Q4 2019 Earnings Call
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Good morning, ladies and gentlemen, and welcome to the U.S. Express fourth quarter 2019 earnings conference call. During today's presentation. All parties will be an I listen only mode. Following the presentation. The conference will be open for questions with instructions to follow at that time.
A reminder, this.
Conference is being recorded.
Now, let's turn the conference call over to Mr., Brian bought back Senior Vice President Corporate Finance that finance excuse me. Please go ahead. Thank you operator and good morning, everyone. We appreciate your participation in our fourth quarter 2019 earnings call with me here today are airport President and Chief.
Second dogs or an air Peterson Chief Financial Officer.
Mind or a replay of this call will be available only investor section of our website through February 13 2020.
We've also posted supplemental presentation to accompany today's discussion on our website at Investor Dot U.S. expressed dotcom.
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Before we begin 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.
These include remarks about future expectations beliefs.
So my plans and prospects.
Such statements are subject to a variety of risks uncertainties.
These and other factors that could cause actual results to differ materially from as indicated or implied by such statements.
Such risks and other factors are set forth in our 2018 10-K filed on March six 2019.
Our other FCC violence, and our press releases, we do not take 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 considered in isolation or as a substitute results prepared in accordance with U.S. gap.
Reconciliation of these non-GAAP measures to the most comparable GAAP measures can be found in our earnings.
And shortly.
At this point I'll turn the call over at the airport.
Thank you Brian good morning.
Today's call our view, our fourth quarter results and provide an update on our strategic initiatives are Peterson will then discuss our fourth quarter financial results in more detail.
I will then discuss the market.
Our outlook before opening the call your question.
I've spoken about on prior calls our industry has been severely impacted by increased capacity relative to volumes that have driven spot rates down to levels, we haven't seen in over 10 years.
Not to mention the disruption created by trade tensions and new digital brokers operating at unsustainable nugget.
The margins.
This environment <unk> continue to pressure spot pricing and our over the road results through the fourth quarter.
Last year, we discussed a wide range of initiatives that we had implemented such adds a redesign fleet renewal and maintenance program and asset optimization program a low.
Planning initiative and a fleet management program.
All of which are critical to improving our operations in closing the profitability gap with our peer group overtime.
These initiatives set the foundation for further improvement in the future as we continue to advance our company.
That said, we have much left to accomplish.
In order to achieve our goal and I'm very disappointed with our results to adapt and succeed in an environment like we experienced in 2019, we must continue to execute on our current initiatives. While also finding new ways to operate and improve our efficiency, which is the focus of our executive management team in 2020.
There are four themes that I would like you to keep in mind as we review our results. This morning.
First our dedicated business, which accounts for more than 40% of our available tractors continued to perform well through the fourth quarter.
Initiatives implemented and late 2018 delivered record.
Adults as we achieved revenue per tractor per week in excess of $4000 again this quarter.
Dedicated segment is a steadier business and an area that we're focused on growing.
Second we continue to manage the challenging market environment that has impacted our over the road division.
The severe decline spot rates combined with spot exposure in excess of our approximate 20% target of total over the road miles or approximately 10% target a total miles has impacted our profitability and weighed on our financial results.
Third we remain an advocate for increased safety.
The industry and they have a minute hair follicle testing for all of her drivers in the fourth quarter.
We remain committed to increasing the safety of our fleet and our roads, which we also believe will positively impact our insurance and claims expense over time.
Finally, we continue to implement our internal initiatives and invest in digital.
Technologies that are designed to create efficiencies lower costs and improve our offerings to our customers and professional truck drivers <unk>.
Our results this quarter are drawing attention away from the progress that we have achieved and we remain optimistic that they will become more evident in our operational results through.
20.
Turning to our fourth quarter results are over the road segment experienced an approximate 30% year over year decline in spot rates, given a persistent oversupply of tractors relative to market demand.
The supply demand imbalance pressure average revenue per mile down by seven point.
3% as compared to the 2018 fourth quarter.
While our average revenue miles per tractor, we decreased by 3.2%.
Our contract rate also modestly declined down 1.3% year over year.
This is largely due to freight mix related to.
The addition of incremental contract business as we work to reduce our exposure to the spot market, which continues to be a priority of our team.
And our dedicated division.
