Carrier's brokers division takes off
USA Truck says branch up 177%
Posted: August 31, 2014 at 2:26 a.m.
A portion of USA Truck's strategy for growth over the past 18 months has centered on enticing customers to use multiple services by the company.
Among the objectives set out by Chief Executive Officer John Simone when he took over in February 2013 was getting customers to use the company for more than its traditional truckload business. A year ago, the company reported that 60 of its top 100 customers were using multiple services. More than 90 customers fall into that category now, Simone said during a recent interview.
Nowhere has the company harvested the fruits of that strategy more than its freight brokerage division, known within the company as Strategic Capacity Solutions (SCS). During the first six months of the year, the company reported $79 million in revenue generated by the division. Only 100 of USA Truck's 3,000-plus employees are housed within the freight brokerage, which matches customer shipments with available equipment.
Recent growth within the brokerage has been influenced by multiple factors. Capacity in the industry is tightening -- there is more demand than drivers -- so customers are looking at any option they can to move their products. That creates the need for freight brokers to help find alternatives.
Winter weather created shutdowns in some markets and kept carriers from being able to move goods efficiently. That led to calls looking for alternative shippers or methods of shipping.
"We were able to take advantage of pent-up demand in the supply chain," Simone said.
Within the company, the performance of the brokerage has been a source of both pride and cautious optimism. After a $37.4 million performance in the first quarter and a $42 million performance in the second quarter, executives expressed skepticism that those numbers could be replicated consistently.
Cliff Beckham, who recently announced his resignation as chief financial officer, told investors earlier this month that the company had taken advantage of "an unusual market environment" and did not see an 85.7 percent operating margin within the division as being "sustainable over the long term." The brokerage's operating income increased 177 percent to $6 million in the second quarter.
Simone, in an interview Thursday with the Arkansas Democrat-Gazette, said the freight brokerage portion of USA Truck has performed well during the first half of the third quarter. Revenue is up year over year so far, but Simone said the segment wouldn't necessarily perform at the levels seen in the first half of 2014.
"Going into the third quarter, we're starting to see it get back to normal levels," Simone said. "It's still elevated year over year, but we're not seeing the demand levels we saw in the first and second quarters. ... That's why the cautionary statement was made."
Despite the caution from within the company, the segment has generated high interest among outsider investors. Some have even suggested spinning the freight brokerage off into its own stand-alone company.
ADW Capital, a $30 million New York City hedge fund managed by Adam Wyden, distributed a letter Monday calling for changes in company leadership and operation. Wyden projected the freight brokerage division by itself could command $20-$30 per share. USA Truck stock has traded between $5.28 and just under $20 per share the past 52 weeks.
"They've been using SCS as a crutch," Wyden said. "I don't think more time is going to fix their issues.
"The fact that SCS has performed well indicates they have good customer relationships," Wyden added. "I think the signs are there that there is strategic value to SCS. They just can't get out of their own way running the trucking business."
Wyden is not alone in suggesting that the brokerage division be spun off into a separate business. When Stone House Capital met with USA Truck management in February, the discussions included "strategic combinations given the accelerating pace of consolidation in the truckload and freight brokerage industries."
Stone House and Baker Street Capital combined to form Shareholders for the Benefit of USAK in May. Because the activist group shared 28 percent ownership, USA Truck followed its suggestion of adding two board members May 2.
It is unclear if the new board members and managers of Stone House and Baker Street are still in favor of spinning off the brokerage business. Attempts to reach the managers of those funds were unsuccessful.
Simone declined to speak specifically about the ADW Capital letter or conversations with Stone House and Baker Street Capital but talked in general about how the company views the role of vocal investors who suggest changes within the company.
"We remain receptive to receiving constructive input from all of our shareholders toward our shared goal of increasing long-term value for all of our company's stakeholders," Simone said.
There are plans to increase the company's investments in the freight brokerage.
The brokerage has grown rapidly enough that the company is planning to grow its operations at its current freight brokerage locations. According to the company's 2013 annual report, it had 10 separate facilities nationwide. Simone said the company is looking at adding new markets.
As for spinning the broker operation off as a standalone business, Simone said the company is currently focused on implementing the strategy implemented when he took over as CEO. Long-term relationships developed through the trucking side of USA Truck's business have helped generate the additional interest in its freight brokerage.
"We're laser-focused on continuing to execute against our business strategy as well as completing our turnaround in the trucking operation," Simone said.
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