U.S. Xpress Enterprises, Inc. (USX) on Q1 2021 Results - Earnings Call Transcript
Operator: Good afternoon, ladies and gentlemen and welcome to the U.S. Xpress First Quarter 2021 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn this call over to Mr. Brian Baubach, Senior Vice President of Corporate Finance. Please go ahead, sir. You may begin.
Brian Baubach: Thank you, operator and good afternoon everyone. We appreciate your participation in our first quarter 2021 earnings call. With me here today are Eric Fuller, President and Chief Executive Officer; and Eric Peterson, Chief Financial Officer. Additionally, Cameron Ramsdell, President of Variant; and Joel Gard, President, Xpress Technologies, are here to answer questions.
Eric Fuller: Thank you, Brian. This afternoon, I will review our first quarter results and provide an update on our digital initiatives designed to accelerate revenue growth, expand our profitability and improve our return on capital. Eric Peterson will review our financial results in more detail, and I will then conclude with a review of our market outlook. On today’s call, there are five main themes that we hope you take away. First, we continue to successfully execute against our strategic plan to improve our profitability while doubling revenues over the next 4 years. To accomplish this, we are allocating investment and capital to our higher return digital businesses while taking capital out of our lower return legacy OTR business. Second, we exceeded our goal of growing Variant to 900 tractors by the end of the first quarter, having grown to more than 950 tractors, and remain on track to meet or exceed our goal of growing Variant to 1,500 tractors by the end of this year. Third, as we invest in scale Variant, we are carrying duplicative costs as we are essentially running 2 OTR companies, one with higher profitability and returns and one with lower profitability and returns.
Eric Peterson: Thank you, Eric, and good afternoon. Operating revenue for the 2021 first quarter was $450.8 million, an increase of $18.2 million as compared to the year ago quarter. The increase was primarily attributable to increased revenues in the company’s brokerage division of $31.4 million, partially offset by a decrease of $6.5 million in Truckload revenue and decreased fuel surcharge revenues of $6.6 million. Excluding the impact of fuel surcharges, first quarter revenue increased $24.8 million to $417.6 million, an increase of 6.3% as compared to the prior year quarter. We posted operating income of $8 million in the first quarter of 2021, which compares favorably to an operating loss of $3.7 million in the 2020 first quarter. Our operating ratio for the first quarter of 2021 was 98.2% as compared to 100.8% in the prior year quarter.
Eric Fuller: Thank you, Eric. As we look ahead, our core markets have recovered from the weather related disruptions that occurred through February and freight demand is running better than normal seasonality through the first 2 weeks of April. Our expectation is for freight demand to remain strong throughout 2021 given the broader economic recovery and tailwinds that we are experiencing as a result of the Federal government’s most recent stimulus package, which is having a notable impact. On the supply side, the market for experienced drivers remains challenging, which is keeping a lid on supply. Additionally, ship shortages and supply chain constraints are impacting new tractor builds, which will impact supply over the near-term. To conclude, I am proud of our accomplishments through the first quarter as we grew Variant to more than 950 tractors as we exited the first quarter, and remain on track to meet or exceed our goal of having 1,500 tractors transitioned by year end. Continued to scale our digital brokerage platform having handled 67% of transactions over our tech-enabled platform this quarter and addressed critical pricing issues in several of our dedicated accounts, which we believe will yield positive results as the year continues. Over the balance of the year, we intend to continue to redeploy capital from legacy OTR to Variant operations to meet our goals of at least 1,500 trucks, a Variant run rate of 25% of Truckload revenues and a return to total fleet growth. We believe we are firmly on this path. As a reminder, Cameron Ramsdell, President of Variant; and Joel Gard, President of Xpress Technologies are on the call, and we will be able to add color to questions on Variant and our Brokerage segment as needed. Thank you again for your time today. Operator, please open the call for questions.
Operator: Our first question comes from the line of Jack Atkins with Stephens. You may proceed with your question.
Jack Atkins: Great, good afternoon guys. Thanks for taking my question.
Eric Fuller: Hi Jack.
