Q3 2020 US Xpress Enterprises Inc Earnings Call
Can you talk a little early for closing remarks.
Hi.
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Good afternoon, ladies and gentlemen, and legal should the U.S.A. <unk> third quarter 2020 earnings conference call.
During todays call all parties will be listen only mode. Following the presentation. The conference will be opened for questions with instructions will follow at that time.
As a reminder, this conference in the quarter I would not like to turn the call over to Mr., Brian all that.
Hi, Good corporate finance. Please go ahead Sir.
Thank you operator, and good afternoon, everyone. We appreciate your participation there were 2020 going to school.
With me here today are it for President and Chief Executive Officer, Eric Peterson, Chief Financial Officer.
As a reminder, a replay of this call will be available on the investors section of our website through October 29.
We have also posted an updated more detailed supplemental presentation to accompany today's discussion on our website at investor that U.S. Express.
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We will be referencing portions of this couple of months as part of today's call.
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.
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 that.
Such risks and other factors are set forth in our 2019 10-K filed on March 4th of 2020 as supplemented by our second quarter can be 20 form 10-Q filed on August 24th.
We do not undertake any duty to update such forward looking statements.
Additionally, during today's call, we will discuss certain non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with us GAAP erect.
A reconciliation of these non-GAAP measures to the most comparable GAAP measure can be found.
At this point I'll turn the call over there for.
Thank you, Brian and good afternoon.
Today's call I will review, our third quarter results.
Body update on our digital fleet initiative.
Pietersen will review our financial results in more detail and I will then conclude with a review of our market outlook.
The five main themes that we hope you take away. Our first we continued to make progress transitioning underperforming OTDR, so low tractors, where digital fleet, which we have now brand it is varied.
This transition remains a priority for our management team and the key to driving margin expansion.
Second the substantial improvement in various operating metrics include increased utilization lower driver turnover and reduce costs held steady from the second quarter's levels as we grew the fleet approximately 25% during the quarter.
Third the freight.
The freight market Street did during the third quarter would boost the revenue per mile in the uncommitted portion of our geography, we made.
We made hiring qualified drivers more challenging across our entire truckload segment.
I'm going to spend more time on this topic later, because attracting and retaining the right drivers in the single largest optical to improving our profitability and we believe our digital fleet initiative will increasingly help address the issue through 2021.
Fourth.
Dedicated operations continued to deliver strong performance as we continued our trend of average revenue per tractor per week in excess of $1000 for the sixth consecutive quarter and lastly, we've taken meaningful steps to the third quarter to improve the profitability of our brokerage division.
To start this is an exciting time at U.S. Express as we seek to transform our business to deliver not only pure levels of profitability, but also deploy an operating model that is the purpose built organically scale over time.
During the third quarter, we continued to scale variant, adding approximately 100 average tractors compared with the second quarter very.
Various business model continues to prove out maintaining a more than 20% advantage in utilization and approximately 70% reduction in driver turnover and substantially fewer accidents per million miles in the legacy over the road or MTR fleet.
This provides real confidence in the scalability of variance as we work to transition to an additional 400 underperforming tractors in our legacy MTR. So little fleet by the end of first quarter 2021.
As we complete phase one of our transition we expect improvement in our operating ratio through the first half of 21.
Regardless of the market backdrop ultimately we believe that variant provides a long runway for not only margin expansion, but also sustained organic growth.
I'd like to take a few minutes to discuss our historical challenges, we driver turnover and their former MTR student driver program in more detail because it speaks to the profitability that we are addressing and will also provide good insight into why our unseated tractors increased in the midst of a strong market.
We're confident that the steps we've taken will ultimately lessen the volatility that are result of experience through market cycles.
Over the last decade portions of our legacy Ot Our division have experienced driver turnover as high as 185% in some years as assistant because became unnecessarily complicated.
<unk> costs increased well lower miles driven and ultimately a reduction in our drivers ability to earn on average competitive pay.
As a result, we've had to spend significantly on driver recruiting training and bonuses as well keeping excess capacity of unseated tractors to meet this high turnover.
See our student driver training program was a key source of the drivers supply to keep up with turnover and provided a buffer to our fleet to meet customer demand the downside to them with solutions with the poor profitability of our student drivers given their cost of recruiting and retention low utilization and higher less.
Sales of accidents per million miles driven.
Our frictionless order initiatives, but specifically created then designed to reduce the complexity in our system and improve our driver satisfaction, while also accelerating the velocity of our operation.
