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Quality Distribution, Inc. (NASDAQ:QLTY)

J.P. Morgan Aviation, Transportation & Defense Conference

March 5, 2013 4:25 PM ET

Executives

Joseph Troy – EVP and CFO

Randy Strutz – President of Quality Carriers

Analysts

Thomas Wadewitz – J.P.Morgan

Thomas Wadewitz – J.P.Morgan

First we have Randy Strutz who is the President of Quality Carriers who is going to provide some remarks on Quality Distribution and then we have the CFO, Joe Troy. I believe he is also going to have some comments and then I think we will have some time again for Q&A. So, Randy, if you want to go ahead and take things away.

Randy Strutz

Okay, thank you, Tom. So, where we get started? So, first thing I want to mention is our typical forward-looking statements and disclaimers. You can refer to our website for any additional information on this. Okay. We are going to get started. So as Tom mentioned, my name is Randy Strutz. I am fortunate to be the President of Quality Carriers, which is one of the three business segments of Quality Distribution.

So I am going to give you a little overview on the business and then turn it over to Joe who will talk on some of the financial numbers for the business. So Quality Distribution is made up of three sectors, chemical, intermodal and energy. Last year, 2012 our reported revenues, chemical made up about two-thirds on a pro forma basis, meaning we are getting the energy on a full run rate for energy since we made some acquisitions last year.

So chemical is about $600 million, $596 million to be precise. Intermodal about $131 million, energy as reported $115 million we said on a run rate basis, kind of $175 million to $185 million. So chemical about two-thirds. And I think what’s typical of all three of our business segments is asset light.

On the chemical side, we kind of talk about that is about 90% of our business is run through affiliates, which are similar to franchisees. And the sustaining CapEx is about 1% to 2% in that range. On the intermodal side, for Boasso, which was its trade name, owner operators make up a significant share of the loads, about 70%.

And the sustaining CapEx, there is about 2% and then in energy, our newest business, we’ve got a significant portion of owner operators in two of the largest shales that we operate in Texas and Oklahoma and sustaining CapEx there we think is in the 1% to 2% range. So again, all told asset light.

On the chemical sector, which I am the responsible for; overview is again, asset light business model. It’s the largest nationwide network. And each one really should say North American. We run a large network in Mexico and Canada. We have a flexible and a variable cost structure, especially driven by our affiliate network.

We are really wherever chemicals are in this country and in North America; because of our affiliate model we have tremendous affiliate strength on the local level, knowledge of the local market. And if you look at the chart shown there as well, when it comes to our end-markets, we are not only dependent on any one sector, whether it be automotive or housing, we are pretty well diversified.

Okay and as the market leader, our best sets of this roughly $4 billion industry that we are around 15%. We say our best estimates, because most of our competitors are privately held and we try to get a best estimation of the market. So it kind of gives you an idea on the chemical side.

On the intermodal side, which often you’ll see as in Boasso, that was the heritage name from the founder of the company and the brand that our customers recognize. It’s the largest ISO tank operator. So those are folks move in international tanks to and from the ports and to from some rails.

You can see on the right hand side the key locations we are up and down the eastern seaboard. We are in the Gulf, and then our inland sponsor at Chicago and Detroit. We provide the transportation in an addition how the value-added services, the depot services could be cleaning, testing, maintenance repair, all those kinds of things.

And again, if you look on the bottom right of the charts, the global ISO tank market in the US is about 250,000 plus tank containers and we believe we have a pretty substantial market share of about 110,000 of those 250,000 in the movement. Okay, so it gives you a brief overview on Boasso.

On the energy side, again our newest sector. We are taking advantage of the, really a very fast growing market, because of the low cost natural gas and oil plays based on fracking technology. We started in Marcellus in 2011, which is primarily a dry gas market. We then expanded first at an affiliate in the Eagle Ford in Texas to haul oil and then we bought three companies last year, one in the Eagle Ford as well, one up in Bakken and North Dakota and then a third one that operates in two, the Woodford and Utica which is Oklahoma and Eastern Ohio.

