Q3 2019 Earnings Call
Greetings and welcome to the U.S. Express third quarter 2019 earnings Conference call.
At this time, all participants are they listen only mode.
Question and answer session will follow the formal presentation.
If anyone should require operator since started the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
I'd now like to turn the conference over to your host Brian bought back Senior Vice President corporate side. Its we'd go ahead with your conference or.
Thank you operator, and good morning, everyone. We appreciate your participation in our third quarter 2019 earnings call with me here today are airport, President and Chief Executive Officer, and Eric Peterson, Chief Financial Officer.
A reminder, a replay of this call will be available on Investor section of our website through November eight 2019.
We have also posted a supplemental presentation to accompany today's discussion on our website at Investor Dot U.S. Express Dot com.
Before him again, let me remind everyone that this call may contain certain statements that constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995 [laughter]. These include remarks about future expectations beliefs estimates plans and prospects.
Such statements are subject to a variety of risks uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by such statements.
Such risks and other factors are set forth in our 2018 10-K filed on March six 2019, we did not undertake any duty to update such forward looking statements.
Additionally, during today's call 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 considering isolation or as a substitute poor results prepared in accordance with U.S. GAAP.
A reconciliation of these non-GAAP measures to the most comparable GAAP measures can be found in our earnings release.
At this point I'll turn the call over at the airport.
Thank you, Brian and good morning.
On today's call our view, our third quarter results and provide an update on our strategic initiatives.
Third Peterson will then discuss our third quarter financial results in more detail.
I will then conclude with a comment on the market and our outlook before opening the call to your questions.
And you think about our results even more important as you consider our prospects.
As the trucking cycle turns we ask that you keep in mind the following thing.
First our dedicated business, which accounts for approximately 35% of our revenue.
Do you need to perform well through the third quarter. This is a steadier business with longer term contracts that have less exposure to business cycles. I'm pleased to report that we delivered another quarter of record performance as we achieved revenue per tractor per week in excess of $4000.
Second we grew our truckload fleet, approximately 5% versus the 2018 quarter, which we attribute to offering professional truck drivers a superior combination of training equipment miles respect and stability through the business cycle as well as a flight to quality amongst the overall driver population.
Third we continue to execute our internal initiatives and invest in digital technologies that are designed to create efficiencies lower cost and improve our offerings to our customers and professional truck drivers.
I don't agree with the improvement in are dedicated business, a larger OTI, our fleet and significant non contract exposure. We believe we are well positioned to capitalize on the eventual upswing and the freight market and take advantage of the operating leverage inherent in our revenue base.
Turning to our third quarter results, we continue to see excess tractor supply in the market, where overall freight volumes were relatively consistent with your go levels.
This supply demand imbalance not only pressured our revenue per mile, but also our ability to optimize the utilization of our fleet, particularly in the non contractor portions of our over the road in brokerage operations.
The quarter non contracted pricing in our over the road operations declined by approximately 35% from last year's record high levels.
While our spot exposure grew marginally from second quarter levels.
Together with a 3.1 million dollar decline and brokerage operating income the impact of market volatility overcame significantly better dedicated results and the positive impact of our internal initiatives.
As a reminder, our OTDR segment, which is approximately 60% of our asset base. Kuwait has historically seen approximately 80% of its freight weve under contract grades were 20% moving under non contracted or spot rate.
You're in and you're out the vast majority of U.S. expresses spot freight is made up an incremental loads or specific projects from our customers and is not necessarily comparable to the spot market information reported about various services such as the D.A.T.
As we discussed in our second quarter call excess supply in the market combined with the relocation the capacity for my clothes, Mexico operations drove our spot exposure to more than 25% of or over the road Myles.
During the third quarter, our exposure to spot rates marginally increased sequentially, which was largely the result of the continued soft market trends.
Additionally, pricing on a spot market continued to be under unprecedented headwinds as a result of aggressive and unsustainable pressure created by new digital entrance into market.
Looking at are over the road results in more detail our OTI our contract rates were up approximately 2.6% and the third quarter on a year over year basis.
However, our spot rates were down approximately 35% year over year.
Would you put them out an approximate 20% discount the contract.
Our average spot premium has been more than 20% higher than our contract rates over the last 10 years and our spot rates have not been below contract for any of those years.
As we've said and based on our history. We believe the market conditions experienced this year are not representative of a typical market regardless the cycle and we will continue to target approximately 20% spot exposure in our over the road operations.
As a result average revenue per tractor per week for the quarter declined 12.1% compared with a third quarter 2018 enter over the road operations. This was the result of a 7.8% decrease in average revenue miles per tractor per week combined with a 4.7.
One person that decrease and rate per mile.
