Central completes profitable first year
Jun 17, 2003 12:00 PM, Gary MacklinAsked in July 2002 to discuss the evolution of Central Refrigerated Service from the bankruptcy of its predecessor to a profitable truckload carrier, Jerry Moyes, chairman of Swift Transportation and owner of Central, said, “Call me in April.” Contacted in early March 2003, he said, “I need to put you in contact with Jon Isaacson, our CEO at Central.”
Central Refrigerated Service is a new company formed on the skeleton of an old company. Its founding was the result of the purchase at bankruptcy auction of a substantial portion of the assets and operations of Dick Simon Trucking by Central Freight Lines. At the time of the bankruptcy filing in February 2002, Moyes was chairman and the largest stockholder in Dick Simon Trucking. The Simon family was no longer involved, their participation having faded away during the previous year. Central Freight Lines, a dry van and LTL carrier based in Waco, Texas, also is owned by Moyes. The reconstituted company began operation as Central Refrigerated Service on April 22, 2002, and celebrated one year of profitable operation in April 2003.
As of December 31, 2002, Central was spun off from Central Freight Lines as an independent company with Moyes as the sole owner. Central still owns the two Simon corporate names — Simon Transportation Services and Dick Simon Trucking — but has made the decision to make a clean break with its past and change the name and appearance of the entire company.
Dick Simon Trucking has been a well-known name among refrigerated truckload carriers, but recent history damaged its reputation somewhat, says Robert Goates, chief financial officer. “We felt that it was extremely important to take on our new identity as Central Refrigerated Service,” he says. “We spent about half a million to change the markings on the entire fleet. By the time we had every thing in the company identified as Central, we had spent about $650,000. It took about six months to make all the changes, and we only spent the money where it would be visible.”
Danger in uncontrolled growth
The fall of Simon and subsequent rise of Central provides a lesson in the dangers of uncontrolled growth, says Jon Isaacson, chief executive and chief operating officer of Central. Following the Moyes takeover of Simon, Isaacson had been appointed CEO at Simon. In 1996 and 1997, Simon was a lean, healthy company, which was the primary reason that Moyes made such a concerted effort to buy it. Buying Simon rather than building a refrigerated truckload carrier from the ground up had the potential for quick results, he says. It was not a matter of learning how to operate a refrigerated fleet. Swift already had more than 2,000 refrigerated trailers in service. However, almost all were in dedicated operations rather than in general truckload service.
At the same time, some of the focus within Simon slipped away from customer service and safe operation and became fixed on growth and meeting the expectations of investors, says Goates. “By the time, we realized the depth of our trouble, we had let the customer base slip partially away and our services were significantly under-priced,” he says. “For the costs involved in running the business, our rates were nine to 10 cents a mile low.”
In addition, concentration on the largest customers fell as well. At the time of the Simon bankruptcy, the top 40 customers accounted for only 50% of total business. In the past year, that figure has improved to 70%, and Central has set an internal goal of raising the volume produced by its top 40 customers to 80% of the business. “We want to show continuous annualized growth with all our key accounts,” Goates says.
As the environment for trucking deteriorated, the company did not have a clear picture of its finances, Isaacson says. Some of the reasons are that the company developed an attitude that it would move freight anywhere for anybody. As this scattershot approach grew, the company began to rely more and more on brokered freight to fill trucks. “Hauling brokered freight, especially freight from our top 40 customers, is much the same as taking a rate reduction equal to the size of the brokerage fee,” he says. “On many of those lanes, we were already operating at or below costs. Since our reorganization, we have set a plain standard that we want to sell direct with no brokers involved between our top 40 customers and us. About the only reason for taking brokered freight is to reposition equipment to highly rated lanes.”
The top customers have remained remarkably loyal through the bankruptcy and transition to the new company. “We lost only two of our top 20 customers during the bankruptcy, and they since have come back onboard,” says Tork Fulton, vice-president of sales and pricing.
Before the trouble began, the long-term thinking was to roll Simon into Swift, but that was not done with the result that Simon could not reap the benefits available to a company the size of Swift, Isaacson says. This was particularly true with respect to insurance.
By the end of 2001, the picture had cleared greatly, and it showed a looming disaster. Improperly priced freight lanes in a soft transportation market combined with serious safety and service problems along with the possibility that the company might lose its insurance forced a decision. The first effort at resolution was an attempt at out-of-court reorganization in December 2001. When that effort failed, Simon finally sought Chapter 11 bankruptcy protection in an emergency filing in February 2002.
“Most trucking companies can take one or two heavy blows at a time without extreme suffering, but not as many as we took all at once in the last few months of 2001,” Isaacson says. “With costs outrunning revenue, the last straw was a potential loss of insurance.”
Two unappealing alternatives
At the time of the bankruptcy, the company faced two distinctly unappealing alternatives, Isaacson says. Simon could liquidate all its assets or it could shrink the company drastically in an effort to save as much as possible. Downsizing was the chosen path with the company reduced by 40% across the board. Four of the eight terminals were closed. The remaining terminal locations are Atlanta, Salt Lake City, and Fontana, California. In addition, Central operates a maintenance facility in Henderson, Colorado. The sales force was reduced from 23 to eight, and the fleet dropped from almost 2,200 tractors and more than 3,200 trailers to only 1,300 tractors and 1,950 trailers. Of the 1,300 tractors, 445 are operated by independent contractors under a lease-purchase plan.