And you can kind of see on the charts the rig counts and what’s happened in the last couple of years on rig counts, tremendous developments in the Bakken and we think now we are well positioned in the four primary shales with significant activity. So it’s all about organic growth.

When we look at all three sectors, we think that again there are significant opportunities over time in all three of these markets. One is on chemical, because what’s happening because of low cost natural gas, it’s been revitalization, I think I have seen some literatures, the renaissance in the chemical industry.

Lots of announcements for expanded capacity, and we think over time, that’s going to help us significantly. Since so much of you as chemical business is based on natural gas feedstocks through ethylene. Within that, we see again strong sales opportunities, fairly strong market for pricing and we think compared to other transportation segments, for drivers, it’s an attractive offering, because compensation is typically higher than some of the other modes, because of the skills that require.

Intermodal, similar to chemical and that because of the low cost of natural gas, we see significant opportunities over time with the American chemical industry and we think we are well positioned there and again for some of the same reasons, we see export volumes continue to grow for chemical and we think we are well positioned.

And that in energy, again our newest business. If you look at the expectations for growth, we think they are strong especially in the oil producing shale regions, where we’ve put a lot of our growth and lot of our assets. And again what’s really driving at across all segments.

So why we feel pretty strong about our thesis is that shale gas has led to, as you all know a revolution in natural gas which on the chemical side, directly helps, because all of our chemical customers, majority of them are announcing significant expansion. So we think that’s strong.

By the US becoming a lower cost producer of core chemicals, we think it’s strong for Boasso or intermodal or affiliate the deals or substitute the deals with imports and exports. And then absolutely the core of it is what’s happening in the energy sector. Okay. So with that, I will turn it over to Joe Troy, our CFO.

Joseph Troy

Thanks, Randy. So couple of weeks ago, we announced our fourth quarter and full year results. The highlights for the quarter, our revenues were up quarter-over-quarter by around 23%, a lot of that was due to the fact that we made the three acquisitions. So, on a comparable basis that was up significantly.

We also had good year-over-year growth in our chemical and intermodal sectors. Our operating income was down a little bit. We still had some lingering issues from an affiliate conversion. One of our affiliates that was both in the chemical as well the energy business, we needed to convert. So, I’ll get to the next slide.

We also had Hurricane Sandy that came through and impacted the Northeast operations for both of our intermodal as well as chemical group, but mostly in intermodal, had a very large impact on our Newark, New Jersey terminal which was underwater, significant damage to equipment. We had some of our tanks floating down the river.

So, we had some pretty big issues to grapple with. We got pretty fast back online, but it did have an impact in the quarter and still had some lingering acquisition cost, but that’s really most of these issues, all of these issues are really behind. Since we are relatively clean heading into the first quarter.

Our net CapEx spending in the quarter was actually a negative $1.1 million. So we sold a bunch of idle and non-productive assets. That’s continuing into the first quarter. So we really have been a very heavy focus on asset utilization and asset optimization across our entire footprint.

So when an asset is not yielding what it should, we are either finding a way to put it to bigger and better use or we are going to move it off of the balance sheet. And then lastly, we bought some shares back.

We initiated a program, a $15 million open market – a repurchase program in the fourth quarter, bought about 0.6 million shares in the fourth quarter and in the first part of the year about a 0.5 million shares. So that’s a good use of capital right now for us especially with the shares where they are.

But if you look at the long-term trend, the lower right chart, you see really been on a pretty good up trend. We had a little bit of a pause in 2012, based on the growth parameters and some of the acquisitions which I’ll talk about in a second, but we are really in a nice position right now to capitalize on the acquisitions and the positioning in both of our intermodal and chemical groups.

Got a very good and strong financial profile. We are not going to be a cash tax payer for quite some time. Last year we had an NOL on the books for $77 million at the end of this year it’s $75 million. We would have expected to burn through more however the asset acquisitions that we did elongated the NOL benefit.