Turning to our dedicated division average revenue per tractor per week, excluding fuel surcharges increased 5.8% and third quarter 2019, as compared to the year ago quarter.
The average revenue per tractor per week achieved in the third quarter 2019 of over $4000 remained in record territory for the second quarter in a row.
The increase was primarily the result of a 5.6% increase and the division revenue per mile.
As we've discussed on prior calls we've significantly improve the execution in the dedicated division as we managed accounts to achieve a more attractive combination of rate and utilization.
We've been working on this initiative for over a year and are very encouraged with the result, because we've experienced four quarters Oh consecutive improvement and believe there is opportunity for further gains.
Brokerage segment revenue decreased to $46 million that third quarter 2019.
As compared to 65.1 million in the third quarter 2018.
On fewer loads and decreased revenue per load.
We incurred an operating loss of $100000, that's compared to operating income of $3 million and the year ago quarter.
This is primarily the result of a $260 a drop in revenue per load, partially offset by a 205 dollar drop and cost per load.
I would now like to spend a few minutes updating you on our strategic initiatives.
Many of which center on utilizing technology to improve our processes accelerate the velocity of our business improve our customers and driver satisfaction and lower costs.
To further efforts, we recruited a chief information officer at the beginning of 2019 with a mandate to digitize their systems and our business. This first project has been our frictionless order initiative with an early priority on integrating our legacy systems and utilizing existing data to reduce many of the.
Manual decisions that are made on a daily basis.
Let me describe this first initiative to give you a better idea of the opportunity as we work do all areas of the company.
If you look at an order there typically 15 touch points from the time the customer books, the order to the time that it's bill.
These touch points require manual work and at times decisions by our drivers and back office personnel.
This is not only time consuming but also opens the door to both data entry errors and sub optimal decisions.
Our goal is to fully automate most touch points and then optimized the.
The end result will be a significant reduction in the level of work required by our drivers while in the cap, which should allow them to spend more time actually moving freight.
It will also make our office employees jobs more efficient by removing routine work.
As an example, let's take a look at automatic arrivals when a driver would arrive at a shipper he would need to submit an arrival MACRA, which had to be filled the out by the driver. The driver would have to input what trailer. They had to go waiting and other information, which is both time consuming and again opening the door for data entry air.
What we need to do is consolidate the information into one system. So we can auto populate all these items. So the driver doesn't have to input any information.
The problem isn't that we do not have the data that we did not have the data aggregated into one system, which our team is working on and making very good progress. In fact, we have eliminated approximately 4 million touches annualized with line of sight to another million over the next 30 days.
Another important initiative with potentially far reaching impact has been our investment in our redevelop driver training facilities. The first of which was opened a tunnel held Georgia in February .
This program provides continuous learning opportunities for both new and experienced drivers with the goal of providing our drivers with the knowledge skills and abilities necessary for successful career.
It's still early in its rollout we are seeing positive results from those drivers of completed this training.
We are optimistic that overtime. This trainee will improve our driver satisfaction and retention, while also reducing their accident rate and the company's insurance and claims expense.
Given the positive results that we are saying we opened a second facility in July and expect to open a third facility in the next few months.
Our plan is to continue to upgrade their training facilities across the country.
As an additional safety measure we are moving effective immediately to hair follicle testing for all of our drivers which is up from 50% of our drivers that we have been testing through most of 2019.
I would now let's turn the call over to Air Peterson for review of our financial results.
Thank you Eric and good morning, operating revenue for the 2019 third quarter was $428.5 million, a decrease of $31.7 million as compared to the year ago quarter. Excluding the revenue from the company's Mexico operations, which as a reminder were discontinued in January of <unk>.
This year operating revenue for the third quarter decreased $18.3 million. The main driver with a $19 million decrease and brokerage revenue.
And our truckload segment, we had 5.4% more trucks, producing 4.7% less revenue per truck at success in recruiting and retention came during a period of negative market conditions.
Operating income for the third quarter of 2019 was $3.3 million compared to the $22.9 million achieved in the prior year quarter.
We delivered a 99.2% operating ratio for the 2019 third quarter, which has an increase relative to the 95% operating ratio that we reported in a year ago quarter, our profitability declined largely as a result at the challenging market conditions, which Eric has outlined.
Our over the road fleet saw revenue production decreased 12.1% on a per unit basis to $3479 and the current quarter from $3957, an average revenue per tractor per week and the third quarter 2018.
This productivity degradation was partially offset by progress made in our dedicated fleet, which saw per unit revenue production increased 5.8% to 4000 in $11. An average revenue per tractor per week. In addition, and very similar to the second quarter driver pay increased approximately six cents per mile since.
Last year's quarter, as a result of wage inflation and lower utilization.