Jack Atkins: So Eric, and maybe Cameron wants to take this as well. I guess to start off, when I think about Variant and the idea around scaling Variant from here, you are obviously making a lot of progress putting additional trucks into service there. But I guess, I think folks are just trying to understand how the profitability also scales along with this. And so I think that Slide #10 on the supplemental was helpful. But when we think about the Variant fleet today at 900 trucks or 950 trucks, can you help us think about what’s the operating ratio on that fleet today, what will the operating ratio be at 1,500 trucks? And then when you get to 2,500 and you start to see that inflection in terms of fixed overhead, what’s the operating ratio at that point? I guess we are just trying to understand how this is going to progress from here as we add additional trucks and we can absorb that additional overhead?
Eric Fuller: Yes. So Jack, we don’t have all those exact ORs broken out, but I will give you a little bit in the sense that internally, we looked at the cost that we had from the fixed cost investment was roughly – we looked at the breakeven being about 900 trucks. So, as we got over 900 trucks in Variant, then we were starting to inflect positive from an overall corporate standpoint. So, we have gotten to that point. So that’s one positive. The other positive is, if I take the overhead investment out of Variant and just look at the operations, our Variant operations gets about 1,200 basis points better operating ratio than the legacy business today. Now keep in mind, we have had that fixed cost so that kind of offsets it. But that was where we kind of got to that 900 to say, hey, now we are starting to inflect positive. If we look out over the next couple of years, we believe that as we get down into that 2,500 to 3,000 truck range, then we are starting to get closer to that 2,000 basis points gap between our legacy business and Variant. So from here on out, we should have positive results as we add more trucks to Variant. But really as we grow and scale and take more of that fixed cost and spread it out over more miles is where we really get the benefit. And you can see that in that slide, we go from, I believe a high of $0.39 a mile on fixed costs all the way down to $0.20 a mile at roughly 4,000 to 5,000 tractors in Variant. So there is some real benefit as we grow and scale this model.
Jack Atkins: Okay. That’s super helpful, Eric. Thank you for that. I guess kind of moving to a different subject, which is dedicated when I think about other Truckload carriers that are public that kind of disclose their OR and levels of profitability within their dedicated operations. We see mid to low-80s operating ratios for those carriers. Can you help us think through the steps that you guys have taken already to improve profitability within dedicated. And over time, is it reasonable to think that U.S. Xpress’ dedicated business can see an operating ratio with an 8-handle on it. Is that realistic or not?
Eric Fuller: It’s very realistic. And I will tell you Jack, we have made a pretty significant pivot in our mindset. And I will give you an anecdote. In the past, we were always a company that was a little nervous about making sure that we kept our truck count up to our fixed costs. And so I can tell you forever in all ways, going back almost 15 years or 20 years, we were always talking about we needed X or Y from a rate perspective with the customer, but it was always led with the caveat, but whatever you do, don’t lose the business. And this year, we have taken a completely different approach. And Eric and I have told the dedicated group that we have to ride the ship as it relates to profitability within our dedicated division. And we identified nearly almost 1,000 trucks that were not operating where we wanted those trucks to operate. And so we gave instructions to the dedicated group to go fix that business from a rate perspective. And if it means that the customer is going to put that business out to bid and they can’t meet that requirement, then we are willing to walk away from that business. And I can tell you that is a completely different mindset than what we have had in the past. And if it means that we lose an account with 100 trucks and if we can’t get our rate, then we are going to walk away from it. And happy to say that we have taken that aggressive approach through Q1. And so far, we haven’t had any business that we have lost. And so things are moving positively, because we are getting the rates that we need in the business in order to operate it at a profitable level.
Jack Atkins: Okay. That’s really encouraging to hear as well. Last question for me, and I will turn it over and jump back in the queue. But Eric Peterson, is there a way to think about the weather impact to the first quarter, I know it can be difficult to quantify, but it sounds like you guys had a pretty significant impact overall, just given where your operations are located. Can you kind of frame up from an earnings perspective, how much weather negatively impacted you in the first quarter?