So, that’s very positive. So it’s going to push out our usage of the NOLs approximately into 2016. Our debt maturity profile is very long. We don’t have anything maturing until 2016 and our pro forma leverage is right around 4.3 times our actual leverage is around 4.9, but on a pro forma basis for the acquisitions around 4.3.

And one of our goals this year is to use the free cash flow; the company is a very strong free cash generator. If you look on a pro forma basis, right around the $50 million mark, and so our estimates that are used for free cash flow would be for debt reduction, balanced that with share repurchase and then we do have some growth investment opportunities in really across every one of our segments.

We do have some very good opportunities to grow and we will capitalize on those. But the primary uses of our free cash flow will be for debt reduction and share repurchase.

Very quickly on the capital structure, again, I talked about the debt maturity profile, so it’s really pushed out very far. We do have opportunities to call in a portion of our bonds, the $225 million in bonds that we have. So we have two 10% calls that we can do between now and the first call date. And that first call date is in 2015.

So it would be advantageous for us to take advantage of those and we’ll have to balance that with our free cash flow and how that’s running in our liquidity. But that would be a good use of free cash flow this year. And again you see the adjusted EBITDA – our debt-to-adjusted EBITDA ratio is again pro forma 4.3 times.

We really need to be somewhere in the 2 to 2.5 times on a longer term basis and that’s the goal that we have in mind and we can do that through free cash flow over the next several years.

Our key initiatives in 2013, we talked about on our earnings call the other day, but really improving asset utilization and reducing our asset intensity across the board is the mantra. So we’ve got a number of projects underway in each one of our businesses. We are looking to reposition non-productive assets and optimize those assets.

And if we can’t find a way to do that, then we are going to move assets off of the balance sheet. Like I said in the fourth quarter, we did quite a bit of activity in that arena and in the first quarter we are doing more of the same. So, in particular in the energy market in order to increase energy segment margins, we really have to optimize the equipment.

So we have a number of idle assets among the different shales and the team there is doing a very good job, making sure that we can optimize those assets among the shales. They are all of the assets aren’t always interchangeable between the shales and so the task is to find what is most optimal in each shale, because the equipment is very different over the road requirements are very different.

So, that’s really what we are focused on. It will take us a couple of quarters before we can really fully optimize those assets but it’s a very high focus for the company. And then lastly on the initiative front is to control our net capital spend. The $10 million to $15 million is the target for 2013.

We’ve got again, some replacement opportunities that we will typically have to do within our chemical group, especially as we rotate assets and then in the energy segment, we do have some opportunities for growth that we’ll be looking at. Our targeted returns would probably be a little bit higher than we’ve looked at in the past just based on the position of the business.

but we do have opportunities for growth in each one of those markets, but we are going to be able to sell enough assets that our net capital spend will be quite a bit less than it was last year.

So to sum this up, each one of our segments, we have a very positive outlook. Chemical and intermodal had a good January, I know one month doesn’t make a trend, but it’s nice to get out of the gates very strongly in both chemical and intermodal. Our energy revenues were flat in the month. But that’s actually a good indicator.

So, in the fourth quarter of this past year, our revenues were flat to the third quarter, we were expecting them actually to be down. And so by being flat, that’s a good indicator to us especially because our assets are still not fully utilized. So we really have a nice opportunity over the next couple of quarters to improve our as in which we’ll have a nice – it will have a dual benefit. So raising revenues and a strong impact on profitability.

Typically our first quarter is roughly the same as our fourth quarter and on our earnings call, a couple of weeks ago we said that, those quarters are generally the same. But we do had some modest upside opportunities to the fourth quarter. So typically our Q1 and Q4 are roughly the same, Q2 and Q3 are roughly the same, just from a seasonal perspective.

But we did say we did had some modest upside opportunity again because we’ve gotten out of the gates nicely. And to reiterate, we are focused on improving operating performance across all of our sectors, reducing our asset intensity and over a longer term basis, to lower the balance sheet leverage for the company.

