Swift Transportation's (SWFT) CEO Jerry Moyes on Q1 2016 Results - Earnings Call Transcript

| About: Swift Transportation (SWFT)

Swift Transportation Company (NYSE:SWFT)

Q1 2016 Results Earnings Conference Call

April 22, 2016, 11:00 AM ET

Executives

Jason Bates - VP of Finance and IR

Ginnie Henkels - EVP & CFO

Jerry Moyes - CEO

Richard Stocking - President & COO

Analysts

Jason Bates - VP of Finance and IR

Operator

Good morning. My name is Chris and I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 2016 Earnings Call. [Operator Instructions] Thank you.

Jason Bates, you may begin your conference.

Jason Bates

Great. Thank you, Chris. We’d like to welcome everyone out to the Swift Transportation's first quarter 2016 Q&A session. As a reminder, we have posted a comprehensive letter to stockholders summarizing our results on the front page of our Investor Relations website.

We will start the call today with our forward-looking statement disclosure. This call contains statements that may constitute forward-looking statements, which are based on information currently available. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Such forward looking statements are inherently uncertain, are based upon the current beliefs, assumptions and expectations of company management and current market conditions, which are subject to significant risks and uncertainties as set forth in the Risk Factor section of our most recently filed Annual Report Form 10K.

As a result of these and other factors, actual results may differ from those set forth in the forward-looking statements and the prices of the company's securities may fluctuate dramatically. The company makes no commitment and disclaims any duty to update or revise any forward-looking statements to reflect future events, new information or changes in these expectations.

So with that out of the way, I'd like to recognize the members of Swift Management Team on the line today. We have Jerry Moyes, our Founder and Chief Executive Officer; Richard Stocking, our President and Chief Operating Officer; and Ginnie Henkels, our Executive Vice President and Chief Financial Officer. Again, my name is Jason Bates, Swift's Vice President of Finance and Investor Relations Officer and I will be moderating today's Q&A session.

As a part of our evolving IR communication plan, this quarter we strive to streamline the Q&A process by addressing key themes and categories rather than focusing on every single questions submitted. We have attempted to address each of the more prevalent topics. However if you do have follow-up questions feel free to reach out to me after the call.

So we’ll start today’s call with some questions on EPS guidance and expectation, followed by a discussion of each of the segments.

Question-and-Answer Session

Q - Jason Bates

What are the risks and opportunities to your $1.45 to $1.55 adjusted EPS range?

Ginnie Henkels

Yes, opportunities would include a tightening capacity demand equation which would positively affect utilization and pricing beyond our base assumptions which Richard will address in a moment.

This could result from either an increase in consumer confidence and spending or due to shippers shifting freight to ELD compliant carriers. The primary risks to the current range are a continued softness in the freight market, an increase in fuel prices and any significant claims or adverse developments.

Jason Bates

How much of the second half 2016 guidance is predicated on project work rebounding to the level experienced by the company in 2014 and earlier.

Ginnie Henkels

We are assuming project work to be in line with that what we experienced in 2015, not 2014 and earlier.

Jason Bates

Please clarify insurance claims "increase was associated with current year development ".

Ginnie Henkels

Although our accident frequency is trending favorably and is down year-over-year, the development of prior year claims negatively impacts the actuarial models that are used to calculate our expense in the current period. This is the effect we are referring to when we use the term current year development.

Jason Bates

With settlements related to trucking accidents continuing to rise at a rapid pace, is there a risk of more adverse development of prior period claims as the year unfolds in spite of the company's improving safety track record.

Ginnie Henkels

Although it is not something we're anticipating, given the long tail associated with claims it is a possibility.

Jason Bates

What concrete data or observations outside of expectations for ELD induced tightness give management confidence in its view that the capacity demand balance will materially improve throughout 2016?

Richard Stocking

Our perspective on future period is largely a function of customer interaction and feedback. While macro data points suggest a struggling industrial sector they also indicate that the consumer is doing okay.

As you noted, we have had several customers express concerns over shipping with carriers who are not ELD compliant or who do not have clear plans to achieve compliance in the near term.

Materially improve is relatively strong language, however, we do expect the second half to be better than the first half.

Jason Bates

What would cause ELDs not to be a significant impact on capacity?

Richard Stocking

In our view unless there is a change to the regulation, there is no reason ELDs would not have a impact on industry capacity.

