Q2 2004 EGL Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good day, everyone. Welcome to the EGL second quarter earnings conference call. Today's call is being recorded. For opening remarks and introductions, I will now turn the call over to Richie Varna (ph), Legal Counsel for EGL. Please go ahead, sir.

RICHIE VARNA, LEGAL COUNSEL, EAGLE GLOBAL LOGISTICS: Thanks, Diane. Good morning. Before I turn the call over to Jim, I would like to just read the forward-looking statements. Statements in this conference call regarding projected profitability, adding to growth, improved margins, increased deficiencies, second quarter and total year results, and diluted earnings per share and other statements which are not historical facts are forward-looking statements.

Such statements involve risks and uncertainties and other factors detailed in our 10-Qs and our Form 10-K proxy statement and other filings with the SEC. Should one or more of these risks or uncertainties materialize, or the consequences of such a development worsen, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those forecasted or expected.

The Company disclaims any intention or obligation to update publicly or revise such statements, whether as a result of new information, future events, or otherwise.

And with that, I will turn it over to Mr. Crane.

JIM CRANE, CEO, EAGLE GLOBAL LOGISTICS: Thanks, Richie. Welcome everybody. Quick review of the numbers quarter-over-quarter ending 6/30/04 -- gross revenues were at 641 million, up 22 percent versus 546 million in the previous quarter. Net revenues increased to 208 million, up 12 percent versus 185 million previous quarter.

Net revenue margins were 32.5 versus 35.2. Net income increased to 12.7 million versus 6.4 million for earnings of -- diluted earnings per share of 27 cents versus 14 cents.

Quickly reviewing a few highlights of the quarter -- we had a strong finish at the end of the quarter, which led to increased earnings. Usually we see a very strong month in June.

I want to talk a little bit about July and some of the other comments. We had a 1 cent impact from our Miami Air sale, offset by some facility charges. Excluding the Miami Air and facility charge, we had an EPS of 26 cents.

We saw a nice revenue growth, particularly in our international activities in the Middle East and China. We did see some U.S. domestic revenue increases by 8 percent. So we are starting to see a little bit of return of our Overnight U.S. product, which increased by 1 percent per day in the second quarter compared to decline by 12 percent per quarter -- per day in the first quarter.

So we are starting to see the domestic tonnage come back, with an increase of 9 percent -- increase of 6 percent per day in July over last July. So we did see activities continue to improve through July, which gives us some nice footing moving forward.

The net revenue growth was a record high of 209 million in the second quarter, surpassing our previous high in the first quarter of 200 million. Net revenue growth by sector increased 9 percent in North America, rebounding (ph) - (indiscernible) Overnight product and continue expansion of our deferred business was continuing to move forward.

We saw a 19 percent increase in our European and Africa region, strong growth in the Middle East. And also, Western Europe business is improving. We also saw a 21 percent increase in As-Pac; strong volumes, as we mentioned earlier -- China, Hong Kong, and Taiwan.

Just addressing quickly some of our net revenue margins -- net revenue margins in the quarter were 32.5 from 34.2 in the first quarter. Some of the impact there is, we continued to grow our lower margin. International business is growing faster than our higher margin domestic business.

We saw increase in charter activity, which dropped us about 60 basis points. Again, this is high yield business, low margin, and can have some impact. But certainly, nice net revenue business -- we are very focused on the net revenue numbers.

We did see some capacity constraints (indiscernible) in the industry, in line with some of our competitors on the Ocean side, with a drop in the ocean yields of 190 basis points.

Overall, the net revenue growth by product line -- airfreight net revenue increased 13 percent. Ocean increased 19 percent. And customs broker, logistics and others increased by 9 percent.

With that, I will turn it -- oh, just in addition to some details on the quarter, as we mentioned, we saw a very, very large growth in our Middle East operation -- one of our fastest-growing gross revenues -- increased 85 percent year-over-year. Operating income increased 140 percent in that area.

We are continuing to add new operations in Kuwait, Afghanistan, Qatar, and Jordan by the end of the third quarter. And we are implementing some ground support in that region. So we will continue to see a lot of activity there, as everyone knows, and have put some resources in there to support that.

With that, I will turn it to Elijio to give you some more update on the financials.

ELIJIO SERRANO, CFO, EAGLE GLOBAL LOGISTICS: Net income of $12.7 million, or 27 cents per fully diluted share, compares to last year's second quarter net income of 6.4 million, or 14 cents per fully diluted share. Included in the second quarter financial results are two special items that net out to a positive impact to earnings per share of 1 cent. Excluding those two special items, net income would have been 12.1 million, or 26 cents per share.

Operating expenses of $195 million includes $5.8 million of facility-related charges. During the quarter, we subleased and eliminated 1 of our 3 major buildings in Miami. At the beginning of this year, we completed the move into a large, new facility that consolidated all our operations following the acquisition of Miami International holders last year.

As a result, we made the decision to sublease a building we inherited from the Circle acquisition that was on a long-term lease at above-market rates. The permanent elimination of this building is expected to positively contribute earnings per share by 2 to 3 cents a full-year basis. In addition, we increased our reserves on other remaining idle facilities.

Operating income of $13.3 million includes the impact of this. Excluding the impact of the $5.8 million of facility-related charges, operating income would have been $19.1 million. This compares to last year's operating income of 6.9 million, and an increase in net revenue of 23. Today, we are getting an increase of $6.9 million of operating income on an increase of net revenue of 23, representing about 30 percent fall through from the incremental revenue.

Excluding the facility-related expenses, operating income as a percent of net revenue increased to 19.1 percent. This is the highest level we have seen since the year 2000, prior to the downturn, and prior to the merger with Circle.

We expect this rate of improvement to continue into the third quarter, where we should be seeing operating income as a percent of net revenue in the 10 to 11 percent range.

We continue to see leverage from the infrastructure as the volumes continue to increase. Non-personnel related operating expenses have remained in a fairly narrow band over last 2.5 years, despite significant growth in volumes.

For example, non-personnel-related expenses, which are mainly the cost of our facilities, our corporate (technical difficulty), and our hardware and software related investments, averaged $69 million per quarter in the year 2000. This compares to 73.8 million in the second quarter of this year, without the special charges, and an increase of 7.5 percent when gross revenues have increased 37 percent during the comparable time period.

This talks to the point we have made in the past, that we have leverage in our global infrastructure to support significant growth in business. Today, we continued to have us much as 20 percent excess capacity in our facilities, primarily North America. We believe we can continue to support the growth in business for the next 2 …