U.S. Xpress Enterprises, Inc. (USX) on Q2 2021 Results - Earnings Call Transcript
Operator: Good afternoon, ladies and gentlemen, and welcome to the U.S. Xpress Second Quarter 2021 Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions with instructions to follow at that time. As a reminder, this conference is being recorded. I would now like to turn the call over to Matt Garvie, Vice President, Investor Relations. Please go ahead, sir.
Matt Garvie: Thank you, operator, and good afternoon, everyone. My name is Matt Garvie, and I recently joined U.S. Xpress as Vice President of Investor Relations. I'm coming over from Teradata, an enterprise software company based in California, and I'm really excited about joining U.S. Xpress at such an exciting time for the industry. I'm looking forward to meeting with you all in the future.
Eric Fuller : Thank you, Matt. This afternoon, I'll review our second quarter results and provide an update on our digital transformation, which we expect will positively impact our overall financial results beginning in the second half of the year. Eric Peterson will then 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 3 main themes that I want to discuss: First, we continue to successfully grow the tractor count in Variant, exiting the quarter with 1,160 tractors despite the tight driver market and Variant's metrics continue to outperform our legacy OTR fleet. Second, Xpress Technologies, our Brokerage segment, more than doubled revenue year-over-year to $96.5 million and processed approximately 75% of its transactions digitally this quarter. And lastly, we continue to make progress addressing customer pricing in certain Dedicated accounts through the second quarter related to driver and capacity cost inflation.
Eric Peterson: Thank you, Eric, and good afternoon, everyone. Operating revenue for the 2021 second quarter was $475 million, an increase of $52.5 million as compared to the second quarter of the prior year. The increase was primarily attributable to increased revenues in the company's Brokerage division of $50.5 million and increased fuel surcharge revenues of $9 million, partially offset by a decrease of $7 million in Truckload revenue. Excluding the impact of fuel surcharges, second quarter revenue of $437.5 million increased $43.6 million or 11.1% as compared to the second quarter of the prior year. Looking at our financial results in more detail, our second quarter adjusted Truckload operating ratio was 97.4%, which was a deterioration from the 94.1% operating ratio that we achieved in the second quarter of the prior year. As we have been discussing over the last several earnings calls, our tractor count has been declining as we reduce our underperforming legacy tractors and grow our Variant fleet. In the second quarter, our average Over-the-Road tractor count was down by more than 500 tractors as compared to the second quarter of the prior year. Additionally, we experienced an approximate 200 tractor decline in our Dedicated division, given the more challenging driver market.
Eric Fuller : Thank you, Eric. As for our expectations for the second half of the year, we hit the low point of our seated tractor fleet in the first week of June and have since increased our total seated tractor count by 130 units, and our orientation pipeline continues to grow. We believe that we are now at a point where the buildup of Variant will outpace the intentional attrition of our legacy OTR fleet and that overall tractor count will grow for the balance of the year. As a result, our fixed cost per mile should continue to decrease, and we expect sequential margin improvement in the second half of the year. We believe that as we continue to make progress scaling our Variant fleet and address our bottom-performing Dedicated accounts, we have line of sight to exiting the year with a Truckload operating ratio in the lower 90s, and we remain committed to doubling our revenue over the next 4 years. We expect freight demand to remain strong given the broader economic recovery, combined with the continued tailwinds as a result of the Federal Government stimulus package, which had a notable impact on our operations in the first half of this year. On the supply side, the market for professional drivers remains challenging, which is helping to keep a lid on supply. These conditions are expected to continue to support spot market rates in excess to contract rates and a strengthening contract renewal environment through the remainder of 2021 and which we continue to participate in. To conclude, this is a very exciting time at U.S. Xpress as we believe we have hit the inflection point within our digital initiatives and are set to see improved results as we look forward. As we've discussed Variant now has the scale to positively impact our financial results beginning in the third quarter. We remain on track to achieve our goal of having 1,500 tractors in our Variant fleet by year end. We believe we have reached an inflection point on our total company fleet and expect to return to fleet growth as we exit this year. We continue to scale our digital brokerage platform having handled 75% of transactions over our tech-enabled platform this quarter. And we continue to address pricing in several of our Dedicated accounts which we believe will yield positive results with the year continues. We believe we have a powerful profit engine in Variant which is set to deliver significant earnings growth for U.S. Xpress as we work to add tractors to Variant’s fleet. As a reminder, Cameron Ramsdell, President of Variant; Joel Gard, President, Xpress Technologies are on the call, and 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 is from Ravi Shanker with Morgan Stanley.