Net loss for the third quarter of 2019 was $1.4 million, which compares to net income of $16.1 million in the prior year quarter loss per diluted share in the third quarter of 2019 was three cents compared to earnings per diluted share up 33 set in the prior year quarter.
As our tractor and trailer delivery and trade schedules have firmed up we've narrowed our expectations for net capital expenditures for the year to be between 101 hundred $15 million compared to our previous guidance of $110 million to $130 million.
We will continue to manage our tractors to an approximate 475000 mile replacement cycle.
We ended the third quarter with $434.2 million of net debt and had $119.2 million of cash and availability under our revolving credit facility.
Our leverage ratio as calculated under our credit agreement with 2.7 to one which remains well within the credit agreement requirement and our comfort zone for managing the business based on our historical ability to manage at much higher leverage levels.
With our strategy as stated during our IPO, we intend to de lever the organization overtime towards one times. However, we expect progress will be incremental and will vary with market conditions internal initiatives equipment financing decisions amongst other factors. We believe we are currently and trough.
Market conditions and would expect our leverage to peak in the first half of 2020 before beginning to improve thereafter.
Interest expense for the third quarter was $5.5 million and we continue to expect interest expense to be approximately $22.0 million for the full year 2019.
With that I'd like to turn the call back to Eric polar for concluding remarks.
Thank you Eric.
Turning to the market and our outlook. The freight environment has remained challenging as we entered the fourth quarter due to pressure from new capacity added to play 2018 strong spot market and new digital entrance would transactional customer relationships.
We expect the fourth quarter 2019 to exhibit a continuation of negative market conditions experienced through October .
Our prior guidance of a full year 2019, adjusted operating ratio of 95.5%. The 97.5% was predicated on an assumption a flat or improving market conditions versus the conditions in June and July .
Instead freight rates declined and peak season freight has been slow to developed.
To provide context, if the current market environment experienced through October persist through year end.
Our adjusted operating ratio for the full year would approximate 98.5%.
In the longer term, we remain positive on the outlook for our industry and use express is given the significant capacity, we will be able to deploy against the next freight upcycle and the growing rate of capacity exit from industry.
We believe the recent combination of fall in new truck orders growing backlog of used trucks for cell regulatory constraints and skyrocketing insurance premiums for smaller carriers all indicate the early stages a capacity exiting the market.
Additionally, the drug and alcohol clearinghouse is expected to go live in January which we believe will be a major event for the industry and further squeezed capacity out of the market over time.
To conclude we continue to have significant opportunity to improve our operations in our profitability through the cycle as we execute upon our initiatives I remain confident in our team our strategy and the outlook for our business.
Thank you again for your time today.
Operator, please open the call for questions.
Thank you at this time, we will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
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One moment, please while we pull for questions.
Okay.
Your first question comes from the line of Jack Atkins Stephens. Please proceed with your question.
Hey, guys. Good morning, Thanks, so much for taking my questions. Good morning Orange.
So I guess, let me just start off with kind of thinking through Eric Your your outlook commentary about the full year.
You know with approximately an 80 80 excuse me approximately 98 five or for the for the full year that would that would imply something.
North of 100, maybe a 101 wantto too for the for the fourth quarter, which yeah theres. Some sequential deterioration. There can you talk about a is that the right way to think about it be.
What's what's driving that.
Deterioration profitabilities sequentially into the fourth quarter I know that most folks aren't seeing much of a peak, but what we're hearing about at least a little bit of a peak out there I can you just talk about that in and what can you do to mitigate some some cost pressure as we head into the first half of next year.
Yes, Thanks, Jack I think what we're trying to say there is that if market conditions stay consistent exiting the third quarter and starting to fourth quarter that'd be more in that mid we did a 99 two for the third quarter that'd be a comparable result for the for the fourth quarter, which would approximate a 98 five on the year yes.
Our as what we can do to mitigate that our initiatives that we're looking for you over the longer term primarily.
Looking at our insurance and claims expense, we believe we are making.
Progress there and you have an opportunity on that line item those are more longer term initiatives, where the progress it's going to come over time and not necessarily be immediate shown in the number from a quarter to quarter. I think also on the cost side, what we're doing all the digitization of the platform Eric fall.
As mentioned earlier Thats going to continue to take friction out of the process from order to cash of our load, which will ultimately those become more efficient that's going to take cost out of the organization as well once again thats a longer term initiative, where I can't show you hockey stick type results from quarter to quarter, but it's something.
I am seeing.
And the number you I think the biggest thing is that deterioration in the market conditions in our exposure to the spot market primarily in our over the road fleet, which has been the the headwinds on our current earnings which we believe to be temporary in nature based off the private prior cycles that we've managed through.