Revenue per tried to per week, excluding fuel surcharges increased 4.2 person in the fourth quarter 2019, that's compared to the year ago quarter.
The average revenue per tractor per week achieved in the fourth quarter of 2019 of over $4000 remained in record territory for the third quarter in a row.
The increase was primarily the result of a 5.1 person an increase in the division's revenue per mile.
As we've discussed on prior calls we have significantly.
Improve the execution and the dedicated division as we manage accounts achieving more attractive combination of rate utilization.
We've been working on this initiative for over a year and are very encouraged with the results as we have experienced four quarters of consecutive improvement unbelievers opportunity for further gains.
As we look forward our goal is to organically grow our dedicated division to more than 50% of total company tractors.
The dedicated divisions customers are generally on three to five year contracts with guaranteed volumes rates and price escalators built in.
This provides more stability through economic cycles.
We will help reduce the volatility in our business like what we experienced through 2019.
Given the nature the dedicated business you need to have excess capacity in order to handle increases in customer volumes to the year.
That said, we know that we need to reduce our current spot exposure.
Brokerage.
Segment revenue decreased to $54.1 million in the fourth quarter of 2019 as compared to $64.9 million in the fourth quarter 2018, Oh fewer loads and decreased revenue per load.
We incurred an operating loss of $2 million, that's compared to operating income.
From a $3 million in the year ago quarter, primarily as a result, lower gross margins.
This was the result in a strategy to reduce our spot exposure within our asset division by capturing more contract bread business through the quarter.
Due to the competitiveness of the market, we made the decision to get more aggressive from a rate.
Perspective, however, this new business was that a significant premium relative to the freight that we were taking at the time in the spot market.
As the market tied into the fourth quarter, we had opportunities with projects at other at our freight at higher rates than this new business.
Therefore, we outsourced this business.
As Andrea brokerage market, where capacity was tightening and costs were higher.
Overall, the challenging market environment negatively impacted our OTI arm brokerage operations and outweighed the very strong results in our dedicated division.
This environment also obscured the many successes that we achieved implementing Aaron.
Turn all initiatives over the last year.
We believe these initiatives are gaining traction and are set to impact our financial results more visibly through 2020 M. beyond.
One initiative is our focus on lowering our insurance and claims expense, which we've been working on over the last two.
Here's.
This initiative has several components, including the installation of event recorders across our fleet, which we completed in 2018.
Our expectation was that it would take about a year for the event recorders. The change driver behavior and we are encouraged with the results we've started to experience.
The second component was the.
That's full launch of our redevelop driver training facilities that we have had underway for the past year, having opened two facilities in 2019.
Our plan is to open to more facilities by the end of the first quarter with the goal of using this new training for 100% of our drivers over time.
The third component.
With our decision to implement hair follicle testing for all of our drivers in the fourth quarter 2019.
Just started to have a positive impact as our health hair follicle testing is this qualifying drivers that successfully passed through your analysis stuff ultimately make narrowed safer.
We continue to believe that the company.
Nation of these initiatives will lower insurance and claims expense over time.
A second initiative of our management team has been the utilization of technology to improve our process.
Accelerate the velocity of our business improve our customers and driver satisfaction and lower costs.
Central to this effort has been our.
Efforts to digitize, our systems and our business with the goal delivering the frictionless order.
The first step as the integrate our legacy systems and utilize existing data that as traps across our company in order to reduce me. The manual decisions that are made on a daily basis.
These may know touch points require input.
Our drivers and back office personnel, which is not only in 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.
This will significantly reduce the level of work required by our drivers, allowing them to spend more time.
I'm actually moving freight.
We will also make our office employees jobs more efficient by removing routine work.
The frictionless order is just one of many initiatives that we have underway as we drive technology across our operations.
We are exploring new ways to operator business improve.
And even think about new business models that can better compete in today's rapidly changing market.
Central to this initiative was the hiring of Cameron Rams del this past April the lead the company's effort of exploring new business models utilizing technology.
While still early.
We believe this will drive improved.
Profitability for the company and we expect to have more tangible result to discuss with the investment community in the second half of this year.
I would now like to turn the call over the Air Peterson for a review of our financial results.
Thank you Eric and good morning.
Operating revenue for the 2019 fourth quarter.
Was $449.6 million, a decrease of $19.6 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 2019 operating revenue for the fourth quarter decreased 6 million.
