story by Michael Tilley
mtilley@thecitywire.com
Less than two years ago Van Buren-based USA Truck was losing money faster than a fur coat sales booth at a PETA rally. Company shares, which historically traded between $10-$20 per share, had dipped below $3. By the end of 2013, the company would post five consecutive years of losses that totaled almost $48 million – wiping out the $45.76 million in net income earned between 2001 and 2008. The company likely would have been shot if it were a horse.
In late 2012 the USA Truck Board of Directors reached out to Harvard graduate Robert Peiser to chair the Board and get the company back in the black. Peiser, known in corporate circles as someone able to rescue a company for future growth or acquisition, hired John Simone in early 2013. He had a reputation in the trucking and logistics sector for tidying up troubled operations.
Peiser and Simone began making wholesale changes to USA Truck’s corporate philosophy, management and strategy. The effort was soon made more difficult when a hostile takeover attempt was made by Phoenix-based Knight Transportation. Knight eventually withdrew from the fight.
Even in the midst of the Knight action, Simone began implementing a broad 27-point plan focused on reducing expenses, broadening relationships with key customers, and, as Simone has said, returning to the basic “blocking and tackling” of a trucking company.
‘BETTER TRAJECTORY’
It’s working – thanks in no small part to an improving national economy and national freight sector dynamics that now favor the trucking industry. The company reported Wednesday (Feb. 11) that 2014 net income was $6.033 million, a more than $15 million swing from the $9.11 million loss in 2014. The swing ended five consecutive years of losses.
Investors are impressed. USA Truck shares (NASDAQ: USAK) on Wednesday hit a company record intraday trading high of $31.99 – well above a 52 week low of $13.32. The price would eventually close the day at $29.97.
Somewhat ironic is that the non-asset side of USA Truck was a big factor in the positive 2014 earnings report. The company’s Strategic Capacity Solutions (SCS) – logistics and freight brokerage – division posted operating income of $20.775 million, more than double the $9 million in 2013. The trucking division posted a $3.532 million operating income loss in 2014 – although it was a big improvement over the $17.66 million operating income loss in 2013.
SCS generated 29.7% of total revenue – $178.982 million – for the company in 2014, up from 24.6% in 2014. Simone said there is not set timeframe, but his goal for SCS is to deliver about 40% of annual revenue.
There was a measure of relief in Simone’s voice during a Wednesday interview, but he was far from celebratory. He said the “early surprises have settled down,” but the turnaround is “still in the early innings.” On the 27-point plan, the company has completed 13. Of the 14 remaining, Simone said there are five that account for about 80% of the “upside” for future growth and financial performance. Simone said the five items are reducing insurance and claims expenses, reducing maintenance operating expenses, reducing out-of-route and empty miles (non revenue miles), improving fuel economy and improving retention of experienced drivers.
Simone is confident the company will have a “better trajectory in 2015” because a massive, fleetwide upgrade to the company’s more than 2,000 trucks was completed in 2014. The effort resulted in higher expenses in 2014, and resulted in more non-revenue miles driven to get the trucks on a schedule that would get them in and out of maintenance shops. However, Simone expects margin improvements in 2015 with trucks that are more efficient and provide “more creature comforts” for drivers.
THE DRIVER SHORTAGE
Drivers will be a problem for the entire trucking industry in 2015. The American Trucking Associations estimates a shortage of about 35,000 drivers for the industry, with that number predicted to reach 200,000 by 2020. Part of the problem is a combination of experienced drivers approaching retirement age and fewer young people entering the profession.
The industry is responding by improving pay and benefits.
“Fleets are raising pay and offering generous benefit packages in order to attract and keep their drivers in the face of a growing driver shortage,” ATA Chief Economist Bob Costello noted in a December report.
His report showed that median pay for drivers ranged from a little more than $46,000 for national, irregular route truckload drivers to more than $73,000 for private fleet van drivers. In seven of the nine categories of drivers covered by the ATA survey, pay met or exceeded the U.S. median household income of more than $53,000.
Simone said USA Truck has “a number of initiatives in place,” including driver wage increases and more “home time” for drivers. The pay increases were not broad. The company used a “scientific approach” to identify excessive turnover demographics and then respond with financial and other incentives within that set of drivers. Simone said the company in 2014 and early 2015 had to spend more than planned on driver pay and benefits “because the market dynamics as it related to drivers, changed pretty dramatically” – especially in the early weeks of the first quarter of 2015.
The company has also flipped its mix of drivers. Just a few years ago the mix was about 35% experienced drivers and 65% new students. That is now about 75% experienced and 25% students. Simone said the company will maintain that ratio because it is important to recruit young people into the profession. He also said addressing the driver issue requires constant assessment.
“We continuously monitor why drivers come, why drivers leave and why drivers stay,” Simone said.
BETTER RATE STRUCTURE, EXPECTATIONS
Efforts to improve the company and maintain equipment so that service was “more consistent and reliable” has helped USA Truck raise rates, Simone said. Prior to 2014 the company’s rate structure was below market averages, but improved customer service levels have allowed USA Truck to achieve overall rate increases close to 10% in 2014.
Simone said there is “some room for uppricing” in 2015, but estimated that rate increases will moderate back to a 3% to 6% range.
What is not likely to moderate are Simone’s expectations and his effort to check off the other 14 points of the turnaround plan. Simone said the “rallying cry” for the company in 2015 is “USA Truck – even better.”
He’s not the only optimist. Brad Delco, the transportation industry analyst with Little Rock-based Stephens Inc., said in a Feb. 12 investor note that the company’s truckload segment “contributed to bottom-line results meaningfully for the first time since 2007. Looking ahead, we expect continued progress on variable expense reductions and pricing to drive margin improvement into FY'15.” He said USA Truck’s 2014 results were a “big earnings surprise.” (Stephens owns shares of USA Truck, and provides investment banking services for the company.)
Delco raised his fiscal year 2015 earnings per share target from $1 to $1.25, with “greater momentum” on higher rates for truckload services as a key factor in driving more revenue. He also said the company’s efforts to improve fleet fuel economy combined with lower diesel fuel prices helped boost the bottom line. He said an about 10% improvement in fourth quarter miles per gallon “suggests to us that the improvement in this line item is more sustainable that what some might think.”
SIMONE’S FUTURE
Because of Simone’s corporate history, his tenure in Van Buren has been in doubt. Even Simone has said in a previous interview with The City Wire that his DNA is more of a builder than a sustainer. So is John Simone a transient? Does he spend 3-5 years with USA Truck and then move on to the next challenge?
“I’m not transient. This is a great company. This is not a stopping point for me, this is a finishing point for me,” Simone said.
He said when the turnaround plan is complete, there will continue to be areas on which the company can build.
“My initial goal was to improve our operating performance and restore shareholder value,” Simone said, adding later in the interview that “there is still so much opportunity left in this company. ... We’re going to continue to reinvent ourself and move this company forward.”