Celadon Group's (CGI) CEO Paul Will on Q3 2016 Results - Earnings Call Transcript

| About: Celadon Group, (CGI)

Celadon Group, Inc. (NYSE:CGI)

Q3 2016 Earnings Conference Call

April 28, 2016 11:00 AM ET

Executives

Paul Will - CEO

Eric Meek - President & COO

Bobby Peavler - CFO

Analysts

Todd Fowler - KeyBanc Capital Markets

Aaron Reeves - BB&T Capital Markets

Jeff Kauffman - Buckingham Research

Operator

Good morning, and welcome to the Third Quarter 2016 Celadon Group Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded.

I'd now like to turn the conference over to Paul Will, Board Chairman and CEO. Please go ahead.

Paul Will

Thank you. Welcome to our March 2016 quarter earnings conference call. I'm joined in Indianapolis by Eric Meek, our President and Chief Operating Officer and Bobby Peavler, our Chief Financial Officer.

I'd like to remind you that my comments and those of others representing Celadon may contain forward-looking statements which are subject to risks and uncertainties. Our SEC filings contain additional information about factors that could cause actual results to differ from management expectations. Before, I address results of the quarter I would like to thank the community for overwhelming support as we mourn the loss of our Founder, Steve Russell.

As we look back at the impact Steve has had on the industry community and company, we are grateful to having had the opportunity to have worked alongside of such a great man. I will now talk about the quarter.

Earnings per share were $0.19 compared to $0.36 during the March 2015 quarter, on a 16.6% increase in weighted average diluted shares, resulting primarily from the company's public offering of 3.5 million common shares, completed in May 2015. We have continued focus on improving key operating metrics reducing debt and improving lane densities and leveraging our brokerage capability.

As indicated in the press release revenue was $259.6 million, up by $27.9 million or 12%. Revenue excluding fuel was $239.9 million, up by $38.2 million or 19%. Revenue per loaded mile improved from $1.80 in the March 2015 quarter to $1.89 or an increase of approximately 5% to the prior year quarter. Asset-light revenue increased in March 2016 quarter to $31.4 million, from $24.9 million last year, or an increase of $6.1 million.

The average company tractor count increased by 270 trucks, from 3,140 last year to 3,410 this quarter. Company miles increased to 79.1 million, or an increase of 1.1 million in the current March 2016 from 78 million miles last year. Owner operator account increased by 641tractors from 1,031 last year to 1,672 this quarter. Owner operating miles increased by 12.6 million from 23.8 million in the March 2015 quarter to 36.5 million this quarter.

The revenue growth in the quarter was attributable to rate increases, higher account and continued focus on the growth of our dedicated businesses gained through acquisitions over the last 12 months. Our fleet grew 22% year-over-year, however, we expect sequential reduction of approximately 46% in the June quarter as we continue to focus on asset utilization. Our revenue per truck per week of $2,804 is made up of two components $2,694 from our core truckload group, up from 2617 in the same quarter and $3,108 from our dedicated business. We anticipate rates for the remainder of the calendar year to be flat [32%].

Utilization for the quarter reported was down approximately 129 miles per week per truck, however, was up sequentially by 45 miles. This improvement is result of our focus to continue to evaluate our total fleet account without existing book of rate as we had new business for the concentration our core operating lanes, we will reevaluate our fleet growth strategy. We saw that over the road fleet utilization increased by approximately 100 miles per week per truck. We also saw sequential improvement of 0.8% in load ratio.

We are continuing to evaluate our freight mix and customer base and we have a focus over the next 12 months to increase utilization and drive down our empty percentage. We have continued to see positive results from qualities companies our sales and leasing division. We have been actively transitioning for a mile heavily focused on gains doing more annuity based model to better serve our customers and maintain long term financial stability. The 2 million gain on sale of equipment which is in trade expense was primarily from the sale of third party equipment. The division generates $300,000 of operating income in the quarter and we expect this number to improve as we continue to transition the model. We expect operating income to be roughly $700,000 to $1 million on a quarterly basis going forward generate from sales, leasing, business services, insurance and maintenance and gains to be in the millions to 2 million range for the June 2016 quarter.

Next I would like to address our current leverage position. Leased assets and the assets held for sale represented approximately $135 million at the end of March quarter. Of the $135 million approximately $56 million was leased at the end of the period which generated $6 million of lease revenue held in other revenue. This is the reduction of the Celadon, we have seen a slight sequential increase in the equipment held for sale as the assets for disposition. We had some equipment sales transaction carried over into the June quarter, however, we still anticipate selling or leasing remaining assets and equipment held for sale over the next 90 to 120 days. We do not anticipate having any significant net cash expenditures needs for the next 12 months so we will continue to focus on paying down that and reduce our leverage.

Our debt reduction plans over the next 6 to 12 months should result in a decrease leverage ratios of 2.5 times from our current position of approximately 3.5 times. Finally I would like to briefly discuss our strategic vision we have diversified and grown our customer base, customer service offering increased our rate per loaded mile in our in the process of adding additional customer business that will help drive increase utilization better lane density on our existing book of business. We believe we have positioned our business to grow our operating income through improved operating inefficiencies, cost reductions and increased freight volumes.

