USA Truck’s Simone, Beckham Talk Turnaround Plan

It was noted during the Halloween morning interview with USA Truck CEO John Simone that company shares were set to open at $13.35. Within a few minutes of the interview, USA Truck CFO Cliff Beckham reported that the shares had jumped above $13.50 – a brief gain of more than $1.5 million for company shareholders.

While certainly a welcome Halloween treat, Simone’s trick is to keep the wheels rolling as he manages a long-haul trucking company facing five consecutive years of financial losses amidst an industry challenged by growing regulatory burdens, an emerging driver shortage, rising equipment costs and a tepid national freight environment.

Oh, and there’s the matter of Simone being about seven months into what was already shaping up to be the challenge of his career when a hostile takeover attempt hit his inbox.

Phoenix-based Knight Transportation made public its bid for Van Buren-based USA Truck on Sept. 26. The $9 per share bid at the time was a 39% premium from USA Truck’s share price on Sept. 25. The share purchase and assumption of liabilities creates a $242 million deal. At risk in a deal with Knight would be some or all of the 500 jobs at USA Truck’s corporate headquarters in Van Buren.

The USA Truck management and Board of Directors have rejected the offer, saying it “substantially undervalues” the company and does not reflect the value of potential gains from ongoing turnaround initiatives.

USA Truck shares (NASDAQ: USAK) closed Wednesday at $12.89, down 36 cents. During the past 52 weeks the share price has ranged from a $14.25 high to a $2.77 low.

SIMONE’S DNA
Considering the known and unknown challenges Simone – 51 when he took the job in February – agreed to tackle when recruited by USA Truck Board Chairman Robert Peiser, the obvious first question during the Oct. 31 interview with Simone was easy: Why are you in this job when you could make just as much or more money at another trucking operation with considerably fewer headaches?

“That’s true, but that’s not in my DNA,” Simone said about having an easier job. “I was approached about the opportunity last year and it was intriguing to me. … I saw a lot of opportunities. I saw a lot of excitement in the company. And this company, although it has been struggling for the past few years, continued to invest and do the right things. I knew that it was definitely something that could be restored to the great company that it once was.”

Simone has more than 30 years of experience in the industry. He’s worked with freight companies such as UPS, Ryder, and Greatwide Logistics. Most recently, he was the CEO of LinkAmerica.

New York City-based Tenex Capital Management acquired a financially struggling LinkAmerica in June 2011. Simone was hired in August 2011 and orchestrated moving the corporate headquarters from Tulsa to Fort Worth in early 2012. Simone began modernizing the LinkAmerica fleet and improving the financials. A deal between U.S. Xpress Enterprises and Tenex was announced in December 2012 that merged Arnold Transportation – a subsidiary of U.S. Xpress – with LinkAmerica. The deal gave Tenex ownership in Arnold.

Simone’s departure from LinkAmerica was not smooth. He sued LinkAmerica alleging the company did not pay a May 2013 severance settlement agreement of $200,000. Simone sought $312,500 in total damages. The two parties eventually settled and in August 2013 agreed to dismiss the lawsuit.

SHIFT TO SELL?
Simone’s history with LinkAmerica and his recruitment to USA Truck by Peiser has resulted in speculation in the community and trucking industry that USA Truck is being positioned to be sold. Peiser, named Board Chairman in November 2012, is known in the corporate world as a turnaround artist.

Beckham, the former USA Truck CEO who now serves as chief financial officer, acknowledged that some believe Simone and Peiser are trying to financially position USA Truck for a premium deal for shareholders.

“I’ve had a front-row seat to the whole thing, and nothing could be further from the truth. These guys have been incredibly steadfast in their support of this business, continuing to execute its turnaround plan as an independent company,” Beckham said.

Simone was adamant in pushing a simple message about the present and future condition of USA Truck.

“We’re back, and we’re back strong. We’re going to continue to move rapidly through our turnaround and return this company to profitability as quickly as possible and restore shareholder value. This organization is focused. This organization is committed,” Simone said.

But, and considering that Knight has suggested it is open to a price higher than $9 per share, is there not a price point at which the company would sell?

“That’s a board discussion. I’ve been focused and head down in the trenches running a business,” Simone replied.

‘BLOCKING AND TACKLING’
The first challenge in running the business was in trying to determine why the company has not made a profit in four years – and potentially five years if 2013 ends up in the red. Among the three analysts who cover USA Truck, the consensus is that the company will post an overall loss in fiscal year 2013 of 44 cents per share. The analysts project the company will post a 30-cent per share profit in fiscal year 2014.

Simone’s assessment was that the company had some basic problems, but nothing insurmountable.

“I would say overall there were strategies put in place and there was a gap between strategy and execution. … It was a combination of a few areas in the business. I would call it basic blocking and tackling,” Simone explained.

An example Simone provided was in the company’s decision a few years ago to shift from a long-haul model to shorter regional hauls.

“Historically this company has been long-length of haul … and in the last few years wanted to go to a more regional model. And while that was a good strategy, the difficulty was getting the rate (price) where it needed to be and also the velocity in the system. The assets weren’t productive enough. When the assets weren’t productive enough it hurt our financial performance. And at the same time it hurt driver turnover. Our turnover spiked significantly during those years.”

100-DAY PLAN
Simone analyzed the operations and issued what he called a “100-day plan.” The plan included 27 “high-leverage activities” Simone believed could restore profits. Of the 27, nine items held the potential to be 90% of the actions needed to return to positive financial territory. The top three among the nine are:

• Reducing insurance costs and claims expense;
• Improving fuel efficiency; and,
• Lowering maintenance costs while also improving overall maintenance operations.