Ravi Shanker: Eric and Eric, have you considered reporting Variant as a separate segment? Could you give us a little more disclosure and kind of give investors more comfort on the direction of each segment? And also just to confirm that, you are saying that if Variant was reported separate segment today, it would be doing an ?
Eric Fuller: The 1,200 basis points is really 1,200 basis points relative to where the legacy fleet was before. And that's on a operating income per unit basis. Now, as far as reporting as a separate company, there are separate results. That's something we want to do in the longer term. But right now, we're carrying down one operation and building up a little, it's an allocation game and I don't think it'd be that meaningful. And so as Variant gets scaled up, which we plan on doing but right now it's in the middle of the convert as we're taking down legacy Over-The-Road and standing up Variant. Once it’s pure, that's something we definitely want to report on.
Ravi Shanker: Okay, got it. I mean, it's encouraging to see that the Variant revenue per tractor per week is kind of much higher than the 2019 legacy, but is it just because the cycle is now much stronger and rates are higher? How do I look at that chart?
Eric Fuller: No. And that's what we're really trying to disclose for Variant doing on a fundamental basis. When you look at the significant increase in miles, I would even argue that when it's a really hot market that there's more congestion and your utility actually goes down, we've seen our utility go up. And the other pieces to focus on too is, the improvement, the driver turnover, the significant increase in our safety and -- as well. And that's how we get to that 1,200 plus basis point improvement relative to what we were doing. And that's where I really like everyone to focus because as that contribution margin on a per unit basis hold serve and we continue to increase that division over time, it’s going to eat up that high fixed cost.
Ravi Shanker : Okay. Got it. Just 1 more for me if I turn over. On Xpress Technologies, how big is that within logistics? And also in the slide, it says you've had 3 consecutive quarters of operating within the intended earnings range. What is that intended earnings range?
Joel Gard: Yes. Hi, Ravi, this is Joel. The entirety of the Brokerage segment as reported represents Xpress Technologies which is a combination as Eric did a good job of explaining of us kind of building back better our pre-existing logistics capability as well as investing in our business model for the future. We are, as we've said in prior calls here, seeking to scale revenues aggressively to support our broader growth imperative as an organization while maintaining breakeven to slight profitability at the operating income line. And that's what we're kind of referencing in the supplement there, we've done a pretty good job of holding the line there as we've been growing over the last 3 quarters, and we'll continue to the business in that direction moving forward.
Ravi Shanker: But just what is the end game there? I mean at what point do you guys say, okay, now we've built a big enough platform and then we pivot to profitability or kind of what's the long-term strategy?
Joel Gard: Yes. Well, obviously, long-term strategy is predicated upon value creation and running a profitable business. I think, as Eric has mentioned in prior calls and even in the call today, we have an expectation that we will be seeking to double the size of aggregated revenues over the next 4 to 5 years. We've disclosed previously that we expect Brokerage to be about a 30% share of that pie. And as we reach that level of critical mass, we expect that the investments we're making now and through sort of the inner years or the next kind of 4- to 5-year plan, will give us a windfall at maturity.
Operator: Our next question is from Jack Atkins with Stephens.
Jack Atkins: Okay. Great. Just to go back to the Brokerage comments for a moment. And Joel, I'd love to get your input on this as well. But when we kind of look at the operating expenses per load, on a year-over-year basis, they're up 33% within Xpress Technologies, but you're doing a lot more digital matching, I think 75% versus 22%. So with that much more digital matching going on, why are we seeing more operating leverage there? I just -- I'm having trouble following why there's not more profit flow through on such a significant increase in revenue.
