Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

USA Truck, Inc. (NASDAQ:USAK)

Q2 2014 Earnings Conference Call

July 31, 2014 09:00 AM ET

Executives

Jody Burfening - IR

Cliff Beckham - EVP and CFO

John Simone - President and CEO

Analysts

Donald Broughton - Avondale Partners

Zack Buckley - Buckley Capital Partners

Operator

Ladies and gentlemen, thank you for your patience and holding. We now have your presenters in conference. Please be aware that each of your lines is in a listen-only mode. At the conclusion of today’s presentation, we will open the floor for audio questions. At that time instructions will be given as to the procedure to follow if you would like to ask an audio question.

It is now my pleasure to introduce today’s first presenter Ms. Jody Burfening.

Jody Burfening

Thank you, David. Good morning everyone and welcome to USA Truck’s second quarter earnings conference call. Joining us this morning from management are John Simone, President and Chief Executive Officer and Cliff Beckham, Executive Vice President and Chief Financial Officer. Before we begin the call, we’d like to note that this conference call will contain forward looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. Forward looking statements may be identified by their use of terms or phrases such as expect, estimate, anticipate, projects, believe, plans, goals, intend, may well, should, could, potential, continued, future and terms and phrases of similar substance.

Forward looking statements are based upon the current beliefs and expectations of management and are inherently subject to risks and uncertainty, some of which cannot be predicted or quantified, which could cause future events and actual results to differ materially from those set forth and contemplated by or underlying the forward looking statements.

Accordingly our actual results may differ from those set forth in forward looking statements. Investors should review and consider the factors that may affect future results and other disclosures by the Company in its press release, annual reports and Form 10-K and other filings with the Securities and Exchange Commission. Management disclaims any obligation to update or revise any forward looking statements to reflect actual results or changes in the factors affecting the forward looking information.

We’d also like to point out that management is using certain non-GAAP financial measures in today’s conference call that supplement the Company’s consolidated financial statements. A reconciliation of these non-GAAP measures to GAAP is provided in the table at the end of the earnings press release and the slides accompanying today’s conference call prepared remarks.

With those housekeeping items out of the way, I’ll now turn the call over to Cliff. Good morning, Cliff.

Cliff Beckham

Good morning and thank you Jody. Before turning the call over to John, I’d like to note that our GAAP financial results for the second quarter include a $0.13 per share charge incurred in connection with defense costs. The arrangement with our primary financial advisor is complex and contemplates a wide range of potential fees for a variety of outcomes. After a few quarters of uncertainty, we determined during Q2 that payment of an independence fee later this year is now probable. So we accrued for it. More detail will be included in our 10-Q filing in a few weeks.

In his remarks today John will focus on our adjusted EPS results which reflect USA Truck’s fundamental operating performance and the metrics we use to measure our progress towards restoring profitability. Now to you, John.

John Simone

Thanks, Cliff. Good morning, everyone. We’ve reached an important milestone this quarter, crossing over to profitability while making good progress in implementing our turnaround plan. Let me take you through the key financial metrics on Slide No. 3. First and most important we delivered adjusted earnings per share of $0.20 as compared to a loss of $0.14 in last year’s period. This is also USA Truck’s first positive GAAP EPS since the second quarter of 2011. Our strong performance was driven by a 12.1% increase in base revenue, excluding fuel surcharge revenue. We improved our consolidated operating ratio by $410 basis points to 96.6%. For the second consecutive quarter our asset-light SCS business turned in a record quarter and the performance of our trucking business continued to trend in the right direction. These achievements offset the tough winter that posed so many challenges to our industry at the start of the year.

Looking at our adjusted EPS for the first half of the year puts our operational improvements over the past 18 months in perspective. We delivered EPS of $0.07 for the first half of 2014, compared to a loss of $0.38 in the first half of 2013. For the same period in 2012 the Company posted a loss of $0.81. So the trends clearly show a major step forward. As you look at our results for the quarter, it’s important to keep in mind that as shown on Slide 4, we offer complementary services designed to work together to drive growth.

An integrated diversified business has always been an important aspect of our strategic plan. We are using all four offerings to move freight for our customers and our plan is to enhance operational execution in all of these areas. In the second quarter 92 of our top 100 customers used more than one of our services. That’s up from 83 in last year’s second quarter.

