Q3 2019 Earnings Call

To adjusted EBITDA on a consolidated basis, and operating income and loss to adjusted EBITDA on a segment basis.

During this call we may refer to our non-GAAP measure of adjusted EBITDA simply as EBITDA.

In conjunction with today's earnings release, we issued a presentation, which will be reference during the call. The presentation was filed an 8-K along with the earnings release and is available on our website.

Ill now turn the call over to Darren.

Good morning, everyone and thanks for joining our third quarter earnings call.

Now, let's start with layer sheet freight as I'm proud of the progress they made in Q3.

Even with continued softness in the economy and slight moderation in yield improvement they reported year over year increases in both operating income and operating ratio, which resulted in the best third quarter operating income and over 10 years. These improved financial results were at.

We've largely due to the labor contract efficiencies from box trucks that resulted in a significant decrease and local purchase transportation expanse and through increased line haul efficiency, along with disciplined cost control across all areas.

Concerning our regionals.

Operating results deteriorated due to depressed volume levels, which were particularly acute in the Midwest rust belt, along with the labor disruption in the automotive sector, where we have regional exposure and that did not help the last two weeks of the quarter.

Our ability to leverage the operational flexibilities obtained from the labor contract for the regional companies has been hampered due to these muted volume levels. While labor costs have increased we will continue to remain disciplined with cost control measures to balance capacity with asset.

And resource utilization needs, while also continuing to focus on improving our density through network optimization, which should lead to improved operating performance from our regional network.

29 team has been a challenging freight environment all year alone, but also a productive year for wire CW as we look beyond Q3, our path forward as defined and currently well underway with our multiyear strategy. We have cleared the hurdles of the ratification of a new five year.

We're agreement, providing us more stability and flexibility and an improved capital structure with our refinanced term loan.

Additionally, we implemented an enterprise wide sales and operations leadership structure, while clearing and extending the runway for network optimization across all brands. These changes are intended to drive asset and property utilization, while building density and creating a fish.

Unsi across multiple productivity measures.

With the focus on greater efficiencies, we have completed 12 consolidations of service centers and we are on track to hit our goal of approximately 25 service centers to be consolidated by the end of the year as I've mentioned this just scratching the surface of the effort and.

Two new to enhance our network through terminal consolidations for the next several quarters.

In closing, while our network optimization strategy helped offset the weak demand environment. We are experiencing in Q4 cost controls will continue to be a primary focus until these conditions improve I.

I would like to thank our 31000 employees for their commitment to safety and dedication to getting the right things done to modernize all of our companies I will now turn the call over to Stephanie to share more details around our financial results.

Thank you Darren and good morning, everyone for the third quarter 2019, Lasky worldwide reported consolidated revenue of 1.6 billion, which is down from 1.3 billion, our 3.6% when compared to prior year.

Operating income for the third quarter was 23.8 million compared to operating income of 41.2 million and the third quarter 2018.

Additionally, the company reported adjusted EBITDA of 65.9 million for the third quarter 2019, compared to 84.2 million for the prior year.

For the trailing 12 month, adjusted EBITDA with 240.8 million compared to 288.8 million in 2018.

Turning to our operating staff by Air Sea freight reported third quarter 2019 year over year LTL tonnage per day was down 4%, which is due to a 3.5% decrease in LTL shipments per day, and a 0.5% decrease and weight per shipment.

Additionally year over year LTL revenue per hundred weight, including fuel surcharge was up 1.7% and LTL revenue per hundred weight, excluding fuel surcharge was up 2.8%.

Finally year over year LTL revenue per segment, including fuel surcharge was up 1.2% and that 2.3% when excluding fuel surcharge.

Moving to the regional segment, the third quarter 2019 year over year LTL tonnage per day was down 3.6%, which is due to a 3.9% decrease and LTL shipments per day as weight per shipment was flat year over year.

Additionally year over year LTL revenue per hundred weight, including fuel surcharge was down 0.8% and LTL revenue per hundred weight, excluding fuel surcharge was flat.

Finally year over year, LTL revenue per shipment, including fuel surcharge was down 4% and flat when excluding fuel surcharge.

The wires defray third quarter results indicate that even in this depressed volume environment, they've been able to take advantage of some of the operational efficiencies and absorb the increased labor costs for the regional companies on the other hand, the depressed volume environment has diminished their ability to fully leverage the operational efficiencies from the labor contract.

Typically as it relates to utilizing lower labor cost opportunity.

On a year over year basis revenue for the regional companies decreased 27.9 million and wage and benefit expense increased by 8 million when compared to third quarter 2018.