Okay, Okay, Gotcha, gotcha, but I mean, I guess just to make sure I understand Eric the guidance or that the outlook commentary I guess to be more specific correctly.
You know the 98 five does that assume any sort of seasonal uptick you know into the back half back.
A couple of months of a year or does that assume that.
The September October levels, just persist on through I, just I'm, just trying to figure out what's.
What's assumed in that 98, five yes, you're 95 number yes, yes, yes, if we go back in September we saw a little bit of life in the market.
I would call it kind of seasonal life, starting to feel a little optimistic about where the market was headed.
October Unfortunately felt a lot weaker than what we would like a normal October to feel.
So I think that probably put a little bit more cautious approach to our outlook.
I still see as you mentioned earlier, we still see that there is going to be a peak I think it's a very muted peak and I don't think it's going to be anything like we've seen probably the last couple of years, but I do think that there are some peak opportunities and we are seeing some some projects and pop ups and things like that so I think.
Really the do it the guidance was based on the fact that if things did not see any type of improvement as we go into November and December .
Unfortunately, this point I would I'll tell you, we're not seeing improvement.
That's worth noting.
But we still have some cautious optimism that with some of our dialogue with our customers that we will see a little bit of pickup relative to the peak season, and so thats kind of where that's the reason, we're being a little cautious and how we approach this guidance for the fourth quarter. Okay. Got you are one one last one it.
Ill turn it over but.
When we look at the fleet sequentially.
With the the OTI are.
Business. It was up 174 trucks on average Twoq to Threeq you.
Can you talk about the fleet plans there.
But you did it why not maybe looked up to shrink that fleet or keep it stable why why why are we growing that what sequentially in such a challenging market because that would go would guess that the OTI. Our business is probably the consolidated company is a 99 to OTDR is over 100 Yep Yep.
Yes, yes, admittedly the OTDR group is really giving us a lot of headwinds at this point, but if we go back and look really over the last 20 years and I would even throw 2008 2009 into this conversation.
Typically only see a few quarters of of rates that were spot rates are running countered to contract rates and we're now running three to four quarters, where we've been in that scenario. So we believe that the upside opportunities. If we look over a long period of time are far greater.
So with larger truck count as opposed to.
Keep in our truck count.
Reduced and so from our approach we think it's prudent when there is opportunity to grow truck count to do so.
As we think coming out of this cycle, there will be a lot of upside opportunity for us.
Okay got you add one other thing and one other thing Jack I did want to I mentioned also is dedicated we also so we saw some grew a good bit of growth and dedicated but we also anticipate.
Additional growth in dedicated over the next couple of months, we do have a number of accounts that we have already sold that are going and over the next 90 days that will allow us to continue to grow our dedicated so we said we feel very optimistic about dedicated opportunities and so our.
Ability to grow with it over the road and then shift those drivers and drugs into dedicated also leads us to go ahead and grow that fleet now okay. Gotcha Gotcha. Thanks again for the time this morning guys.
Right.
Your next question comes from the line of Scott Group with Wolfe Research. Please proceed with your question.
Hey, Thanks morning, guys. So more to so I understood. Just so I understand that last point are are you going to take the trucks than out over the road and.
Put them into dedicated as these contracts began.
We would now now if there is an opportunity to grow both with our belief that the market has troughed in that there will the market will turn.
In a relatively due time, we would would take the opportunity to grow both but.
Our first intention would be to move those drivers and those assets out of over the road and into dedicated.
And what it so what does this mean for Capex and I understand this year, but what's the preliminary thoughts on.
Cash Capex for next year.
Yes, yes, we're going to stick to the equipment cycle started 475000, and we're still going through.
What's going to be leased and what's going to be around but I think obviously when you're going to look at our earnings were going to be prudent and to the extent, we have more cash earnings and better results, you'll see a higher percentage of that will be with debt financing compared to leases.
Okay, and then I just wanted to clarify what you guys are saying about the fourth quarter to so we all have the right expectations. So are you, saying I.
I guess.
Peter you made a comment that fourth quarter or should be similar to third quarter.
That wouldn't get you to a 98 five just so I'm not sure she will be getting to 98 five for the or should we be modeling fourth quarter or similar third I just want to make sure we understand what your.
Yes.
In approximately a 98 five so I meant to the extent that you're in that mid not similar results in the fourth quarter compared to the third that's going to approximate 98, five I think to your point I might be slightly lower.
Okay and then.
The rate per mile and over the road down eight and utilization down five and third how are you thinking about those two metrics in the fourth.
Yes, I mean.
No we still anticipate some peak season rates that will boost that up a little bit, but I think at this point, we probably anticipate similar results.
Okay.
And then just.
Lastly, depreciation took a bit of a step up I'm guessing is that more just on.