The main driver to the decline with a 10.7 million dollar decrease in our brokerage revenues in our truckload segment, we had 5.8% more trucks, producing 4.2% less revenue per truck year over year.
Sequentially. However, our truck count was relatively stable from the 2019 third.
It is level with a higher number of tractors being allocated to our dedicated operations.
Operating income for the fourth quarter of 2019 was $1.4 million compared to the 21.1 million achieved in the prior year quarter, we delivered a 99.7% operating ratio for.
The 2019 fourth quarter, which is an increase relative to the 95.5% operating ratio that we reported in the year ago quarter, our profitability decline largely as a result of the challenging market conditions impact on our over the road Division, which Eric has outlined.
Our over the road fleet.
<unk> revenue production decreased 10.3% on a per unit basis to $3517 on a per week basis, and the current quarter from $3919 per week and average revenue per tractor for the fourth quarter of 2018.
This protocol.
Pivoted to aggregation was partially offset by progress made in our dedicated fleet, which saw a per unit production increased 4.2% to $4032 an average revenue per tractor per week.
Our insurance and claims expenses increased approximately 5.2 million.
Dollars year over year with approximately half of the increase related to an incident incurred in a prior year policy period, where our exposure with $10 million per occurrence and due in part to a 6% increase and total miles.
For the full year, our insurance and claims expense was $89 million or a.
Succinctly 13.5 cents per total mile as compared to $85 million or approximately 13.2 cents per total mile and the prior year, while we're not happy with our performance, we believe holding costs essentially constant for the full year of 2019.
Versus 2018, and a year with industry wide cost inflation for excess insurance premiums and higher settlements as a result of a more costly litigation environment. This demonstrates the progress is being made on our initiatives to reduce our insurance and claims expense, which Eric touched on earlier.
Looking forward, we continue to believe that we have opportunities to reduce our insurance and claims expense on a per mile basis.
Additionally, and as a reminder, we've reduced our per occurrence exposure to $3 million in September of 2018, which we believe will reduce volatility in the liability portion of our.
It's been claims expense.
Our depreciation expense net of gains and losses with $19.8 million or $6.8 million lower than the third quarter, primarily at the result of an approximate 2.7 million dollar gain on the sale of our Laredo terminal that was closed as a result of our exit of our U.S.
Mexico Cross border business earlier in the year and an approximate $1.2 million gain realized on the execution of a sale leaseback transaction related to three of our terminals.
Net loss for the fourth quarter of 2019 with $9.6 million, which compares to net income of 7.0.
Zero million dollars in the prior year quarter.
Excluding a 6.8 million impairment charge for an equity method investment our adjusted net loss for the fourth quarter was $2.8 million or five cents per diluted share.
Turning to our balance sheet, we announced in January that we have.
Since our senior credit facility into a new $250 million credit facility.
The new credit facility has improved pricing and provides us with greater flexibility to execute upon our many strategic initiatives, including our plan to convert a significant portion of our fleet from operating leases.
Owned equipment in order to optimize our tax and trade and positions.
Importantly, the new facility single financial Covenant fixed charge coverage test that only if available borrowings falls below a threshold amount will afford us significant flexibility toward executing this plan.
We continue to.
Do appreciate the support and confidence of our lenders in our business plan and strategy to improve our operations.
At year end 2019, we had $390.4 million of net debt and had $123 million of cash and availability under our revolving credit facility.
We have disclosed subsequent.
To your end, we expect the availability under our new credit agreement to be in excess of $100 million upon completion of real estate perfection and other post closing items.
Interest expense for the fourth quarter was $5.3 million and we expect interest expense to be approximately $22 million for the full year 2020.
We also anticipate our effective tax rate to be between 24 and 26% for the full year 2020, with our cash tax rate to remain at low single digits.
In 2019, our capital expenditures net of proceeds related primarily to tractors and trailers were 81.6.
Yes million dollars, excluding equipment finance under operating leases. We also had approximately $20 million of net capital expenditures closed in early January which were originally planned to close in December and which would have brought our 2019 capital expenditure spend to $101.6 million.
Looking forward to 2020, excluding any lease conversions, we will spend approximately 140 to 150 million and net capital expenditures through 2020 with approximately 20 million of the total related to the fourth quarter transaction reference above that closed in January of this year.