Eric Fuller : Sure. Yes. No, I appreciate the question. I think what's key to establish here is we're still very much in the early days of the investment cycle here, right? So as we've disclosed rather transparently in the supplement, there's layers of automation associated with the management of digitizing the legacy business. We've seen some early benefit there already. I can tell you amongst our incumbent workforce marginal productivity has improved to the tune of about 120% compared to this time last year. So where we've been focused on precision in the investment, we're already seeing a benefit in totality. Still early days, and we expect more of what you're seeing or referencing there to create the desired benefit from an operating leverage perspective over the next little while.
Jack Atkins: Okay. All right. So is it -- I mean, if I'm understanding you correctly, Joel, there's been sort of a necessary investment in back office, technology, et cetera, to create the platform for the revenue growth, but as we scale from here there could be more operating leverage in this brokerage model. It doesn't have to necessarily be breakeven as you're rapidly growing revenue.
Joel Gard: Yes, that's correct. I mean I think the crux of the prior comment was really rooted in ensuring that sort of foundational elements, the fundamentals of a traditional brokerage model are healthy and robust to be able to allow us to expand margins over time as this investment takes root. If you look at sort of our revenue mix year-on-year, we've done a lot of work to remedy some pre-existing challenges that were limiting us from a profitability and growth perspective as we layered on the technology investment. So absolutely room to breathe. We're not constraining ourselves to a breakeven margin and seeking to sub-optimize there if opportunities present itself, we just want to be realistic in setting expectations for our growth strategy here over the next few quarters. And to that end, we're early days on some pretty positive in what we believe accretive elements of our long-term strategy and those will start to take root here in due course.
Jack Atkins: Okay. Okay. That makes sense. And I guess maybe taking a step back and kind of pivoting towards the trucking business for a moment. I think everyone understands that you guys are bearing a significant amount of start-up costs related to Variant. And it sounds like we're at the tipping point, we're beginning to see some operating leverage associated with that, which is great, and that will show up in the second half of this year and into next year. But I guess when we think kind of bigger picture about the entire fleet. Obviously, we have a very strong market out there right now. Why are we seeing a more significant improvement in profitability on sort of the legacy fleet while you're scaling Variant? Like why can't we have both at the same time? Like Variant is going to be sort of the growth engine for the future, and that's important to scale. But why aren't the legacy trucks more profitable this year versus, say, the last several quarters, just given the robust rate environment that's out there right now?
Eric Fuller : Yes. I mean -- so a couple of things. On the Dedicated side, I mean, we look at the legacy businesses, obviously, Dedicated is a big proportion of that. And there are some things that -- we saw some incremental improvement in Dedicated, but we still have a little bit of ways to go on getting some of those accounts set up in the manner that we wanted, that we need to from a rate perspective. And we believe that this next quarter, we'll be getting the proper momentum there to get those accounts better aligned. On the OTR legacy side, I mean, we're really in the process of kind of bringing that down and really focusing on Variant. And we are making decisions on a quarter-by-quarter basis to set ourselves up for the future. And so instead of trying to -- now if there's opportunity in the market, obviously, we're going to take advantage of that, but we're really focused on the long-term build, and that long-term build is, we believe, appropriate to set us up for performance in the future. And so that's where the main focus is. And what we don't want to do is throw what I would say is good money after bad and spending a lot of time in energy and resources, propping up a division that ultimately we will be exiting over the next couple of quarters.
Operator: Our next question is from Scott Group with Wolfe Research.
Scott Group: I'm not sure if I'm getting this right, but there's still over 2,000 legacy trucks in the Over-The-Road fleet if we're getting rid of 2,000 trucks over the next few quarters, how are we at the inflection point in the overall fleet?
Eric Fuller : So we look at -- of that 2,000, there's a little bit over 1,000 that are incredibly healthy that are getting the results that we want and desire for the rest of the fleet. And so if we look at what needs to kind of get replaced, it's probably less than 1,000 trucks at this point. And so that, over the next couple of quarters, we should start -- a couple of things: It should start inflecting positive on a net basis as well as seeing continual growth in Variant. So part of what's happened over the last couple of quarters is the attrition in our legacy tractor fleet has happened at a faster pace than we could grow and based off of the fact that we are down to a size where the attrition jut from a math perspective, will attrit out slower, we'll start to see net positive growth in our tractor count. And that's positive for a lot of reasons of 1 because we're going to have more trucks in Variant; but two, it will obviously spread that fixed cost over more units, and so we'll start to see net growth in our tractors.