Losses on sales.
Can you give us number on that and how we should think about.
Residuals lost some sales going forward.
Yes, I would say that you have put in some equipment that we took out.
During the third quarter, there were some losses, there that really drove that depreciation up by a couple of million dollars, but on a go forward basis, Yes, I would expect that number to be lower than what we experienced in the third.
Do you think we should start to move depreciation lower again, starting in the fourth.
Slightly.
Okay, Alright, thank you guys.
Thank you.
Your next question comes from the line of Ravi Shanker with Morgan Stanley . Please proceed with your question.
Oh thanks.
And.
Just couple of follow ups here one is.
Just going off in response to the first question.
I am still I'm so sorry.
Little bit of in time understanding why the rights strategy here as kind of staying where you are and waiting for the market to target.
Rather than kind of trying to go where the market is where.
It's seems to be something that that's not what appeals are doing I understand what youre, saying if the market comes back hard you're going to be in a great place, which you will be by the market may not come back for a while just given them earlier and right now and so what does that scenario looks like.
Right, Yes. So I mean, we are working diligently to move our over the road assets either into dedicated opportunities or into consistent contract freight that will give us more consistency both on the utilization side and on the right side.
And so we believe we can accomplish that while seeing some truck count growth.
Again.
Understand the approach I would say that our network.
And we've run numerous scenarios is our network is not built aware if we work to shrink the fleet that we could improve our profitability through shrinking.
And part of it is an infrastructure issue and so if we look at our overall fixed costs from our infrastructure, putting more revenue and more miles over that infrastructure is a better model for us.
And so for US, we believe that with Theres opportunity to grow truck count that it's prudent to do so.
Okay.
Just a follow up to that is.
I hear what you're saying on repositioning the truck fleet and such but are there more.
Decisive cost actions that you guys can take.
I mean, you're doing a lot of good things on deck, we just grade but but.
Any other big Big cost items, I know you spoke about the long term cost initiatives anything in the short term, we can do differently.
Yes, we are we.
We have taken down so if you look at I think one of the bright spots for us as we look at our.
Our overhead and our SDMA within our operations.
Group and though the truck count the truckload group, though the truck count has grown we've been able to maintain that headcount.
So we're not having to increase headcount in order to handle the additional drugs. So I think thats significant.
And that will lead.
Our results down the road.
We are all continue into focus on our insurance cost that is a major area, that's getting a ton of attention within the company and we've seen some positive results in that area. In fact, we havent had the level of catastrophic accidents that maybe we had had in the past and so we believe that that will continue spec.
Finally, as we move into hair follicle testing and have a better quality driver that's coming in the door. So we feel really optimistic there and then the frictionless order process that we're really focused around automation and optimization.
I believe that this next two quarters is where we're really going to start to see the impact.
We've been working on it for about three quarters now and a lot of it was what I would call kind of.
Rudimentary stuff just try and.
Maybe do some things that maybe we did further hadn't done in the past now we're really focused around some things that I think will really start to bear some significant results in our financials.
Very good thanks, guys.
Your next question comes from online David Ross with Stifel. Please proceed with your question.
Good morning, gentlemen.
Good morning, Lorna, Eric I wanted to talk a lot of a drivers are you seeing any pressure this year.
No we're not.
This year.
With the driver situation and you know I look at it as a couple of things I mean, obviously you know we're focused around change and things within the company to make us easier to deal with that frictionless piece I think is really starting to help us get a little bit more traction from a driver perspective, particularly in recruiting.
But also.
What we're seeing in the market broadly is more of what I'd call it little bit of a flight to quality as.
The market continues to feel we then you'd typically see drivers move to the larger carriers, where there's more stability and we're seeing that as well. So that we're not filled in any pressure to increase wages in order to bring drivers and.
And with the extra trucks and the decline in utilization is it just hard to get them the Myles.
Because their pay in theory is down year over year now.
So if we look at where we were if we were to go back and look at our over the road group two quarters ago in roughly the same operating environment. Our utilization was comparable so we do not believe that we're seeing a significant degradation or.
Asian related to truck count growth.
We think that and again because of the irregular route network.
It is difficult to net debt be affected on one way or the other so we are able to continue to bring in revenue that's getting the same amount of utilization. So if you look at on a truck backdrop basis I don't think that the drivers necessarily are making significantly less.
And in fact, I'd say, probably probably around the same.
And so that hasn't affected that and we don't think that will affect us going forward either.
And then on the hair follicle testing.
Do you.
Anticipate any material incremental cost from that before you get any benefit.
Yes, I mean.
Minimal I mean, obviously right now the government still requires us to do both hair follicle in your analysis, which is unfortunate and we are still try and we are a part of.