Going forward, we will continue to be disciplined to grow the right freight at the rate price increase our efforts around cost reductions throughout the network based on current volume trend.

Additionally, we will continue to focus on the network optimization efforts as those efforts will provide additional cost reduction opportunity to reduce miles increased density and reduced facility cost.

Even with the benefits expected from network optimization cost control measures identified over the last couple of quarters and the progress we have made on some of the operational efficiencies from the labor contract volumes will still be the ultimate determining factor in our ability to achieve the 60 to 80 million of margin expansion in 2020.

Moving to the balance sheet.

Darren mentioned, we recently announced the refinancing of our term loan agreement our new term loan provides additional liquidity less restrictive covenant 100 basis point decrease in interest rate and an extended maturity to June of 2024.

In conjunction with a new term loan we recognized an $11.2 million charge related to the extinguishment of our prior term loan which negatively impacted our EPS by approximately 34 cents per share.

Regarding liquidity, our cash and cash equivalents and managed accessibility at September Thirtyth, 2018 was 150.1 million, which at the decreased to 52.7 million compared to December 31, 2018, and is comparable to liquidity levels. We reported in June .

We used approximately 41 million in cash to invest in revenue equipment and technology during the third quarter.

One final note as it relates to fourth quarter similar to what we experienced in 2018, we expect to recognize the nonunion pension settlement charge ranging from $8 million to $10 million during the fourth quarter 2019 based on projected lump sum for the remainder of the year.

This settlement charges, a noncash charge and will not impact our adjusted EBITDA.

In closing as we move beyond Q3, we will continue our focus on the implementation of our multiyear strategic plan all the while ensuring we have appropriate cost control measures in place to manage through the current macroeconomic environment positioned ourselves for margin expansion in 2020.

Ill now turn the call over to TJ.

Thank you Stephanie and good morning, everyone.

As you heard from Darrin wire Sea freight had a solid quarter. This quarter operating income was the best in over 10 years.

We have benefited from operational efficiencies negotiated in our recent labor contract. This includes the new box truck language, which has allowed us to reduce the use of expensive local purchase transportation.

Good cost control measures contributed to improved operating margin despite sluggish volumes.

I want to talk a bit about our regionals.

Our new Labour agreement provides higher wages, and Flexibilities and new job classifications, and these are necessary to be competitive in the market.

However, with the depress volumes, our ability to fully leverage the use of these flexibilities has been restricted in the short term.

Year over year average wage has increased at the regionals, while revenue has decreased with the volumes. We're prepared for increased demand. However, current conditions required continued use of strict cost control measures.

As it relates to our operational efficiencies of our labor contract. There continues to be solid interests in our new non CDL box truck driving positions. We are now operating approximately 250 box trucks. These company drivers provide a reduction in the use of expensive local purchase transportation, while improving our service to customers.

Yes.

Another exciting new offering has our next day service in Texas Wire Sea freight has expanded its service offerings in Texas as we transform our network and optimize our operations. We can now offer next day service through our velocity center in San Antonio.

This allows for greater Ontime service with less handling. This is just another example of opportunities from network optimization and the benefits the deliveries to our customers.

In order to increase efficiencies and serve our customers, we have developed and deployed a new operations structure.

This structure Leverages, our most experienced and talented field management leaders from all of our brands.

The area and division managers are responsible for multiple operating company brands within their assigned geography.

Leveraging best practices from all brands, including the regional next day model in fact, the speed and flexibility use of the regional service models at Holland, Neupogen, and Reddaway remain a core fundamental and our network optimization.

All of our brands will remain strong and vibrant and their respective markets.

Holland, New Pan and right away all provide great value to our customers. These best in class regional LTL companies and then the size scope and endless capabilities of wire sea freight to go anywhere in North America as well as our newest company Henry logistics.

Thanks for your time. This morning, we'll now be happy to answer any questions that you may have.

Our first question will come from David Ross with Stifel.

Hi, Good morning, everyone Hello, Brian .

First thing is talking about wire free.

Seemed to bucked the trend in terms of weight per shipment everybody else is complaining about a drop of weight per shipment and.

You are showing it not only up year over year, but also up sequentially any color on that.

Well David This is DJ good morning, I think there was some influence from our truckload traffic in that mix that.

Drove the.

So weight per shipment up and thats resolve them.

Our non asset based Henry operational yes, if you look at the LTL only slightly down and then including Henry logistics and the success we've had in the truckload.

Focus of Henry logistics, it makes it look quite different on the total.