As a result of our 2020 replacement cycle, we expect the average age of our company attractively will reduce modestly from 21 month to approximately 19 month as we exit 2020, when thinking of free cash flow a normalized net capex figure over a four year period is approximately $115 million.
With that I'd like to turn the call back to Eric Fuller for concluding remarks.
Thank you Eric.
Turning to the market and our outlook market conditions are modestly lower relative to the conditions that we experienced through the third and fourth quarters, the 2019 and consistent with normal seasonality.
Looking out to the full year, our baseline assumptions for 2020 include slow growth in industry wide truckload shipments combined with a continued reduction of total truckload capacity from the market.
We expect this improving supply demand environment to drive an inflection and pricing later in the year.
With cost inflation remaining benign.
It's important to remind you that the first quarter is generally our weakest quarter the year as we experienced lower revenue per tractor and higher costs, then the other quarters due to seasonal freight fluctuations in harsher operating conditions.
While we see positive.
Trends in certain areas there continues to be uncertainty in the short term environment, which will impact the actual sequential margin deterioration in the first quarter.
We continue to believe that market conditions will improve in the back half 2020.
The timing and magnitude of market changes will have a.
That impact on our quarterly results given our substantial operating leverage.
Over the long term I remain positive on the many initiatives that we continue to implement which are designed to improve our operations in our profitability through the cycle.
I remain confident and 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 will now be conducting a question and answer session. If he would like to ask a question. Please press star one on your telephone keypad confirmation John will indicate your line is in the question Q. You May proceed start to if you'd like your with your question from the Q.
Participants using speaker, maybe necessary to pick up your handset before passing the start keys. One moment. Please all we pull for your question.
Okay.
Our first question comes from the line of Scott Group with Wolfe Research. Please proceed with your question.
Hey, Thanks morning, guys. So go ahead.
Can you help us think about a fair expectation fair range for the first quarter operating ratio and then strategically if you think the markets bottoming why why such a push to get out of the spot market now.
Well, yes, yes, Scott. So this is Eric polar.
Okay.
If you look at our typical O our performance.
From fourth to first.
Ranges anywhere from 150 basis points to as much as 400 basis points degradation from fourth to first in a typical environment.
Now I.
I would tell you. This is this is probably an atypical environment and that we have.
Theres a lot of questions around where the market as and back I think where we said.
We feel a little bit better about.
The environment, but I think we also have a lot of questions.
And also.
Yeah that rate seemed to kind of be lagging any kind of turn in the market. So.
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At this point, we think that a normal degradation is probably more likely than anything else but.
From a no our perspective, but obviously you know this market is unique.
And that it's a lot more.
Kind of money then what we would typically have a month into a quarter. So.
I know that doesn't exactly answer your question, but it's kind of where we said at this point from that perspective.
And then on the spot side of.
The business.
Not like we're trying to get out a spot, but we we really believe that being in that 10% of our total revenue.
Is the right answer regardless the cycle and we.
With with that.
Excluding Mexico in a few other things.
These spot percentage has gone up and we would like to see that go down a little bit I mean spot is still running an incredible discount to contract at this point and while we believe it will start to move back towards equilibrium.
We're nowhere near that at this point.
And so it's prudent for us to get back into a normal cycle, which would be around that 10% of our total revenue.
Okay.
I think you gave the contract pricing for the fourth quarter, you have any early update on bids or contract pricing for.
First quarter.
You know, we are seeing probably a higher percentage of bids.
Customers are pushing bid earlier, so we are seeing probably more opportunity. We're also aggressively trying to bring new business new customers and so there's more opportunity in the hopper today than we've seen in a long time.
Im.
With that said.
We're still kinda I and in this current situation flat to maybe slightly down on a contract renewal basis.
But as the year, obviously goes forward, we think that will move into positive territory.
Okay.
And then for Eric Peterson so.
The if I heard net Capex is 140 to 150, but that's.
I think you said excluding lease conversions I thought you said earlier, though that with the new the the plan is to do more lease conversion. So what is a realistic all in that.
Capex number for you guys.
Yeah, that's going to depend as the year went we just closed this new credit facility, that's going to give us that.
Flexibility so every quarter when I disclose our net Capex I'll, let you know what amount of that was a a lease conversion as a reminder, here the financial commitment whether it to leads or whether we.
