Transport America 2003 Q3 Earnings Conference Call Transcript
10/20/2003
TRANSPORT AMERICA
3RD QUARTER 2003 CONFERENCE CALL
OCTOBER 20, 2003
10:00 AM CT
Operator: Good morning. My name is Shatina and I will be your
conference facilitator today.
At this time I would like to welcome everyone to the
Transport America Third Quarter Earnings conference
call.
All lines have been placed on mute to prevent any
background noise. After the speaker remarks, there
will be a question and answer period. If you would
like to ask a question during this time, simply press
"star" then your number "1" on your telephone keypad.
If you'd like to withdraw your question press the
pound key.
Joining us today will be Michael Paxton, Chairman,
President and Chief Executive Officer as well as
Keith Klein, Chief Financial Officer and Chief
Information Officer. Thank you.
Mr. Klein, you may begin your conference.
Keith Klein: Thank you, Shatina.
Good morning, and thank you for joining us for
today's call. Before we get started, I would like to
remind everyone that today's conference call includes
forward-looking statements that are covered under the
safe harbor provisions of the private securities
litigation reform act of 1995. Actual results may
differ from those expressed. Factors that may cause
results to differ are covered in the company's Form
10-K for the year ended December 31, 2002 as filed
with the Securities and Exchange Commission.
I will now provide some brief comments on the third
quarter financial results and then turn the
conference call over to Mike Paxton, Chairman,
President and Chief Executive Officer, for his
comments on the business and plans as we move
forward. After Mike's comments, we will be glad to
open the conference call up for any questions that
you may have.
For the third quarter of 2003, revenues decreased by
$4.9 million, to $64.1 million compared with the
prior year. Third quarter's revenues include $2.3
million in fuel surcharge recovery, compared to $1.5
million in the third quarter of last year, because of
slightly higher fuel costs year-over-year.
Our customer paid miles in the third quarter were
down about 7.7 percent compared to last year's
levels. The decrease in miles was due to weaker
freight volumes early in the quarter and lower seated
capacity than in the prior year. Mike will address
these items in more detail later. In the third
quarter, we averaged 10.4% deadhead miles, compared
with 11.3% in the third quarter of
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Transport America 2003 Q3 Earnings Conference Call Transcript
10/20/2003
2002. This is the 6th consecutive quarter that we
have experienced a year-over-year improvement in our
deadhead percentage.
Our average revenue per total mile in the third
quarter, excluding fuel surcharge, increased by 1.8
cents over the previous year. Our rate per customer
paid mile improved in the third quarter on both a
sequential and year-over-year basis. Sequentially,
this is the third quarter in a row of increased
rates, with an average rate of $1.417 per mile
compared to $1.399 per mile in the second quarter of
this year. In addition, our rate per customer paid
mile exceeded the same quarter of the previous year
for the first time since the 2nd quarter of 2001.
This rate trend is due to both improved customer mix
and rate adjustments, as we continue to manage our
freight network, lane balance, and customer
profitability.
Revenue per tractor per week, excluding fuel
surcharge, decreased slightly to $2,725 for the third
quarter from $2,746 in third quarter of 2002 due to
softer freight volumes early in the quarter and
unseated capacity. When looking at productivity of
seated capacity, our revenue per seated tractor per
week increased slightly to $2,875 for the third
quarter from $2,870 last year.
As we announced last quarter, we initiated a broad
cost reduction effort across the organization. We
have challenged the organization to identify and
implement changes that will reduce our overall costs
by 5 cents per mile. Through the end of September, we
have implemented cost reduction actions that we
expect will save over $5 million in annual costs over
2002 levels. Expenses that will be positively
impacted by these initiatives include salaries and
wages, maintenance costs, accident claims costs,
depreciation, and other general and administrative
expenses. In addition, the organization has
identified an additional $5 million in cost savings
opportunities that we expect to implement in the
fourth quarter.
Our revenue per non-driver increased year-over-year,
rising to $633,000 compared to $605,000 in the
previous year, an improvement of 4.6 percent.
We do expect some costs to increase next year. The
tight driver market will put upward pressure on our
driver hiring expenses and potentially on wages and
purchased transportation costs. Insurance costs,
specifically on the excess layers, are not growing as
much as they did last year, but early indications are
that cost are still rising in this area.