The company is a good cash flow generator. And so we want to use that cash flow for the most optimal use which would be debt reduction, share repurchase, and right now if you look at the amount of free cash flow that we generate across the share price, that’s a pretty good cash-on-cash yield. So we think it’s a nice opportunity and we are now open to some questions.

Question-and-Answer-Session

Thomas Wadewitz – J.P.Morgan

Okay, great. Thanks, Randy. Thanks, Joe. We’ve got a number of questions and if there are questions from the audience we’d be happy to take those as well. I’ll start with, let’s see one, in terms of the shales, how do you view the evolution? You did acquisitions in a couple of different shales, I think it’s some organic growth which originally in the Marcellus.

Where do you think the sustainable opportunity is for you? Is it more attractive in the Eagle Ford? Is it more attractive in the Bakken? Just how do you view your opportunity to have sustainable business or growth in different shales?

Joseph Troy

So, I think, I’ll start with the one where it’s probably most difficult which is in the Marcellus shale. It’s really where we got our start in the very first quarter out of the box which was the third quarter of 2011. We were on about $100 million run rate. Today, it’s probably more like a $30 million run rate.

So, that’s been a pretty steep decline and mostly the source of a lot of our assets under utilization. And we are finding ways that those equipment, put that equipment to use in the right places. So we have to modify some of that equipment or move it or just use it in a more unique way or move it off the balance sheet.

So that’s probably our toughest shale. The oil rich shales are really where we like to be. The business is more diversified obviously. Texas is probably our best area right now. The Eagle Ford is very strong. We have both an affiliate operation there as well as a company-owned operation that was our first acquisition.

And they’ve been on a very nice growth curve. The affiliate there is doing extremely well and we have opportunities in the Permian Basin which is nearby. So we are very optimistic about Texas and in the shales there. We are also optimistic about the Bakken Shale.

They did take a bit of a dip in the third and fourth quarter, a little after we made the acquisitions. Some of our revenues came down. But we’ve got good operators up there. We have a very good position in the marketplace. We believe that as they continue to address and relieve the crude oil movement in the Bakken, that that should be another lift to the business.

We do have some idle assets there, but the management team is rapidly putting those assets to use and putting them in the right places. So, again, we are optimistic about the Bakken. And then the last one of significance for us is the Woodford Shale. We got a very slow start in the acquisition we made in the Woodford, but we have one of our better operating guys there that’s managing day-to-day. He is doing a very, very nice job getting that business back and reposition for an upward movement.

We’ve got a new affiliate that we launched within the last few months and he is going very nicely. The affiliate is doing the oil moves in Wood ford and our company operation that we acquired is more of the water move. But there is plenty of opportunity in Oklahoma and nearby in Kansas, just got to get the right assets moving in the right places there. And we should see some opportunity to rebound from the slow start out of the Woodford.

Thomas Wadewitz – J.P.Morgan

You characterize the run rate about $30 million in the Marcellus. Can you give a ballpark for run rate from the other, the Eagle Ford Bakken and Woodford?

Joseph Troy

I rather not do that, the only reason I pointing out Marcellus is because we are having a difficult time. We don’t really want that, we’ll call it competitive information out there about how we are doing exactly in each of the shale. So we try to keep it a little more high level. I can tell you though that our mix between oil and water movements is about 50:50.

And we would like to see that move even a little bit more towards the oil side which is a steadier part of the business. What we find is the – certainly the freshwater business which is most associated with a fracking activity is the more lumpy part of the business.

The fracking occurs for – let’s call it a couple weeks and then it will fall off until the next frac occurs. The production water is steady. But there is a little more pressure on that part of the business, because it’s the byproduct. It’s the waste part of the process. But the oil business is a little more steady.

Oil prices would have to fall considerably in order for or so that have to be in essence turned off there. So we like the oil business. The assets that we can deploy there. Every time we deploy assets into the oil part of the business, they get used up fairly rapidly. So we like those aspects.

Thomas Wadewitz – J.P.Morgan

Are you a little bit larger in Texas than the Bakken or similar size?

Joseph Troy

Bakken is a little bit bigger right now. If you combine the affiliate operation and our company-owned operation in Texas, they are getting closer every day, because that area is on a pretty good growth trajectory.

Thomas Wadewitz – J.P.Morgan

Okay, great. We have a question from here.

Unidentified Participant

Can you just speak to the competitive dynamics like the energy and chemical businesses relative to more traditional trucking? I am just curious how do you compete share in those markets?

Joseph Troy

Randy, do you want to do chemicals?

Randy Strutz

Yes, I’ll start on the chemical side. So, it is a little bit different than say the dry van world or the intermodal world. In our world, it’s a little bit more important of first of all having the right assets, the trailers vary a lot by types of commodities and such. So where we have invested has been in some of the higher growth commodities, lot of assets, supporting a lot of the energy business going on. And for us, the chemical industry compared to again dry van and that, you don’t have an infinite amount of shippers.

Right, because you only have 100 or so really good size chemical companies. So you don’t have new ones popping up every day. So you really have to have strong commercial relationships with these guys. Secondly, what we provide them I think is it might be in best-in-class when it comes to safety performance, insurance all the things that chemical companies are concerned about.

And then the next thing is, we offer a pretty broad network across all of North America. We have a good presence in Mexico through our partner down there. A strong presence in Canada and so when customers come to us, I think we are able to do some things that maybe some of the smaller carriers aren’t able to, especially when it talks about matching resources for rail outages, other natural issues with flooding, that kind of stuff.

And so I think for us, it gives us a little bit of an advantage on the market place. And I think that’s how we try to – just how is that we can solve most problems with our resources, our networks, our size and our ongoing commitment to safety.

Joseph Troy

In the intermodal business, it’s about having the most well rounded offering for the customer. So when you look at our Boasso operations, they not only do the trucking and the movement of the ISO containers, but we also do the storage and the maintenance, the repairs and we are certainly, I think it’s safe to say the most well rounded of all of the ISO container providers in North America.

And so their adherence to customer service requirements is very, very strong. So they’ve always gotten high marks. So we command a very high level of share in that business, because we can offer every part of that business to the end-user.

In the energy business, that’s gone through quite a transformation. I think probably early on if you had a truck you could move products for any particular customer. As the business has matured, I think it’s becoming a more and more about the similar types of customer relationships, the reliability, the safety programs that we have in place in today and I can tell you that our customers value those a lot more today than when we very initially got into the marketplace.

So that maturity will inure to our benefit and if we make it a little tougher on some of the smaller mom and pops to be able to compete with us, I know we have one business and our management team there has one business, because safety statistics and the way that we manage our operations were head and shoulders above some of our competitors. Does that answer your question sir?

Thomas Wadewitz – J.P.Morgan

Do we have any other questions? We got one in the front here in the audience.

Unidentified Participant

Thanks. Quick question. To the extent you are moving oil, are you typically moving it to a pipeline, to a rail facility or how those moves work? Thanks.

Joseph Troy

Sure, in the Eagle Ford it tends to be from the pad to a pipeline gathering point. In the Bakken it tends to be to a transloading facility. Just the pipeline is not as prevalent in North Dakota as it is in Texas. And I believe that it’s probably similar in Oklahoma, where it’s a pipeline gathering point.

Thomas Wadewitz – J.P.Morgan

Questions from the audience? Randy, I think over the last, I suppose a year or maybe a touch longer than that, there have been, maybe it’s a year-and-a-half, you implemented EOBR's and you had some issues with driver retention and I think that maybe took a little bit longer to lap and see the ability to grow. But where you add in terms of ability to grow relative to the drivers and how you might look at the driver fee looking forward?

Randy Strutz

Okay, so that was a good question. So, right we did implement EOBRs. We started in 2011 completed in the first quarter of 2012, if you are not familiar with Electronic On-Board Recorders, the key element of that which we were after in using those electronic those, which we believe ultimately will be mandated and there is lot of dialog with the FMCSA and that is to when.

But we went ahead and implemented them. But, yes, some drivers that don’t like it and so we finished that about a year ago now and so we think we purge through the drivers that were resistant to it.

And since then, as we market for new drivers whether it’s owner operators or company drivers, they know we have EOBRs and the ones that are here already have EOBRs and we think it’s actually it’s been needed for us in the marketplace. It was tough a year or so ago, year-and-a-half ago and so as you look forward now.

We’ve been able to grow our driver base. I think we did our earnings call, we said we are up nearly about 2% to 3% in drivers year-over-year and we think that when you look at the overall package that we can offer an owner operator and a company driver, we think it’s pretty competitive.

And now they know that we have EOBRs and like I said, eventually everybody is going to have them. We would like to see that sooner than later. But we think we are over that hump that we had through 2011 and the first part of 2012.

Thomas Wadewitz – J.P.Morgan

So do you think 2% to 3% growth in drivers is a reasonable, normal your run rate or do you think it’s higher than that?

Randy Strutz

Frankly, I think the market is still tough. We tend to attract those drivers from other segments, because again the total compensation package is greater in chemical than in some of the other segments of dry van and intermodal. We would like to see even higher than that. But there are also just limits on the availability of drivers. So if we can sustain the 2.5%, 3% type level, we’d be happy with it.

Joseph Troy

One of the things that Randy and his team has been working on is, a way to attract the owner operators to, we lost quite a few owner operators during the EOBR conversion process. So there is – along with attracting those owner operators comes the revenue. So, when the owner operators were leaving us, then capacity was leaving us and revenues were leaving us.

And so, in order to get those back, we have been having to think a little more creatively about that and hopefully we will be able to institute some things in the not too distant future to get some of those owner operators back.

Thomas Wadewitz – J.P.Morgan

Great. Check with the audience again for any questions. Not, let me know if you have any, I think a couple more. What’s the – you mentioned somewhat on the idle energy assets and that probably more of that was in the Marcellus. Have you kind of figured out what you can move to other shales or is it more likely that you would end up selling assets or how do you view that transition?

Joseph Troy

Well, in particular, the Marcellus assets are a little more difficult to grapple with, in particular we have 110 barrel they are combination units in the Marcellus that technically really don’t work very well in any of the other shales, be either not competitive because we can’t carry as much products or as, for an example, we can’t use them in the Utica because of weight restrictions.

You can only have 100 barrel trailers in the Utica because that would be a normal place to reposition those assets. So we tend to be a little more creative. So we have – Gary mentioned on the last call that we were looking to reconfigure some of these one-tenths and cut the barrels out and turn them into just tractors to be used elsewhere.

There is also some other opportunities that we are evaluating in a different shale, we reduce them in combination with another unit. So we’ve had, again think very differently, in the oil shales, the interchangeability of the assets is a little bit better than the one-tens but there are certain assets that work best among all the shales. So we’ve been repositioning a lot of those assets.

Every month we are putting more and more assets to work which is very positive. So there probably will be a few more shales that will do of assets that really – we aren’t able to optimize, but that was slow to a trickle over the next couple of quarters, because we are now finding the right place for these assets.

We will move them that will be a little bit costly over the next couple of quarters it hurt us to the tune of a couple of hundred thousand plus in the fourth quarter. I would expect that continue until we get some settlement of those assets in the right places.

Thomas Wadewitz – J.P.Morgan

Okay. Let’s see, I think one of the elements of potential optimism in the economy is increasing. Housing starts and that I just wanted if you could comment on how you think the housing market affects your business. It’s probably a bit indirect for what you do but do you have a sense, as your customer base has sensitivity to that? Could that be a leverage point that might drive demand in let’s say the chemicals area?

Randy Strutz

So if you think that’s one of the charts we show briefly. We are not really dependent on any one sector however, when the housing sector has changes, it really does have a lead over affect to multiple sectors with from latexes and coatings to PVC, resins, anything with building products. So we do see it as a positive impact on us. But again, we are not really dependent on any one sector. We are pretty broadly based.

Joseph Troy

We have seen some pick up in the latex business. So that’s been a noticeable pick up. Now whether that’s sustained and really the housing industry is really is rebounding as everyone says that it is, that’s the jury I think at least in my opinion is so little bit on that. But it would have a good impact on us net-net.

Thomas Wadewitz – J.P.Morgan

Okay. And how you look at the, I guess the low cost energy position with respect to natural gas, the feedstock for US chemical producers, relative to say naphtha-based producers in Europe kind of brent-based crude feedstocks. Is that net-net a positive for you or do you kind of gain some money outbound or lose money inbound or how do you view that?

Randy Strutz

Joe may answer on the intermodal side, but on the chemical side, clearly when you look at the large number of expansions of the chemical plants for the crackers the hydrocarbon crackers with Dow announcing a significant expansion of Freeport, Shell announcing a facility outside of Pittsburgh in Monaca.

There is something like maybe the better part of it doesn’t or so these expansions I think over $30 billion of investment. We are not sure that all of them will be built. But I think it goes to the fundamentals that because of low cost natural gas that drives the feedstock of ethylene which most US chemical producers are based on as opposed to naphtha products in Europe we think enhances the position and it’s why everybody seems to be making an announcement on expansions.

And so we think for all of our business that it’s going to grow all modes that the chemical company is shipping including the trucking mode for our sector. We think on the intermodal side, possibly it could be more exports versus imports but I think overall, there will be more robust activity in that sector.

And I think the energy side, it was built really because of the expansion of low cost natural gas and related fracking into the oil shales. So we think over time very positive. I think on the chemical side most of those expansions are not throwing up a warehouse that takes 60 days, a lot of them of two, three, four years out and we expect the impact to be seen in the 2015 through 2017 timeframe as additional capacity comes on.

Thomas Wadewitz – J.P.Morgan

Okay. Great, that’s helpful. Another question upfront here?

Unidentified Participant

Thanks. Just to follow-up on that. So, let’s say, half of those expansions or new crackers got done, so $15 billion as opposed to $30 billion, round numbers. What sort of capacity increase would that be for the industry? So theoretically when those were all up and going, what sort of incremental volume, you grew in line with the industry, what sort of increment are we looking at?

Randy Strutz

That’s a good question. I apologize, I don’t know the exact answer. I know when a lot of the chemical pre-journals they talk about existing ethylene capacity and what this means in expansion. Like I say it’s substantial, but I am – mirrors on the pure chemical industry side I know the exact answer. But we know it’s substantial I don’t know Joe if you have a specific number.

Joseph Troy

No, I think the way that that Gary has characterized it in the past is, right now, if you were to look at the company in a big picture, especially in the chemical side, it’s a GDP plus. And so what it add a couple of additional points to our growth if those, all of those projects were put into place, I think we would say that’s theoretically possible. So, and that would be a big net positive for us. The challenge would probably be again we would go back to capacity in the drivers and to make sure that we had enough capacity there to move it.

Thomas Wadewitz – J.P.Morgan

Last chance for any questions from the room. Yes, we have one over there. Great.

Unidentified Participant

Hi, so you said that one of your competitive aspects that you have best-in-class safety, but at the same time a lot of your affiliates and owner operators 70% to 90% are from owner operators. So how do you make sure that you attract the right type of owner operators who will carry on that kind of safety standards?

Randy Strutz

Okay, that’s a great question. So, regardless of the type of driver that we have, we manage all and oversee and account for safety on all drivers, again, whether they are company owner operator, whether it’s adhering to CSA standards, our own safety processes, our audits, we go through recruiting of drivers.

We go through pretty rigorous driver qualification looking for things like past safety performance, accident history, any other flags we might see in their history, minimum age and experience requirements. And so regardless of have the driver we have a pretty heavy scrutinzation process upfront and then ongoing. We really review and measure all drivers and if we see any type of behavior that we don’t like, we will disqualify drivers. And that’s how we believe we maintain our performance.

Thomas Wadewitz – J.P.Morgan

Okay, great, with that, I think we are going to wrap it up. Randy and Joe, thank you very much for your time.

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