If you think it’s tough trying to guide a company through a recession, how about two companies? But Scott Mattox, CFO of a pair of trucking firms with a common part-owner, is comfortable with their financial performances this year. Both had solid bottom-line gains through August compared with last year, even though one of them saw revenue shrink by 17%.
To a large extent, the results are a product of the business the companies are in. This year’s drastic drop in the price of diesel fuel provided a $3 million boon to one of them, Truline Corp. — a massive savings for a company with an expected revenue base of just $30 million this year. The other entity, Estenson Logistics, with revenue on pace to approach $90 million, got a $4 million bump-up from fuel costs.
Fuel is a bigger share of Truline’s expenses, not only because it’s a third of Estenson’s size, saleswise, but also because the smaller company provides long-haul, full-truckload services. Estenson, by contrast, provides such companies as Home Depot, Simmons Mattresses, and Capital Lumber with dedicated trucks for hauling goods from distribution centers to stores within relatively small geographic areas.
Aside from the fuel bounce, the recession has been tougher on Truline, because the demand for freight hauling has nosedived. Estenson, on the other hand, has been somewhat shielded by its business model, which involves multiyear contracts with its customers. Its top and bottom lines were up 3% through August.
In any event, Mattox, who has been with the companies for three and a half years, says they have been operated the same way during the recession as they were before. That includes a strong bent toward not spending a dime unless it’s for something that is absolutely needed, which the CFO credits for helping keep cash flow healthy.
Indeed, he says, that thrifty orientation goes back to 1962, when Grant Truman launched Truline as a one-truck company. Today Truman’s son Paul owns part of both companies — 20% of Estenson Logistics (Tim Estenson owns the other 80%), and Truline, which Paul and two brothers bought from their father in 2004. The two companies share, in addition to the CFO, accounting, accounts payable and receivable, and payroll personnel, as well as employee-benefits programs and general liability insurance.
Here is an edited version of CFO.com’s interview with Mattox.
What is the value proposition for Estenson’s customers? Why does a big company like Home Depot use someone else’s trucks?
They don’t have to be in the transportation business and worry about the rules, taxes, and maintenance. They [otherwise] would have to have their own maintenance directors, safety directors, and transportation risk managers. [But] they’re on the hook for the equipment. If they want out of the contract they can get out, but they either have to pay us for it or let us sell it, and if we sell it for less than the contracted amortized value, they have to make up the difference. If we sell it for more than that, they get the difference.
What effect has the recession had on your businesses?
With Estenson, all the equipment that’s contracted gets paid for whether it’s in use or not. But we contract at a level where we’re confident that the assets will be utilized continuously. So when there are peaks, we bring in additional equipment — either we rent it or we use some additional equipment that we have for when our [contracted] tractors and trailers are down for repairs. That revenue is what we lost during the recession. But our margins stayed good based on our contractual agreements.
We’ve continued to sign new contracts. When people started looking at controlling costs, we started getting a lot of phone calls. In 2009 we’ve added more than 100 employees, and we’ll add about 75 tractors to our fleet.
On the Truline side, truckload carriers have been hurt by the recession because there’s been very little freight. When there is not enough supply to go around, there are price pressures. A lot of the other smaller truckload companies have taken whatever business they could get their hands on just to cover their fixed costs. But if you do that you’re not covering all your costs, so you can only do it for so long.
Have you gotten more vigilant on costs during the recession?
No. Truline has been around since 1962 and has always been very conservative. The owners and I have very similar finance philosophies. Our expenditures, including capex, are based on need, not on desires or typical [trucking] industry patterns. All petty cash reimbursements have to be approved by me before AP issues the check. When I see an expense for Starbucks coffee, I tell them to stop it — go out and buy a can of Folgers instead. We believe that by watching the pennies, the dollars will take care of themselves.
You personally approve all petty cash reimbursements? How is that wieldy for a $90 million company?
It really doesn’t take that long. We don’t use petty cash for everything. We use it for, say, tolls, meals for safety meetings, and for scale tickets in areas where we don’t have a contract with a scale company to get the tractors weighed. I look to make sure it is not an old receipt, that it is an original, and make sure that we’re not paying some guy three times to get his truck weighed. We have over 50 sites. That could add up to be a huge area of abuse.
But how much can you save by overruling Starbucks reimbursements and things like that?