Let’s move to Slide 5 now, so we can start drilling down into our two reportable segments. I’ll start with trucking. These operating metrics which we provide each quarter underscore the effects of driver turnover on our performance in the second quarter and in fact throughout the first half of 2014.

This industry wide challenge causes a rise in the number of unseated trucks in our fleet, a decrease in seated trucks and a decline year-over-year in total miles. The good news though is that our driver recruiting and retention initiatives are beginning to yield results. Driver turnover trended down throughout the second quarter, and accordingly our seated truck count began to rebound after April.

As we discussed during last quarter’s call, we put several initiatives in place to address recruiting and retention. While we still have ground to cover, we’re encouraged by the progress we’ve made during the quarter. Just as importantly, our improved asset utilization, the highest in more than three years help to offset some of the unseated truck count and mitigated the decrease in total miles. Along with an increase in pricing, the higher asset utilization helped us achieve growth in our weakly revenue per seated truck of 7%.

Slide 6, provides further detail on the improved performance of trucking. While base revenue grew modestly and we experienced a spike in costs related to employee medical benefits, we reduced variable costs and improved our trucking OR by a 170 basis points, bringing trucking’s turnaround largely back on track after the severe first quarter weather.

Three of the four metrics that decreased on a year-over-year basis were related to the industry's challenging driver situation. Our variable cost improvements are summarized on Slide 7. We’ve made substantial progress in three categories critical to our turnaround plan; fuel, maintenance and insurance claims. This is the first time thus far in the turnaround that during the same quarter we have posted improvement in all areas of these operating metrics simultaneously.

The progress is the direct result of initiatives we’ve implemented during 2013, notably our efforts to improve maintenance operational efficiencies and reduce our insurance and claims costs. While the initiatives themselves are broad, we have been executing on literally hundreds of action items every day to drive improvements. As a result, we produced a $0.04 net reduction in variable costs for the second quarter, net of inflationary and cynical pressures on driver compensation.

Now let’s turn to Slide 8 to review SCS, which turned in an exceptional quarter. The segment's strong results reflect a combination of factors, including crisp execution, a high level of service to our customers and as I mentioned before the benefits of our integrated model. Base revenue grew 39% to almost $42 million, accounting for more than a third of our consolidated base revenue.

On the strength of improved productivity of our staff, we increased operating income 177% to $6 million and SCS operating ratio increased by 700 basis points to 85.7%, illustrating the substantial fixed cost leverage this business generates. Overall, it was another industry leading performance.

At this point, I’ll turn the call over to Cliff for an update on balance sheet and liquidity.

Cliff Beckham

Thanks John. On Slide 9, we’ve summarized our balance sheet and liquidity information. We ended the quarter with $125.1 million of debt outstanding, up modestly as expected from Q1 due to the continuation of our fleet refreshment program. Year-to-date however, our total debt is down by $3.8 million. At quarter end, we had 31.7 million of net borrowing availability on our revolving credit facility, net of the minimum availability we were required to maintain of approximately $18.8 million.

Our cash flow from operations was very strong, compared to recent quarters and was in fact one of the highest levels in recent years. It was down year-over-year but that was primarily due to a one time pick up in last year’s Q2 when we implemented a major DSO reduction initiative. Now back to you John.

John Simone

Thanks, Cliff. I’ll pick up on Slide 10, so we can go over our outlook for the year. To summarize, our turnaround plan continues to progress after a challenging first quarter. Despite the high unseated truck count, we made considerable progress in Q2. Going forward, although we have to compete with other industry drivers, we expect to benefit both from the strong pricing environment and from our operational improvements, particularly in our SCS business.

Building on the positive Q2 trends, our confidence is growing that we will achieve positive consolidated operating income for 2014. Of course there are always macroeconomic trends not completely within our control such as elevated competition for drivers and fuel cost but overall we’re feeling very upbeat.

However there is a modification in our outlook that I would like to call out. As I mentioned on the last quarter’s call, our biggest challenge to meeting the goal of positive trucking OR for the year was overcoming the difficult Q1 through lower unseated truck count. While our seated truck count is now ramping back and we expect pricing strength to hold, given the persistent driver challenges our industry is facing, we’re no longer comfortable making a promise to you that we will meet that goal this year.