Converted is symmetrical, it's just putting them on the books, so it'll be the depreciation instead of the rent.
And then the last thing just went that like that the interest expense guidance you gave us does that contemplate taking on debt for the.
Increased capex rail to cash from ops.
A portion of that yes, because you know.
As we said the new credit facility, we are able to get favorable pricing relative to where we work on that facility and Thats why you don't see that interest expense number dropping as much.
On a year over year basis.
Alright, Thank you guys.
Thank you. Our next question comes from the line of Jack.
Atkins Stephens. Please proceed with your question Hey, guys. Good morning, Thanks for the time.
Morning warning, Jeff So I guess you Eric.
If we can you maybe start first so just kind of think about fleet growth from where you ended the fourth quarter. How are you guys thinking about that moving forward, we've been growing the fleet and.
What the teeth of a pretty tough market.
It sounds like you're beginning to see some green shoots out there, but I mean, how are you guys thinking about fleet growth as we sort of move through through the first half a 2020.
Yes.
I would say, mostly flat and I think the big reason a couple of factors one.
You typically see a spike on the dedicated side, we're dedicated demand spikes near the fourth quarter and so some of that comes off in the first so yes, you have a little bit of less lets say demand on actual truck count in your dedicated division going into first and then it starts to build back up.
Other.
The factors, we have as we went to hair follicle testing for all of our drivers in November.
While we were able to maintain truck count we didnt see a big degradation in truck count we didnt see once we made that decision we didn't add incremental trucks, and so I think adding incremental trucks.
It's a little more.
Difficult, because we pared down our pool little bit.
The other thing is we are looking at reducing some of our exposure to student hires and trying to really focus on more experienced tires on a go forward basis.
And that is going to reduce a little bit of our Poland.
Levers as well.
We think we can maintain truck count with that that'll help us to reduce our costs goods. You. Typically have students are are much more expensive. Obviously you have a lot more safety issues, usually have higher turnover, so trying to reduce our overall exposure to students while not eliminating it.
Will help us take some cost out, but we think we can maintain truck count by doing so.
Okay Gotcha Gotcha, and then I guess, just going back to the January trends for a moment.
Could you maybe talk about some of the.
Some of the encouraging because you're seeing out there you referenced.
In the press release, I guess from a high level just curious if you could kind of kind of do.
A little bit more detail.
There and then you know I guess you know as you sort of think about the next several months here.
Where do you think the market is in terms of.
Yeah, how far out a balances. It is there is there a way to kind of kind of thinking about that it feels kind of like were little bit more imbalance say that we were.
Call. It 60 days ago, but it would just be curious to get your thoughts on that.
Yes, yes.
Would take November and December, which obviously have some seasonal demand.
Situation, that's different but if you take those months out I, probably feel a little bit better from a supply.
Slide demand perspective over the last four to six weeks than we probably have for though for really the last year.
Now with that said.
It's nothing to get overly excited about right. We've we've been an incredibly depressed situation for the last year and so marginal improvement.
Where we're seeing that improvement is.
Building more on the volume side, where there are certain markets that we are coming in everyday that are either even or slightly over booked.
Last year. It felt like everything was underbought nationwide and we are coming into pockets of overbook situation. So thats a positive we also.
We closely track our Turndowns on a day to day basis.
And there will weeks last year in fact, the majority of the weeks last year, where we returned in down maybe less than 150 or so loads a week.
For the year, so far we've been averaging closer to 140 or 150 turned down today.
Okay. So I think theres. Some there's a the volumes are a little bit better now with that said I'm not seeing any life in the rates at this point. So the rates are not reacting to that situation at this point the rates are still highly depressed spot rates how impressed.
And so at this point until rates.
Hard to move.
In accordance with the volumes.
Before I'm really going to say that this markets really starting to really significantly turned a corner.
Okay Gotcha Gotcha, and then last question for me I'll turn it over is on brokerage 2 billion dollar operating loss. There you know it sounds like that was because its.
Strategic decisions in terms of how to allocate your your company metal but.
Are there anything are there any specific actions you can take to mitigate that losses should sort of move into the first half a 2020 or if we think about the market tightening up is that is that lost their brokerage actually going to get worse before it gets better can you help us think through that.
Yes, so even the best way to look at it is as.