A request with a number of other carriers to get that.
Lifted so we can do just hair follicle, but at this point, but I think those costs are not significant outside of that we believe because we are a little bit later than some of the other peers, who saw significant degradation in their truck count when they went to air follicle.
We believe that we won't see as significant of a reduction if not if if a reduction at all and our.
Truck count relative to hair follicle and also keep in mind, we've had about half of our drivers hair follicle test tested up to this point. So it's not like one of these other carriers that went from zero to 102 or three years ago and saw a huge hit we believe that we can maintain our truck count, but I will say that.
Part of our strategy on boosting up our truck count was anticipation of hair follicle testing so.
If we do see some slight degradation in our recruiting glasses.
We're doing it with a higher number of trucks versus being at a lower number and then see a degradation from there and we thought that was a better strategy as well.
Excellent. Thank you.
Yeah.
Your next question comes from the line of Brian Ossenbeck with.
JP Morgan. Please proceed with your question.
Okay.
Hey, good morning, Thanks for taking the questions Martin.
Just to.
Cap off that last last train of thought it sounds like the over the road fleet Youve.
Size, maybe a little bit.
In terms of putting more.
Dedicated tractors from there on the road in the future obviously, you've got to view on the cycle.
Two plants that as well and then maybe a little bit as a headwind from hair follicle testing going 100%, depending on how that plays out.
Could you if there's any other buckets in their please add to them, but could you kind of rank order those in terms of the size. How much dedicated is growing for example is that the biggest factor here or is it really more of your your view on the cycle in wanting to be in every place at the right.
Yes, I mean look our long term strategy is still to grow dedicated and have a higher concentration to dedicated we're still running roughly that 35 ish percent, we'd like to see a be closer to 50. So we are focused around growth there.
Our line of sight of growth within dedicated is probably we can see anywhere from 5% to 10% growth over the next quarter quarter and a half.
Within that group and we're continuing to be aggressive out in the market to try to bring other opportunities in.
Within dedicated because I think thats going to be very impactful, regardless of whether that where the cycle goes right.
The hair follicle testing is something that will give us a benefit longer term I think that once you have a higher quality a driver for a period of time, then you start to see less accidents less catastrophic accidents definitely you usually see less turnover you see.
Better service. So we think at all really Interplays, but you know that one of those deals where we would get an impact they want absolutely not I look at that probably is more of a longer tail and the impact.
But.
When it was it relates to cycle.
We still long term want to focus on building that dedicated up to say, 50%. But then also we are still committed long term to keeping our spot within that 10% with so so trying to get back to that level on a total revenue basis and stay there regardless of cycles are long term strategy.
Okay. So when you talk about dedicated going to 50% over overtime and be more more aggressive perhaps in the near term for the pipeline can you just put some context around that in terms of what else you're looking to grow how big the pipeline is here relative to last quarter. So.
Then if theres any other.
Verticals geographies.
In markets that you're looking at in terms of other growth opportunities.
Yes, I mean, so dedicated opportunities I would say a lot of opportunities with in our current customer base I think the interesting thing last year was there was a number of customers that opened up their carrier base within dedicated.
They seem to have a retracted in large part that strategy and gone back to trying to do a lot with a few.
And those that view that kind of understand their business and again can perform at a high level.
I think that benefits us because of our large presence within dedicated.
So we think we can see some decent growth within the current customer base.
Theres also some opportunity for us in some other verticals within dedicated specific more towards.
In a different types of products not like we're I'm, not saying, we're going into last mile or does that but into other types of product whether it be maybe.
Different types of electronics or.
Consumer products and things like that we've been very heavy.
Discount retail and.
Grocery up to this point, we can we will continue to prioritize that but I think there's other opportunities. So.
I would say pipeline wise.
Interesting enough. It definitely is the pipeline from an overall opportunity standpoint is down significantly.
But like I said, what we're seeing as better opportunity because there's less carriers in the in those opportunities as well and so from a growth perspective, I think we Phil just as bullish now and dedicated as we probably did 12 months ago.
Okay. Thanks for the update there maybe one for.
Peter since you can just give us.
Context on raising the leverage ratios for their credit facility. Now you gave some some color earlier about where you think that the ratio will top out in the first half a year. Thank you got some some headroom already but you took that up a little bit.
Further at the end of September so.
Your sort of more context as to why you felt that was that was needed to is an abundance of caution and maybe how close you think youre going to be to the new ceiling.
Given your guidance for the first half topping out thank you.
Yeah. Thanks to everyone. Just a reminder, we did amend our credit facility.
Yeah, Yeah, we'd like that we have great financial partners at U.S. Express on our on our term loan and we're continuing we're continually monitoring the market conditions and as the market conditions have deteriorated. We thought it was prudent to go ahead and adjust the financial covenant requirement in that facility regarding where that could go and.