Simone hired a chief risk officer in August. Jeff Lester, executive vice president of Safety and Risk, has 25 years in the industry and has worked for Greatwide Logistics, FedEx and Ryder. Simone said safety and training is one of the best ways to reduce costs in the trucking industry.

“Improving our safety performance is clearly one of our highest leverage activities,” Simone said.

USA Truck will soon go to a 24/7 maintenance schedule at its eight maintenance shops. Simone said USA Truck maintenance crews often do better work, faster and at lower costs than using third-party maintenance crews and companies. The new hours also mean drivers have less down-time – which helps reduce driver turnover – and better delivery results for customers, Simone explained.

Improved maintenance, according to Simone, also reduces the need for expensive fleet turnover. Knight Transportation recently criticized USA Truck for having one of the oldest fleets in its peer group. The average age of a USA Truck tractor is 2.5 years, while the average for Knight is 2 years. Simone has a different perspective on fleet age than others in the industry.

“We have a relatively new fleet. Some of our industry peers tout newer fleet ages, but I have a different philosophy on assets than maybe some of my truckload peers do having come from 16 years at an asset-based trucking company … that maintains trucks for a living and that’s how they make their money,” Simone said during the interview. “So I have a different philosophy on how to procure … and how to maintain trucks and I think we don’t use our trucks up enough. I think we get rid of them too soon, today. Technology has changed. They are more reliable and they cost about 40% more than they did about five years ago. So, I think there is an opportunity to better leverage the assets.”

That being said, the company announced Wednesday (Nov. 6) the purchase of 150 new Navistar International ProStar tractors. The new tractors are set for a fourth quarter 2013 and first quarter 2014 delivery.

“Through this continued investment of equipment, USA Truck is maintaining and reinvesting in a modern fleet of Class 8 trucks with an average age of 2.5 years, well below the industry average of 6.6 years for 2012 according to ACT Research,” noted a USA Truck statement.

‘WIDER AND DEEPER’
Another part of the turnaround plan includes better connecting with USA Truck “blue chip” clients. USA Truck offers four basic services: Trucking, logistics and brokerage (Strategic Capacity Solutions); dedicated fleet; and intermodal.

Simone said a year ago that 65% of the 100 top company customers were “doing business in multiple products” with the company. This year that has grown to 96%.

“We have an initiative to get wider and deeper with our current blue-chip customer base,” he said.

The company also is moving away from hauling freight just to get the business – or “chasing freight” as some in the industry call it. Simone said the length of haul is up 8% and the prices they are getting to haul freight are up 3%, which he said is proof the company is not losing money in the push to haul more freight.

Simone also expects cost reductions with “route optimization” and fuel optimization” software that essentially prescribes the best route and specific places to purchase the cheapest fuel along the route.

“It’s (100-day plan) looking at every process in our business, and we’re not leaving any stone unturned,” Simone said.

BECKHAM’S NEW ROLE
It may seem uncomfortable to most that continued financial losses caused former CEO Clif Beckham to be replaced as the head of the company and moved down the corporate ladder to a previous job. But Beckham, now Chief Financial Officer, says he welcomed the management change.

“I was part of the effort to recruit John and recognized the need for that change along with the Board,” Beckham said.

But how tough was it to move from CEO back to CFO?

“That’s something that I just wasn’t born with was a big ego. My priorities are pretty straight in my life. Maybe in the first year or two that might have been different for me, but after five years of going through what we went through it was clear to me from a professional standpoint that I wasn’t ready when I stepped into that job. And that John was clearly more ready to do it,” Beckham explained. “So you know, it stings. You never like it. It never feels good. But it was the right thing for the business, for the community.”

Beckham also accepted blame for the length of haul shift that Simone said was a mistake.

“I think I misdiagnosed the root cause of the problem” as to the loss of business and reduction in margins, Beckham noted. “In hindsight, the real issue was a lack of operational execution and that was coupled with a lack of a clear network strategy for freight. And I did not recognize that because I did not have that operational background.”

MOVING FORWARD
Simone and Beckham also face a host of external obstacles – in addition to the hostile takeover attempt – in their effort to return USA Truck to profitability.

Beckham said “significant regulatory headwinds in the industry” include new emission rules from the Environmental Protection Agency and new hours-of-service rules mandated by the federal Department of Transportation. Many of the new federal rules not only increase internal compliance costs, but also add to equipment and labor costs.

“There is a lot of cost and red tape and restrictions on capacity that is being forced by the feds that the industry is really struggling with,” Beckham said.

One federal change in which the company says it will be able to avoid is the Affordable Care Act, aka Obamacare. The self-insured company is, according to Beckham, able to keep its plan in 2014 and at 2013 premiums.

“We are proud that in 2014 we are going to continue to provide that coverage to our employees with no increase in premium. USA Truck employees are shielded from the horror of the Affordable Care Act,” Beckham said.

Simone said he believes employee morale and the image of the community has improved in the past few months. In addition to pushing the financial goals, Simone said he will continue “improving both our image in the community, our image out in the industry, and also our reputation and image with current and former employees.”

While change is not always welcome or fun, Simone is confident he has the backing of the drivers and other employees.

“I feel really good about where we are today with our workforce and the engagement with our workforce. There is a lot of energy. If you had the opportunity to walk around you can feel the energy in our buildings. You can feel the excitement with our team members.”