We get overly exposed to the spot market on the asset side of our business last year, we talk about the Divesture, Mexico and a few other factors and so around late summer last year, we got aggressive in the market.
Trying to find contract business that we get average our rates up.
And we did that.
By going in and find in some opportunities that and they these were opportunities that if we couldn't put on the assets we get outsource.
And I would say that we got aggressive from a rate perspective.
But again these those rates were better than what we were just getting out in the spot market. What occurred at the ended the year is as the market started a firm up a little bit and as we had better project opportunities then that freight fell to brokerage and because of the low.
Lower rated nature of that freight.
The gross margins were a good bit less than what our typical gross margins weren't so put some pressure on us.
We're still seeing that a little bit right now.
And so we're in the process of evaluating that freight to see where we go and what makes sense and how.
I'll handle that freight going forward, because we still think it was the right decision to try and get out of as much spot as possible.
In an enterprise market, but.
Obviously, we.
We don't want to run losses within our brokerage division as well I think the other thing I mentioned in brokerage is just the sheer amount of competition.
And that's occurring in that market so anything that is.
So called broker bowling and usually it's broken up between whether it's a live load live unload versus a preload.
And those live load freight as become incredibly competitive youre seeing the digital brokers uneven traditional brokers getting incredibly aggressive.
On pricing and we are feeling a little bit of that and our market as well.
Okay makes sense, thanks for the time.
Thank you.
Thank you. Our next question comes from the line of Ravi Shanker with Morgan Stanley. Please proceed with your question.
Thanks, Good morning.
Justin.
Yes.
Maybe unfortunately continue with the theme for the question so far.
If you kind of like takes them back into the market right now I think based on your comments as well it doesn't look like things are maybe.
Improving slightly sequentially you stabilizing even obviously not off the risks anything, but certainly moving into right direction.
And yet you guys are pointing to the kind of high end of the sequential deterioration in all our for one Q, which would put you, adding well over 100 a war.
What does the Boston getting back to a low ninetys or I mean, what do you need obviously, if there's a 20 I'd like scenario where.
No rates are up like 30% sure, but short of an outlier scenario like that I mean, how do you how do you get this all our back to where it should be.
Sure Yeah mid year, obviously with two things its revenue cost right. So we're incredibly focused around costs.
With all the things that we're doing around say.
Safety and trying to reduce our overall exposure from an insurance perspective.
But there's a lot of other factors that go into it as well and I kind of touched on it a little bit, but reducing our overall exposure to students will reduce our overall cost as well make and make.
Make it a little bit less costly to bring drivers and so there's things that we're doing in our business that we can try to shave some costs out here in there that may not have an effect on day, one, but if we look back quarter to back we'll see the decisions. We made started to have a material effect.
On our our cost infrastructure.
As we look at revenue.
We are working towards trying to do things that will drive better utilization.
We're seeing some as Eric would call green shoots around that we're seeing some a little bit alive being able to.
Certain markets to be able to take advantage of of opportunities and you'd better utilize the drivers available time.
For example, I'll give you one one good example.
We started to to aggressively push out.
Parking opportunities to our drivers, allowing our drivers to better.
Has there they're clock in their hours and not shut down early and by providing better defined parking opportunities for our drivers. It's given our drivers as much as 30 to 45 minutes additional driving time every single day.
And so it's things like that that overtime as we get more of that into our fleet will drive utilization.
Nation.
And those things are going to drive our kind of our outperformance as we go forward, obviously, we need.
The market, obviously to respond as well.
Part of the problem today is just that the rate situation.
Is just as bad from a spot perspective as.
We've seen in a long long time, and we need a little bit of life. There, it's kind of get us back.
Position, where we feel a little more comfortable at the rates.
Got it so based on those initiatives then if the market. If we were just to have a normal market from here for the next 10 years like a low to mid single digits.
Great insulation market I mean, how long do you think it takes to get to a low ninetys or.
Yes.
I think it's hard to gas, but I think we feel like we could I mean in a normal stable market without the volatility it wouldn't take its very long at all.
Our niche.
Gives our are starting to to showed some improvement we need a little bit a market.
Let's come back to give us a little bit of more confidence in that but I don't think it would be very long I mean, it anywhere from.
Four to eight or 10 quarters at best So we feel.
So we feel pretty good about where we are as long as the market.