Jason Bates

For clarification, in the $1.45 to $1.55 range, is it correct to assume you are using $0.25 for the first quarter?

Ginnie Henkels

Yes, that is correct

Jason Bates

Can you discuss quarterly progression of earning given the revision and the full year guidance?

Ginnie Henkels

We would again point you to the guidance we gave on our first quarter earnings call which we reiterated in more detail on our mid first quarter call. The most recent revision to the full year guidance would not necessarily affect the anticipated earnings cadence.

Jason Bates

Please clarify what is the base of the $3 million to $5 million increased gain on sale in the second quarter of 2016?

Ginnie Henkels

We actually had several questions with regard to our gain on sale estimate for the second quarter and realized we were not very clear in the letter. So to clarify, we are expecting gain to be a total of $3 million to $5 million for the quarter, which was actually less than we experienced in Q1.

Jason Bates

Is Swift still excepting gain on sales in the $15 million to $20 million range for full year 2016 and how should we be thinking about this on a quarterly basis?

Ginnie Henkels

Yes, that is our best estimate at this time. However, as you all know the used truck market is continually evolving and could potentially impact that range favorably or unfavorably. We would anticipate the gains to be in the range of $3 million to $5 million each quarter.

Jason Bates

Do you have an estimated breakdown of where the 200 tractors will be removed from the segments?

Ginnie Henkels

It will be a little bit from each of the segments wherever we have the opportunity to improve utilization.

Jason Bates

Does the new guidance range reflect adjusted expectations for contract rates during the rest of year?

Ginnie Henkels

Yes, that has been factored into the revised guidance range.

Jason Bates

We're going to move into the truckload segment questions. The first, what is driving the rate pressure across the truckload industry? Do customers have serious doubts about capacity tightening as a result of the forthcoming capacity constraining regulations?

Jerry Moyes

It is a combination of activities. There are brokers in the market trying to capture share. There has been freight softness in the market creating excess capacity and there are some carriers in the market exhibiting irrational behavior in an attempt to keep equipment as well as drivers moving.

Customers are concerned about future capacity, but some are taking advantage of the short term dynamics leading to lower pricing. However, we believe this trend is not sustainable on the long term.

Jason Bates

Will the tremendous rate pressure in the spot market drive more small carriers out of business before they have to worry about ELDs, speed limiter or sleep apnea testing et cetera?

Jerry Moyes

As we’ve stated in the past, we believe that the recently discussed behavior is not healthy for the market and will lead to an increase in bankruptcies amongst smaller carriers in our industry. This will obviously have an effect on capacity, availability which should favor – have a favorable impact on companies like Swift.

Jason Bates

How would management describe the pricing environment out there? Is the 0.7% revenue per loaded mile ex-fuel surcharge in first quarter sustainable? What does management expect for revenue per loaded mile ex-FS for the remainder of the year?

Jerry Moyes

Given the current market dynamics previously discussed, we believe full year revenue per loaded mile could be up to 2% as opposed to the previously anticipated 2% to 3%. However, we do believe that rates will strengthen on a year-over-year basis in the back half of 2016.

Keep in mind in Q1 we hauled some broker business as well as some intermodal business at lower paying rates in our truckload division that affected our overall revenue per loaded mile.

Jason Bates

What are your customers telling you about the much advertised inventory glut that is supposedly currently depressing demand for truckload services?

Jerry Moyes

There are a lot of different thoughts within the industry on this topic. We believe the current inventory cycle has been a slight headwind on freight volumes. There are shippers out there that are reducing their safety stock and becoming a more just-in-time shipper.

However, this will ultimately be a positive for carriers. Additionally we have a variety of customers who are opportunistic in buying inventory right now and will warehouse this inventory affecting the reported inventory data points.

Jason Bates

How many bids are still outstanding at this point of the current cycle?

Jerry Moyes

Although the first quarter was a bit stronger than normal this year as we have discussed on past calls, our book of business is pretty – is priced pretty evenly throughout the year.

Jason Bates

How much business is Swift winning in bids where carriers were kicked out without an ELD?

Jerry Moyes

It is increasing in regularity and we expect this dynamic to gain momentum in the back half of this year and more so into 2017 and 2018. We have already realized several million dollars of business awards due to shipper’s expectations of carriers to have an ELD implementation plan.

Jason Bates

How does April truckload demand look? What has been the biggest disappointment, capacity or retail inventory overhang?