Additionally, as we begin to replace tractors next
year with EPA compliant engines, depreciation costs
will increase as well.
Our accident frequency declined even further during
the third quarter from already historically low
levels. Year-to-date through September, our total
accident frequency was 5.5 accidents per million
miles compared to 5.8 last year.
The third quarter results include a pretax gain of
$1.3 million relating to the sale of our Clarksville
maintenance facility. Net of tax expense, this gain
increased after tax earnings by approximately
$800,000, or 11 cents per diluted share.
Interest costs decreased this quarter by 17 percent,
to $1.1 million compared to $1.3 million in the
previous year. This decrease was primarily the result
of our continued reduction of debt and lower interest
rates.
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The effective tax rate for the quarter, prior to a
cumulative-effect adjustment, increased to 44
percent. This is due to the effect that
non-tax-deductible items have on the effective rate
as earnings change throughout the year.
Our net income in the third quarter, prior to a
cumulative-effect accounting change but including the
gain on the sale of Clarksville, was $1.0 million, or
15 cents per share, compared to a net profit of
$254,000, or 3 cents per share in the third quarter
last year.
As we discussed at last quarter's conference call and
in the press release, we adopted, on July 1, 2003,
the accounting treatment prescribed by the FASB's
Interpretation Number 46 relating to our corporate
office building. Prior to that date, the building was
recorded as an operating lease in accordance with
generally accepted accounting principles. On July 1,
the building was treated, in essence, as a capital
lease for accounting purposes. The building was
capitalized as an asset at a net book value of $11.2
million and the related debt of $13 million was
reflected in current liabilities, as the lease
expires in May of 2004. The difference between the
asset value and the liability value is reflected as a
cumulative effect of a change in accounting
principle, net of tax benefit. This difference
represents depreciation expense that would have been
recorded had generally accepted accounting principles
required capitalizing the building at the date of
acquisition.
As we also announced in the press release, we have
signed an agreement to sell our corporate office
building in Eagan and then lease back the space that
we currently utilize. I want to remind everyone that
this agreement has a number of contingencies that
have yet to be satisfied. These include the buyer
completing due diligence and securing financing for
the transaction. It is not certain that these
contingencies will be satisfied, but we are very
optimistic given progress to-date. The agreement
requires the buyer to satisfy all contingencies by
the end of November.
The significant terms of the agreement are as
follows: Transport America will receive approximately
$11.5 million dollars, which is already reduced by
estimated brokerage commissions and closing costs. At
that time, we will pay off the $13 million obligation
relating to the property. We will also sign a 13-year
lease for approximately two-thirds of the total
square footage of the building. Base rents will be
approximately $1 million in the first year with
escalations of one and one-half percent for each year
of the lease term. We will also pay a pro-rata share
of the building's operating costs, which we cover 100
percent of today. We would not be obligated to cover
any costs and do not have any contingent obligations
relating to the remaining one-third of the building
that we do not occupy. The buyer would assume all
risks relating to the rental and operation of that
space.
Focusing now on the balance sheet, we cannot say that
our reported debt balance declined again this quarter
as we have said every quarter over the past three
plus years. This is due to the addition of the $13
million relating to the building. However, we were
able to reduce other debt during the quarter by an
additional $8 million. The net of these two items was
an increase in reported debt of $5 million during the
quarter, bringing our total debt balance to $65
million at
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Transport America 2003 Q3 Earnings Conference Call Transcript
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September 30, 2003. This debt balance is still lower
than our reported debt balance at December 31, 2002,
by $4.5 million, and excluding the $13 million of
debt relating to the corporate office building, we
have paid down $17.5 million in other debt in the
first 9 months of this year.
Looking at 2003 capital spending, we took delivery of
and financed 125 tractors during the third quarter,
which represents one-half of our total replacements
for the year. Year-to-date, we have spent $12.6
million in gross CapX, and, net of proceeds on
trade-in and disposals, we have spent $6.9 million.
We plan to take delivery and finance an additional
125 tractors in the fourth quarter. We expect gross
capital spending for the full year to be
approximately $21 - 24 million in total. Net of
proceeds on trade-in and disposals, we expect net
CapX to be in the $12 - $14 million range, prior to
the sale of our corporate office building.