Eric Peterson: Yes. The weather was really tough, especially in Texas, not just in our over the road division, but dedicated as well. And looking at the impact of utility and some of what it did to our orientation classes with the drug testing and physical results getting delayed going through the – just our supply chain, I mean really close to $0.10 a share when you are looking at what that did to our OR. I mean if you look at our utility on a year-over-year basis, you see that it’s down, and that’s despite having almost 900 more tractors in our Variant fleet that are getting that excess utilization. So I would say, close to $0.10 a share.
Jack Atkins: Okay, that’s helpful. Thank you for the time guys. I appreciate it.
Eric Peterson: Thank you.
Operator: Our next question comes from the line of Ravi Shanker with Morgan Stanley. You may proceed with your question.
Ravi Shanker: Thank you. Hi Eric and Eric. First of all, I will just say that the increased disclosure on Variant is very encouraging and very helpful. So please keep that coming. I am sure within the quarter or 2 quarters you should be able to get to a point where you can disclose or on Variant separately as well, which would be incredibly helpful. A couple of questions, one, on Slide 8, where you kind of give us the legacy versus Variant metric comparison, that took a little bit of a step back from what you gave us last quarter. I mean was that entirely because of weather or are you seeing a little bit of diminishing returns as you kind of scale up the fleet?
Cameron Ramsdell: Ravi, this is Cameron. Thanks for the question. I think which metrics were you specifically referring to?
Ravi Shanker: I am looking at Slide 8, the versus legacy changed percentage. I think the preventable accidents, the delta, I think it was 61% decline and now it’s 54% decline. And – hang on, let me just split up this year – and the other points?
Cameron Ramsdell: Yes. I can just speak to all the metrics on there. Obviously, the truck count was in line. The accidents, generally, we did see a pronounced uptick in the number of accidents per million miles during the storms, which is fairly intuitive when weather like that occurs in areas where you are dense, you generate those, so that’s nothing alarming from that standpoint and that has normalized. The turnover is slightly up on a percentage basis. I will say it is still very much in line and has completely normalized, sort of stemmed, and the voluntary attrition is also in line with the last quarter, which is substantially less than the number we published. And utilization, of course, as we have already discussed on this call and in the core earnings transcript, we experienced a step back mainly again due to the storms.
Ravi Shanker: Got it. That is incredibly helpful. Thank you for that. And then maybe on Slide 10 as well, I mean this is also a very helpful slide. But just if you can help me understand what I am seeing here, I mean that inflection point at around 2,000 trucks or so, is that telling me that the fixed cost of Variant becomes lower than the legacy fleet at that point or what exactly is that tell me? Because you are going from $0.33 to $0.39, clearly the fixed cost starts turning – the headwind starts turning lower from this point forward, but what’s the point at which it intersects the X axis?
Cameron Ramsdell: Yes. So traditionally – go ahead, Eric.
Eric Peterson: No, I was just going to say, the point of the slides, if you look at that opportunity going from $0.39 to $0.30, that’s over 400 basis points of earnings on a Truckload level. And so the increase to $0.39 isn’t just the investment that we have in Atlanta with the new infrastructure, we are standing up for Variant, it’s also representative of that over the – that legacy over-the-road infrastructure that we are not carrying down. Like – so that’s still there. And so if you look at on the previous slide, first quarter over first quarter, we are down over 1,000 tractors in our legacy over-the-road operation, and that infrastructure is still there. And the reasons what we said previously is we want to keep that there is because we are continuing to grow Variant, and we don’t want to tear down infrastructure just to have to build it back up 12 months later. But going from $0.39 to $0.30 a mile, that’s over 400 basis points alone in improved Truckload earnings, and that doesn’t take into account the improved per unit metrics on a Variant tractor versus the legacy tractor.
Cameron Ramsdell: And Ravi, the $0.30 really is where we have been kind of historically over the last couple of years prior to going the launching Variant. And so that’s kind of why we made that kind of that breakeven point.
Ravi Shanker: Great. And 1,200 basis point difference that you guys speak about, I mean is that excluding this $0.30, is that just the variable portion alone or is that including these gains?