It tells the site managers and department heads that they can’t get away with spending $100 here and $500 there. They can’t go out and buy a new laptop because they have one that is six months old. They’ve got to request it before they spend it. We don’t want them asking for forgiveness; we want them asking for permission.
Another example: there is a cable that you can put on the trucks that will give you a wealth of information about what the driver was doing during his run — whether he had to slam on his brakes, was accelerating too fast, or was speeding. It’s $200 per truck, which is not a lot of money. But the first thing I said [after receiving a request to buy the cables] was, what are you going to do with it? What’s the recourse going to be? Are you going to counsel the driver? Suspend him? How many shots does he get? Because I know what would happen. They’ll get the report, and talk to the driver, and not do anything until the driver has a wreck. While this cable is really nice technology with bells and whistles, it’s not something we would utilize fully for the cost, so we shot it down.
How about bigger-ticket items?
On the Estenson side, we only buy equipment when we have a new contract with a customer. We don’t go with just the normal cycle that the industry uses for replacing their older vehicles.
Where does risk come in? Don’t you have to take on some risk to maximize the performance of a company?
Every time Estenson signs a new contract, there’s an element of risk, as there is anytime you do a contract with a company you’re not familiar with. Did they give us all the information we needed to do the bid? Is anything hidden in there that we didn’t know about that’s going to bite us?
On the Truline side, Miller Beer wanted a solution where they could bring more beer into Las Vegas per load. The problem was the weight, because you can only carry so much weight over the roads. We looked at different options for lighter tractors and trailers and compared that cost to what we would get per load.
Navistar International had come out with a new tractor with a tiny sleeper space, just barely big enough for the driver to lie down in. We bought 10 of those. It was a huge risk for us, because we were one of the first to buy them. We did find one problem — the jake brake [a hydraulic brake particular to big diesel trucks] only has 300 horsepower, and you really need 400 to 500. So Navistar is working to increase their braking power. If we had had other issues, we might have paid for something we couldn’t utilize all that well.
But otherwise we don’t take a lot of risk. That’s one of the reasons Truline has done so well in the recession. We have good cash flow, we still have all our employee benefits, we’re still giving pay raises, we haven’t laid anybody off, and none of our trucks is sitting idle.
Do you do any bank borrowing?
We have lines of credit. In the three and a half years I’ve been here, Estenson has drawn on its line once, back in 2006 when Home Depot switched all of their accounts payable over to India. We renew the credit lines every year. The bank would like us to draw on them because [not doing so] ties up their capital, but we don’t need them.
You haven’t had any problems renewing the credit lines last year and this year?
No. Our financials are strong. Estenson has about $2 million in Nevada State Bank, our primary account; $1 million in a payroll account at U.S. Bank; and $750,000 in a money-market account at Citibank. So it’s a $90 million company with almost $4 million sitting in the bank.
The problem is, that makes us a target. If one of our trucks hurts or, God forbid, kills somebody, the first thing the lawyers will do is look at your balance sheet to see how much cash you’ve got. Then they know what they can go after. So our lawyers agree that we shouldn’t keep any more cash than absolutely necessary.
But the owners want the money liquid for growth and opportunities. So a while back, I told them they need to take money out of the company and start up an investment company; put the money in CDs or money markets to keep it liquid, and if we need a capital call you can put it back in. So in July, I issued them checks through accounts payable for $1 million as a dividend distribution, in proportion to their ownership shares.
Before they only took out distributions for taxes and to pay off a grant. Now that they’re taking regular distributions out, they’re going to have to do personal guarantees for the financing on our tractors and trailers, and they understand that.
What kind of deals are you getting on that financing?
I will only agree to a prepayment penalty of 2% the first year, 1% the second year, and 0% for any future years. I do that because it’s highly unlikely one of our customers is going to want out during the first two years of a contract. After that, [the client] may just decide they don’t want to do it anymore for whatever reason.
But by then I have no prepayment penalties, so now, with the amortization schedule I have with the customer, I’m right-side up on the equipment. If they buy out the equipment, by the time I pay off the note, I have extra cash left over.
And then we look at the insurance clauses and default clauses. Every [financing firm] has default clauses, but they never have notice clauses. So I told [the financing companies], I want a written notice and a 30-day option to cure. Because you know what, the Post Office really does lose mail. The AP clerk really does make a mistake and the invoice gets paper-clipped to something else and something doesn’t get paid. If you want to do business with us, we have to come to an agreement on [this].