Downsizing was necessary, Fulton says, because the fleet was badly underutilized and was not generating sufficient revenue to cover the costs of operation across many traffic lanes. Some of the worst pricing was on lanes into the Northeast and the Southeast. In addition to cutting the size of the fleet immediately, the sales and operations group at Central embarked on a lane-by-lane cost analysis. The result has been rate increases on some lanes and discontinued business on others. Central has simply walked away from about 30% of the business it once handled, he says.
Adjusting pricing to return to profitability is a cooperative effort, Fulton says. Some shippers are willing to raise rates on some lanes but not others. Many shippers also insist that carriers take freight in difficult-to-serve lanes in return for access to highly desirable freight. “We adjusted our approach to some traffic lanes to ensure continued business that we wanted,” he says. “On other lanes, we held our ground a little more, raising rates or dropping non-compensatory freight.”
Increase pricing; retain business
Most of the increased pricing was concentrated on the Northeast and Southeast lanes. At the same time, Central put renewed focus on retaining its business in the West. Some of the company's best pricing is in the West, so Central wants its equipment to spend as much time in the West and Midwest as possible, where the average length of haul is 1,150 miles. Central's average length of haul has not changed much from the Simon days, falling perhaps 100 miles over the past five years, but the miles now are logged for some of the company's best rates, Isaacson says.
Meat shippers are an exception to the desire to run the West and Midwest lanes. Simon gained a foothold with meat shippers with its acquisition of Westway Express, and Central is determined to hold that business. Most of the meat traffic runs east. Wal-Mart also is considered a prime account; the huge retailer began working with the company after the Moyes takeover of Simon and remains one of the largest customers.
As the rate analysis progressed, the company emphasized communication with shippers. “We may have over-communicated in some instances, but we wanted our customers to understand our position,” Fulton says. “Jerry Moyes was a great help in that process and made a lot of sales calls with us as we explained our costs and our need for increased revenue. He has been emphatic about the need to generate rates that compensate the company for the costs of providing refrigerated service. This reflects the reality that refrigerated freight is time and temperature sensitive, needing extra care during transportation, and so should command a premium rate.”
Integrated management team
Throughout the company, the focus is providing every employee the information to work smarter and harder, finding a way to do more with less while maintaining an emphasis on service. Almost the entire mid-level bureaucracy of the company is gone. The sales and operations departments have integrated so thoroughly that they now are almost a single group. Upper management is lean as well with the senior leadership team held to 3½ executives, including Isaacson, Goates, and Fulton. The half of an executive is a legal vice-president that Central shares with another Moyes company. One irony of the transition from Simon to Central, the executive team in place now is the same one in place before the bankruptcy. During the bankruptcy, Isaacson, Goates, and Fulton were representatives of the estate of Dick Simon Trucking, while Moyes' interests had to be represented by an independent law firm.
Administration and maintenance has been reduced to a ratio of four tractors to one non-driver employee. More contraction of this ratio can be expected as Central strives to reach a 5:1 ratio of tractors to non-driver personnel such as that found at Swift or Knight Transportation.
All of the efforts made at Central since the reorganization have aimed toward profitability. Some of them have been painful such as the reduction in the fleet and administrative staff. In every instance, safety compliance and customer service were used as the benchmarks for retaining personnel with only the most productive remaining onboard. Operating ratio at Simon for its last year of business was in excess of 120. Cuts and controls instituted during bankruptcy resulted in profitability on the first day of operation as Central. Among those cuts was a 10% wage reduction for all employees. Central rebuilt its compensation structure with incentives that allow employees to earn back the lost pay through increased productivity. The result has been an operating ratio of 96 for the first year of operation. Goates projects an operating ratio of 94 for 2003.
Such a projection is possible, Isaacson says, because shippers are beginning to experience a capacity crunch among truckload carriers. In particular, the company feels a lot of demand for service off the West Coast to the extent that some shippers are beginning to pay for deadhead miles to reposition equipment for outbound freight. March 2003 was one of the most productive in the past several years with average miles per tractor per day at 506, which at Central's average revenue per mile generates $600.
No growth for 2003
Goates says the company has learned its lesson about growth for the sake of growth. No appreciable growth is forecast for 2003. Nearly all efforts will be concentrated internally to ensure that the company remains profitable. For instance, the company has extended its tractor trade cycle to four years. So far in 2003, it has purchased 60 new tractors and will take delivery of 50 to 60 more before the end of the year. All will be for replacements — none for growth. The same principle applies to the trailer fleet. The trade cycle is seven years, and 330 new trailers are on order for delivery during 2003, all of them for replacement of older equipment. “We can begin growing again when the national economy becomes strong enough to support some growth,” he says.
The environment for truckload carriers is becoming more predictable, Isaacson says. “Eighteen months ago, we had no reliable projections; now we have enough good information to begin creating budgets,” he says. “These are detailed projections, but not a long-term strategic plan. The main purpose of a strategic plan is to provide focus for a company. We've found that it works just as well to focus on raising expectations for performance and delegating the authority to meet those expectations to every one in the company without all the extra effort of writing a strategic plan.”
Goates takes pains to staunch a persistent rumor that Moyes intentionally put Simon into bankruptcy. The price of doing so would have been too high, he says. With information available from the public filings, Moyes has more than $30 million personally invested in Simon and Central. In addition, once the company was in bankruptcy and at auction, Moyes had no certainty that he could remain the owner. “In the end, Jerry bought Simon twice, but he hasn't had to put in any more cash since the first day of operation as Central,” he says.