Where that could peak in the second half.
In the second quarter of 2020, as I mentioned, that's really going to depend on the market conditions and so thats something that we're going to monitor closely.
And keep our eye on and yes, electro mind, we'd never been in breach of the financial covenant because of that because of our strategy with our financial partners to try and stay ahead of that the our strategy really hasn't changed since the IPO, we'd like to marks the organization to one times Levered organization, but we realize right now that's that's longer.
Our term and that's going to depend on the market conditions and how successful we are in our initiatives, but obviously the market conditions are going to play a large part of that so we'll continue down that path and where that number peaks I was going to say is largely dependent on where the market is going to be and that's something that I don't think anybody has a perfect lineups.
Two right now.
Hi, guys. Thanks for the time.
Your next question comes from line, Ken Hoexter with Bank of America Merrill Lynch. Please proceed with your question.
Hey, good morning, Eric Eric.
I guess after listening so I'm still confused a little bit on on the why you're increasing the tractors. It so much in the quarter I get that you want to be private, but I guess going back to ravi's comment on that if the conditions continue a bit longer why not maybe react to the market.
And then I guess, just a follow up on that.
If you're expanding the fleet and you're anticipating that theres going to be some negative reaction from from the hair follicle testing, even though you're going from 50% to 100.
Why would you expand the fleet in face of what would be at a decline in in driver assets why wouldn't you want to be.
Reducing the fleet and in preparation for losing some capacity there.
Yes, so I think a couple of things one we do have business in dedicated that has already sold.
And just hasn't started yet as we onboarded those opportunities we will move those trucks out of.
Over the road.
We would where were building dedicated opportunities in a lot of these opportunities.
Can take a little while to staff up so by going ahead and staffing early will allow us to go ahead and be at full capacity quicker than probably typically we would anticipate and so we view that as a positive with the opportunities that we have in the pipeline.
So I think Thats, one piece I think the other piece.
Eric can I just jump in there because what I guess I mean, we've heard so many questions on this when you have other peers that are operating at.
15 percentage points difference I mean, if you were at that point I guess, you could say, okay, I can expand because it makes sense, but at a 99% to 100% I'll our.
I mean, if if you've got the risk that you've got more of the spot pressure and is pressuring your margins why not decrease your exposure to that market and move I guess I get that you want to be prepared but theres always say ability to add capacity if if the market calls for it when when things are changing.
Yes, I mean like I said with a dedicated piece, it's really about having the capacity.
Is the these dedicated opportunities are onboarding over the next 90 days and so being able to shift trucks out, but I think the other big piece is this hair follicle testing as it goes if you go back and look historically at the our peers I went to air Buckle digesting some sole as much of a drop as five.
Some of its highest 10% and their truck count for a period of the quarters. After they went to air buckle testing. So if we were to reduce our fleet and then go to hair follicle testing and take a huge here then that would be a significant hit what to our overall revenue and we believe our cost infrastructure with.
Suffer and so by being able to boost our truck count now in anticipation and try to mitigate that loss potential revenue and loss of coverage of our fixed cost infrastructure. We believe is the right strategy.
We go to air pocket.
Well I mean, thats, even more confusing to me because then you're stuck with even more tractors, if you're losing drivers if you're expanding your fleet as opposed to.
A few were tractors at risk and with a 99, how are you figure you'd want to.
Trying to minimize that no yes, so so two different situations right. So what.
The when we look at the assets, we look the physical truck assets, we have very little concerned that if we saw a degradation that we could reduce the fleet that is not the problem.
With our trades and with the number of trades at constantly come up.
We could we could we can pull back some additional orders and the additional new tractors that we're bringing on and naturally bring that truck count down. So it's not an asset issue. It's a driver issue, so allowing us to have the drivers.
Is the reason that we would do that the asset play is very fairly easy to manage and we can reduce the number of tractors.
As as its actually occurring but just reducing the number of trucks, we take or by increasing the number of trades that we put out into the market.
Okay. So is that.
Kind of timing any leases or operating leases or capex going into the end of the or is there kind of a timing into peak season that we should look that you could adjust at a faster speed.
Yes, you have really just to add to that last answer from Eric If we look at the financial impact of this incremental truck count I think a point that Eric made earlier on the call as it relates to SDMA and our overhead is that we were able to add this truck count without increasing our fixed cost. So the incremental trucks are actually occur.
Creative to our earnings even in the challenging market with it.
Primarily two thirds variable one third fixed.
Cost infrastructure, and so I would say that in a down market, where the the volumes and the rates are suffering a little over the road that it does incremental trucks helped offset some of those headwinds and actually become a tailwind and also if you look at our our strategy work, we're looking law.