Eric Peterson: Yes. The 1,200 basis points is the variable piece. So this is an addition to.
Ravi Shanker: Okay, got it. And then just very lastly, kind of Eric Peterson, given all the moving parts here with this kind of ramp down in the fixed cost and scaling up the Variant fleet with the improved dedicated pricing, brokerage getting traction, but at the same time, kind of carrying the fixed cost on the legacy fleet, where do you think or looks like exiting the year and for ‘21? Are we looking at getting to a 90 OR by the end of the year?
Eric Peterson: Yes. Not saying all the way to a 90 OR by the end of the year. But as we have said previously, as we approach that 1,500 trucks in Variant in our get healthy plan on some of these dedicated tractors, we can see that number being in the low-90s.
Ravi Shanker: Understood. Thanks so much.
Eric Peterson: Thank you.
Operator: Our next question comes from the line of Brian Ossenbeck with JPMorgan. You may proceed with your question.
Brian Ossenbeck: Hi, good afternoon. Thanks for taking the question. Eric Fuller, maybe just start with the bigger picture. Like you mentioned in, I think, your economic report infrastructure demand will create some tension for the trucking jobs. Obviously, it’s quite hard to get people and keep them and retain them, whether it’s – I mean, maybe a little easier on Variant for now, but is this sort of the environment that you’ve envisioned where it’s really hard to scale the fleet where you really do need that digital initiative, whether it’s in Brokerage or on the Variant side? I know you’ve talked about technology disruption as well, but just maybe putting that aside, just talking about the cycle? Like are we at the point where this is where you say, hey, this is why we’re making these pivots because it is hard to scale the business, kind of exactly when you would want to when the market is tight?
Eric Fuller: Right. It does make it easier. By having a new brand, a digital brand, like Variant, we’re actually seeing more traction in the market from a recruiting perspective than we would in our traditional legacy business. And so we do think it helps to differentiate us. So from that regard, I definitely think it’s a positive. I mean if you look at the market, the driver situation is probably more difficult than anything I’ve ever seen in my entire career. And I envision if we get an infrastructure bill, it’s only going to get worse. And so I think we’re well positioned to at least see some growth now. To be honest with you, that pace of growth has slowed a little bit. We were running at a pace that I thought we would probably in the quarter more over 1,000 trucks, where we were, say, a week or 2 before the stimulus bill. And we did see a little bit of a fall-off in our recruiting numbers once the stimulus payment went out and so that has created a little bit of a headwind. But I think that we’re probably moving past that now, and we can get back to a little bit quicker of a trajectory from a growth perspective at Variant.
Brian Ossenbeck: Okay. Got it. I guess the point of the question was really, though, is with this type of market being tight and hard to get drivers, like it does seem like this is what you’d – you’re pivoting the company to be able to grow through. And it sounds like that’s still valid. Like this – I guess the way I’m looking at it is sort of your test case, can you get the scale in this market? That’s kind of what you’re pivoting the company to. So I guess that was that was more of the question. It sounds like you feel like you’re on track even though it slowed down a little bit recently, is that fair?
Eric Fuller: Yes. We’re still on track. And like I said, it’s showing that we have some – this model really can scale regardless of cycle. And so we feel real confident about it. Yes.
Brian Ossenbeck: Okay. Great. So I guess on the other part of scale, the digital brokers rollout, I know that’s kind of coming along behind the Variant side. You did mention the acquisition. You got some commentary in the slide deck as well. Can you or Joel, just kind of give us a bit of an update on how things are progressing? What we should expect throughout the rest of the year? The pace of investment, anything to kind of help frame the pace of improvement in kind of where you are at this point in time?
Joel Gard: Yes. Thanks for the question, Brian. This is Joel. I think to start, it’s just worth highlighting the approach to improving some of the fundamentals that we really emphasized last year in parallel with the integration of the acquihire transaction reported in the supplement. All of our internal kind of transformation initiatives are very much on track. We’re starting to see some of the positive indicators of that thus far, and we expect to be able to leverage some of the benefit that we’ve built up in the trailing quarters here for the rest of this year, which is indicative of the hard work being done by the team right now.