Thanks and.

I guess could you just walk through.

How the tonnage or shipment trends went through the quarter and what Youre seeing in October for both the wires you play freight Marci regional sure Yes sure David Good morning, as Stephanie So for wire Sea freight and this is LTL tonnage only July was down 3.3%.

I guess was down 3.6% September was down 5.3% and than October was down 4.1%.

For the regionals LTL tonnage July was down 1.5%.

I guess was down 4.4% September was down 4.5% and then October is down 6.2%.

And now that the strike silver would you expect that October number did improve in November and December .

Yes.

Yes.

Good question, David specific to the regionals and our largest regional carrier that tough as part of the freight economy that we've seen is in the Midwest and was even before the automotive labor disruption that we experienced the last two weeks on a quarter and then the majority of the month of October So I do expect a slight and.

Proven in the Midwest, but overall the Midwest was overall down more than any area of the country for us. So that'll that'll continue to be something we keep an eye on but it certainly helps that we've got the labor disruption out of the way and then also the news from most recently that other.

Oems are getting contract contracts lined up that should prevent further disruption.

Excellent. Thank you very much and David David.

The next question comes from Jack Atkins Stephens.

Darren 70, PJ. Good morning, Thanks for taking a little rack Hello, Jack Thanks for joining Oh, absolutely.

So just just a couple things here.

For the year your comments around.

You know the $60 million to $80 million in a accretion related to that the new Labour agreement you said the down is ultimately dependent upon being able to drive drive volume.

Next year and I guess as you sort of think about a what's been captured so far that 60 80 million, if there's a way to sort of quantify that and b.

The economy.

Does that you know improve next year.

Does that 60 to 80 million number change and can you help us sort of thinking through how that would look.

Yes, a couple of different things Jack as it relates to the 60 to 80 million as TJ mentioned in the prepared remarks. The box track program is actually benefiting wire speed radio and we're seeing that move along nicely. We expect to continue to get benefit from that box track movement really coming from.

Reduction and local card spend that was about 5 million specifically for the quarter.

We expect that to continue as we move forward into 2020, so thats something that will absolutely carry into 2020 and be part of that 60 to 80 million as we think about the other pieces. The other pizza as of the pie, where some wage classification reduction in wages from classification of workers and casual workers that we have obviously.

Early on those kinds of items take additional volumes to come come into play so those those could be at risk, but I think the other thing that that will help us in 2020, as we think about our five year a strategic plan is the network optimization and as we continue to consolidate service centers.

Which we've done 12 to date, thus far in expect 25 by the end of this year and likely another 25 in 2020, well see some of those cost savings start to roll into 2020, as well, which will also help be part of the 60 to 80 million, but to your point earlier could the 60 to 80 million come down a it could.

And depending on what happens with with volume levels as we as we move into 2020.

Okay got it got it.

And then just thinking about all the different puts and takes here I mean, you guys are clearly.

Executing on what you could control, which is the operational efficiencies and then in the network optimization, there's more to go there moving into the fourth quarter from the third but you have headwinds related to some things that at the regional subsidiaries. So I guess historically, we tend to see ebay.

Good job decline a little bit Threeq to Fourq, you you know but.

Obviously, there are some there's some costs opportunity there sequentially. How do you how are you guys thinking about.

You know EBITDA in the fourth quarter relative to the third I I'm not asking to give guidance just kind of directionality given given the different moving pieces that are out there right now.

Yeah, Jack with the AD demand still being weak we are obviously considering that as as part of the EBITDA equation for <unk> for Q, but.

But the other part of that equation is the reductions that we can make for my salary wages and employee benefits perspective in the fourth quarter.

So we will work to make sure the workforce Mcmahon or matches the volume levels that we have so you know will split we still expect Q4 to have a a decline from Q3.

But we'll manage that through Q4 with our salary wages and employee benefits expenses and Jack This is there and you'll see that a stringent cost control continue until we say conditions improve even throughout Q1, you know as we look at they actually and we look at whats played out this week with many other.

A public companies announcing and giving us awesome.

Much needed information about what's happening in October we will keep cost control at the top of the list like we always do and certainly network optimization is good timing for that cost control because it's not only building density in the network as we've taken. These is we're on track to take the 25 terminals out that we've already got into.

This year and then will immediately start working on the next 25.

Oh right after that it also eliminate redundant cost in our network. So as we were in an uncertain economy moving forward that network optimization will be a help to our cost control focus and TJ. If it's helpful. The Stephanie referred to the box truck savings.

Through the contract efficiencies.