Scott Group: What's a realistic target for net fleet growth in the third quarter?
Eric Fuller: I don't know if we're really putting targets out there for net growth in tractor count, but we believe that we have momentum. We've grown, I think it's 100?
Eric Peterson: 120.
Eric Fuller: 120 tractors from the bottom and the bottom was in that mid-, say, June time frame and we've grown off of that. And so I think that we believe we can probably maintain that level of momentum through the rest of this quarter and through the fourth quarter as well.
Scott Group: And I think you said, Eric, would get to a low 90s by the end of the year for Truckload. Any thoughts on how much improvement we should see in the third quarter? Should we be should we be in the mid-90s for Truckload OR in the third?
Eric Fuller: I think we can see some improvement. So again, we're -- our truck count is still a little depressed from where we would need it to be as we grow out of it, those earnings -- the earnings profile will improve over the next couple of quarters. But it's probably -- we're probably not necessarily splitting the difference, but we're moving incrementally into a better operating environment in Q3.
Scott Group : Okay. And then just last 1 for me. When I look at the Over-the-Road utilization, it was down sequentially a couple of percent. I guess I would have thought with the mix of more Variant and legacy that, that mix would have taken utilization higher. Why is it still going lower as we're mixing up more towards Variant?
Eric Fuller: Yes. I mean if you look at the amount of unseated tractors because of that transition, we've had more unseated tractors than what we have had typically. And so that has created -- because we kind of -- we hit the bottom in Q2 from a truck count -- seated truck count standpoint, and that's where you're seeing a big impact from the utilization.
Operator: And our next question is from Brian Ossenbeck with JPMorgan.
Brian Ossenbeck: I wanted to go back to Dedicated for a minute here. It sounds like. I guess, the bigger question is like do you have confidence that this is these pricing issues, these contracts are contained? Are you finding that the driver market gets tighter that is becoming a bigger problem? I think the last couple of quarters, we've heard it supposed to be getting better, and it sounds like maybe it is on the margin, but it's also not quite there yet. So maybe you can comment on that. And then just as a little confusing at least to me that you can't quite get the pricing, but you also can't quite get the tractor seated. So I thought that would be kind of mutually exclusive, like if things are pretty strong, you get the pricing, but it seems like you're not getting the price or the tractor seated. So if you can elaborate on that, I would appreciate it.
Eric Fuller : Yes. On the Dedicated piece, we're as you go through and reprice a lot of this business, I mean, it takes time. We started a lot of that process in Q1. And some of that takes a little bit longer than probably we would like. And that's why we started seeing some more of that get layered into Q2, but it maybe wasn't for the entire quarter of Q2. We'll see more of that coming into Q3 from a pricing perspective. So that's a portion of it. I mean if you're looking at from an operating ratio standpoint, I mean, the driver situation has progressively gotten worse in some of our Dedicated accounts. Unfortunately, a portion of our Dedicated operation are in, what I call, less attractive markets or types of operations. And so it's been a little more difficult to source driver capacity in those different as of accounts. And so that's created some headwinds as it relates to cost, and we've had to give some driver increases even in the last, let’s say, 90 days in certain accounts, and that's created a little bit of a headwind where we still have to go back and get back to the customer. So I think it's a combination of the 2, but we feel confident that as we move into Q3, that we will get our rates in the area that we needed to be in order to get the performance that we're looking for.
Brian Ossenbeck: Okay. So do you feel like at this point, you've got to a good sense as to what type of contracts could be affected and are you actively getting ahead of them now. So you feel like it's contained? Or you think there's still a little bit of catching up to do here just by the nature of the thing now and trying to get it back later?
Eric Fuller: It's -- I would say it's contained, but there's always -- in this market, as things progress from a driver perspective, there's always a little bit where there is things moving fluidly in that market that we have to make sure that we're repricing in real time. And so we've got our arms around it. We feel very confident that we will get the pricing that we need but we're also not going to take our eye off the ball as we look at the driver situation in each one of these individual accounts.
Brian Ossenbeck: Also on drivers, can you just talk about the acquisition cost of a Variant driver, maybe how that's been trending in this tight market. It doesn't seem like it's hindering the fleet growth, but maybe from a cost perspective, if you can just give some clarity in terms of what that trend looks like if it's getting easier as it scale? Is there still expensive because there are still drivers and they're hard to get hold of especially ones that are higher experience safer drivers?
Eric Fuller: Yes. I think from an acquisition cost for the Variant drivers, we haven't seen that necessarily to come down. The driver situation is very difficult. It's highly competitive. We also have a new brand out in the market. And so we are still in the process of kind of introducing ourselves to the driver market now that we have over 1,000 trucks, but you're talking about a market with millions of truck drivers. And so getting name recognition is still an issue for us. And so getting our name out there in the market and our reputation out in the market is a big important part of the strategy, but also a costly portion of the strategy as well. And so I would say we've not hit a point to where we are seeing a cost benefit on recruiting. I think we can get there. And we have some strategies around multilevel recruiting and other things that we think will give us a net benefit and a net cost reduction as we go forward. But we're definitely not there at our current size. I mean we probably think that, that probably happens as we get a few more thousand tractors in the fleet where we can get a significant decrease in our recruiting costs relative to what we typically spend.
Brian Ossenbeck: All right. Last question on that point, too, just the whole cost structure, maybe for Eric Peterson. When you talk about repurposing the cost structure. Is it really just the duplicative costs? Is it really just about volume at this point and more tractors, more miles? Or is there getting to the point where you've got some visibility to maybe repurpose or maybe tear down is not the right word, but is it really just more miles? Or do you have some levers that you can pull to kind of right-size the business as well?
Eric Peterson: Yes. I would say from a fixed cost perspective, the biggest piece of it is just getting biggest piece of it is just getting -- not just more biggest piece of it is just getting the number of terminals we have, the size of our organization, and this foundation that we've built has very broad shoulders now to we believe, handle several thousand more tractors before we're having to do it. And so where we're really encouraged is as long as the Variant truck count trends up, we're going to -- we'll grow into our fixed cost infrastructure up to $0.13 a mile lower on a per mile basis, and then we think it can scale even more than that. And the way you think about that, if every $0.02 is 100 basis points, going from $0.43 a mile to $0.30 a mile over 600 basis points of earnings once we just get back to the legacy size that we've been before. So we know at a minimum, we can get there, and then we'd like to accelerate and keep scaling Variant on top of that. So it's just growing into the footprint that we have today. You could -- what I can't do right now is just take that footprint down to match the revenue only to have to build it back up in 12 months with nonsensical. And that's why we're looking through some of these quarters where maybe our earnings aren't as ideal relative to the market. But as long as we're focused on the build and that landing pad, so to speak, that we're heading down, we're really excited about where we're going.
Operator: . Our next question is from Ken Hoexter with Bank of America.
Ken Hoexter: Just wonder a decelerating pace at Variant. So if you're at 1,160 tractors, you're targeting up to over 1,500. It seems like you added about 465 in the first half, targeting 340 in the second. Or are you prepared now to raise that 1,500 target?
Eric Fuller: I wouldn't say we're raising it, but I feel very, very confident that we will outrun it. Internally, we have lotter goals than that, and we think that we will hit those. But for a goal that we're setting out there for the public markets, I mean, we're still saying 1,500, but I feel very confident that we'll outrun that.
Ken Hoexter: Irrespective of, I guess, the decline in the over the road, right? That's just completely separate.
Eric Fuller: Yes.
Kenneth Hoexter: Yes. So you talked about -- Eric Peterson, you talked about allocation to get to the 1,200 basis points how do we get visibility on what we'll look at then when you fully allocate the differential, right? So if you've got to take that overhead now to put it on to Variant, I guess what gives you the confidence in that? And just following on that, the cost -- well, I'll stop there and then I'll move on to a wage question. Go ahead.
Eric Peterson: Yes. I think while we feel confident, there's a bit of some asset exercise, if we know what our fixed costs are and they're constant, and we're able to shoulder more tractors. And I know that I'm putting these Variant contribution on a per unit basis of over $25,000 on a per unit basis of what was there historically. As we grow Variant from 1,160 tractors to 2,000 tractors to 3,000 tractors to 4,000 tractors and we're able to maintain that fixed cost, that's going to be very accretive to earnings. I think as a reminder, as we said with our revenue target to double our revenues over the next 4 years, and we broke down the individual components as over $1 billion of that was on the Truckload segment which equates to an additional 5,000 tractors from where we are today, and that's what we're building. And with that size and scale and superior earnings on a per unit basis, all of a sudden, what that's going to do is it's going to make that fixed cost and that overhead, a much smaller, smaller, smaller percentage of overall revenues.