And we understand where we are in the market right now, but if you look historically on the cycles on how long the rates in the spot market have stayed lower than the contract. We believe if we follow historical cycles that we should be coming out of this in the next couple of quarters.
Okay.
Hi, just maybe switching to another topic for a quick second youve.
You kind of highlighted in the spot that given the thank Eric you mentioned early on the brokerage exposure for the spot really pressured rates.
Is there something you can do to work your spot exposure away from the brokerage market maybe on your own salesforce on on current customers that anything you can do to decrease that exposure I get not not necessarily in the spot rate, but but maybe on your exposure to the brokerage segment.
Yes, so and we look at spot it's not brokerage. So spot is how we define spot would be anything we don't have a long term contract with a spot could come from one of our major direct cut our one of our major customers added just not have a rate and the reason we call.
All that spot is because thats, usually predicated on the supply demand at that specific time in which we quote that order.
Most of our spot as we define it does not come from brokerage.
Just to clarify but.
Yes, we are working toward getting more contractor business.
We've made over the last nine months, we've made some pretty big changes or 12 months within our sales group.
And I think it was about 12 or 14 months ago, we made a change within our chief marketing officer, and so that's that's really start and shows.
Significant improvement we also opened up an inside sales group that is.
On the phones going after smaller customers something that you as expressed as not traditionally done which is focused on that tail of small small customers people that may have a 10 or $20 million spend we've typically focused on the kind of mega shippers and so now we've built a group around trying to.
Bring in smaller shippers and hope to fill gaps we're seeing some pretty significant wins that are just launched within the last 90 days. So they wouldn't be really in this last quarter's numbers, but we're starting to see some some wins from that group and I think over the next couple of quarters, we're going to be able to fill more of the trucks that are going out into spot with some key.
Consistent contract business do that program.
Just so when you said the pricing in the spot was under unprecedented headwinds created by new digital entrance.
Just want to clarify you're just talking about the entire spot market pricing not just your exposure to these digital entrant, yes, I mean, if you look at the digital.
The digital brokers that are out there they are shoveled rates through floor and it is unsustainable.
They they are taken negative gross margins to try to grab market share.
And they apparently they have unlimited cash you don't have to make any money and so these guys are very aggressive in the market and they are creating this situation in my opinion I think without those type of brokers in the market you would not have this market behaving like it does because I think.
If you look at the normal supply demand situation, it's not as bad as the market makes it look because of how these digital brokers are aggressively trying to buy market share so with that comment, though and just looking at what's happened with.
JV on noting that they're willing to spend money and foods lose operating income for the next 12 to 18 months I think they said you've got over freight convoy Amazon all coming out and staying around but yet you're saying, we expect the market or prepping ourselves for a rebound very shortly.
Wouldn't you in light of the unlimited capital that you just mentioned.
Believe that you should be cutting the fleet to prepare for maybe longer cycle on the on the market pressure there.
Yes, I think you've got you got two situations. Yes, you add these digital brokers that are that are pushing rates. The what we would call unprecedented levels, but on the flip side. They are also pushing out their own capacity.
Because of the rates that they are taking in the market. They are pushing these small marginal carriers out of business in a quicker fashion. Then we believe we've seen in a long time as well and so I think that even though they are aggressive in the market from a price perspective, I think there are also really hurting themselves in the back end because there.
Kill and they're all capacity. So we still believe with everything that we're seeing in the market that this thing will self correct in a relatively short period of time.
And I think that scenario it will probably speed that correction and then at some point I mean, you look at it you also see.
I don't think this in less supply of cash and never having to make money is going to somebody going to last forever and I think this whole we work thing obviously, what's kind of the beginning of that and I think we're starting to see that from venture capital and from private equity is this the capacity to just never make a profit I think that that world has changed.
A little bit.
Hey, guys. Appreciate the time, thank you very much.
Thanks, Ken.
Ladies and gentlemen, we have reached the end of the question and answer session and I'd like to turn the call back over to management for closing remarks.
Great all right.
I appreciate everybody on the call one thing I do want to that didn't come up on the call I just want to mention as we go into 2020.
We do have the drug and alcohol clearing house that goes into effect in January we still believe that is going to have as significant impact.
And and in fact, I would say much larger impact than what made some of you may have anticipated.
And so we think thats going to have.
Probably going to push this market towards.
Back in favorable position for the asset guys and quicker fashion then than may be would normally occur because of this regulatory situation. So there's going to bring that up but.
But anyway I appreciate everything and well talk to you guys in a few months. Thank you.
This does conclude todays conference you may disconnect. Your lines at this time. Thank you for your participation.