Swift Transportation Earnings Call NUGGETS: Rate Trends, Plus One Initiative

On Friday, Swift Transportation Co (NYSE:SWFT) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Rate Trends

Richard Stocking – President and COO: Thanks, Jason, and good morning, everyone. To answer the first question, the lower consolidated rate improvements were actually a result of business mix and in economic environment that was less robust than we had originally anticipated. As we mentioned in the letter, we achieved rate improvements of 3.3% in the over-the-road linehaul service, and we also lowered our guidance to 3%, 3.5% now that we had two quarters of actual results under our belt and have better perspective on the trends as well as the mix impact of growing our dedicated service offering for the remainder of the year. The decline in dedicated rates was also a result in a change of business mix within the dedicated service offering.

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Jason Bates – VP of Finance, IR & Assistant Treasurer: Can you provide some color on how rates trended throughout the second quarter on a monthly basis?

Richard Stocking – President and COO: Yeah, well, again, we don’t disclose the monthly details behind our rate per mile. I can’t say that the trend was positive and that it built throughout the quarter. We will continue to work on that momentum for the remainder of the year.

Jason Bates – VP of Finance, IR & Assistant Treasurer: What is your view on spot pricing? Are there any regions that pricing has been weaker or stronger?

Richard Stocking – President and COO: Yeah, as we’ve stated in the past, we really don’t participate very much in the spot market; however, we do provide a service to our customers. That’s more in line with repositioning, which we actually charge extra to reposition those trucks. We have seen that market remain relatively consistent on a year-over-year basis. We strongly believe that the repositioning need that our customers have will continue in the third and fourth quarter as it did last year.

Jason Bates – VP of Finance, IR & Assistant Treasurer: So there were quite a few questions that came in as it relates to volumes and utilization and trends. First one here, 2012 freight has demonstrated more typical seasonality thus far; do you think that that continues?

Richard Stocking – President and COO: We do. We believe that we are experiencing a more typical seasonal pattern relative to years passed, and the continuation of this trend will obviously depend on several factors; consumer confidence, as well as what’s going to happen in the economic environment and political environment, but we believe that this trend will be typical of years past going into Q3 and Q4.

Jason Bates – VP of Finance, IR & Assistant Treasurer: How much of a drag on total utilization was the shift from linehaul to dedicated? Should we expect this trend to continue?

Richard Stocking – President and COO: Yeah, Well, it’s a good question. We don’t disclose specific amounts at this time; however, as we’ve discussed in our letter that we sent, our loaded utilization in the over-the-road linehaul service offering was up 110 miles per truck per week, which we’re very proud of. Historically, our dedicated service offering has yielded a lower utilization figure, but comparable on the revenue per truck per week, and we expect this trend to continue, but it will ultimately depend on the type of dedicated customers that we add as well as we retain on a go-forward basis.

Jason Bates – VP of Finance, IR & Assistant Treasurer: So what percent of your truck revenue today is dedicated versus a year ago? How does this impact yields, utilization, margins, et cetera?

Richard Stocking – President and COO: Again, we don’t break that out or segment that at this time, that level of detail; however, we have shifted trucks from our over-the-road linehaul service offering to our dedicated service offering as we have gained new dedicated contracts and awards throughout the year and throughout the quarter. Doing so gives us the opportunity to shed some less efficient lanes in our over-the-road network and bolster and build our dedicated line of business

Jason Bates – VP of Finance, IR & Assistant Treasurer: What was the year-over-year percent change in total loaded miles during the second quarter?

Richard Stocking – President and COO: Loaded miles were down 2.5% year-over-year due to a 3.7% reduction in our average operational fleet, now is offset by 1.2% improvement in our loaded utilization and a point of clarification, keep in mind that we define utilization as loaded miles per truck per week and I believe others may define utilization as revenue per truck per week.

Jason Bates – VP of Finance, IR & Assistant Treasurer: Can you discuss volume trends throughout the quarter? Throughout the quarter, you guys had commented that volumes were good but not great. Can you provide a little color on that comment and then has July started out softer than normal or are you concerned with the current economic environment?