During the third quarter, we did not purchase any
additional shares of Transport America stock. Share
repurchases since October of 2002 stand at 122,700
shares. Under the currently outstanding
authorization, we have remaining authority to
purchase up to an additional 120,600 shares. We plan
to continue repurchasing shares under this program
when it makes sense to do so.
That concludes the financial review...I would now
like to turn things over to Mike for his comments.
Mike
Mike Paxton: Thanks Keith. Good morning everyone.
As Keith pointed out in his remarks, our financial
performance at Transport America rebounded in the
third quarter despite lower miles than a year ago.
This was driven primarily by our continued focus on
productivity and strategic network improvement.
For the recent nine months, our loaded miles were
down 4.4% versus a year ago. Total available miles
were down 6.1% for the same period. Our trucking
revenues, which excludes fuel surcharge and logistics
revenue, on a year-to-date basis, are off 5.3% from
last year.
On the positive side, our revenue per tractor per
week of $2,687 for the last nine months, excluding
fuel surcharge, was up 0.4% relative to last year.
For the same period, our deadhead was at 10.3% or 160
basis points below year ago levels. Finally, our
third quarter rate per mile of $1.42 was 2.3% higher
than the fourth quarter of 2002.
As further evidence of our productivity gains, our
average annual revenues per non-driver employee for
the last nine months increased 8.2% to $635,000,
versus last year.
I am also pleased to inform you that Transport
America recently received two more outstanding
performance awards for 2003. Best Buy recognized us
with their Quality Partnership Award for the second
year in a row. Additionally, FedEx Supply Chain
awarded us Carrier of the Year for the second
straight year.
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Transport America 2003 Q3 Earnings Conference Call Transcript
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There has been a noticeable increase in capacity
demand throughout the industry. On top of that, we
have added several significant pieces of business to
our portfolio. While this is good news, it comes at a
time when driver turnover is high due to weak freight
and high fuel prices in the first six months of the
year. Consequently, our unseated tractors, and that
of the industry, are higher than normal.
To offset the problem, we initiated an aggressive
bonus plan and referral incentives for new drivers.
While this has helped our recruiting efforts, we are
still finding the labor market to be very tight. We
are currently evaluating additional options to solve
the problem.
We accelerated our maintenance campaign in the third
quarter to repair a closed wheel end system on nearly
3,600 of our trailers. At this point, we have
completed inspections and/or repairs on approximately
half of these units. We met with the vendor, Strick
Corporation, to discuss their liability on the issue.
As yet, there has been no resolution on remuneration
of our costs, which we expect to exceed $1 million.
In closing, we are feeling more optimistic about
increased freight opportunities. We also feel that
our productivity efforts are beginning to pay
dividends in better utilization of our assets and
lower costs in the organization. The key issue we are
facing is seated capacity. It is clearly constraining
our ability to accept more freight. Our goal is to
achieve substantial improvement in seated tractors by
year-end.
Thanks for your attention. Shatina, Keith and I will
now entertain any questions from the participants.
Operator: At this time, I would like to remind everyone in
order to ask a question, please press "star" then the
number "1" on your telephone keypad.
We'll pause for just a moment to compile the Q&A
roster. At this time, there are no questions.
Your first question comes from Carter Newbold.
Carter Newbold: Morning guys.
Mike & Keith: Morning, Carter.
Carter Newbold: I wonder if you could talk a little bit about the $5
million in cost savings that you've identified during
the quarter. Can you give us any breakout of where
that is coming from and is that against 2002 base or
is it against a 2nd quarter of 2003 base? Kind of
what is the math there. And then secondly, on the
driver availability issue, can you talk about whether
driver pay is yet part of the mix that you are
looking at to solve the problem, and do you think, or
how much of the problem would you ascribe to internal
issues - the reduction in miles that your guys have
seen, versus kind of macro issues that you might be
observing? Thanks.