I said, we had about 250 boxworks currently in operation the savings per box drug versus using expensive part into our purchase transportation, which is outside of purchase transportation is about $4600 per month per job per truck Wow, Okay gotcha that that.

That is definitely substantial one last things definitely all I'll turn it over just just housekeeping item can you kind of help us think through.

Go forward interest expense.

Under the new credit agreement.

Yes, so it should be approximately I think about 14 to 15 million on a quarterly basis.

Okay, perfect. So 14 to 15 million from the from the New credit agreement in terms of terms a piano interest expense just for a models what should we when should we be blowing in there.

It should be the same okay gotcha gotcha, okay, great. Thanks, very much thanks Jack.

The next question will be from a Jeff Kauffman of loop capital markets.

Thank you good morning, everyone and congratulations.

Yeah comes after you.

Questions.

Number one there had been some other folks that have popped a little bit about the the strike that GM and I think what we've heard is about two weeks impact to the third quarter in about three and change weeks impact to the fourth quarter.

Can you parse out.

This affected I'm going to assume mostly call him, but your your regional subs.

In October which was already a challenging freight environment, even without that added piece, but it was it was it was noticeable but also overall when we look at where the regionals landed in October from a negative tonnage environment.

I think if you.

Compared to August and September that was a more normalized than October and I think that's you know kind of them the metric to look at moving forward is that 4.4 to 4.5 decline.

Okay. Thank you and <unk>.

It appears to be seeing some of the benefits of the new labor contract at wire sea freight and looked like a pretty decent.

Quarter on metrics there.

First and maybe what might be going on under the yeah, you bet, a Jeff and think about when we started negotiating our contract. It was ratified in Q2 of this year, we started a year before that and our focus you know this time last year, our largest regional company was actually using price to.

That that we've seen for several quarters now and those contract benefits.

Currently we were down the road on our network optimization efforts, which will increase the density and to the regional networks and allow us to start capturing these contract benefits once a where and proving density on the individual regional lines and their length to haul and that's oh, the target of network optimization.

So certainly in a tough spot where the regionals, but we've got good cost controls in place. We will continue those and the plan we have moving forward or absolutely build density in the network to network optimization reduce the service center footprint and through all that.

Kind of an annualized revenue run rate just to give an idea where the size is but.

Sectors. So we're very happy with the way our shipments have grown much like what you've heard from other brokerages. This week and last week that I've reported our revenue per shipment has came down our margins are solid through that process, but because of the revenue per shipment dropping our overall revenue impact and 29.

Pain is less than we originally a we're talking about how we're on track after that a $140 million to $150 million range and Henry logistics, where earlier, we had reported a little stronger growth, but revenue per shipments the only a impact there the number of shipments and basically double.

Alright. Thank you and then one last question for Stephanie and then of good Stephanie you called out the million dollar loss on the real estate sales the 11 million dollar impact to be the debt agreement.

Look like.

Looking through the back pages of the release, there was a vendor bankruptcy impact, but that book to be a benefit and then I was wondering whether there were any what I would call unusual costs that you absorbed related to.

The new pen headquarters.

That was a very actual a minimal as that was only about 70 employees in total you're right you didnt see the impact a have a vendor bankruptcy that was actually some recovery that we got a in the third quarter from the vendor bankruptcy that we talked about.

Receivables a in that space as well so those two things are probably the only to kind of unusual things on a on a quarter basis that I would call out.

Okay, well congratulations and thank you.

Your next question will come from Scott Group with Wolfe Research.

Hey, Thanks morning, guys.

Scott can you give us I'm the pricing renewals in the quarter and then just more broadly just talk about how you see the pricing environment and sort of your focus if it's more tonnage more price how you're thinking about it Scott I'll start with that one as far as our contract negotiations and Q3 three.

For sand and that was true at the regionals and a wire sea freight if you average of those contracts specifically.

So does it feel like the pricing environment is getting more challenging. It do you think that's more the whole market is it more of a focus on tonnage that you guys have help us think about them. Yeah. Certainly of course as you. So you know the regional she flat from a yield perspective, although very.

Strong comps from last year as they were tracking over 8% and then a wire sea freight tracking a little better than that or contract renewals. We had over 1000 of them in Q3, I would classify those renewals as I'm, a very stable pricing environment.

You know when most of these big renewals that we're reporting out on you're dealing with you know 60000 origin and destination payers.

As you price. The so you know specifically with a new pan foot bran or reddaway footprint or a national footprint. There's there's lanes that we are.

Scott I think the longer that continues.