I would now like to open the phones to questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We do have a question from the line of Todd Fowler. Please go ahead.

Todd Fowler

Great. Thanks good morning and Paul our condolences obviously to Steve’s family and everyone at Celadon on his passing. Just to maybe start so what would be the expectation be for the fleet at this point going forward on a sequential basis I mean do you need to take more units out of the fleet or the sequential decrease that you seen here in the March quarter are you at the run rate where you want the fleet to be for the rest of the year?

Paul Will

We anticipate, we have continued to have rationalize it and we are probably you will see a sequential reduction of 200 to 300 trucks at this point we believe that's probably the right number and then we will continue to evaluate as we bring business on. The bid activity that Eric and team have seen relative to bid activity and how we are trying to bring on the current business, additional book of business we believe that that will start to ramp up in the back half of the year and in the third, fourth quarter calendar, so that's kind of what you would expect in the short term and then obviously try to business volumes going forward.

The other thing I would add is a lot of the business, the majority of the business that has been coming has been brokers, so we believe that will allow us to also increase revenue with existing customers and march on that as we service those customers.

Todd Fowler

Okay that makes sense. And then, just on your pricing commentary, the expectation for rates to be flat up or flat up to, you said that the contractual rate expectation and do you have thoughts maybe on what revenue per mile should look like either year-over-year or sequentially for the rest of the year?

Paul Will

So we put in flat 2%, so when we try to get contractual increase on existing same lanes that's kind of what our thoughts are as we look ahead lanes as we grow our length of haul on our business two from Mexico two from Canada that's more driver friendly so that's good result in reduce the driver turnover in retention, it would be better utilization on the equipment but what comes along with that is the lower rate per build mile and therefore lower rate. But the utilization should go up so we believe the corresponding increase in utilization driver satisfaction and drive our total revenue per week per truck is kind of what the measure will look at more so then just our rate. So, we are not as focused on rate, pure rate per say but what we are going to get is far as generate income on the trucks. So [indiscernible] 2% and existing business that we are currently bidding out existing business but new business coming on maybe at lower rate and might pull total rate down but we don't really have that right in front of us right now. So that's how we are kind of evaluating this point.

Todd Fowler

Okay now that makes sense and I think I understand all that. So just a couple on the balance sheet, so it sounds like that assets held for sale were 135 million at the end of March, the PC actually will dispose off, it sounds like there is a portion of that $56 million or so that remain on the balance sheet, but those are least out and says the revenue stream so is it really that there is about $80 million or so that will come up after balance sheet over the next I think you said 90 to 120 days and that will be used to pay down some of the debt?

Paul Will

Yes, that's a fair statement. So what we are evaluating is we had several transactions larger transactions that we anticipate close by the end of the March quarter but they rolled and went to the June quarter so the it will be somewhere between $80 million to $100 million probably worth of the equipment associated with that. And then, as we bring that equipment out we are evaluating how much we want to leave just from our revenues stream standpoint on the quality book of business. But I think your numbers are fairly accurate. So our expectations we said three to six months at the last call and we still believe by the end of June we give ourselves low lane to about 90 to 120 days from today but we still believe by the end of June we will have the majority of that cleaned up relative to what we have currently working.

Todd Fowler

Okay. And then, just the comment on the gains the 1 million or 2 million for the June quarter does that have, it sounds like there is some additional equipment from the Celadon fleet going into that is that all in or is that the quality piece from a gain standpoint?

Paul Will

That's pretty much all in but we don't anticipate any significant gains on the Celadon equipment that we pull down to the operation side of the business.

Todd Fowler

Okay. I will leave it at then I will get back in the queue. Thanks for the time this morning.

Paul Will

Thank you.

Operator

[Operator Instructions] We do have a question from the line of Aaron Reeves. Please go ahead.

Aaron Reeves

Hi, good morning. I just wanted to follow-up a bit on Todd's question I just want to make sure I heard you correctly so it sounds like there is this is for the equipment held for sale there are maybe one or two transactions that didn't close in March and they are going to close in June and those transactions were for roughly $80 million to $100 million is that correct? I got that correctly?

Paul Will

I think Todd's question was if you take out equipment that could be maintained on the balance sheet to be used for quality and leasing and not sold that's where we came with the $80 million. So $80 million or $90 million for the equipment that there is probably we would expect a topper amount of that pay down equipment sale and that pay down over that time frame between selling of equipment and equipment for resell.

Aaron Reeves

Okay but by the end of June thought it's probably likely that we could see that equipment held for self fall by $80 million to $100 million is that correct?

Paul Will

Yes. So some of that equipment if we determine that that point based on where we are at from the leverage standpoint that we want to maintain that equipment on the quality books and that will be moved out of equipment of resell because it will ongoing assets utilizing our operations, so yes that it could go $80 to $100 million by the end of June correct.