Is cooperating.
Got it just one more for me.
The the hair follicles best conversion can you share some of the results of that I mean, what kind of seeing the rates you saw hearing the same driver basis.
If we were due.
Get the NHS approval for a hair follicle at some point the CR.
Do you think you see something similar for the rest industry.
Yes, I mean, unfortunately that the HHS piece that's out there today, we'll just allow those of us that are doing hair follicle to only do hair follicle.
Obviously.
Mandate hair follicle across the board, which I actually think is necessary and were big proponents of.
But I don't see that happening anytime in the near future.
On the hair follicle side, though we are seeing failure rates as high as 10 drivers a week failing hair follicle that are passing your analysis. So it goes.
Back to what we said multiple times, there's active drug users out on the road that aren't getting caught by your analysis that are getting caught by hair follicle testing, so where we know we're doing the right thing. We know we've got to continue doing the right thing to take people that are drug users off interstates and we really believe that this is something that really.
Should be mandated across the entire industry.
Thank you.
Thank you. Our next question comes from the line of Brian Ossenbeck with JP Morgan. Please proceed with your question.
Yes.
Hey, good morning, Thanks for taking my question.
Just wanted to see you gave some commentary.
Sorry on interest expense tax rates wanted to see your comments on.
Assumptions for benign cost inflation, obviously, we're we're hearing.
Elaborated on.
Insurance expense going up.
Seems like your constricting the driver base, a little bit based on the testing in the.
Going to fewer students.
So just maybe you can walk through some of the bigger line items in terms of what you expect Tim and how that might progress throughout the year.
Hi, Brian This is Eric Peterson good to hear from me Yeah, Yeah. If I just go line by line to on the financials and we look at the Biggers, Yeah, I would say that there's probably not a lot of pressure right now on the on the driver wage line to go in and.
And put in significant increases in the year, you, obviously that can change if the market changes, but usually that will be more than made up for on the rate side.
When we looked at our equipment costs for bringing all the new tractors and the fleet we plan on bringing the average age down to about 19 month from 21 as we exit the year.
Here, we're not seen significant inflation on the cost of equipment on a year over year basis.
Then you have these general another in these overhead type line items, we don't have any.
Big numbers in the or we don't have any large line items in there, but we're seeing significant cost inflation.
I would say the.
The one line item on the financials were on the most bullish is going to be the insurance.
Claims expense line item.
Well I think that's one that asset gets traction it's going to get traction in a way where you on that line item despite inflation on excess premiums despite inflation and the litigation environment and the court.
And I still think we have an opportunity to.
To lower that cost on a per mile basis, and a percentage of our revenue. So you have the comment was really just general to say theres not any line item on our financial statements, where we feel like there could be.
Rapid rapid inflation from a cost perspective, I think if you.
Back over the years, you'll look at beyond these cost inflation line items and they stay relatively constant and then the rates kind of lag a one year, you'll get significant increases in rates and then and then I'll go down, but usually over a period of time.
I have a.
Pretty similar trajectory over four years, but what we're saying right now.
Honestly on a year over year basis, we saw our near the rate inflation and what's happening in the rate market is going a little backwards and obviously the costs continue to go up, albeit as slow slope.
Hi, Thanks, Eric on that point on insurance is that a is that a like for like basis is another has been.
Some choppiness from the.
Claims another.
Vince recently.
This is that.
Is that included and what you're saying you're seeing on a like for like basis, excluding some of these bigger items.
Yes.
Yeah. That's fair I think you know the nature of our industry and the the.
Health insurance were always going to have on a quarter over quarter basis, we're going to have some volatility when you have the unfortunate events.
However, I think in general and looking at the trend with the things. We're doing we should see that start to come down and so while there are still might be some choppiness, we believe our net results.
Can be lower insurance.
It's expense you I had that one client hit this quarter and that was from a $10 million policy year.
Yeah that we had the unfavorably settle out if you look at our insurance expense and the policy place that we have in place today, it's not limited to $3 million. So you know had that.
Happened subsequent to 18, wherein have had some of that choppiness that I experienced this quarter. We have if you look at our balance sheet, we have 100 $105 million and accruals on our balance sheet for these insurance claims and that's something that gets managed overtime and so now that we have.
A couple of years with this new.