Richard Stocking – President and COO: Yeah, Jason, volumes in the second quarter were softer than we would have hoped, but they weren’t concerning. We remain cautiously optimistic about the overall economic environment. If you look at the month-to-month trends we were consistent throughout the quarter of Q2 and July is following normal seasonal trends. So, again softer in Q2, but not concerning.

Jason Bates – VP of Finance, IR & Assistant Treasurer: With the transition to a larger dedicated mix what level of mileage increase per tractor is the management team targeting for the next few quarters?

Richard Stocking – President and COO: Again, we don’t disclose certain targets. However, as we’ve said in the past our long-term goal is to improve return on our net assets and one of the best ways our organization knows to do this is to increase our utilization per tractor and that remains a major key focus or a (wild and) important goal for us and we have several initiatives that are helping us make progress to that goal.

Jason Bates – VP of Finance, IR & Assistant Treasurer: With the recent decline in broad measures of consumer business and market sentiment, what impact has the environment had on your shipper base? Have customers become reluctant to commit to peak shipping capacity, can management provide us with an update on where broad levels of demand and supply are in the truckload market?

Richard Stocking – President and COO: Sure. We believe that the market is close to equilibrium and I believe that manifests itself as markets improve and capacity tightens very quickly. Customers are still concerned about the peak season as it relates to obtaining sufficient capacity for their business needs, so much so that they are currently willing to negotiate search pricing and capacity commitments going forward. So, it’s also a situation where it’s flight to quality as well, and we feel is a, just as you look at Swift, as they use more of our suite of services, we have more opportunity to gain that share.

Jason Bates – VP of Finance, IR & Assistant Treasurer: As far as improving utilization trends – or utilization and deadhead, can you discuss the role of the network engineers that you now have in place? What tools do they have at their disposal, how far along in the process are we, and do you have any specific internal targets around utilization and deadhead?

Richard Stocking – President and COO: Yeah, we are very excited about our network engineers, the progress we’re making, and we still have more to obtain here within those goals and initiatives relative to engineering our entire network. But they monitor and analyze our balance, our head-haul backhaul markets throughout the network. They also develop solutions to match load volumes with or truck availability. They look at seasonal demands. We have equipped our network engineers with several tools, including freight maps, load optimization software, inbound, outbound balancing reporting and lane privatization tools among others to help us achieve those numbers that we’ve achieved so far and the goals that we have set for ourselves going forward.

Plus One Initiative

Jason Bates – VP of Finance, IR & Assistant Treasurer: Can management provide us an update on the Plus One initiative, as well as give some examples of benefits the Company has achieved today?

Richard Stocking – President and COO: Yeah, the Plus One initiative was a contributing factor in our ability to grow that 110 miles per truck per week in our linehaul service offering. In addition, it has helped increase our drivers’ W-2 as a results in them running more miles, which then helps our retention and then our cost control, so it all hooks together.

Jason Bates – VP of Finance, IR & Assistant Treasurer: What percent of your volumes relate to consumer goods that are purchased during new house construction? Can you reposition your trucks to take advantage of the improvement in housing starts?

Richard Stocking – President and COO: Yeah, great question. Our trucks are positioned across the country because of our infrastructure terminal network and we’re ready to take advantage of any improvements relative to this type of business. If you think about the tile and the carpet that comes out of Southeast or the insulation and windows out of the Midwest or whatever, our fleet is positioned to take advantage of that opportunity. However, we don’t break out specific revenue related to housing starts.

Jason Bates – VP of Finance, IR & Assistant Treasurer: There were also a lot of questions with regard to CapEx and our fleet overall. It looks like you made the decision to lease the new tractors instead of purchase. Is this the reason why your net cash CapEx guidance was reduced to the $190 million to $220 million? Will this continue to be your decision moving forward for the rest of 2012 as you look at tractor acquisitions? Are operating leases included in the leverage ratio?

Ginnie Henkels – EVP and CFO: At the beginning of the year, we gave net cash CapEx guidance of $250 million. As we discussed in the past we’re trading or selling our trucks today based primarily on mileage rather than age, so when we put our CapEx plans together for 2012 at the end of 2011, we used an algorithm to project the miles by truck and determine how many trucks we expected to trade. Now that we’re halfway through the year, we’ve been successful at managing our trucks and our applications meaning putting higher mile trucks and lower mileage applications. And we’ve been able to keep these trucks longer than originally anticipated. Therefore, we’ve been able to push out some of the orders to next year, which has reduced our total CapEx needs for 2012, which is why the guidance was reduce. We will continue to lease trucks in the second half of the year as well and the current split is estimated to be roughly 40% to 45% purchase with the rest leased either through capital or operating leases, which depends on the economics at the time of financing. With regard to the leverage ratio, our leverage ratio as defined in our credit agreement does not include operating leases as debt, but the rent does decrease our EBITDA used in that calculation?

Jason Bates – VP of Finance, IR & Assistant Treasurer: How should we be thinking about 2013 net cash CapEx levels?

Ginnie Henkels – EVP and CFO: We have not finalized our CapEx plans for 2013 yet, but I would expect that net cash CapEx would be similar to 2012.

Jason Bates – VP of Finance, IR & Assistant Treasurer: So, kind of following up on the comment about the fleet, how do you feel about the current age and composition of the fleet? What targets do you have for fleet count moving forward?

Ginnie Henkels – EVP and CFO: We’re happy with the current age of our fleet, our average Company’s sleeper fleet is about 2.8 years, but as I just discussed, we’re trading our trucks based on mileage, not age, so the age will bury as a result what those mileage factors. With regards to the fleet count as we mentioned in the letter, we are expecting to increase between 50 to 100 units on average in both Q3 and Q4.

Jason Bates – VP of Finance, IR & Assistant Treasurer: Finally, how robust is the used equipment market at this point in time?

Ginnie Henkels – EVP and CFO: The used truck market is softening just a little bit. As you can see from our gains it’s still pretty strong.

Jason Bates – VP of Finance, IR & Assistant Treasurer: Then with regards to the owner-operator fleet what are your goals with regard to expansion in that arena this year?

Richard Stocking – President and COO: Yeah, originally we were targeting as you well know, our owner-operator, growth of 200 to 300 for the year. Unfortunately, we haven’t seen that growth. This is the contributing factor into our recently announced owner-operator banded pay program, which we believe will help our retention and the growth of the fleet.

Jason Bates – VP of Finance, IR & Assistant Treasurer: There were also a few questions around debt, and leverage and interest. It says that you show on Page 1 of the letter that you paid $48 million of debt, yet you show only $36 million reduction in net debt. Why the difference? Was it the growth in the revolver or royalties?

Ginnie Henkels – EVP and CFO: The difference between the debt and the net debt is unrestricted cash, meaning that unrestricted cash is netted against debt to derived net debt. So the $12 million difference represents a $12 million reduction in our unrestricted cash balance.

Jason Bates – VP of Finance, IR & Assistant Treasurer: What should we expect for interest expense for the remainder of 2012? Do have plans to pay down additional debt in the third and fourth quarters?

Ginnie Henkels – EVP and CFO: With regard to interest expense a portion of our debt is based on LIBOR. So obviously our interest expense will depend on those trends, but we are currently expecting interest expense excluding the amortization associated with the terminated interest rate swaps to be between $28 million and $29 million per quarter. Then as for additional debt payments, yes, we are expecting to make additional payments this year. We have reduced our gross debt by $119 million so far this year, and over $72 million on a net debt basis, and as we’ve stated, since our IPO, our goal is to reduce our net debt by a minimum of $50 million to $100 million a year, and we expect to be at the top end or above this range for 2012.

Jason Bates – VP of Finance, IR & Assistant Treasurer: When is the next schedule prepayment on the term loan?

Ginnie Henkels – EVP and CFO: As we make the voluntary prepayments on the term loan, they are applied against the scheduled payments. Currently we have made all of the scheduled payments on the term loan B-1 through June of ’13, so the next payment scheduled on the term loan B-1 is for $5.25 million in September of 2013. On the B-2, we’ve made all of the scheduled payments through September of 2016, and we will likely continue to make these payments well in advance.

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