Quality stresses staying power, builds commanding market presence
May 1, 2003 12:00 PM, By Charles E Wilson
RUMORS that Quality Distribution Inc is teetering on the edge of collapse are little more than wishful thinking, according to top executives of the $514.3 million company. North America's largest tank truck carrier is both financially stable and poised to grow with a recovering US economy.
Chief Executive Officer Thomas L Finkbiner recites a litany of reasons for the optimism at Quality Distribution: More than $56 million in new business under negotiation; a solid focus on core competencies; strategic programs in tank container, rail transloading, and third-party linehaul substitution; a superior affiliate/company terminal operating model; state-of-the-art information systems that include satellite tracking; and a large, experienced, and safe driver force.
“This company is in good shape,” Finkbiner says. “We've put a lot of time and effort into the financial side of the business. The year started out well for us, and we're marginally ahead of this time last year. Our objective right now is to do better than the rest of the market, and we are on track in that regard.
“Our analysis shows that Quality Distribution accounted for almost half of the approximately $77 million in operating profits achieved by the top 20 tank truck carriers in last year's Modern Bulk Transporter Gross Revenue Report. That is a noteworthy achievement.
“We're generating about $74 million in cash annually based on a five-year average. In our research, no trucking company with annual cash flow of $70 million or better has gone out of business. In comparison, Matlack recorded minus $50 million cash flow in its last year, and the same goes for CF (Consolidated Freightways), which shut down early this year.”
Finkbiner predicts a reasonably good year for Quality Distribution despite the sluggish economy. He expects 2003 revenues to be 1% to 2% above last year. “We're doing that in what our customers tell us is the worst chemical market in 20 years,” he says. “This market is so lousy that it's more likely to get better than worse at this point.”
Finkbiner says that when all factors are considered, Quality Distribution is among the best positioned of tank truck carriers. “In spite of the economic softness, we're creating value, and generating a ton of cash” he says. “We still have too much long-term debt, but we are paying it down.”
The debt is the result of the mergers that created Quality Distribution Inc in 1998. The process started in early 1998 when New York investment banker Apollo Management LLP bought Montgomery Tank Lines. Chemical Leaman Tank Lines was added a few months later. The two tank fleets were consolidated and renamed to form Quality Carriers Inc under the parent, Quality Distribution.
“Due to market conditions, this has not been a typical leveraged buyout,” Finkbiner says. “The typical leveraged buyout is turned in 30 months. Apollo has held Quality Distribution going on five years now, but Apollo still will get a very fair return from this company. Further, we plan to get back into the merger and acquisition market at the right time.”
In the meantime, Quality Distribution continues to restructure and streamline existing operations. In addition to Quality Carriers, and its dry bulk division, TransPlastics, are the other QDI subsidiaries Levy Transport (limited Canadian operations) and QualaSystems (one of the largest networks of wash racks).
Trimming waste has been a priority. Even as revenue fell by about 15% over the past three years, headcount was reduced by 45%. The company employs 690 people today, down from a high of 1,220 in 1999. The reductions came at the support level — administration, terminal managers, and customer service staff.
“We have overhauled this company from top to bottom to make it more sophisticated and efficient,” Finkbiner says. “One objective was to move toward the sort of sophistication in asset management that has been achieved in the packaged freight business. It's a cultural issue, and everyone at this company has to believe in the changes that we are making.
“When Quality Distribution was formed, this was an unsophisticated business. Equipment was all over the place, and we had no tracking system or computerized central dispatch. We've got that now with TMW Suite, which was modified for the bulk sector.
“We had no web site. Today, 80% of our customers get load status information off our web site, and they can transmit payments through online EDI (electronic data interchange). Shippers have password-protected access for load tracking. We're also generating new business opportunities through the Internet.
“We've worked hard to reduce operating costs without sacrificing service. Service is better today. It's still not good enough, but it's the best it's ever been. We measure our performance with each load, and our target is a perfect shipment — priced right, serviced correctly (with the right equipment and picked up and delivered within a 15-minute window), and correctly billed and invoiced in electronic format.”
Finkbiner credits the changes with bringing in new customers. “Existing customers and those we are soliciting can see that we are creating value for them by providing a higher level of service,” he says. “Our goal is to deliver a higher value of service than our competitors.
“The tank truck industry and many customers are at least 20 years behind the dry freight sector in terms of transportation and distribution efficiency. We can still squeeze out a lot more inefficiency and improve productivity. We all need to find better ways of operating.”
Specialty chemical manufacturers are seen as the best source of new business for Quality Carriers. “We are a chemical transportation specialist, and chances are that we've hauled just about any chemical commodity shipped over the road,” he says. “Traditionally, we've hauled the industrial production index, a sector that grows 1% to 3% annually. Like other chemical haulers, we've been hurt by the fact that overall chemical tonnage is down 13% right now. We're overcoming that by working harder and smarter.”
To serve its varied customers, Quality Carriers runs 3,300 tractors and 7,700 trailers that are dispersed among 110 terminals across the United States, Canada, and Mexico. The company also has two storage terminals — one each in North and South Carolina.