New risk strategy that we're executing with the $3 million exposure I can to I. I believe we'll see less volatility as we go forward.
Okay got it.
One follow up for Eric piece, and I'm, sorry for on the fleet size.
Feels to me like maybe obviously.
Mark has been in volatile and you've got some of these.
Things like the Mexico fleet.
Position do you.
You're managing dedicated as well but.
It seems to me like maybe last quarter, there's expectations. They can you that little bit more leverage to spot and now you're you're pairing it putting it back down so is that just to.
Virtue of kind of the balance and the mix that you're you're trying to manage or is this more of a strategic.
Direction that you're you're calling out here, maybe you can just put some clarity around that there would be helpful.
Yes, yes, we weren't actually trying to increase our exposure to spot last quarter. I mean, we did see some truck count growth are we.
That was opportunistic growth that at the end of the day with our model.
I haven't more revenue.
Spread over our fixed costs, because we didnt have to increase fixed costs in order to grow the truck count.
Was the right answer for us in that in that situation.
But at the end of.
Today, it's always been our intention to get our spot to a 10% of revenue consistent regardless of cycle and that is at this point has not been any any change in our strategy. So that is that it will continue to be our strategy and we just think thats a prudent way.
To manage.
Because of the cyclical nature of our business.
Okay. Thanks for the time guys.
Thank you. Our next question is a follow up from Scott Group with Wolfe Research. Please proceed with your question.
Hey, Thanks for the thought guys. So just a.
Couple of quick things.
Can you give us some guidance on gains loss on sale in depreciation for the year.
Yeah, I think if you want to look on a sequential basis, excluding lease conversions. If you look at our year to date.
Loss, we had an approximate $2.2 million.
Or loss in the third quarter, we had a 1.8 million dollar gain in the fourth quarter. So with those normalized and yes that brought our depreciation expense down from that 26 million to 19 million. I think you can split the difference and thats going to be a decent run rate excluding losses.
On a go forward basis.
So give or take 23 million a quarter that 20 to $23 million to $24 million. Then that's not that's excluding losses that start appreciation to what the losses, Yes, we'll see what the market does.
Relative to our equipment, but if you look back historically the our losses.
I have been fairly inconsistent earth and significant rather.
And given used truck you feel like that's a good assumption.
Immaterial losses right now.
Right I meant there could be one $2 million of loss as a quarter.
Yeah. As we then we'll see those markets start to recover and then that could flip the other.
Away, but right now I would expect nominal losses.
On top of that depreciation.
Okay and then.
Eric full or you said a couple numbers, maybe one just get some perspective on it. So you said, we're at a 140 Turndowns a day.
What.
Where does that number peak I just want to put that in perspective, and then you said 10 failures a weak on the hair follicle testing how many drug test you do we do a week.
Yes so.
On the drug test side, we're probably drug testing about 200 drivers a week.
ER.
Give or take so what was that 5% failure.
But now that's 5% failure, that's not failing your analysis.
We do have a few that'll failure analysis as well.
So the total failure percentage as a little bit higher.
Yes.
It's the turned down so yes, the turned down.
So yes.
It can peak I mean, if you look at 2018, we had days, where we were over 1000 turndowns in a single day. So it can definitely peak much higher than where we're at.
So but for US it was really.
Yes, Doug.
Comparing ourselves to last year, where we were part of the turning down anything and seeing a little bit turned out not like I said, it's very regional based where there's markets theres different regions, where we're coming in a slightly over booked.
And since those opportunities do not pay a premium than were.
Turning those down because we can't we can't handle those those opportunities in an over boat market. So the problem is what what that doesn't.
Really give you is that the fact that even though there is some markets that are overbooked. There. So markets that are grossly under booked and thats. The reason that from a rate perspective.
We don't feel that the rates on an overall.
Aggregate basis are moving much at this point.
Okay, and then just last thing real quick you said spot still well below contract what how far below percentage wise are we.
He and I don't have in front of me, but it's.
As bad as it's been it has.
Spot as not showing in the life on our end at this point from a rate perspective.
Okay Alright. Thank you guys appreciate it.
Thank you. Thank Scott. Thank you we have reached the end of our question and answer session I'd like to turn the call back over to Mr.
For any closing remarks.
All right Great will we appreciate everybody being on the call today, and we look forward to talking to you in a few and a few months. Thank you.
Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.