Aaron Reeves

Okay it's helpful I will hop back in the queue, thanks.

Paul Will

Thanks.

Operator

We have a question from the line of Jeff Kauffman. Please go ahead.

Jeff Kauffman

Thank you very much. Hi Paul, good, good thank you I wanted to take a step back and think a little bit about the element 19 street strategy because I think the short fall there is overwhelming what’s probably very strong improvement that we are seeing on the trucking side of the business. Can you talk a little bit about how the relationship with element maybe changing or how you are changing your intentions on using 19 streets which I think is more of the annuity leasing and kind of rental maintenance side of the revenue stream how has that changed in the last six to nine months and how should we think about those relationship strategically going forward?

Paul Will

So, the 19 capital and financing sources on equipment is being moved over historically the equipment would be brought as we talk about the last fall brought on our books leased out and then flipped out. The relationship obviously between element and so on and 19 and so on are good we continue to do transactions and continue to service the equipment on for both entities.

So, what we are trying to do though on a go forward basis is have it so that equivalent as we talked about that not come on books, but it's actually work directly to the third party lenders whether it would be element 19 or any other third party. And that we believe is more conducive to what obviously is beneficial from Celadon’s standpoint, from quality standpoint on a go forward basis. So when you take the equivalent that we currently have we are currently leasing out and really all the service offerings associated with the equipment that's being leased that's where the ongoing annuity revenue comes into play on the quality side of the business. That's why we transformed it -- over the last six months and so that we don't have the onetime gains, but yet we have this more of a ongoing annuity which is kind of what we are laying out that we are going to be at the $700,000 to $1 million level in the June quarter and manage to continue growth there from there as services continue to grow.

Jeff Kauffman

Okay just a follow-up to that Paul. The change in the gain on sale expectations that we have had over the last few quarters is that more function of what’s happening in the market in terms of the profitability of the sales model or is that more a function of kind of change in the channels by which we are recording these transactions from accounting standpoint?

A - Speaker

It’s more flipping the transactions from quality gain service provider overtime getting service income as oppose to selling buying equipment selling equipment coming onetime gains. So it's really more of ongoing service income which used to be one time gain. And that way it makes lot more sense from the street gain point we don't have that service of gains coming out and we want to kind of adjust that miles fees more conducive to what the streets are looking for on the ongoing earnings stream as obvious to the ups and downs of gain on sales.

Jeff Kauffman

Am I understanding this right, it's just stretched out over longer period as opposed to be recognized upfront, is that a fair way to think about it?

A - Speaker

That's exactly right and we think, like I said in the [indiscernible] kind of moving in that direction in small period time and I think we are in pretty good shape right now.

Jeff Kauffman

Okay Paul thank you.

Paul Will

Thanks.

Operator

[Operator Instructions] We do have a follow-up question from the line of Todd Fowler. Please go ahead.

Todd Fowler

Thanks for taking the follow-up. So I guess just a couple of ones on the expense side Paul do you have any comments on how we should think about salaries and wages as percent of revenue on I know that there is it's not just driver cost that are in there but there is going to be other cost associated with the quality companies you know is there any additional leverage on the salaries and wages line going forward or we see just the normal kind of seasonal increases as driver miles go up into the counter second quarter in the back half of the year?

Paul Will

Yes, we have taken a really hard look at our expense that include headcount relatively to size and suite that the big components there is to your point our payroll so seasonality is going to be the biggest driver at this point going forward.

We have seen some increase overtime in the rented area, we have seen some favorable activity in the benefit side, the last quarter based on some plan change that we have done and then we had some headcount reduction we better reduce that. The other big item in there is expense that we moderated the recruiting expense, but then we tweak up so all in all there is different to your point, but for most part it's really going to be seasonality side. So it's running 25% but as the percent that will go down as revenues go up.

Todd Fowler

Okay and just a couple of just small ones and I know that rental expense sometimes gets tied in with depreciation and purchase transformation but it was little bit higher than where it had been running versus what you were remodeling here in the quarter was there anything going out with rental or do we need to look at that combined with some other line item in the P&L?

Paul Will

Yes the biggest piece that there is some equipment that was old equipment that as that was sold off other equipment came on, it came operating, so operating rents go up in the course line depreciation will go down and the interest go down so that's the biggest individual piece but the majority of the change in that is totally reflection of independent contractors. Yes that will be the take piece.

Todd Fowler

Okay that helps. And then just the last one I had the tax ratio in the quarter was lower than where you had been and I know that can bounce around but any thoughts on and what we should be thinking about from a tax rate for the rest of the year?

Paul Will

Yes, 35% to 36% typically where we had some credits to this quarter so it could be as low as 33-34 depending on credit its highest 36, but probably 34-36 is kind of the range I would say.

Todd Fowler

Okay those are the all ones I had. Thanks again for the time.

Paul Will

Thank you.

Operator

[Operator Instructions] And we have no further question. I will now turn the call back to you.

Paul Will

Thank you very much. I appreciate everybody signing in the call this morning. Have a good day.

Operator

Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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