One other point about our goals for 2014. We’ve also modified our positive EPS goal from GAAP EPS to adjusted EPS to reflect the $2.2 million charge related to defense costs that we booked this quarter. As Cliff stated at the beginning of the call, we are not in a position to calculate the charge or anticipate the need to book it. On an operating basis we still do expect to deliver positive net income for 2014.

Finally moving to Slide 11, I want to remind everyone that we’re focused on the same 14 high leverage activities to continue executing our turnaround. These 14 levers fall into three major categories: Operational Execution, Profitable Revenue Growth in all products and Cost Effectiveness. With that overview, operator, we’re ready to move to Q&A. Please open up the call for questions.

Question-And-Answer Session

Operator

Thank you. Ladies and gentlemen at this time the floor is now opened for your questions. (Operator Instructions) Our first question comes from Donald Broughton with Avondale Partners.

Donald Broughton - Avondale Partners

First of all - housekeeping, ending truck count owned and ending owner operator count at the end of the second quarter. And I’m assuming owner/operator stayed even at about a 100-101.

Cliff Beckham

Owner/operator is Donald, or actually at the end of the quarter at 140.

Donald Broughton - Avondale Partners

So nice increase there, okay.

Cliff Beckham

Company truck count at 1,856.

Donald Broughton - Avondale Partners

1,856. So you disposed of how many trucks in the quarter?

Cliff Beckham

We net disposed of approximately 65 trucks in the quarter on timing of sales and acquisition of new equipment.

Donald Broughton - Avondale Partners

Sure, sure. I know midway through the quarter we talked about the unseated truck count and that you’d made progress there and that it was down to about 7% but we ended the first quarter at 8%. Now we’re back up to 8.1%. Can you kind of walk us through the quarter, what happened there, the momentum and where you stand on recruiting cost, driver pay, et cetera? Because obviously you've made a lot of progress on many items but that’s one you’re still struggling with.

Cliff Beckham

Yes, I can give you an update on that Donald but it's fairly broad. So please follow up if I don’t answer everything. We saw the driver turnover and the corresponding seated truck count reach their peak in April. So driver turnover was at its highest in April, the unseated truck count was also at its highest in April. Throughout the remainder of the quarter we experienced decreasing turnover and building seated truck count.

During the quarter we did not experience or we didn’t implement a change in driver pay. We did implement a host of initiatives to recruit and retain drivers. However, we do anticipate during the second half of 2014 that there will be upward pressure on driver compensation that is built into our goals that John stated a moment ago, but we do anticipate elevating driver pay by approximately $0.01 $0.02 per mile.

Donald Broughton - Avondale Partners

All right that makes sense, especially given what Swift announced just last week. You made great progress on the fuel line. If my calculations are right, gross fuel dropped on an absolute basis by 7%. Your gross fuel surcharge collected actually went up slightly. Assuming after you’ve paid out the attributable amount to owner operators, I’ve got net fuel expense dropping by 39% on a per mile basis, dropping 37% on a year-over year-basis. That’s phenomenal, guys. Walk me through how that -- how you’re able to accomplish that? I mean quite frankly, how’s that possible.

John Simone

So, I’m going to take part of that question Donald and I’m going to ask Cliff to take part of the question. So the first part of the question is related to trucks specification, continued fleet replacement with more efficient vehicles. Also related to vehicles going through and making sure that all of our trucks, ECMs were programmed to the most effective parameters and idle conservation and we also retrofitted some of our newest trucks that were not equipped with APUs during the quarter. So it’s a combination of parameter changes to the most efficient settings, vehicle specifications and idle compliance and all related to the vehicles at this time. But it addresses one piece of it.

Cliff Beckham

Certainly that, nearly 7% improvement in MPG that was referenced in the presentation was the largest contributor to the reduction in fuel expense year-over-year, but we also improved the efficiency of our fuel surcharge collection programs. Our pricing has improved in that area considerably year-over-year and to a lesser extent, but still material we have been able to reduce our cost per gallon of purchasing fuel, both over the road and in our own facilities. And then there is some effect to having more on our operators in a fleet and having smaller, albeit relatively minor, but a smaller percentage of the fleet for which we buy fuel. All of those things contributed to our year-over-year improvement in fuel. And it is in our minds very sustainable in a structural improvement in model.