International business is increasingly important to Quality Carriers. Canada generates about $35 million a year, and Mexico has good long-term growth prospects. Mexico currently accounts for about $18 million annually. The carrier recently hired Ruben Capaletti to manage the Mexico business out of offices in Houston, Texas.
Most of the equipment and terminals are operated by the affiliates, which continue to form the core of the Quality Carriers system. “The affiliates are our biggest strength, and we continue to expand their ranks,” Finkbiner says. “By specializing in niches, they give us the ability to meet specific customer needs. At the same time, they are part of a very large organization that provides comprehensive liquid and dry bulk transportation service throughout North America.”
Finkbiner and other top managers point out that the affiliate ranks have remained stable throughout all of the changes that have occurred at Quality Carriers and its parent. The carrier hasn't lost more than 5% of its affiliates in any year since the leveraged buyout.
Forty-one affiliates handle approximately 70% of loads moved under the Quality Carriers umbrella. The newest additions to the affiliate family are Eaton's Trucking Service, Johnstown, New York, and Erickson Transport Corp, Springfield, Missouri — both of which came on board in the first quarter of 2003.
“We added three affiliates just in the past six months, including Eaton's Trucking and Erickson,” Finkbiner says. “However, we looked at 200 candidates during that time. These were tank fleets that wanted to become a part of Quality Carriers. The biggest problem many of them face is a lack of qualified drivers. That's killing a lot of deals.”
Of the 110 terminals in the system, 65% are affiliate locations. Quality Carriers wants the ratio to grow to 75% affiliate terminals, according to Randy Sheeler, Quality Carriers senior vice-president of operations.
Most major cities have both company and affiliate terminals. Sheeler explains that in the typical arrangement, one facility will concentrate on specialized business (such as acids or hydrogen peroxide), and the other will provide primarily regional and longhaul for a more varied range of customers.
A distinct advantage of the affiliate program is that it promotes an entrepreneurial spirit at the local level, according to Michael A Grimm, Quality Carriers executive vice-president of affiliate relations. The independent contractor status of affiliates creates a powerful and personal financial incentive to provide Quality Carriers' customers with very personalized service.
Affiliates have considerable flexibility in determining a focus or niche. For instance, one specific Quality affiliate, Cletex Inc in Houston, Texas, works closely with Transportes Especializados Antonio de la Torre e Hijos SA de CV, in Mexico City, Mexico, to coordinate the overwhelming majority of Mexico chemical shipments handled by Quality Carriers.
Other affiliates specialize in tank container drayage or rail transloading. In addition to affiliate operations, Quality Distribution has a network of 28 rail transfer facilities operating under the Quality Transload and Quality Terminals names across the United States and Canada. Quality Distribution recently launched a new affiliate — Quality Tank Container Transport Inc — to focus on container drayage and depot services.
“We see a lot of potential on the intermodal side,” Finkbiner says. “We are developing the critical mass to be a dominant intermodal player in North America. In transloading, we're doing that with our company and affiliate network and we are developing partnerships with CSX, Union Pacific, and Transflo. On the tank container side, we give customers the ability to purchase drayage from a single source anywhere across the United States.”
One reason for the strength of the affiliate program is that many were recruited from the Quality Carriers' management ranks. This includes Charlie O'Brien, former Quality Carriers chairman. His affiliate operation is known as QB Inc and is based in Bridgeport, New Jersey, and Baltimore, Maryland.
The company plans to continue converting Quality Carriers terminals to affiliate status, and this will be a main source of the growth in the program. Grimm says this is very much a win-win arrangement for everyone involved.
Quality Carriers gets dedicated, experienced affiliates who already understand the carrier's widespread operations. In turn, the affiliates have access to an extensive back office support system that includes insurance coverage, billing, receivables collection, and access to the Quality reload network.
“Affiliates pay a percentage-based fee for the basic services, which includes being paid every Wednesday for the previous week's loads,” Grimm says. “Beyond that, tank cleaning and other services are offered as options.”
Affiliates are served by an extensive sales support team that includes five vice-presidents of national accounts and 13 regional sales directors. Each member of the Quality Carriers sales team is responsible for approximately $30 million to $40 million in business.
“We serve the affiliates but we also promote the affiliate system as one of our most distinctive features,” says Terry O'Brien, vice-president of sales. “We show customers how the affiliates provide personalized service and have a vested interest in keeping each customer satisfied.
“In addition, our sales strategy is to show customers that we have some of the most extensive liquid and dry bulk logistics capabilities in North America. The coverage we provide in Canada, Mexico, and the United States enables us to take cost out of a customer's chemical distribution process. We offer a multitude of distribution alternatives that create value for our customers.”
Safety and security
A powerful corporate safety program works closely with affiliates on safety and security issues. Insurance coverage is an important part of the safety program. First and foremost, Quality Carriers and its affiliates are covered by $55 million worth of liability insurance.