Richard Stocking

As you heard from some of our peers, April has been sluggish so far. There's been a combination of capacity and the inventory as was previously discussed. We do however believe we’re going to gain momentum as the quarter unfolds.

I've been out on the road most for last couple of weeks and I can tell you two things. Number one, we picked up some very good business and number two most of our customers are very positive about third and fourth quarter.

Jason Bates

Has management’s target over 1% increase in truckload utilization changed in light of the current environment and the company's decision to modestly shrink the fleet?

Jerry Moyes

It has not changed. Our entire organization is focused on improving utilization. We remain committed to managing our fleet size to the freight volumes to drive success in achieving progress in this most important initiative.

Jason Bates

Has driver turnover increased given the market challenges and the reduction in loaded miles per tractor within truckload?

Jerry Moyes

Our retention figures are very respectable and some of the best in our company's history. We are extremely proud of the numerous driver friendly initiatives we have implemented over the years which we continue to develop.

Jason Bates

Moving to the dedicated segment, would the solid pricing gain have dedicated the result of contract renegotiations or did Swift add new business in the quarter that allowed us to gain solid pricing. Please talk about some of the productivity measures that led to the strong productivity gains and solid operating ratio performance in the quarter?

Jerry Moyes

The year-over-year revenue per truck gain was due to a variety of operational improvements such as increasingly - or increasing our weekly loaded miles per truck, our pricing, rate increases, generating more backhaul revenue, while also hyper focusing on underperforming fleets.

Although we are proud of the progress we’ve made, we remain committed to continued improvements. We are happy with the team we have in place and we look forward to positive results in the future.

Jason Bates

Can you give more detail on your progress in getting through unprofitable dedicated accounts and the "specific opportunities for continued growth" you mentioned in the fourth quarter earnings call?

Jerry Moyes

We continue to have a disciplined and methodical focus on finding opportunities to reduce operating cost. In the first quarter we were able to shed several underperforming fleets while improving the profitability of other fleets through maximizing the productivity of our resources i.e. removing unmanned trucks like we talked about increasing backhaul revenue, reducing trade approvals et cetera.

The growth environment in the first quarter was difficult due to available over the road capacity and private fleets keeping their own fleets busy. We had a number of a dedicated bids where ultimately the incumbent was retained. However, we do foresee growth opportunities here in the - on the horizon.

Jason Bates

Moving to the intermodal segment, how integral is intermodal to your overall strategy?

Jerry Moyes

Similar to what we've reiterated on prior calls. We believe intermodal can offer long term value to both Swift's customers and shareholders. Many of our current customers value a true asset based multi-model transportation solutions of which Swift is one of only a few companies that can truly offer this value to their customers.

That being said, intermodal like every other business as Swift must cover its cost of capital. If we feel that intermodal division is not likely to attain this objective, we evaluate all options available to us.

We still believe we can reach a mid 90 operating ratio on a consistent basis and that remains our main objective to continue to work with our rail partners in order to reduce our rail cost and we're focused on growing topline revenue while implementing cost control initiatives.

The first quarter was a challenge from a volume perspective, however we do believe we are entering a long term - we do not believe we are entering a long term market turn down as inventory levels are reduced and customers better understand the impact of upcoming ELD requirements, we anticipate a gradual strengthening of demand as we move further into this year.

We feel our operating model is refined, our service and safety results are strong and we’ve taken cost out of the intermodal division. The foundational components to deliver consistent profitability are in place as we bring in more profitably priced volumes.

Jason Bates

Have rail service issues from flooding impacted first quarter operations?

Richard Stocking

Intermodal service has been very good for the first quarter with a few exceptions caused by the flooding in the Southern U.S. There are some lanes which could still be improved but however at a broad level, the rail service is back to the previous high levels.

Jason Bates

Is the competitive pricing in intermodal being driven by multiple players or you’re seeing one large competitor sway the market?

Richard Stocking

The current market can be characterized by inconsistent demand. One competitor in particular has focused on volume growth at the expense of price. The reduced fuel prices combined with adequate truckload capacity has created pressure on intermodal volumes particularly in shorter length of haul.

Notwithstanding the situation though, many shippers remain committed to intermodal as rail service results have been strong and they have a concern on whether there is adequate truckload capacity to support their business needs in both the intermediate and long-term future.

Jason Bates

Can you discuss the intermodal initiatives, more color on what these are, potential savings et cetera?