Brian Ossenbeck: Okay. Thank you very much for the time. Appreciate it.
Eric Fuller: Alright. Thanks, Brian.
Operator: Our next question comes from the line of Scott Group with Wolfe Research. You may proceed with your question.
Scott Group: Hey, thanks guys. Good afternoon.
Eric Fuller: Good afternoon.
Scott Group: Can I ask what’s a realistic margin expectation for the truckload segment in the second quarter?
Eric Fuller: I think we can see a little bit of sequential improvement. But I don’t necessarily – we don’t normally give that type of guidance, but I think we will see some improvement from where we’re at. I mean, our biggest – the improvement where you’re going to see is one in dedicated, a lot of the rate increases that we have gotten will go into effect, either at the beginning of Q2 or into say halfway in through Q2. So that will have a positive impact on the quarter. We also will continue to grow our Variant truck count as a percentage of our overall truck count, which will improve our earnings as well. So we feel like we’re moving in the right direction, and we’re going to be making sequential improvement from here on out as we move through the quarters.
Scott Group: You think we will see year-over-year improvement relative to that 94 in truckload a year ago net of fuel.
Eric Fuller: I think that was a pretty unique comp given the situation. So I don’t know that at this point, we were not really saying one way or the other. I do think it will be an improvement sequentially from this previous quarter, though.
Scott Group: Okay. And then when you talk about getting to a low 90s by the end of the year, is that an annual run rate comment or a fourth quarter comment? I’m just trying to understand just because last pricing cycle in fourth quarter of ‘18, you got to a low 90s. And so I just want to understand, is this just getting back to where we were because pricing is great? Or is there something that’s more structurally better?
Eric Fuller: Yes. I would say it’s structurally better because our focus right now on a quarterly basis, like we said, isn’t to maximize the OR to build this foundation for growth. And so I think the difference, if we get to the low 90s this fourth quarter compared to before, we’re doing it with a model that’s not done that’s going to continue to scale, where we can then continue to make improvement into 2022 and into 2023 as we don’t stop our aggressive growth plan, as we said earlier, to double the revenues in 4 years. If we can get to the low 90s by this fourth quarter and still have that scalable platform, that’s going to have a much better feel heading into the subsequent year than the previous time we did that.
Scott Group: Okay. And then just last question, just given the sort of the mix changes. Should we think that utilization turns positive starting in 2Q not that weather is behind us?
Eric Fuller: I think the problem with utilization is our truck count, as you see in our slide, I believe it was on Slide 9, where we show that we’ve lost more trucks in our legacy business than we’ve added in Variant. And that’s intentional, but that has obviously a little bit of a negative impact, a headwind on our utilization numbers as we go through that transformation.
Scott Group: So that has a per tractor impact?
Eric Fuller: It does.
Scott Group: Okay. I’m not sure I follow. Okay. Okay. But – so it’s in the back half of the year when you would expect utilization to turn positive.
Eric Fuller: Yes. And meaning because we have potentially at any given point during the quarter we may have more unseated tractors in that number.
Scott Group: Okay. Okay. Got it. Alright. Perfect. Thank you guys. Appreciate the time.
Operator: Our next question comes from the line of Ken Hoexter with Bank of America. You may proceed with your question.
Ken Hoexter: Hi, great. Good afternoon. Eric and Eric and team, can you just, I guess, maybe start off with how many unseated tractors out of the total? And are you counting that to get to that utilization? It’s all in, right, in terms of your unseated tractors?
Eric Fuller: Yes. Our utilization numbers are for available tractors. And we don’t disclose what they are, but you can infer that on a sequential basis with that drop in legacy over-the-road, but it’s a higher percentage today than it was in the fourth quarter.
Ken Hoexter: So how do we reconcile this progress of Variant? Do you – is there at some point where you’re aging out the tractors? I don’t know if it’s on a 3-year cycle. And so in 3 years U.S. Xpress no longer exists and only Variant trucks exist. Once you get to that flip point of profitability and performance for Variant in distributing the fixed cost that you show?