Bob Pesky, our CIO has done an amazing job digitizing our company as we continue to remove millions upon millions of manual touch points, we're beginning to reduce the level of work required by our drivers, allowing them to spend more time, moving freight which result in higher take home pay and greatly improving their satisfaction working at us.
Brett.
The Frictionless order initiative was also a key first step and foundation, which enabled our team led by Cayman Ransdell to develop variant.
Further this fleet is largely recruited planned this past managed using artificial intelligence and digital platforms.
Variant is a completely new paradigm for operating trucks over the road environment that is provided to the driver through a proprietary at base driving experience.
Through three quarters of operation variant is produced.
A key benefit of variant is the significant reduction in driver turnover.
The drivers either utilization and pay increase is the result of more miles driven their job satisfaction also increases.
This is an important aspect of the transformation of our business model as we continue the transition tractors from our legacy MTR fleet over to variance. We believe not only will our turnover continues to decline so will the accidents per million miles driven and result in claims expense.
Improvement is dramatic.
As an example, our average preventable accidents per million miles are more than 30% lower than a legacy of GR fleet.
Significant costs coming down materially given our business model transformation.
Turning to our third quarter results, our third quarter truckload operating ratio improved to 94.6% or 450 basis point improvement over the prior year.
This improvement was tempered somewhat by a higher percentage of unseated tractors and our legacy Ot Arclight due to increased competition for drivers during the quarter and suspension of our student program during the second quarter, which contributed to an approximate 6% reduction in miles driven during the third quarter.
Early driver satisfaction at variant led me to believe that the fleet be successful rapidly attracting external experienced hires however, our initial ability to attract experienced drivers with on successful to address this issue. We made adjustments to variants recruiting program and are beginning to experience a pickup in hiring about.
Through October as indicated on slide seven of our earnings supplement.
Our over the road segment experienced a year over year increase in spot rates, given the improving supply demand dynamics in the market.
This helped to drive average revenue per tractor per week are about 5.8% as compared with the year ago third quarter the chip.
The challenge with an increase in unseated tractors, resulting in a 1.3% decrease in revenue miles per tractor per week.
Turning to our dedicated division average revenue per tractor per week, excluding fuel surcharges increased $54 per tractor per week or 1.3% as compared to the year ago quarter.
The average revenue per tractor per week achieved in the third quarter of 2020 of over $4000 remained in record territory for the sixth consecutive quarter.
The increase was primarily the result of a 3.7% increase in revenue miles per tractor per week, partially offset by a 2.3% reduction in average revenue per mile.
Brokerage segment revenue increased to $56 million in the third quarter 2020.
As compared to $46 million in it.
In the third quarter 2019.
Primarily driven by increased revenue per load and to a lesser extent, an increase and look out.
We incurred an operating loss of $4.5 million as compared to an operating loss of $100000 in the year ago quarter impact.
Improving brokerage margins is a priority for our team and during the quarter. We executed on a series of initiatives that have resulted in monthly sequential margin improvement since the beginning of the third quarter.
Our short term goal is to return brokerage to a breakeven run rate as we exit 2020.
Let me now turn the call over to Eric Peterson for review of our financial results.
Thank you Eric and good afternoon.
Operating revenue for the 2023rd quarter was $431.5 million, an increase of $3 million as compared to the year ago quarter. The increase was primarily attributable to increased revenue in the company's brokerage division of $9.9 million, an increase of $7.1 million in truckload.
Revenue, partially offset by decreased fuel surcharge revenue of $14 million exclude.
Excluding the impact of fuel surcharges third quarter revenue increased $17 million to $403.7 million, an increase of 4.4% as compared to the prior year quarter.
We posted operating income of $15.9 million in the third quarter of 2020, which compares favorably to operating income of $3.3 million in the 2019 third quarter, our operating ratio for the third quarter of 2020 with 96.3% as compared to 99.2%.
In the prior year quarter. The primary drivers of improved earnings were higher rate per mile and lower claims et cetera.
Revenue per tractor per week improved 5.8% and our over the road division and 1.3% and our dedicated division.
Accidents and overhead cost reduced as we continued to execute on our digital initiatives and fixed and variable cost control efforts.
Additionally, I'm happy to report that our truckload operating ratio improved 450 basis points to 94.6 from 99.1% in the prior year quarter.
We continue to execute on our initiatives designed to improve our profitability and some of the notable results are as follows first we continue to allocate capital away from the underperforming divisions in our organization to more profitable areas. As we successfully grew the variant fleet by more than 25% or.
Only 100 tractors for the quarter to approximately 500, as we exited the quarter and a further grown to approximately 550 tractors in this division to date in October.