Jerry Moyes

Sure. Some of our key intermodal initiatives include increasing our volumes with adequate price freight, improving the turns of our container fleet to desired levels and additional fixed and variable cost reductions, including reducing non-driver headcount.

We also feel there is opportunity to improve efficiencies in our dray operations. We do this by focusing upon increasing truck utilization through increased flip seating, reduced dray trucks in selected markets and relocated intermodal operating points closer to the rail ramps.

Additionally we are reducing our chassis rental cost through tactical stacking of containers. All of these things are happening as we speak. We like our investors feel the urgency as it relates to improving this line of business.

Jason Bates

That takes us through the Swift Refrigerated segment. It seems like the progress at Central Refrigerated has not met expectations thus far. What are the plans to turn things around in this segment?

Jerry Moyes

Yes, there is a lot of positive things happening at Swift Refrigerated. However we have experienced some headwinds along the way which we have – which have been impediments to achieving our desired financial performance.

Having said that, we are currently encouraged by recent improvements in our safety and claims, accident frequency and cargo claims are trending in the right direction. Driver retention has improved significantly over the recent quarters and their dead head and utilization improved year-over-year in the first quarter by 20 basis points and 4.2% respectively.

So while recent headwinds and customer turnover have clearly impacted financial results, the team is diligently working to pull the levers at its disposal while seeking to profitably replace loss business. The turnaround will not be immediate but we are optimistic about the long-term potential of this business to our overall suite of services.

Jason Bates

Is there any danger of losing additional temperature controlled business to the spot market given the enticing price points available currently in that market?

Jerry Moyes

The vast majority of our customers are long-term focused and continue to see quality carriers who can haul their freight safely and on time. Although the current spot market maybe enticing based on feedback we’re receiving, we don’t anticipate losing substantial business to the spot market.

Jason Bates

As the more concerted push by railroads into temperature control containers affected your business results or the outlook.

Jerry Moyes

No this hasn't had a significant impact on our business.

Jason Bates

Is the oncoming freight from new customers within Swift Refrigerated going to represent a similar revenue per mile profile than that of the freight from the two large customers that would lost?

Jerry Moyes

This is good news. We are very excited about the new business that is ramping up during the second quarter as it brings with it a solid rate per loaded mile and higher utilization. Based on these two factors and the expected volume of this award with great customers, we expect weekly revenue per truck for the segment to increase from the baseline established during the first quarter.

Jason Bates

How quickly can refrigerated bounce back with new more profitable business?

Jerry Moyes

We have been able to replace most of the business that was lost in the early part of the quarter and feel that the market will continue to improve and produce more favorable conditions into the second quarter.

As we move into the produce and fresh season we expect to market conditions to gain momentum. With improving market conditions and newer awards starting in May, we anticipate better results in the second quarter and throughout the remainder of 2016.

We have had success with servicing our customers evidenced by our recent care of the year awards and we believe this will translate into a new freight awards and price increases.

Jason Bates

Were the last refrigerated customers related or completely separate?

A – Jerry Moyes

No, the two customers were unrelated.

Jason Bates

We’re going to move to some questions about debt and CapEx, as well as a few miscellaneous questions? You had significant free cash flow in the quarter, will you use all of this to repurchase shares in Q2? What are your share repurchase assumptions for the year?

Ginnie Henkels

As we discussed previously, our share repurchases are contingent upon our free cash flow expectations for the year after fleet replenishment and at least $30 million to $50 million of debt reductions. Our free cash flow in the first quarter was approximately $130 million with which we reduced our debt by $30 million and repurchased $45 million of shares.

Our net cash capital expenditures netted to zero after considering the proceeds from the sale of equipment. This was lower than originally anticipated due to the delay and certain attractive purchases to right size the fleet to current demand as we discussed in the letter.

The end result was an increase in our cash balance of $35 million which also helped to lower our leverage ratio to $1.89 since this is calculated based on debt net of cash.

That is a very long-winded way of saying that our free cash flow was unusually high in the first quarter. For the full year, our net cash CapEx should be toward the lower end of the $200 million to $250 million range for the year given the pull back in the first quarter.

Therefore with an increase in CapEx in the next three quarters compared to Q1, I would expect our free cash flow and the pace of repurchases to slow somewhat over the next two quarters given normal seasonality and free cash flow.

Our net debt balance and leverage ratio may fluctuate a bit but both should remain below December 31 balances.

Jason Bates

Does that market outlook in any way impacts your approach to repurchasing shares over the next several quarters or primarily just price sensitivity.

