parts flowing again, that causes a snap-back. When there's a snap-back, that's a good thing for Express-1.

Okay.

And Rich, on the CGL side -- this is Dan Para -- we have very little export/import trade with Japan. Most of ours is from China. So we don't really see an impact.

Okay. Now that the Company has been together for a year it seems -- we've got a full year to look -- it seems there is a sense of seasonality in the second and third quarters, if you look back to last year. Can you guys discuss that? Is that something that we can expect this year?

Can you repeat that question again, Rich?

From a revenue standpoint, it seems like the second and third quarters last year were stronger. So seasonality seems to be -- it seemed to be stronger in the second and third quarter, your business, particularly at Express-1, and ultimately, Concert Group too. Is that true when I'm looking to model out the rest of the year that --?

Historically, you're right. Historically, yes, absolutely. You're going to see some -- we generally see some real strong second and third quarter numbers, especially in the last two years. We would continue to expect that. As we stated earlier, we continue to expect growth in the high teens to the low 20s, as far as what we think we can do every year. So we had strong second and third quarters last year, and we think we'll build upon those quarters also, looking forward.

Okay. Next one -- I guess I was reading through the 10-Q real quick before the call. The 12 employees -- were they all Bounce -- in the Bounce division?

No, actually, we had an addition -- Rich, this is John -- of 12 employees at Express-1 in addition to 12 employees at Bounce.

Okay. So 12 employees at Bounce seems like you're getting ready for something big, as Campbell was trying to allude to it. Is that -- how do I look at that? Are those revenue-generating employees? Are those customer service folks? Can you just give us a little more color on that?

Yes, Rich. This is Tim Heinz. I can tell you that the employees and the investments that we put in are all on the sales side. We've -- the number of customers that we serve a month continues to grow and it's actually -- Customer Serve grew by 80% quarter -- I mean, year-over-year. So, that can -- we see that continuing. We've got a nice growth trend, and the people that we bring on are responsible and accountable for bringing in sales.

And what's the ramp-up for someone like that? Is it a six-month ramp? Are these experienced people that come with a Rolodex?

No, there is a ramp-up and we measure that very closely. Normally, it's six to nine months before we've got, really, somebody is hitting their stride.

Okay. And then from a cash flow, I guess, it looks like the earnout is over LRG, f I read that correct in the 10-Q? So that's -- looks like you also paid down most of your debt.

Hey, Rich, there's actually one more earnout that would be due next -- first quarter of 2012 in the event that they hit their criteria.

Okay. I guess the (multiple speakers) --

That's (multiple speakers) -- $450,000.

$450,000. All right. I didn't see that. So for cash loan, if we're going to kind of sum it all up, if we're going into a seasonally strong period, it seems, and we've taken care of all -- a lot of the debt's paid down. What is the use of cash from the executive suite that you guys are thinking about? I understand organic growth and that seems like -- is there any --?

Well, we're -- Rich, we always are looking for those strategic acquisitions that would either fit into Express-1 or CGL, primarily. Bounce, as a start-up, we're really focusing on organic growth, but we would look for the potential tuck-ins, especially for CGL and Express-1.

Okay. And on that front from an acquisition -- tuck-in acquisition standpoint, is the M&A world -- how does it look today? Are multiples below? Obviously, when you look back at '08, you saw some real good deals, and we've benefited from that. What's the world look like out there?

I think everybody in transportation is pretty positive right now, so that's has caused them to rise a bit. But on the flip side, I think is, what we try to do is sell our success being part of our Company and some of our past successful tuck-in acquisitions, really, whether it's Dan Para or Bill Champe from Express-1 Detroit, to explain how it can be beneficial to be part of the bigger team. But the multiples probably are creeping up, because everybody is more and more optimistic about transportation than they certainly were two years ago.

Okay. Well, great quarter -- looking forward to the next couple quarters. They should be good. On the M&A front, do you see -- and I know you probably can't answer this -- but do you see people looking at you guys -- I mean, you're trading -- my model is around six times enterprise value to EBITDA, which is pretty cheap for your industry. I guess, are you guys concerned -- I mean, there's Panther out there, there's a few other guys in your space, but it's somewhat of a -- you guys are some of the top players in the expedited space. Is this -- have you been seeing people talking to you on that front?

I mean, we -- we're not concerned, no. No.

Okay. All right. Well, awesome quarter, guys. Good luck the rest of the year.

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

I just have a couple of minor things. The tax rate seems high in the first quarter. It was 41.5% or something like that. Is that what you expect for the whole year, John?

It probably will go down a little bit, David. We had some permanent items in the first quarter relating to the exercise of stock options. And if I was a tax expert, I could get into more detail with you, but our tax expert says it's a little higher this quarter than what it should be for the remainder of the year.

Okay. And now that you've paid off your line of credit, or almost paid it off, what do you expect interest costs to be? They were $49,000 in the first quarter. Is that -- should that go down to nothing?

Actually, we'll have some interest related to the final earnout. We have -- a portion of that earnout, we have to present-value that. So we accrue interest on that until we hit $450,000. So, it won't go down to zero but it should be cut in half.

Okay. And did I hear you right, that you had earnout payments in the first quarter? Or did you say first quarter of next year?

First quarter of next year. Another $450,000.

Right. Well, they certainly [owe] -- they've been doing a great job. (laughter)

Yes, they have.

(laughter) So, yes, so I guess that's about it. I really haven't got a lot of changes I can see here. And I appreciate your answers. Good luck the rest of the year and look forward to future results.

Thanks, David.

Thanks, David.

There are no further questions at this time. I'd like to turn the floor back over to Mr. Welch for closing comments.

Once again, I'd like to thank our shareholders. We feel very strongly about our first quarter results and believe we can carry that on throughout 2011. And we wish everybody a good day. Thank you.

Ladies and gentlemen, this concludes our teleconference. You may disconnect your lines at this time. Thank you all for your participation.