Second we continue to benefit from the strategic decision to close our student program in our over the road Division.
Third for the quarter, we were able to achieve growth in variant without diluting previously realized operational efficiencies that we announced last quarter as outlined on slide eight of the earnings supplement. This is significant as we are not seeing dilution on a per unit basis as we increase the volumes over this new model as a result of.
The success, we are continuing to expand that group with a target of having a total of 900 tractors converted by the end of the first quarter of 2021 as we are effectively in the process of transitioning the majority of our legacy so over the road operations over there.
Finally, we are making recent progress towards improving the financial result in our brokerage segment. Despite robust market conditions that generally pressured gross margins in this business.
The segment operating ratio for the quarter was approximately 108%, but improved sequentially through the quarter as we execute on our initiatives, we expect the segment or to improve approximately 500 basis points for the fourth quarter.
During the quarter as we continue to execute our strategic decision to allocate capital away from our underperforming legacy OTDR division and into variant the driver market tightened and turnover in our legacy NCR fleet return to the higher pretended like level. This.
This dynamic resulted in a faster pace of contraction of the underperforming legacy Ot our divisions than the pace of growth in variant, which route which resulted in approximately 10 million fewer miles in the third quarter compared to the second quarter of 2020 due to fewer seated tractors. However, we remain committed to our strategy and under.
I stood in advance that the digital conversion would not be linear in nature.
We believe the trends are positive for our future. For example, we believed the negatives such as higher recruiting costs and legacy operation more unseated tractors and higher insurance premiums were mostly front end loaded in contrast, we believe the positive contract rate renewals occurring during a rising market the impact of safety on.
Claims expense related to the spending of the student program and.
And the continued growth of the variant fleet all build overtime and we are in the early innings.
For example, as we continue to build and skilled areas and reduced the number of unseated tractors. These models will return, but over a digitally enabled platform that is yielding lower cost and higher revenues on a per unit basis.
We believe that ultimately this will have a significant impact on our ability to deliver levels of profitability on a regular basis.
Net income for the third quarter of 2020 with $10.7 million, which compares to a loss of $1.4 million in the prior year quarter earned.
Earnings per diluted share were 20 cents, a modest increase from our second quarter earnings of 18 cents per diluted share.
Turning to our balance sheet, we had $386.3 million of net debt and $154.9 million of liquidity defined as cash and cash equivalents plus availability under our revolving credit facility.
Very pleased with the progress that we have made as our leverage continue to decline to three times net debt to trailing 12 month EBITDA for the third quarter of 2020 compared to 4.15 times the end of the 2021st quarter we.
We believe our leverage will continue to improve over the next several quarters, we were taking a conservative approach with respect to our liquidity leverage and capital expenditures until we have greater certainty concerning the pace and extent of the economic recovery.
As we discussed on our second quarter call, we reduced our planned net capital expenditures for 2020 to be in a range of $100 million to $120 million and still believe this is where we will end up which includes a previously discussed 20 million dollar transaction that carried over from the fourth quarter of 2090.
Through the third quarter of 2020, net capital expenditures were $95.3 million, including the $20 million carryover.
Interest expense for the third quarter was $4.4 million and we expect interest expense to be approximately $20 million for the full year 2020.
Finally during the quarter, we were able to renew our auto liability insurance program in a challenging market, which ultimately resulted in annual premiums increasing approximately $5 million, which went into effect on September onest.
With that I'd like to turn the call back to Eric for for concluding remarks.
Thank you Eric to conclude.
To conclude our third quarter results continue to validate our vision for variance and the long term potential of this new business model offers for a driver.
Our company and our industry.
This model was designed to be created by US Express utilizing artificial intelligence in digital platforms to manage all aspects of the fleet operations, including recruiting planning dispatching and management wont.
What makes variants optimization, so effective as its ability to dynamically react to changes within it gets us and.
In self correct instantaneously.
What this means in plain English is their operations are continuously being optimized which improves their utilization and ultimately our drivers pay and satisfaction as.
As we've discussed this is delivering a substantial lift in our performance is very is achieving an approximate 20% improvement utilization per truck the dramatic decrease in driver turnover of approximately 70% in.
Improved safety higher level of on time service and overtime a reduction in fixed costs look.
Looking forward, we remain on track to have the initial 900 underperforming legacy GR tractors moved into the very weak by the end of the first quarter. We will then embark upon phase two.
The key is the scalability of the model, which means we can organically grow this business, while maintaining these strong financial results regardless of the cycle.
What has been a headwind to our results over the last decade is driver turnover.
We believe variant solve this challenge and the resulting inefficiencies in cost to come with it.