A – Ginnie Henkels

The market outlook could impact our repurchasing as purchases are based on our outlook for free cash flow which would be impacted by changes in the market. Price sensitivity is also a factor.

Jason Bates

Has the M&A market in the truckload sector been helped or hurt by volatility in valuations and increase level of competitive intensity in the marketplace.

A – Ginnie Henkels

It’s a bit difficult to comment on this as we have not been active in M&A and are not aware of any significant transactions that have occurred as of late.

Jason Bates

How would you characterize the driver market currently? Are you satisfied with the general quality of your recruits? Have the pay increases help to stabilize your workforce?

Jerry Moyes

The driver market continues to be challenging. The pay increases have definitely helped and have bolstered our recruiting efforts. Our schools continue to be full and we had a steady pipeline of new recruits. Our retention levels are good and remain well below the industry average but we feel we can continue to improve in this area.

The weakness in the freight market is a frustration for drivers as it reduces our utilization and the miles of drivers are driving. Therefore their paychecks are impacted negatively partially offsetting the benefit of the pay increases. This is one of the reasons we have reduced the fleet. We want to ensure we are getting as many miles as possible to keep our current drivers and to keep them happy.

Jason Bates

What safety technologies are you are evaluating for installation on your trucks, what are the cost benefit ratio associated with these investments?

Jerry Moyes

We are investing in collision avoidance systems, lane departure and automatic transmissions and event recorders and other technologies to improve the safety of equipment. Based on the strong results we have been experienced thus far with this new technology, we believe that return on investment will be achieved.

Jason Bates

Will the tightening in insurance marketing increase your premium cost for the layer or coverage in excess of $10 million per occurrence?

Ginnie Henkels

The disruption in the insurance market is occurring in the primary coverage levels for which we are self insured. Our premiums for our excess liability insurance above our $10 million self-insured retention level is a small portion of our overall insurance and claims volumes.

With that said, we are in the middle of the multiyear program so we do not expect to have a significant impact in the near term. With the investments we have been making with the safety enhancements to the equipment and the improvements in our frequency and severity trends, we hope to mitigate the impact of the tightening market when our renewal occurs.

Jason Bates

Do you believe you will need to do any more driver wage increases this year?

Jerry Moyes

Given the current environment, we do not anticipate giving any additional across the board - increase rate increases. Our goal is to increase the drivers W2 by increasing its utilization and the number of miles that they can drive.

Jason Bates

Can you discuss some of the actions, measures or occurrences in the quarter that led to the lower tax rate? How should we be thinking about tax rate in the remaining quarters given these results?

Ginnie Henkels

As we discussed in the letter, the tax benefits received in the quarter were related to reductions and reserves for uncertain tax positions related to certain states, as well as certain income tax credits realized by our Mexican subsidiary.

Based on this and other items, we do expect our effective tax rate to be lower for the remainder of the year and should be approximately 37.5% in each of the next three quarters.

Jason Bates

Can you give some color on what drove the $4.4 million in losses in your other segments and whether or not this is expected to continue?

Ginnie Henkels

The $4.4 million loss was driven by the amortization of intangibles and certain unallocated corporate expenses. The difference year-over-year was driven by a change in allocation methodology that occurred last year in Q2. Therefore we would expect the trend going forward to be similar to the trends we had last year.

Jason Bates

Great, thank you. That concludes the questions we received. We are going to go ahead and turn it over to Jerry for a summary.

Jerry Moyes

In summary, as you have heard from our peers and us, the first quarter was one of the most difficult challenging markets we have experienced in sometime. However in spite of industry headwinds, we did generate $0.25 of earnings per share. We are optimistic about our recent freight rewards which will assist us in our organization wide focus on enhancing the utilization of our fleets in each of our service offerings.

Additionally the entire organization remains extremely focused and disciplined on managing our controllable costs. We will continue to pull all the levers we have at our disposal to generate utilization, improvement, drive out cost and streamline our processes. The combination of these activities will help further drive profitability improvements.

I have spent most of the last two weeks meeting with the customers and I can tell you that almost every one of them are very concerned about the upcoming ELD mandates and its potential impact on the industry. We believe that this will have the tightening effect on capacity and demand equation in the back half of this year and more so in 2017.

With that, we appreciate the continued support of Swift and looking forward to talking to you on our mid quarter call. Thank you very much.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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