John Simone

And Donald if I may, I want to add, one other. We talked about it over the last couple of quarters but we have software that we implemented throughout last year that directs our drivers to the best, most affective, cost effective fuel stock. So we have high compliance on our fuel solution and that’s a technology implementation that we have done over the back, we started in the first quarter or second quarter of last year and we’re, hitting our stride on that fuel solution.

Donald Broughton - Avondale Partners

So I've looked back over the last 15 years and fuel on a per mile basis has ranged anywhere from essentially $0.11 to $0.23 a mile and this is a $0.07 a mile quarter. On a go forward basis am I hearing you say that I should remodel it for $0.07 to $0.08 a mile or is $0.10 or $0.11 a more normalized amount?

Cliff Beckham

Donald, I think that maybe your $0.07 a mile is pulling fuel surcharge out from maybe our asset life business. The way that we measure internally we’re more in the $0.15 per trucking mile range during this year.

Donald Broughton - Avondale Partners

Ah, so you have -- your gross fuel surcharge includes fuel surcharge collected on brokerage operations?

Cliff Beckham

Right.

Donald Broughton - Avondale Partners

Okay. That would explain it.

Cliff Beckham

When you’re looking at our rolled up GAAP consolidated statements and offline we can take you through how to…

Donald Broughton - Avondale Partners

That’s fine. I don’t want to monopolize the call on kind of a -- that’s great Cliff. You and I can talk offline after the call. One last thing and then I’ll let someone else have the floor and then get back in the queue. At the end of the quarter, do you have handy what your accrued insurance and claims liabilities for the short and long term basis are? If not we can get -- I can get that from you later?

Cliff Beckham

Yes. Approximately Donald, those are in the range of $20 million.

Donald Broughton - Avondale Partners

So drops a little bit sequentially?

Cliff Beckham

Correct.

Operator

Our next question comes from Brad Delco with Stephens Incorporated.

Unidentified Analyst

Hey it’s actually Ben on for Brad. So I'm looking at a past presentation here and you guys said that you needed the unseated tractor account or you were targeting for the unseated tracker account on longer term basis, you get it down to 4%. You’re above 8% now? What level do you need to reach to achieve profitability in the truckload segment?

Cliff Beckham

Well, Ben this is Cliff. There are, as you know a lot of variables that go into answering that question. So I’ll attempt to answer it in vacuum and assume that every other variable stays the same as it was in Q2. And if that’s the case we would have needed approximately a 100 more seated trucks to overcome the operating loss in a trucking for the quarter.

Unidentified Analyst

So that we can put it around. What percent of your total fleet? So maybe 6% or so?

Cliff Beckham

Yes.

Unidentified Analyst

Got it. And based on kind of the improvement that you’re seeing in that seated tracker account number, it sounds like a terrific quarter, it improved sequentially. How has it performed so far in July and I know it’s the inhibitor toward achieving profitability this year, bit when do you think you can get it low enough to achieve profitability maybe over the longer term?

John Simone

We made significant progress as I mentioned in -- we really started to get traction on growing the seated truck count. Probably the middle of last month we started to really add to our seated truck count and that’s continuing through July. That’s a difficult question. I'm trying to give you the best answer without not giving you an answer. We feel like our recruiting efforts and our drivers hiring is going well. We continue to get good inflow. We are slowing down our turnover, resulting in the net increase. So if we continue at the pace that we’re going, we’re adding trucks every week, but certainly as volatile as the market is, it's difficult to give you an exact time. Right now we feel like we’re going to continue to move through and get that work done in this quarter to that 6% level.

Unidentified Analyst

Okay. That’s good color. And you saw a big increase in revenue preloaded mile. What percentage of your contractual business have you renegotiated at this point and what kind of rate increases are you seeing on that contractual business?

John Simone

So the rate increases that we have implemented thus far come in two categories. One is the bids that we get in and I don’t like to refer to it as this season because we're receiving business all year along the heavy part of the year. So we have changes and increases through our normal bid cycles and we’re seeing increases coming from our -- out cycle increases where we’re under market. So we’re continuing to work through the rate increases. We’ve worked through the majority of our largest contributors, our top 100 and we are seeing increases that range all over the board, some double digit rate increases, where we might have been under in a particular market for whatever reason but across the board our average increases 7%.