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Transport America 2003 Q3 Earnings Conference Call Transcript
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Keith Klein: I'll take the first part of that - regarding the cost
savings initiative. It is against the 2002 base, is
where we are measuring against, Carter. And it is
coming in a number of areas. Salary and wages -
earlier this year we restructured the service
centers, which is part of that, but in addition to
that, we've done some other re-engineering efforts
within the organization. We are managing, and we have
put in place some different strategies around
insurance and claims costs. We are focusing heavily
on safety, training and prevention in the
organization, driving down costs there; but also in
terms of the management of the claims process within
the organization, so we expect some savings in the
insurance area. General administrative expenses - we
are going through every group, and as contracts for
services and supplies come up, we are re-bidding
those contracts, and we are seeing additional savings
in a number of areas there. So, it is across the
board, but the biggest chunks, I think, are salaries
and wages, insurance costs savings, and maintenance
changes that we've made in terms of maintenance
structure and maintenance costs.
Mike Paxton: On the driver availability, I guess 2 comments. One
on the pay, we mentioned last time that we did reduce
our rate per mile for our drivers, but we actually
grandfathered all of our current drivers. That
decrease really just put us in the middle of the
pack, and so far, that looks to be where we are
remaining. However, I think that it is just a
question of how many drivers are out there right now.
I think that a number of drivers have dropped out of
the industry for one reason or another, either it was
the summer months, or just have looked at other local
opportunities. What we are doing however, is
increasing the bonus pretty significantly, so for any
new drivers coming in, there is a $2,000 bonus
associated with that driver coming on. Now that is
obviously cash for us, but it doesn't affect our rate
per mile on a future basis, and we prefer to take
that track. So far, it seems to at least be helping
us. I wouldn't say that there is overwhelming
increase, but it is certainly helping us. If we had
to take the rates back up, we would certainly
consider that, and we are considering all options,
but right now, that isn't our initial plan. And then
on the mileage - our mileage has been going up for
the last 2 quarters, and in fact, we are pretty even
with miles per seated tractor per day with last year
- very slightly below it, but not very much. So, it
is not the miles that seems to be the issue. It was
certainly the miles in the first quarter, and in fact
more in the second quarter than the first quarter,
but that has rebounded, so I don't think that is the
issue at all. The issue is more around just the
availability and with capacity tightening and freight
starting to pick up, everybody is out there looking
for quality drivers, and quite frankly, we are not
compromising on the quality side of it. Our safety
record is too important to us, and particularly with
the insurance rates where they are. So, we are
probably taking a little more disciplined tack with
regards to those new drivers coming on.
Carter Newbold: Ok, thanks - that's helpful in understanding that.
Also, Keith could you just restate what your
expectations for gross and net Cap X in the 4th
quarter of this year?
Keith Klein: I don't have it broken out for 4th quarter, but I'll
give you the year-to-date ones.
Carter Newbold: Ok
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Transport America 2003 Q3 Earnings Conference Call Transcript
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Keith Klein: Gross Cap X of $21 to $24 million, and net Cap X,
prior to any sale of our corporate headquarters
building, of $12 to $14 million.
Carter Newbold: That is the full year expectation?
Keith Klein: Correct.
Carter Newbold: Ok. All right, I can compute the difference.
Thank you.
Keith & Mike: You're welcome.
Operator: Once again, I would like to remind everyone, in order
to ask a question, please "star" and then the number
"1" on your telephone keypad. Your next question
comes from Dick Ryan.
Dick Ryan: Hi Mike. Could you maybe give a sense of your
business that might be affected with the new
regulations going into effect next year concerning
driver time - whether it is multiple-stop business or
the live loads, unloads? Do you have a feel of the
percentage?
Mike Paxton: It is an excellent question, Dick, and I don't have
an answer for you yet. We are doing an in depth
analysis right now, customer by customer on our top
50 accounts to get at that issue. Just generally
speaking, we don't have as many customers that
require multiple stops in our system. So we don't
anticipate that too many of the shippers will be
affected, but regardless, there is an issue with
certain segments - in fact all the segments in some
respects, whereby if our truck drivers get delayed at
the consignee, for any period of time - whether it is
a live unload, or whether it is just difficulty in
the appointment not being recognized when they get
there, and maybe having to wait before the load gets
unloaded - all that time now works against the 14
hours that the driver has before they lay down for
10. In the past, the driver could take the time off
while the truck was being unloaded and not count that
as part of the overall mandatory time. We are losing
that time and so it will be I think, an issue among a
lot of our customers in getting more disciplined with
their consignees, and if not, then we will have to
consider additional charges - whether it is higher
rates or accessorial charges. We are putting it
together and hope to have the analysis completed by
the end of this month, and hope to be able to be in a
position to start talking to our shippers middle to
late November, if there are any significant issues
associated with a particular customer.
Dick Ryan: Ok. On your efforts to increase rates, how far down
the path are you there? I know that you kind of got a
late start with trying to replace the Sears business
a year ago, but where is that process coming in?
Mike Paxton: Yeah, we were really struggling in the first quarter,
as you know, even though that was when we were going
out fairly aggressively. And then of course, we
brought on Craig Coyan in the last 2 months, and he
has really helped accelerate the program. We sent a
letter out to all of our customers beyond our top 50,
with a mandatory increase, and so that went through
and we have not had any loss of revenue associated
with that. So it would appear that has stuck. With
the top 50, we have gotten to most of those customers
now, and we are getting the rate
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Transport America 2003 Q3 Earnings Conference Call Transcript
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increases, but as I mentioned in my comments, if you
look at the 4th quarter of 2002, versus where we are
at in the 3rd quarter today in 2003, we are up
roughly 2 and 1/2 percent -- 2.3 to 2.4 percent.
Dick Ryan: Uh-huh
Mike Paxton: So we are seeing the rate increases start to hold,
and we are also convinced that some of the new
business that we brought on at better rates and
better mixes helped us as well.
Dick Ryan: In your Cap X, is that just all tractors this year -
are you doing any trailers or is that an issue for
next year?
Keith Klein: It is just tractors this year. We don't anticipate
any trailers. We did get a few trailers early this
year related to a specific piece of business, but in
terms of new trailer replacements - none planned for
this year, and we will look at next year - we are
finalizing the plan right now and looking to build
some trailer replacement into that plan for next
year.
Mike Paxton: Let me just make one comment on that as well, and it
has to do with the hours of service. There is at
least some speculation in the industry that because
of this hour of service change that it may be to the
advantage of the shipper for us to do more of what we
call, drop and hook. Which is to drop the trailers
and let them load them at their discretion, and then
bobtail our tractors in to pick up those trailers. If
that starts to become a trend, which is good news and
bad news, it may then increase the required tractor
and trailer ratios that are currently normalized in
the industry at around 2.7 - 2.6 - 2.8. And that has
been our target - to get it down around 2.6 to 1,
trailers to tractors. We don't know yet whether that
is just pure speculation or whether that may be a
trend that we will see. If so, then that may
accelerate any needs we might have on the trailer
side, but it is too early right now to give you an
answer.
Dick Ryan: Great. Ok, thanks.
Keith & Mike: Thanks, Dick.
Operator: You have a follow-up question from Carter Newbold.
Carter Newbold: Hey guys. I know you've not given much in the way of
guidance other than some sort of general Cap X feel,
but just looking at the trucking revenue itself with
many quarters now of negative comparisons, is there a
point out there where it seems likely to you guys
that you would turn the corner and start to show
positive numbers which would allow us to see the
benefits more clearly of all the cost management that
you've done?
Mike Paxton: The answer is yes. We'll probably be in a little bit
better position to give you some direction at the
next investor conference, but with the business that
we are bringing on now is, as I mentioned, pretty
significant, and I will not mention the customers,
but it is really working into our network extremely
well. Quite frankly, I think we would be showing
revenue numbers right now if we didn't have the
unseated capacity. In fact, I know it, because we've
been turning down
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a lot of business on a day-to-day basis. We are
optimistic that we'll be turning the corner on the
revenue side and hope to be more specific about that
as we close out the 4th quarter.
Carter Newbold: Fair enough. Good luck.
Mike Paxton: Thank you.
Operator: Once again, I would like to remind everyone, in order
to ask a question, please press "star" then "1" on
your telephone keypad. At this time, there are no
further questions.
Mike Paxton: Thank you very much for your time, and we'll be
talking to you later. Thank you, Shatina.
Operator: You're welcome. Thank you for participating in
Transport America's 3rd Quarter Earnings Conference
Call. You may now disconnect.
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