SWIFT TRANSPORTATION COMPANY
Moderator: Jason Bates
04-28-15/10:00 a.m. ET
Confirmation # 19522748
Page 1
SWIFT TRANSPORTATION COMPANY
Moderator: Jason Baters
April 28, 2015
10:00 a.m. ET
Operator:
This is conference # 19522748.
Ladies and gentlemen, thank you for standing by. Welcome to the Q1 2015
earnings conference call.
I'll now turn the conference over to Mr. Jason Bates. Please go ahead, sir.
Jason Bates:
Great, thank you, Crystal. Again, we would like to welcome everyone to Swift
Transportation's first quarter 2015 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, usually identified by
words such as anticipates, believes, estimates, plans, projects, expects, hopes,
intends, will, could, may, or similar expressions which speak only as of the
date the statement was made. 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, and 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 Factors section of our annual report Form
10-K for the year ended December 31, 2014. As to the Company's business
SWIFT TRANSPORTATION COMPANY
Moderator: Jason Bates
04-28-15/10:00 a.m. ET
Confirmation # 19522748
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and financial performance, there are many factors that could cause actual
results to differ materially from those in any forward-looking statements. You
should understand that there are many important factors in addition to those
discussed and in our filings with the SEC that could impact us financially.
As 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
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.
In addition to our GAAP results, this call also includes certain non-GAAP
financial measures as defined by the SEC. The calculation of each measure,
including a reconciliation to the most closely related GAAP measure, and the
reasons management believes each non-GAAP measure is useful are included
in the schedules attached to our letter to stockholders.
With that out of the way, I would like to recognize the members of Swift's
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.
We genuinely appreciate all the questions that were submitted prior to the
deadline last night. Similar to quarters past, we have categorized them and
will do our best to provide a detailed response to each. To the extent you have
additional follow-up questions, feel free to reach out to me after the call.
Jason Bates:
With that, we will start the Q&A portion of the call today with a couple of
questions on adjusted EPS trends and guidance before moving to discuss the
various operating segments.
You plan to give another large driver wage increase on May 1, which will
negatively impact your Q2 results according to you press release. What gives
SWIFT TRANSPORTATION COMPANY
Moderator: Jason Bates
04-28-15/10:00 a.m. ET
Confirmation # 19522748
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you confidence that you can still achieve your original full-year EPS
guidance, especially given the fact that we have seen signs of Truckload
market loosening, which may impact your ability to pass the higher driver
wages to your customers?
Ginnie Henkels: The driver increases we announced were included in our original plan for the
year. Therefore, these increases were already assumed when we gave our
original guidance of $1.64 to $1.74 for the full year. We used the phrase –
“negatively impacting Q2” in order to ensure the investor and analyst models
appropriately reflect this increase.
With regard to our confidence in the range and the ability to pass on the driver
increases, as Richard will elaborate on, we believe there is still tightness in the
market and our customers are still concerned about capacity. They need
quality carriers such as Swift to meet their needs. Therefore, we are still
expecting to work with our customers to achieve the required rate increases
necessary to provide the drivers with the pay they deserve.
Jason Bates:
When you talk about sharp increase in driver pay and owner-operator
payments in the second quarter, can you describe the magnitude or impact of
the cost?
Ginnie Henkels: We are not quantifying the increase other than to say the impact should be
similar in magnitude to the increase we gave in August of last year.
Jason Bates:
A similar question -- can you quantify by segment -- Truckload, Dedicated,
CRS -- how much the increased wages going into effect on May 1 should
impact operating income relative to the first quarter?
Ginnie Henkels: Again, we're not quantifying the exact impact but I will give some perspective
by segment. The increase we are referring to is applicable to the majority of
drivers in the Truckload and CRS segments. Dedicated works a bit differently
and those increases are passed on to the drivers as we are able to obtain
increases from the customers.
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Moderator: Jason Bates
04-28-15/10:00 a.m. ET
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Intermodal will also be giving an increase to the majority of their drivers on
May 1, but this is only applicable to the dray portion of a total Intermodal
move, thus it will be a smaller financial impact to the overall segment.
Jason Bates:
Since the increase is on May 1, to be clear, the wage increase would only
cover two-thirds of the second quarter but then 100% of the third and fourth
quarter, correct?
Ginnie Henkels: Yes, this is correct.
Jason Bates:
Driver pay increases on May 1, does it put Swift in line with the industry or
are you moving to the upper end of pay?
Jerry Moyes:
I believe we are moving higher in the ranks of pay scale. But it is not just
about the pay, it is about their W2 and what they take home. Which is also a
function of the miles that they run. We're continuing to work on improving
utilization to increase the miles a driver can run so that they can take more
money home to their families.
Jason Bates:
Where does driver pay have to go to alleviate the driver shortage?
Richard Stocking: I will answer from the industry perspective. In general, I believe the industry
average for driver wages is around $45,000 or so, and some private fleets with
low turnover pay north of $60,000. But, again, it is more than wages. These
people deserve respect on the road and at our customer locations, in addition
to having a great experience at our terminals. In some of these areas we as an
industry have a long way to go. We want to really focus on respect and
treatment, the predictability in the home time and the paychecks for our
drivers.
Jason Bates:
How are you thinking about seasonality of earnings following a strong first
quarter with driver pay increases and fleet expectations? What factors do see
as potential upside and downside to your affirmed 2015 EPS guidance of
$1.64 to $1.74?
Ginnie Henkels: Our seasonality should be somewhat similar to prior years, normalizing for
unusual items. Q1 should be the lowest quarter and Q4 should be the highest
SWIFT TRANSPORTATION COMPANY
Moderator: Jason Bates
04-28-15/10:00 a.m. ET
Confirmation # 19522748
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quarter with regard to EPS. Despite the driver increases in Q2 we would
expect to have some sequential improvement over Q1 with improved weather,
additional volume and pricing helping to offset the wage increases. This
should accelerate a bit more in Q3 with additional fleet growth, as well.
In Q4 we would expect the project business to kick in, which should drive
EPS higher, similar to prior years. The downside to our guidance would be
significant claims issues and acceleration in fuel prices and/or unexpected
weakness in the economy. The upside potential would be rate increases that
exceed 4% to 5%, a continued reduction in our driver turnover, and/or
improvements in our safety trends, amongst other factors.
Jason Bates:
Over the past few years the fourth quarter has represented a higher portion of
your overall annual earnings and comparisons this year could be challenging
with the fuel tailwinds in the fourth quarter of 2014. Do you expect the fourth
quarter of 2015 to represent a similar magnitude of annual earnings compared
to recent years? What visibility do you have to the fourth quarter? And what
could be some of the factors that result in the fourth quarter being higher or
lower year over year versus 2014?
Ginnie Henkels: With regards to the visibility to the project business in the fourth quarter, we
are working on those contracts with several customers now and currently
expect that we will have a similar level of business in 2015 as we did in 2014.
Based on this, as we just discussed, we do expect that Q4 will be a larger
portion of our annual EPS, as we have seen in prior years.
We are expecting to have a year-over-year headwind with regard to fuel in the
fourth quarter, as we've discussed previously, but are hopeful that our
insurance and claims will be a tailwind in Q4 given the focus and changes we
are implementing with regard to safety. Other than this, the upside and
downside factors are similar to what we just mentioned with regard to the full
year.
Jason Bates:
In your Q4 2014 earnings call you forecasted that gains on sale would be
lower in 2015 versus 2014. Has that outlook changed? And what type of color
can you provide us on expected gains on sale in the coming quarters?
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04-28-15/10:00 a.m. ET
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Ginnie Henkels: Gain on sale is very difficult to predict and it is dependent upon the number of
trucks or trailers that we have available for trade or sale in any one particular
quarter, the completion of those sales, the type of equipment we are selling
and the used truck market, amongst other things. We are expecting gains to be
slightly lower year over year but this could vary given a change to any of the
variables we just discussed.
Jason Bates:
Is you $1.64 to $1.74 range using the $0.29 adjusted EPS or $0.26 GAAP EPS
estimate? I presume it's $0.29 since your target is an adjusted rate but I just
wanted to verify.
Ginnie Henkels: Yes, $1.64 to $1.74 is based on our adjusted EPS, therefore would include the
$0.29 of adjusted EPS for Q1.
Jason Bates:
Do you include derivative interest expense in your EPS? Haven't you
excluded it in the past? And why is this rising?
Ginnie Henkels: Derivative interest expense is included in EPS, meaning that it is deducted
from our earnings, just like regular interest expense, to arrive at EPS. For
adjusted EPS purposes, per our definition, we add back derivative interest
expense that is associated with the ineffective portion of the mark-to-market
adjustment of our interest rate swaps, which has been minimal for the past
several years since the swaps were de-designated as an effective cash flow
head in 2013. This is explained in more detail in footnote 16 of our annual
report.
The amount of derivative interest expense is increasing because the
underlying interest rates incorporated in the hedging, for which we are paying
fixed and receiving floating, increases each quarter. These hedges mature in
July of this year.
Jason Bates:
What was the impact of the drop in fuel prices on your income statement? Has
it been positive or negative? Please express in terms of EPS impact and
impact by segment.
SWIFT TRANSPORTATION COMPANY
Moderator: Jason Bates
04-28-15/10:00 a.m. ET
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Ginnie Henkels: As anticipated, we did have a positive impact year over year from fuel in the
first quarter that was roughly $0.04 to $0.05 of EPS. The majority of the
impact was in Truckload followed by CRS.
Jason Bates:
Okay. We will move into the segment questions. There were a lot -- emphasis
on a lot -- of questions specifically as it relates to the Truckload segment.
We've tried to group them and capture all of the key themes here. So, we will
go ahead and run into that section right now.
Can management talk to demand trends experienced during the first
quarter of 2015 on a month-by-month basis compared to a year ago?
How is
April shaping up compared to April of last year -- miles, turn down rates, or any other
metrics that speak to demand and supply? Also, can you elaborate on freight volumes
from a geographical strength and weakness perspective from an end-market perspective
and/or from a segment perspective?
Richard Stocking: I will start by reminding everyone that the first quarter of 2014 was extremely
abnormal as a result of the severe weather. So year-over-year comparisons
would probably be somewhat misleading. However, I will talk about the
monthly trends we experienced this year in the first quarter and thus far in
April to help provide some color to what we are seeing out there.
In an effort to halt the end-of-the-world mentality that some seem to want to proliferate out there
for the truckload industry. As we mentioned in our last quarterly call and
reiterated at the mid-quarter conferences, freight volumes in January were
very strong. February slowed down a little bit because of the severe weather
but volumes returned solidly in March.
Seasonally April is generally not a record month for the industry as a whole.
We have seen a little softness during some of the weekends this month;
however, month to date in April we are actually up year over year in total
loaded miles.
Geographically I would say the majority of the markets have been relatively
balanced. If I had to pick an area of softness I would cite parts of the West
Coast having been soft from time to time.
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Moderator: Jason Bates
04-28-15/10:00 a.m. ET
Confirmation # 19522748
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From an end-market perspective that there hasn't been anything I would
characterize as weakness. And from a segmentation perspective I would say
Intermodal has been somewhat soft, followed by refrigerated being light
during certain periods thus far in 2015.
Having said all that, even though there have been soft spots we are still
booking out consistently so thus far we are relatively pleased with April.
Jason Bates:
The market seems to be reacting to the idea that supply-demand dynamics will
get materially weaker in the coming months and quarters. What type of
visibility do you have from customers on their demand for capacity?
Richard Stocking: Simply put, we would characterize the dry van truckload market as strong, as I
just mentioned. We have had some recent softness in a couple of markets and
over a couple of weekends. However, a few soft weekends doesn't mean the
truckload cycle is over.
Jerry and I have actually met with several of our larger customers over the
past few weeks and they are still very bullish for the remainder of the year.
Several of them are talking about growing, adding stores and DCs, and are
concerned about capacity availability over the next several quarters.
To reiterate, over the past several months we have seen persistent supplydemand imbalances, driver shortages, combined with the desire from shippers
to transition more to larger carriers and use less brokers. Customers recognize
the value of partnering with large well-capitalized diverse service providers
like Swift, and they are willing to pay for the comfort, service and security
that comes from doing business with us. Simply put, we are very optimistic
about our short- and long-term outlook.
Jason Bates:
What has been the productivity gain from the reversal of the hours of service
rules change?
Jerry Moyes:
The utilization impact from the original implementation of the hours of
service change is roughly 3% to 5% headwind for the industry, although not
quite as extreme for Swift. Since that time, we have been actively working to
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Moderator: Jason Bates
04-28-15/10:00 a.m. ET
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train our drivers on how to maximize their legal availability time to drive,
such as when to take their breaks and when to do their restart.
As a result of these training initiatives, we have been able to offset a good
proportion of that initial utilization headwind. Therefore, the recent reversal of
the hours of service will not have very much utilization impact or tailwind for
us, given that we've already worked to recover the loss utilization these past
couple of years.
Jason Bates:
Can you discuss your expectations for rate increases in 2015? Truckload
revenue per mile increased 6% during the quarter, with previous comments
expecting 4% to 5%. Is 4% to 5% still appropriate for modeling purposes?
And if so, does the implied second-half moderation primarily reflect
comparisons or something else?
Richard Stocking: Our most recent guidance for 2015 was for rate increases in this segment to be
in the 4% to 5% range for the full year of 2015, but not necessarily for every
quarter. Obviously the sequential quarterly rate development in 2014 would
play a role in that. As the rates improved sequentially throughout last year, we
are still very confident in the 4% to 5% range previously provided for the full
year of 2015.
However, to be clear, within that range there will be customer accounts or
lanes which could necessitate significantly more than 4% to 5%, while others
may warrant less. Obviously there are a variety of factors which could cause
us to meet or even exceed the weighted average of 4% to 5% range. However,
as we discussed previously a good portion of these increases will be passed
along to our drivers to ensure they continue to be appropriate compensated.
Jason Bates:
What is the split of your Truckload business between spot and contract? The
spot market in the Truckload market appears to have softened according to
many in this resources. What is Swift seeing early in the second quarter and
how do you anticipate the recent trends will impact your contractual business?
Richard Stocking: As stated on previous calls our business is almost entirely contractual in
nature and we do not meaningfully operate in the spot market. We, too, have
heard that the spot market has been softening up. However, that could be a
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byproduct of a variety of factors, including an abnormally difficult comp in
Q1 of 2014, or the desire for shippers to pursue contract carriers instead of
playing in the spot market as a result of their capacity concerns. So, the
movement of these shippers away from the spot market and into the
contractual market is a positive for carriers like us.
Jason Bates:
Of the 6% year-over-year increase in average revenue per loaded mile during
the first quarter, how much of this was a result of the contract rate increases
versus spot or bonus pay? What percentage of the truckload accounts have
repriced thus far in 2015 and what percentage of the revenue reprices during
the remainder of the year?
Richard Stocking: As discussed previously we do not meaningfully participate in the spot
market; therefore, the 6% year-over-year rate increase is almost entirely a
result of contracted rate increase and mix. Regarding the latter part of your
question, we are continually repricing our business. Although a slightly larger
percent of the business gets repriced in the first quarter relative to the
remaining three quarters, the split is not as disproportionate as some have
inferred.
Jason Bates:
Should we view the driver pay increase announcement as a validation that the
2015 rate increases have been better than expected to date this bid season?
Jerry Moyes:
No, we anticipated providing a meaningful driver wage increase when we
provided full-year guidance last quarter. We weren't certain exactly when in
the second quarter we would be rolling it out. However, the revenue per
loaded mile increase we have realized, as well as the driver wage we will be
implementing, were both previously anticipated.
Jason Bates:
What percentage of the achieved rate increases is being passed on in the form
of driver wage increases?
Jerry Moyes:
This is a difficult question to answer because of the wide range which are
triggered by a variety of different factors. But setting aside the year-over-year
impact on the driver wage we put into place in the third quarter of 2014 for the
majority of our fleet, this year's increase to the drivers will range 25% to 30%
of the increase that we're actually getting from our customers, dependent on
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the tenure, ranking and the experience of each driver. However, in some
fleets, including the Dedicated, it can be a little higher. The remainder of the
increase is used to defray other costs, such as new equipment, technology,
recruiting and training, and to expand our margins for our shareholders.
Jason Bates:
If 33-foot pup trailers were legalized, is there a role for them to play in your
free-running truckload operation and/or your Dedicated operations?
Richard Stocking: The short answer is yes, there's a possibility to incorporate these trailers in
both our Dedicated and Truckload segments and we would closely evaluate
and be ready to respond accordingly if the law were to change.
Jason Bates:
How does the advent of Amazon fulfillment centers in urban cores impact
your businesses? Is this shift positive or negative for the Company? Would
you ever consider last mile delivery as an additional service offering?
Richard Stocking: Yes, Amazon is one of our valued customers with whom we have been
growing rapidly. So, obviously we are excited to see them grow, as it has the
potential to be mutually beneficial to both parties. I have met personally with
these folks, both in our offices and in their offices, and there's significant
opportunity in many of our service offerings.
The potential and possibility is there for us to participate in the final mile, we
haven't participated in this offering as of yet, but that doesn't mean we
wouldn't consider it in the future.
Jason Bates:
Can you give us progress reports on where your Mexican operation and the
truck brokerage initiative currently stand?
Richard Stocking: Yes, our Mexico division has had some record results in the first quarter. We
are extremely excited about our progress in Mexico. We have great customers,
great employees, and we are seeing great results. And we will continue
improvement in many of our key operational metrics.
We are focused on growing both our trucking as well as our intermodal
offering in Mexico. I will defer my answer to the latter part of your question
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regarding progress in our truck brokerage division until a little later on in the
call as we have a variety of questions on that topic.
Jason Bates:
You've reached an 87.9% operating ratio for the quarter in Truckload. Does
that lead to a sub mid-80s OR for the year? What is your threshold for more
rapid fleet expansion?
Richard Stocking: While we are proud of the progress we have seen in our Truckload segment,
we want to be careful to not “get out over our skis”. Rest assured, our teams
will do everything in their power to over-achieve their targets. We remain
very optimistic about the possibility of reaching our long-term goal of the low
80s adjusted operating ratio in our Truckload division.
However, we want to reiterate that as we expected, the first quarter was aided
by a fuel tailwind, additionally, as planned, the next couple of quarters will
have meaningful driver and owner-operator wage increases as a cost
headwind. So, everything at this point is developing according to plan. As
such, for the time being, we anticipate to remain consistent with our
previously stated fleet growth objectives and our OR improvements in the
Truckload division.
Jason Bates:
How much were the total miles impacted by weather and port issues?
Richard Stocking: This question is very difficult to answer accurately. We had at least seven of
our terminals that were shut down due to weather during the first quarter,
some for a day or two because of ice-related issues. I will state that both of
these issues served as headwinds in the first quarter but to identify the exact
magnitude is difficult.
Jason Bates:
Weekly revenue for tractor growth accelerated from 9.1% in the fourth quarter
of 2014 to 7.3% growth in the first quarter of 2015. Are we past the peak of
rate growth?
Richard Stocking: The fourth-quarter 2014 improvement was very strong, boosted by a
combination of solid rate increases, year-end project business, and seasonally
strong fourth-quarter demand. We expect weekly revenue per truck will
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continue to grow at levels similar to Q1 with varying levels of increases in
rate versus increases in asset utilization as we progress throughout this year.
Jason Bates:
Tractors in service dropped 100 from last year's first quarter but are up 200
sequentially. Was the third quarter of 2014 the bottom for the truckload
count?
Ginnie Henkels: Yes, that is our current expectation.
Jason Bates:
You showed nice sequential fleet growth within Truckload during the quarter
and seemed comfortable with the expected full-year growth of 700 to 1,100
tractors. Can you provide an update on expected growth by segment -Truckload, Dedicated, CRS -- as well as a cadence by quarter?
Ginnie Henkels: We don't really provide that level of segment specificity in our guidance.
However, trucks will continue to grow across all of our segments for the
remainder of the year, with the largest number occurring in the Truckload
segment. Keep in mind that in total we are just now approaching our prerecessionary fleet size, and that is after the 2,000 additional truck growth that
were added with the Central acquisition.
Jason Bates:
Approximately how much of the 480 basis points of year-over-year OR
improvement at Truck during the first quarter of 2015 was attributable to fuel
benefits? How much from core operations and execution of improvement
initiatives? How should we think about Truck OR for the remainder of the
year?
Richard Stocking: As Ginnie mentioned previously and as we anticipated in our original
guidance, we realized roughly a $0.04 to $0.05 EPS tailwind from fuel in the
first quarter, the lion's share of which was in the Truckload segment. The
remainder of the year-over-year improvement would be a function of
operational execution and price increases, combined with improved year-overyear weather trends.
As it relates to modeling the Truckload segment for the remainder of the year,
we would advise you to look at the typically seasonal quarterly trends,
normalized for the aforementioned benefit, being sure to take into account the
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large driver and owner-operator increases in Q2. As such, this year's quarterly
adjusted OR trend may look abnormal relative to years prior, but the plan is
still to generate year-over-year improvements for the segment on a full-year
basis.
Jason Bates:
Loaded miles per tractor decelerated from fourth quarter's 2.5% improvement,
and on an absolute basis, from 2Q to 3Q to 4Q performance, what level of
growth would you expect going into the rest of 2015? Will growth accelerate?
Richard Stocking: The level of year-over-year utilization improvement will likely vary from
quarter to quarter this year. But our goal is to continue to realize improvement
in this metric for our Truckload segment on a full-year basis.
As mentioned previously, the fourth quarter of 2014 was particularly strong
for a variety of reasons. Additionally, this year, as previously discussed, we
will be trading a lot of trucks, which may lead to a slight utilization headwind
from time to time as we strive to bring in this newer, safer technology for our
drivers.
Having said that, we have worked hard to clear the path for our network
engineering and planning groups, empowering them to assist our drivers in
maximizing the use of their driving time, thereby increasing the number of
miles they can run, through a variety of tools and initiatives, all of which help
lead to better tractor utilization for Swift and a larger paycheck for our drivers.
Our shops are also hyper-focused on turning the equipment as quickly as
possible, further assisting these metrics.
Jason Bates:
Great. As I mentioned previously there were obviously a lot of questions on
our Truckload. Hopefully we've been able to address all of the themes. We are
going to go ahead and move into the CRS segment now.
Central has turned the corner on margins. Is this sustainable into the upcoming
beverage season?
Richard Stocking: Yes. We do believe that Central has turned the corner and that this trend is
sustainable on a go-forward basis. As we have previously discussed, our goal
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is to produce quarter-over-quarter improvements in profitability in each
quarter in this segment.
This is a commitment we don't take lightly and, as such, we have
appropriately allocated the required people and resources to make this happen.
We are encouraged by these recent trends and remain focused on delivering
and sustaining these improved results.
Jason Bates:
What is the Company continuing to do on the cost side? Or has illuminating
that large breakeven customer altered the economics here?
Ginnie Henkels: Eliminating the unprofitable dedicated account will certainly be helpful. But,
as in all areas of our organization, we are constantly looking for areas to
improve efficiencies and reduce cost, and this is no different in our CRS
segment.
The same strategic initiatives implemented on our dry-side continue to be
implemented in the refrigerated segment and are beginning to produce results.
These results include a large gamut of activity such as reducing the number of
unpaid miles driven, realizing synergies developed through our acquisition,
and improving driver retention. We are constantly re-evaluating our key
processes to ensure we are running efficient and cost-effective.
Jason Bates:
The fleet has increased for two quarters now. What are your thoughts on
optimal size for the network?
Jerry Moyes:
We are excited by the continued growth within this segment, and view this
growth as a direct byproduct of our recently implemented driver-friendly
initiatives. We have growth opportunities with our existing customer base, as
well as with new customer accounts on both the OTR and Dedicated side. As
long as this growth meets our profitability requirements we will continue
adding trucks to this fleet. A lot of this growth will be directly dependent on
our ability to attract and retain these drivers.
Jason Bates:
For your CRS segment, the loaded miles declined only 2% after falling 18%
last quarter, yet yields were up a solid 5%, double our target. But revenue per
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load of miles fell off. What is driving that decline? The sequential increase in
fleet?
Ginnie Henkels: As we discussed in our letter to stockholders, due to the lack of sustained
profitability we made the decision to discontinue servicing a large dedicated
customer account effective January 31 of this last quarter. This particular
account had a much higher revenue excluding fuelper loaded mile, a much
lower length of haul, and much higher deadhead. These mentioned metrics
were all affected by the termination of this account. And when this account is
excluded for both periods the remaining business produced a year-over-year
increase in revenue excluding fuel per loaded mile of 4.7%.
Jason Bates:
Can you elaborate on the customer adjustments at Central Refrigerated? How
did the contract adjustment impact tractor utilization and deadhead miles
specifically? Can you remind us of how big this fleet was?
Richard Stocking: This account was approximately 100 tractors and carried a very high revenue
per loaded mile, roughly 4 times the normal level, which was more than offset
by extremely low utilization and very high deadhead.
Jason Bates:
CRS walked away from a dedicated account at the end of January 2015 given
it was underperforming and generally wasn't a good fit. Are there further
accounts that CRS may cull over the next 12 months? If so, please discuss.
Richard Stocking: The mentioned customer account was a specialty operation and as such was
foreign to our core business. It was the only one of its kind within our book of
business.
That being said we are constantly culling over our OTR and Dedicated
operations, ensuring profitability requirements are being met. To the extent
improvements need to be made, we work diligently with our operations team
and in many cases our customers to help drive efficiencies and price increases
where necessary to attain expected profitability targets.
Jason Bates:
Do you offer team-expedited services in your CRS unit? With all the emphasis
on fresh foods, I have heard that this market is very attractive right now as
stores offering fresh foods often opt for expedited services to extend shelf life
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if the food is not processed with preservatives. How large is this operation or
how large could it be?
Richard Stocking: Yes, we do roughly have 200 trucks that run team-expedited services in our
refrigerated segment. We currently operate this fleet in several strong power
lanes with customers requiring expedited transit. Based on customer feedback
and conversations, I agree that this is a high potential growth area and one we
will continue to focus on.
Jason Bates:
Can management provide more color on the improvement in driver
recruitment and retention at CRS, and how Swift's been able to successfully
grow tractor count during a period when the CRS fleet was experiencing two
full challenges from both the industry as well as the Company-specific, such
as integration headaches, competition, et cetera?
Richard Stocking: Yes, we are committed to delivering a better life to all of our drivers. And as
part of this commitment we continually seek feedback from our driving
professionals. We view this feedback as immensely valuable as it helps
structure our relationship with our drivers.
As it relates to the CRS segment, we have listened to driver feedback and
have implemented measures to address their specific concerns. As a result,
great opportunities have been created for our drivers to grow, develop, enjoy
home time, and earn the appropriate paycheck to support their families.
Jason Bates:
Can management provide an update on the CRS acquisition synergies?
Management previously spoke to $4 million of potential synergies that are
likely to be generated through the Swift CRS combination. Is this goal still a
reasonable one? And if so, what is the proper timeframe for achieving the
synergies?
Ginnie Henkels: We have completed the facilities consolidation, the back-office consolidation,
the insourcing of Central's maintenance and the fuel savings, as originally
anticipated. The challenge we had was recovering from the significant driver
turnover we experienced in Q1 and Q2 of 2014. As discussed previously, we
are making progress in this area on a daily basis and are replenishing the fleet
while making other operational improvements, as well.
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Jason Bates:
That turns us to the Dedicated segment.
The first question -- yields turned positive for the first time in seven quarters.
Is this a sustainable trend given the loosening of spot rates?
Richard Stocking: I'm assuming you are referring to the revenue per tractor excluding FSR
metric. Spot rates have very little, if any, impact on our Dedicated business.
Mix has been a contributing factor to the decline we have seen over the past
several quarters, especially in light of the significant growth over the past
year.
However, as it relates to our Dedicated business, we generally evaluate the
combination of revenue per truck per week, as well as the adjusted operating
ratio on an account by account basis. The goal would be to ensure that each
account is showing progress in each metric even though the weighted average
for the segment may be trending down.
Jason Bates:
Since the first quarter of 2010 the size of the Dedicated fleet is up 90%.
Revenue is up roughly 80% but the operating income is flat. We are at a point
in the cycle where demand for Dedicated capacity is at a premium. Why are
the results seen as much margin pressure relative to the results back in 2010,
2011?
Ginnie Henkels: This is a good question and one that deserves a deeper comparison to fully
explain recent trends within the segment. I believe your analysis is simply
looking at the first quarter of 2010 compared to the first quarter of 2014.
However, when comparing full-year 2010 to full-year 2014, Dedicated truck
count and revenue have grown roughly 70% while operating income grew
roughly 14% over the same period.
The 14% operating income growth was dampened by significant startup cost,
which will be recouped over the life of the contract, increased driver wages
and increased insurance and claims expense in 2014. Our stated goal is to run
the segment with an adjusted operating ratio in the mid to high 80s. Doing so
on a revenue basis that has increased by 70%-plus, will be an accretive
prospect to stockholders.
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Jason Bates:
How would you describe the pace of new Dedicated wins so far in 2015
versus the more torrid pace you experienced in 2014? Are customers as eager
to consider Dedicated as a key components of their supply chains? Or has the
decrease in diesel fuel prices reduced their interest in exploring Dedicated
fleet solutions? What sort of start up cost do you expect to incur during the
remainder of 2015 for this segment?
Jerry Moyes:
The pace in Q1 Dedicated growth has been a much slower and controlled
growth when compared to the rate of growth over the past couple of years.
This pace is intentional and by design as we first focus on improving the
profitability within our existing business. We are continually approached by
customers taking Dedicated solutions. Therefore, I do not believe the decrease
in fuel prices have impacted the customers' desire for Dedicated solutions. We
will continue to evaluate new Dedicated opportunities and will proceed with
those that meet our profitability objectives.
As it relates to the Q1 results, no substantial Dedicated startup costs were
recognized.
Jason Bates:
Were there any headwinds in the Dedicated operating margins during the first
quarter of 2015, such as startup costs or other miscellaneous costs that could
potentially dissipate as the year progresses?
Ginnie Henkels: As explained in the fourth quarter the biggest headwind in Dedicated in Q1
was related to insurance and claims expense, which we hope to dissipate
throughout the year given the initiatives we have in place.
Jason Bates:
Does management believe that the potential mandate for ELDs beginning in
2016 could accelerate demand Dedicated to industry services?
Jerry Moyes:
Generally we feel the potential mandate for ELDs could result in a tightening
of capacity for the overall industry not just the Dedicated services, and that
large, well-positioned carriers such as Swift could greatly benefit. We feel that
over the long run these devices could help improve productivity as well as
improve safety within the industry.
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Jason Bates:
We will now turn to the Intermodal segment.
While you called out the port labor strike in the letter as a reason for soft
Intermodal performance in the first quarter, wasn't poor railroad service still a
significant factor? How long do you think it will be before the rail fluidity
returns to the levels experienced in 2012 and the first half of 2013?
Richard Stocking: Rail service has improved significantly on a year-over-year basis but it has not
yet met our expectations or some of our customers' expectations. We have
been able to deliver more consistent service in many lanes, especially when
compared to last year. Maintenance activities are now underway with many of
the railroads which will negatively impact service through much of the
summer. Therefore, we don't expect service levels to fully improve until later
in the year.
Jason Bates:
Walk through the impact on business due to the West Coast port strike. Loads
per container were flat year over year and down sequentially.
Richard Stocking: The port strike has reduced both the length of haul and revenue per loaded,
especially in February. It also has impacted dray fleets, particularly those
based on the West Coast whose utilization was negatively impacted by the
port slowdown.
Jason Bates:
Can management quantify the impact of the West Coast port labor and
congestion issues on the Intermodal volume and margin during the first
quarter of 2015?
Ginnie Henkels: It is very difficult to accurately quantify the impact of the port issue since
there were many variables that were impacted, such as lost volume, volumes
filled with spot business, balance issues throughout the network, driver
turnover due to a lack of volume, et cetera. Given the impact to impact of the
metrics in this business we believe the impact was significant but we will
refrain from quantifying at this time.
Jason Bates:
How is the West Coast port cleanup going to impact results in the second
quarter? More specifically, length of haul, container turns, spot usage and
operating ratio?
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Jerry Moyes:
We anticipate the West port cleanup to continue through much of the second
quarter. As this occurs, we believe volumes will progressively increase which
will improve revenue per load, container turns and the operating ratio. The
usage of spot business off the West Coast has dropped since February, which
was the high point. We anticipate spot business to progressively reduce as a
percent of overall volume mix as normal volume flows return and new
business implementations take place.
Jason Bates:
Has Intermodal returned to profitability month to date in April? Have your
margin expectations for the segment changed? What rate increases is
Intermodal realizing this bid season?
Jerry Moyes:
We anticipate Intermodal being profitable in Q2. We also anticipate overall
Intermodal profitability to improve for the full year. We have been successful
on increasing price during this bid season. The strength of the increases have
been stronger on east to west lanes, which we feel is a byproduct of the West
Coast port situation.
Jason Bates:
What is the breakout of COFC versus TOFC on loads or revenues?
Ginnie Henkels: We don't disclose this level of detail. As we have mentioned in the past the
TOFC product is a much smaller percentage of the total volume we move
intermodally. However, COFC continues to be the strategic focus of the
Intermodal segment, and we are pleased to see continued success in growing
that offering, which is up 16% year over year in the first quarter.
Jason Bates:
What have you done to get Intermodal costs back in line for the second
quarter and beyond?
Richard Stocking: We continue to focus on improving container turns and the utilization of the
dray fleets, as we feel these are critical to reducing costs. Increasing container
turns will reduce chassis expenses and deliver more revenue and profit across
the fixed equipment base. Increasing the use and efficiency of our own dray
fleet will reduce the usage of more costly third-party options. Significant
progress has occurred in this area with drays conducted by Swift power
approaching 80%.
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Additionally, we have continued to improve the dray infrastructure. As an
example, we opened a new Chicago dray operating point about halfway
through the first quarter within a few miles of the primary rail ramps in
Chicago. We are continuing to establish additional dray operating points near
rail locations. This will reduce both empty miles and increase available power
to move customer volumes.
Jason Bates:
Loads were up 8.5%-plus. What gets Swift to increase container fleet again
versus improving margins?
Richard Stocking: We believe we can move 20% more loads with our existing container fleet by
continuing to increase the turns on our equipment.
Jason Bates:
There were some questions on logistics.
Other segment revenues -- brokerage, logistics, IEL, et cetera -- slowed to a 21%
growth. Is this fuel related or is there a slowdown in brokerage activity given
loosening of the market?
Ginnie Henkels: Actually, our logistics business continues to grow both the top and bottom
line. Load count actually increased 60% year over year in the first quarter.
The primary reason for the slowdown you are referring to from 29.7% yearover-year growth in Q4 versus 21% year-over-year growth in Q1 for the entire
other segment is primarily related to the leases and associated lease revenue of
the CRS owner-operators and the integration of their program into our IEL
lease program.
Jason Bates:
They were a handful of questions on debt and CapEx.
The first -- what is your plan for debt reduction in 2015? Given the amount
achieved in the first quarter of 2015, can you update us on the amount you
plan to achieve for the full year?
Ginnie Henkels: As we discussed in the letter, our debt balance and leverage ratio in Q1 was
lower than originally anticipated due to the delay and receipt of equipment
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purchases. Therefore, we were able to temporarily pay down some debt while
we awaited the equipment deliveries.
As our equipment deliveries will now be heavier than anticipated for the rest
of the year, we are expecting that our debt and leverage levels will increase a
bit from where we ended Q1. But, as we discussed last quarter, we anticipate
ending 2015 with a net leverage ratio that is lower than the end of 2014, which
will largely be driven by growth in EBITDA.
Jason Bates:
What caused you to increase your CapEx guidance by $50 million for 2015?
Ginnie Henkels: We actually did not increase our CapEx guidance by $50 million, we just
described it differently. Last quarter we said we anticipated our net cash
CapEx to be in the range of $300 million to $350 million. This quarter we
broke out the components of that and said we anticipated the full-year total or
growth CapEx to be between $350 million to $375 million, which will be
offset by proceeds from sale of roughly $45 million, which implies a range for
net cash CapEx of $305 million to $330 million.
Jason Bates:
Management discussed delays in deliveries of new equipment during the first
quarter of 2015. What drove these delays?
Jerry Moyes:
We believe it was the change to the new model year with all of their new
specifications, and the new safety equipment being brought in. It just took
them a little longer to get everything implemented. We actually believe that
this is probably going to continue in the third and fourth quarter.
Jason Bates:
Under what parameters would you consider an equity-driven refinancing?
Ginnie Henkels: Given that we no longer have high priced debt and our leverage ratio is close
to 2 times debt to EBITDA, finding parameters that would make an equitydriven refinancing feasible or accretive is challenging. This is not something
that we are considering given our improved financial position.
Jason Bates:
There were, just to wrap up here, a couple of questions on drivers and a
couple of miscellaneous questions.
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The first -- can you give us an update on driver turnover performance?
Richard Stocking: Yes, our driver turnover is down year over year. We have many initiatives in
place to deliver a better life to our drivers, and those initiatives are helping to
retain our drivers. We believe there are many benefits for our customers, our
non-driving employees, our shareholders and our communities if we can make
Swift the employer of choice in the industry.
We are not there yet, and although our turnover has improved year over year,
we are not where we want to be. We have many more things to do and many
other non pay-related items that we will be rolling out very soon.
Jason Bates:
Is there risk that the industry is finally retaining drivers and growing fleet
count at a time when, broadly speaking, economic growth is slowing?
Jerry Moyes:
I do not believe this is a risk to Swift. It's still very difficult to attract and
retain qualified drivers. As many of our competitors discussed, recent industry
data has shown that the turnover in large fleets such as ourselves has
improved, but the turnover in smaller fleets, and the industry as a whole, is
still very challenged.
Jason Bates:
Did the West Coast port labor and congestion issues have a positive or
negative impact on Swift's remaining businesses, the non-Intermodal
businesses? If meaningful, can management provide some more color on the
impact on a division by division basis?
Richard Stocking: Our Truckload segment had some small benefit but this was negligible when
looking at the segment as a whole.
Jason Bates:
This is a final question and then I will turn it over to Richard to wrap up.
With several carriers discussing industry consolidation initiatives, at what
point will Swift be ready for its next acquisition? Do you have any preferred
deal size or preferred type of carrier in mind?
Richard Stocking: We want to continue to make progress with Central and deliver upon the
acquisition objectives there first. Then it will be a matter of what make sense
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for us at that time. We do not have a targeted deal size. Each opportunity is
unique and will be analyzed as such with the objective of rapid accretion to
earnings.
Just to recap, over the past several months, I want to reiterate, we have seen
persistent supply and demand imbalances, driver shortages combined with a
desire from shippers to transition to more larger carriers, core carrier
programs, and to use less brokers, as we talked about earlier. Customers
recognize the value that we bring and are willing to pay for that service and
security of that capacity.
We are extremely excited about our short-term and long-term outlook. We
have had two quarters of 6%-plus rate increases and this is huge. Our network
engineers are working very well to engineer our network to help load our
trucks where they land, increase our rates in head haul markets.
We have strategic focus teams that are aligned to produce results. Safety is
number one. We are very focused on that through leadership and technology.
We are making great progress and believe this will continue.
We are hyper focused and fanatically focused on our cost control and making
sure that we get a return for the dollars that we spend. We are very focused on
revenue growth, bringing in the right revenue in the right lines of business.
And our teams are extremely aligned through sales, customer service and our
network engineers, and pricing to do so.
We are extremely focused on recruiting and retention. Our net promoter score
for our drivers is at an all-time high, which is helping us to retain our drivers
and grow our fleet. We are very excited about our recruiting and retention
efforts.
Our utilization obviously is a continued focus. We believe we can be best in
class with utilization. We have several initiatives underway to continue to
bolster the utilization, as we believe that helps the W-2 of our drivers as well
as the profitability of the organization.
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We are extremely proud of our team, our leadership, the Swift family. Drivers,
the men and women who drive our trucks, are very important to us. We put
them on the top of the inverted triangle. And we are proud of our progress in
delivering a better life to our employees, obviously our drivers, our shops and
office employees.
I believe we are aligned, our morale is high, and we are extremely focused on
the future. And we believe this is a great year for our customers, our
employees, our shareholders. We believe we're making progress in delivering
a better life in each of those categories.
So with that, we thank you for joining the call.
Jason Bates:
Thank you all.
Operator:
This concludes today's conference call. You may now disconnect.
END