Unidentified Analyst

Okay. And then on the SCS business, obviously it’s performing very well. It showed significant improvement year-over-year. Can you kind of talk about typical seasonality in that business and how you expect it to perform in the back half of the year here?

Cliff Beckham

Ben, its Cliff. So historically, SCS has had its best quarter in Q2. However, the market dynamics this year are different then obviously what we’ve seen in the recent past. So we anticipate continued strength in SCS throughout the next several quarters and so we expect the third quarter to be very strong. The fourth quarter will taper off seasonally simply because of the holiday disruption and of course Q1 is always down a little bit from a seasonal perspective. But we think that Q3 is going to be similar to what we’ve seen in the first half of the year.

Operator

Our next question comes from Zack Buckley with Buckley Capital Partners

Zack Buckley - Buckley Capital Partners

I wanted to get some insights relative to another company in the industry that I know is similar in size and structure but had taken a different strategic approach, PTSI has relatively similar length of haul and a similar, though a smaller sized fleet. With revenues flat, they took OR in trucking significantly down over the past year. And it appears the Company achieved this by shrinking its spot fright business and diverting those customers to delicate freighter brokerage. I was curious, would you guys be able to take advantage of this strategy?

John Simone

As part of our strategy in our product mix mentioned earlier on the call, Zack that we are looking at growing all of our products and with -- when the market gets tight, customers tend to what to secure capacity in a variety of a ways in which dedicated phase in one area that customers seek to secure capacity over longer periods of time. So absolutely dedicated freight is one of our growth areas that we’re focused on, adding more contractual business at better margins.

Zack Buckley - Buckley Capital Partners

Got it, and then how do you look at sort of run rate profitability on an EBIT basis for SCS at this point.

Cliff Beckham

Zack, its Cliff. Certainly we are in an unusual market environment and the results in SCS are reflective of that. We don’t want to -- we're not comfortable in stating that the current margins in SCS are sustainable over the long term. Through the economic cycles and seasonality we think that model is a low 90s OR model but we also believe that the tight capacity environment that we’re operating in right now is going to persist for a while. So we believe that margins similar to what we’ve experienced in the first half of this year are sustainable in the near term but your guess is as good as mine on how long that might last, but we don’t foresee a material change in 2014.

Operator

Our next question comes from Donald Broughton with Avondale Partners.

Donald Broughton - Avondale Partners

I guess I’m back in the queue. Average age of the truck fleet really hasn’t gone down materially, correct?

Cliff Beckham

That is correct.

Donald Broughton - Avondale Partners

Then what helped you drive what was essentially a $0.03 a mile decrease in the operations and maintenance cost?

John Simone

Donald, this is John. A lot of our decrease in maintenance cost comes from our strategy to leverage our maintenance facility infrastructure. So were doing quite a number of repairs through third parties and on the road and we had cut back our staffing and hours in our maintenance facility so a large portion of that comes from bringing the trucks through our shops when the drivers are scheduled through the house on home time, not to disrupt their productivity. So that’s part of it. And then we’re continuing to modify and upgrade our maintenance practices and putting more rigor and discipline around how we maintain our trucks and our shops.

Donald Broughton - Avondale Partners

So it wasn’t change in the absolute amount of maintenance necessary for the trucks. It was more just a change to getting more of it done in house versus outside vendors.

John Simone

Yes, the outside network is more expensive than what it costs us. The labor rate is more, the pure labor rate is more expensive externally and we’re able to control both quality and cost of the repair in our own facilities.

Operator

And at this time we have no other questioners in the queue.

John Simone

Okay, then I’ll move to closing remarks. I want to thank everyone again for joining us this morning. As you’ve heard we’re seeing a lot of upward trends in our business. I can’t emphasize enough the dedication and commitment of our team members in getting us to our best EPS in four years and we’re all working hard to accelerate our turnaround progress. I look forward to giving you another good update on our third quarter call in October. Enjoy the rest of your summer.

Operator

Ladies and gentlemen that concludes today’s presentation. You may disconnect your phone lines, log off your webinars and thank you for joining us this morning.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: USA Truck's (USAK) CEO John Simone on Q2 2014 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts