U.S. Xpress Enterprises, Inc. (USX) on Q2 2022 Results - Earnings Call Transcript
Operator: Greetings, ladies and gentlemen, and welcome to U.S. Xpress Capital Second Quarter of 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. The question-and-answer session will follow the formal presentation. . As a reminder, this conference is being recorded. I would now turn you over to your host, Mr. Matt Garvie, Vice President, Investor Relations.
Matt Garvie: Thank you, operator, and good afternoon, everyone. Welcome to the U.S. Xpress second quarter 2022 earnings call. Eric Fuller, U.S. Xpress' President and CEO, will lead our call today, followed by Eric Peterson, our CFO, who will discuss our financial results. Our discussion today includes forecasts and other information that are considered forward-looking statements. While these statements reflect our current outlook, they are subject to a number of risks and uncertainties that can cause actual results to differ materially. These risk factors are described in U.S. Xpress' most recent Form 10-K filed with the SEC. We undertake no duty or obligation to update our forward-looking statements. During today's call, we will discuss certain non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with U.S. GAAP. A reconciliation of these non-GAAP measures to the most comparable GAAP measure can be found in our earnings release. As a reminder, a replay of this call will be available on the Investors section of our Web site. We have also posted an updated supplemental presentation to accompany today's discussion on our Web site at investor.usxpress.com. We will be referencing portions of this supplement as part of today's call. And with that, I would like to turn the call over to Eric Fuller.
Eric Fuller: Thank you, Matt, and good afternoon, everyone. Today, I would like to provide an update on Variant's key metrics in the quarter, highlight key achievements in the quarter from our other business segments. And following Eric Peterson's discussion of our financial results provide our market outlook for the second half of 2022. Turning to Variant. Variant generated operating revenue of $87 million in the second quarter net of fuel surcharges, an increase of 4% sequentially compared to the first quarter. This increase in revenue was primarily driven by an increase in seated truck count of 200 tractors, bringing the fleet size to 1,889 exiting the quarter, which more than offset the sequential declines in both utilization and rate per mile. In addition, Variant has grown approximately 200 tractors since the end of the second quarter. We continue to believe that Variant is the growth engine for our company because of the large market for one way freight movement, and that we can implement technology to improve capacity, cost and service levels for our customers while at the same time improving the experience for our professional drivers. Improving both Variant and our overall financial results depends on three main pillars. First, improving per tractor utilization primarily within our Variant fleet. Second, lowering our fixed costs both as a percentage of revenue and per mile. And finally, continuing to increase our overall tractor count which in the near term will help to lower our fixed costs as a percentage of revenue and per mile, and over the long term will allow us to realize the better per tractor economics across a larger fleet as we improve Variant's utilization. All three of these pillars are critical to achieving our financial results. Looking at Variant's other key metrics. Variant's turnover remained elevated in the quarter at 150%. While a portion of this was due to the short-term disruption from reorganizing our fleet operations, in order for turnover to improve materially utilization has to get back to where it was a few quarters ago, which is why we're so focused on improving utilization in the fleet. Revenue per tractor per week declined sequentially in the second quarter to $3,863 due to a combination of lower utilization within the fleet and a lower rate per mile as a large decline in the spot market portion of our business more than offset a meaningful increase in contracted rates in the quarter. Finally, preventable accidents per million miles decreased 3% sequentially in the quarter. Fleet safety continues to be a priority for the company. And we've made tremendous progress over the last few years improving our safety staff, not only in Variant but across the entire company. Turning to Dedicated. The Dedicated division continues to perform well in the second quarter building off its momentum from late Q1 and continues to benefit from our Get Healthy initiatives made to the division throughout 2021. Revenue per truck per week increased 13% year-over-year and 4% sequentially to $4,913. The increased revenue per truck was primarily driven by increased rate per mile, partially offset by lower utilization compared to the second quarter of last year. The sequential increase in revenue per truck per week was driven by a combination of a higher rate per mile and higher utilization compared to the first quarter. Total division revenue benefited from these dynamics as well from an additional 125 tractors in the fleet year-over-year. Customer interest in our dedicated offerings continues to grow, and we see opportunities to modestly add truck count here, which will be accretive to our overall truckload results. We see more opportunity to improve margins in Dedicated through responsible growth, improving our utilization and lowering our driver turnover. Turning to Brokerage. Our Brokerage segment gross margin benefited from the softening market conditions which allowed for a lower cost to cover loads. Additionally, we right-sized our technology investments and operational headcount in the second quarter, and we expect these changes to benefit our operating income beginning in the third quarter. If current market conditions persist, we expect this segment's quarterly operating income in each quarter of the second half of the year to be consistent with the second quarter. Before I turn the call over to Eric Peterson to discuss our financials, I wanted to once again thank our employees who have worked tirelessly over the last two quarters executing on our three main pillars. We're in a much better place than when we began the year with our Brokerage segment profitable and our Dedicated division performing well. Seeing improvements in our Dedicated division and its ability to turn around its financial performance gives me the confidence that Variant will mature from a start-up to a stand-alone commercial business. With that, I would like to turn the call over to Eric Peterson.
Eric Peterson: Thank you, Eric, and good afternoon, everyone. This afternoon, I would like to discuss our financial performance in the second quarter as well as capital allocation priorities and provide some financial guidance before turning the call back over to Eric to provide our market outlook. As a reminder, we are focused on restoring Variant's key metrics to their previous levels, responsible overall fleet growth, reducing our fixed cost per tractor, while at the same time being very disciplined and focused with our capital allocation to projects which will drive improved financial performance for the business. Executing on these initiatives are key to continued sequential improvement in our consolidated financial results. Turning to our performance in the second quarter. We generated revenue of $479.2 million, which excludes revenue associated with our fuel surcharge program, an increase of 9.5% year-over-year. Increased truckload revenues of $49.6 million were partially offset by a decrease in Brokerage segment revenue of $8 million. Sequentially, revenue was up $14.9 million from the first quarter, primarily due to increased truckload segment revenues, which were partially offset by lower Brokerage segment volumes. Turning to adjusted operating income. Total adjusted operating income was $2.5 million, a decrease of $0.3 million sequentially from the first quarter. Our adjusted operating income excludes a $4 million benefit from the gain on the sale of a terminal which we are leasing to a former subsidiary. In addition, compared to the first quarter of 2022, the other positive factors included overall fleet growth, operating income growth in our Brokerage segment and an increase in overall contractual and Dedicated rates. Partially offsetting these positive factors were the significant decrease in spot market rates, resulting in lower fuel surcharge recovery on approximately 30% of our over-the-road business, which caused an approximate $15 million headwind. In addition, we incurred $3.4 million in incremental claims expense resulting from an accident that occurred prior to our IPO and for which the primarily liable carrier lacks sufficient assets to pay. Finally, our fixed costs as a percentage of truckload revenues increased by 60 basis points in the quarter, primarily due to cost pressures, which grew faster than our tractor count. It's critical that we continue to grow our overall fleet size, which in the near term will help to spread our fixed costs infrastructure over a larger base of trucks. But more importantly, over the long term, as we improve Variant's key metrics, namely utilization, we will be able to realize these better per tractor economics over a larger fleet of trucks as well. Turning to capital expenditures. Year-to-date, net capital expenditures, which relate primarily to tractors and trailers, were $66.9 million compared to $15.2 million for the same period of 2021. The year-over-year increase in net CapEx was primarily due to timing of equipment deliveries, as well as from lower net proceeds from the sale of used equipment compared to the first half of 2021. Our average age of the tractor fleet was approximately two years at the end of the second quarter, which was the same as at the end of the second quarter of 2021. As a reminder, we use a combination of loan financing agreement and leases to fund our tractor and trailer acquisitions. In terms of capital allocation going forward, we are focused on allocating capital projects that will drive the business forward in the coming quarters and deprioritizing other projects, which no longer have adequate return timeframes by either delaying or cancelling the respective project. Our priorities include continuing to fund our fleet as well as technology and utilization initiatives. Turning to net debt. At the end of the second quarter, net debt, which we define as long-term debt including current maturities less cash balances, was $418.5 million compared to $369.8 million at the end of 2021. We expect our leverage to decrease over time, primarily as our earnings grow but also from divestitures of non-core assets and a more disciplined overall capital allocation approach. Turning to liquidity. At the end of the second quarter, liquidity, which we define as cash plus availability under the company's revolving credit facility, was $155.7 million and we generated cash flow from operations of $20.8 million for the first half of the year, and $26.5 million in the second quarter. We use cash generated from operations together with our revolver to fund our day-to-day operations, while using separate loan financing agreement and lease arrangements to fund our fleet acquisitions. Turning to guidance. To assist with your models, we expect the following. For the full year, a low double digit percent blended increase in truckload average rate per mile, with OTR contract rate up approximately 15% for the full year and spot rates down approximately 10%. Sequential growth in overall truck count through 2022, primarily driven by Variant fleet growth, we expect to see modest sequential improvement and utilization in the coming quarters as we gain benefits from the additional structure and discipline that have been instituted into our fleet operations during the first half of the year. In addition, for the full year, we expect the following; an effective tax rate between 22% and 24% before any discrete items, interest expense of approximately $18 million, and net capital expenditures between $130 million and $150 million. With that, I will turn the call back to Eric Fuller for our outlook.
Eric Fuller: Thank you, Eric. In terms of the overall market, we are expecting overall end market demand to continue moderating primarily as inflation continues to pressure the consumer and comprise a growing portion of their discretionary income. In terms of capacity, we expect smaller carriers to exit the market through the second half of the year as spot market opportunities are less profitable, not only as a result of declining rates but also increased delivery-related costs, including higher fuel expense, equipment and maintenance costs. In addition, these market headwinds will likely discourage new entrants from entering the market. To the extent this dynamic plays out in the market, we would anticipate that it could cause used equipment prices to moderate as well. As for U.S. Xpress, we are focused on what we can control to drive continued sequential improvement in our financial results, namely continued overall fleet growth, which is benefiting from the softer market as more drivers are shifting back to the larger carriers, restoring Variant's key metrics to their previous levels, and continued focus on overall cost discipline, and allocating capital to projects which we believe will drive the business forward. Our focused efforts in these areas are key to demonstrating the operating leverage potential of our business model. And with that, operator, we are ready to take questions.
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Operator: Thank you very much, sir. Ladies and gentlemen, we have reached the end of the presentation. I will now hand it back to Mr. Eric Fuller for closing remarks.
Eric Fuller: Thank you, operator, and thank you everybody for attending today. We continue to be focused on improving our earnings on a sequential basis from here on out, and this is an area of focus and we will continue to execute. And we'll talk to you next quarter. Thank you.
Operator: Thank you, sir. Ladies and gentlemen, this concludes today's conference. Thank you for your participation. And you may now disconnect your lines.