“This is a very important benefit for our customers,” Finkbiner says. “In fact, it should be more of a differentiating factor than it is. Many hazardous materials carriers run with the $5- million minimum, which means the shipper is the ultimate insurer. Fortunately, we haven't seen a major catastrophe in this industry. When and if it happens, a shipper is going to get hit big time. Major disaster claims in today's litigation environment could easily exceed $20 million for a single incident.”
Quality Carriers also has terrorism insurance. “Without doubt, we're one of the best insured tank truck carriers in the business,” says Richard Carr, Quality Carriers vice-president of safety. “It doesn't come cheap, though. “We now have an insurance surcharge, and I can see a day when security-related costs become part of the contracted arrangment with each customer.”
Security concerns have dominated the safety management process for the past two years. Driver hiring has become much more difficult. Carr explains that more extensive background checks added $56,000 to the cost of hiring drivers in 2002.
“We're rejecting many more applicants than we did in the past,” he says. “We continue to strengthen overall security throughout our system.”
However, Carr cautions that it may be impossible to ever achieve 100% security in hazardous materials transport operations. There are simply too many variables. The best strategy is to constantly reinforce the need for employees to be vigilant on the job.
The federal government's preoccupation on technology-based security systems is worrisome to Carr. He believes that drivers are the real key to effective security out on the road. Technology alone won't protect the driver. Any system can be defeated.
“It's frightening to listen to the technology debate,” he says. “Vendors are trying to convince federal regulators to mandate a wide array of security products. This technology will cost a fortune.
“Effective transport security requires a group effort and group sacrifice. Carriers, shippers, and consignees need to share the cost. Trucking can't pay the whole bill.”
Even with the aggravations posed by enhanced security requirements, the driver turnover rate at Quality Carriers is a modest 45%. Still, the company currently has about 250 fewer drivers than it would like. Too many applicants simply don't meet requirements.
At a minimum, Quality Carriers looks for two years of over-the-road truck driving experience and a good driving record. Good means no more than three moving violations and zero driving-under-the-influence convictions in the past seven years (and no more than one in the driver's career). In addition to the criminal background check, the applicant must pass a comprehensive physical and a drug-and-alcohol screen.
The biggest driver challenge for Quality Carriers and its affiliates now and in the future is the aging driver pool. Truck driving has lost much of its mystique, and there are fewer young people entering the business.
“We're going to have to pay more and give better benefits to turn that around,” Carr says. “The biggest attraction is still the sense of freedom and lack of direct supervision that comes with truck driving. However, that's not enough to offset the pay issue.
“Our statistics show that newer drivers are actually safer. They are more cautious because they are just getting used to tanks. More experienced drivers can become complacent, which might result in more accidents.”
Driver supply may be a challenge for affiliates, but equipment is not. Affiliates are responsible for the power, but they have the option of running their own tank trailers or leasing from Quality Distribution.
“We're proud of the fleet we run,” Finkbiner says. “We've acquired in excess of 800 tank trailers since the new Quality Carriers was created in 1998,” About 100 were new, and the rest were less than five years old. There's a lot of used equipment out there on the market.
“We bought 290 Matlack tank trailers when that company ceased operations. The tanks were cheap at 30 cents on the dollar. This purchase reduced the average age of our trailer fleet by two years. We've disposed of most tanks in our fleet that were more than 20 years old.
“Some customers are now requesting tanks less than 10 years old in their bid packages. We'll do that if they are willing to pay for it.”
Terry O'Brien adds recent new business has called for more specialized equipment — multicompartment chemical trailers, rubber-lined units, larger-cube dry bulkers, high-temperature tanks, and B-trains for Canada. “In turn, we're asking for longer term contracts,” he says. “The length of the contract affects pricing. If special equipment is needed, we'd like a five-year commitment.”
About 800 trailers (MC307 and DOT407 units) are in the Quality Carriers per diem lease pool that is available to both affiliates and company terminals. The bulk of the 7,700 trailers in the fleet are assigned to specific Quality Carriers terminals, both affiliates and company locations. Assigned trailers also are available to affiliates. These trailers include tanks, dry bulkers, and dropframe tank container chassis.
While the tank fleet has grown, most of the equipment investment over the past two years has been for tractors. In that period, the carrier bought 185 power units, most of them from Mack Truck Inc.
Ninety-seven percent of the tractors in the fleet, both company units and those from owner-operators, have been outfitted with Qualcomm satellite tracking and communication. Owner-operators lease the equipment.
“We offered incentives such as free email to encourage participation by our owner-operators,” Sheeler says. “We've blended Qualcomm with our TMW Suite fleet management system, and we integrated all of that into our computerized dispatch system. It took well over a year to make the shift to a virtual dispatch environment, but the results are worth it.
“We have more data now than we can possible use. In fact, we've conducted training to show management which reports are crucial to our business. We have much more effective communication throughout our system, and our customers are a part of the process.”
What does the future hold? Management plans to continue expanding the reach and scope of Quality Distribution and its various operating units. The objective is to be the dominant bulk logistics provider across North America.
“We believe we are on target to meet that objective,” Finkbiner says. “We have the terminal structure and the mass needed to serve customers anywhere in the North American market.”
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