Eric Fuller: Sure. So we do have some tractors that will not get converted over. It’s a small percentage of the overall, but we do have some tractors. But for the most part, I would say probably within 2 to 2.5 years, we should have all of the tractors that we intend on phasing out and moving over into Variant. So it’s a slow process. And there is other areas that need to be built out in order for us to absorb the entire fleet, but that should happen over the next 2, 2.5 years.
Ken Hoexter: So at what point – I’m just trying to reconcile your earlier comments on shutting down or carrying two fixed cost companies. Is there a point where we’re migrating into one so you don’t carry those legacy costs?
Eric Fuller: Yes. I would say within, say, six quarters, I think that we’re going to be filling down costs as we go, but we should be able to strip out the majority of the costs within six quarters.
Ken Hoexter: Strip out, not just distributed over a wider base of expansion fleet?
Eric Fuller: Yes, both. But yes, there will be some costs that will come out as well as distribute over more miles, but there will be some cost that comes out over probably a six quarter time frame.
Ken Hoexter: Alright. I appreciate that. On the dedicated, your average revenue per mile up a slim 0.8%. You talked a lot about repricing that starts maybe next quarter or mid next quarter. Is this – I mean, this is just so low given the environment, is this a mix of new and shorter lanes that impacted that average price per mile? Or what is holding that back? I mean, basically, since the IPO, you talked about focusing on rates, what is holding that down given the environment we’re in?
Eric Fuller: Yes, there is a fair bit of mix. So if you look at some of the areas where we have struggled to staff at full levels has been in our higher-paying but less desirable jobs and so some are higher rated, but less desirable job. So in some of those areas, we’ve been most impacted by this driver situation where some of the places where we were getting the best rates. But then also some of our rate increases, like I said, were either went into effect late Q1 or into Q2. And so we think we will see a much larger impact to that rate improvement as we go forward.
Ken Hoexter: So Eric, I guess my final one, just the final quick one, but you’re considering doubling the fleet, yet you’re still at a 98 OR. Why not focused on conversion and gaining that scale and then growing after you’ve improved the performance? Or do you only see the improved performance if you add more scale? I don’t know, sometimes size helps. And sometimes you have too many fixed costs you’re carrying. So maybe walk us through that to give us confidence that doubling the fleet is the right way to go?
Eric Fuller: No, we’re only doubling – we will double the fleet once we make the conversion. So we’re talking about as we move forward that conversion will happen prior to net fleet growth. And we think that we can do most of that conversion going into the back half of the – by the back half of this year. And there’ll be some pockets that may not get completely converted. But for the most part, most of that conversion will happen, and then we move into a net growth stage. So we’re not growing with – the conversion is a big part of that. It’s more on the front end of that growth strategy. And at that point, our operating ratio in that division will be much better than what we have seen in our legacy business. And so therefore that will drive our decision to grow. And if for some reason, we didn’t get the operating ratio that we expect in our, say, Variant fleet, then we’re not going to grow the Variant fleet. I mean we’re not growing it at a 98. We plan on growing it at a really healthy operating ratio and return, and we think we will be there as we move into a growth phase.
Ken Hoexter: So just to clarify then, you mentioned maybe not improving year-over-year in the second quarter. Can – I don’t know if there was anything special other than just a strong market continuing in the third quarter. If you’re talking low 90s by back half, can we presume by then that third quarter you’re seeing year-over-year improvement?
Eric Fuller: I think we will see sequential improvement. I think we will see sequential improvement from quarter-to-quarter as we get more trucks in Variant, as we get our rates layered back in dedicated, and so sequential is what I’ll commit to.
Ken Hoexter: Alright. Thank you.
Eric Fuller: Thank you.
Operator: Ladies and gentlemen, we have reached the end of today’s question-and-answer session. I would like to turn this call back over to Mr. Eric Fuller for closing remarks.
Eric Fuller: Alright. Well, I don’t have anything else. I really appreciate the time and look forward to doing this again in a quarter. Thank you.
Operator: This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation and enjoy the rest of your evening.