Ken Hoexter: Okay. I guess caution though, just given what we saw with Swift when it just went for scale, right? It still takes the focus on the margins along the path. I think that was important to learn that it's more the profits along the way, right, not just scale?
Eric Peterson: Yes, Ken, I think that's a great point, and that's why in this scale, something that we watch very closely is what we call our product index. And we don't want dilution at that. We don't just want revenue, but we want earnings. And so why we feel confident that as long as we maintain on a per unit basis, that superior safety record, that lower turnover and the higher revenue productivity that we're going to not just deliver revenue, but we're going to deliver earnings as well. We're not just going to grow revenue, to grow revenue at a 98% operating ratio, right? That's not the plan at all. We're going to maintain that product index. We're going to scale Variant, and we'll deliver stronger earnings at maturity, much stronger.
Ken Hoexter: Eric Fuller, just looks like wage inflation was up 6% sequentially, yields up to maybe just over 3.5% sequentially just given the market exposure, why do you think you weren't able to adjust fast enough? I guess we've seen a couple of others report where we saw the rates adjust. And given I thought you had a little bit of spot exposure why do you think the -- you weren't able to adjust the cost as quickly as your -- I'm sorry, your revenues could be as cost?
Eric Fuller : Yes. Yes. I think -- It's really based on the fact that the driver -- the acquisition costs for the drivers have gone up significantly, and we're trying to build. And so that is the focus had we been more in a maintained basis. We probably could have kept the cost a little bit lower and matched with the rate. But like we said, we're really in a -- And we have a mindset about looking towards the future and not necessarily focused in the near term, and that was the right strategy for us in this quarter. And I think that you'll see, as we go forward, that cost line a little bit better with the rate. But in this last quarter, like I said, we were focused on continuing the build, which we think is really crucial to our long-term prospects.
Ken Hoexter: I guess if I could just finish with a follow-up to that, Eric. I think you talked about getting rid of 200 tractors that were the worst performing and yet the OR still deteriorated. I think to Jack's question before in this kind of market even kind of it seems like just being in the market, you'd see the benefits from that. And during the IPO, you talked a lot of the costs that you were focused on that were going to come down like insurance and things like that. Are those I guess the whole focus on Variant what that's going to do with improving performance, but are those other plans to fix anything at the legacy are gone? And why wouldn't -- if you're getting rid of the worst performing, you said we're not taking breakeven business anymore where we got rid of 200 underperforming tractors. Just wondering why the legacy wouldn't have outperformed a little bit more than we saw.
Eric Fuller: Yes. So we continue to focus on cost and reducing cost, I think that we will start to see some improvement as it relates to the safety line item. We see improved results in our safety results. If you look at over the last couple of months, we've seen a much lower accident rate. A lot of that is due to Variant, but not all of it than what we have previously run. And so we think we'll start to see some decent savings in that line item over the next couple of quarters, but the real issue with the model as it shows in Q2 is really about fixed costs and the fact that we lost our enough trucks on a net basis to where our fixed costs were not spread across enough units, and that's really the issue. And that's the crux of the OR issue. If we had a few hundred more trucks in our fleet, then our earnings would have looked much more improved. But like I said, we still believe that we are removing the right rocks and replace them with much more profitable trucks. And on the backside of this, while it's a painful process while we're in the middle of it, will show significant earnings improvement as we go forward.
Operator: And we have reached the end of the question-and-answer session. And I'll now turn the call over to the management for closing remarks.
Eric Fuller: All right. Well, thank you for attending, and we'll -- as we look forward, we're very, very optimistic to where we're headed. I know it's a painful process for us as well as we're in the middle of it, and this transition is not something that necessarily is an easy transition or a linear transition. But as we go forward, we feel very confident that we will be moving into a much greater improved earnings profile as we move into the next couple of quarters. Thank you.
Operator: This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