As we look to the fourth quarter, we expect our driver recruiting in Berry to pickup, which we are already beginning to see through October.
This increase will deliver improved results, we should effectively offset the turnover that we have experienced in our legacy Ot, our fleet and slightly improve our profitability for the fourth quarter as we expect to experience improved spot and contract pricing.
As we continue to scale very and into the first quarter 2021, we didnt expect to experience sustainable margin expansion over the course of the next year.
In regard to the market at baseline assumptions for the balance of 22 wins include a general sequential economic recovery that may be volatile at times.
Increasing inventory restocking type.
Tight trucking capacity in.
In relatively benign cost inflation outside of driver related insurance premium expenses.
These conditions combined with the continued shortage in drivers are expected to be supportive of the market and rates through next year, which will have to support significant increases in driver pay.
Some of which are already in place.
As a result, we expect contract rates and 2021 to increase on average by 10% to 15%, but the driver shortage likely extending the cycle as we believe there will be up to 200000 fewer drivers compared to the beginning of the year.
While the economic outlook remains somewhat uncertain.
We remain very positive given the many opportunities that we have in front of us to improve our profitability, including a further development of the frictionless or.
Conversions of underperforming tractors into variant.
And the benefits of further streamlining our operations.
Thank you again for your time today.
Operator, please open the call for questions.
At this time, we'll be conducting a question answer session. If you would like to ask a question. Please press star one on your telephone keypad.
Relations indicate your line open the question queue.
Thank you if you would like your questions on the queue.
Then keeping secrets no maybe necessary for you to pick up you're hopeful before pressing the spiky.
I'll, let probably pull for questions.
Our first question comes from the line of Ravi Shankar with Morgan Stanley You May proceed with your question.
Thanks, Good anyway one.
Good evening.
And it looks like you're taking some short term pain for some long term game, which makes sense I think the the timing was unfortunate coming at the kind of went up strong point in the cycle.
But just to kind of a few quick clarifying question doesn't vary NKTR. One is do you have updated timing for phase two.
Mimi.
Maybe a phase two meeting the second group.
On the truck CS is that 21 thing or is that beyond that it's.
It's a 2021, so we will probably start that starting in second quarter of 2021 and that that conversion shouldn't be finalized by hopefully the first half of 2022.
Okay got it and also you only have like 50 experienced drivers out of 900 trucks, so far but the the momentum is increasing can you share a little more detail on kind of why you had that initial skepticism and kind of how you've been able to convert that and also on the little bit confused I mean, I I got the impression that.
Very into was meant to be able to make student drivers just as effective as experienced drivers.
I'm not sure why you need experienced drivers maybe I misunderstood that.
Yes, no. We're really focused on experience, we think that with the level of turnover being in that.
Better than 50% range within various we think that that we.
That we can just prioritize experienced drivers over students and.
We think that student drivers there is a lot of issues a couple two drivers one Jim it's incredibly expensive to train them, but also the quality. Even if you do a very robust training program you often see that the quality of the driver in accident rates and things are higher so we would rather tried to keep students out of that.
Operation and.
Thats part of it that's part of the strategy.
With with the recruiting piece, we believed and I could say it was a miss on my part we saw the the rapid enthusiasm from our driver population within variant and we thought that as we went out into the market from a recruiting perspective that we wouldn't get the influx of drivers.
And realistically that Didnt happen, it probably took six or eight weeks and to be fair as we were out Rick recruiting externally, we didnt get a lot of traction initially so we had to spend a little bit more time with marketing leverage.
Leveraging our current drivers to go out kind of speak to other drivers do some marketing and some testimonials and as we did that we started to get some traction and you can see there on our supplement slide on slide seven that is started slow but this last week, we hired over 15 drop we are the key drivers that variance.
I believe we will hire more than that this week and we really need to be in that 20, plus range on a week to week basis from a hiring perspective and I believe within the next week or two or three we will be there and I think we can maintain that we're starting to get traction and now.
And now I feel like now that we're getting our name out there we're getting traction that we've kind of gotten over the hump, but that first six eight weeks with a little difficult just trying to get that traction out of the market. I think we just didnt recognize how difficult it would be launching a new brand and a new concepts and the driver accepted the biggest thing was there.
There was a lot of skepticism from the driver population, yes, everybody said this but you know I have a hard time, believing it and so but.
But I think now we're starting to get some bias.
Got it and just lastly, the initial results look really good.
But are you convinced I mean do you have data that convinces you that this is real and not just kind of noises related they called it.
Yes, no we absolutely do because we can go back and then we started that in Q3 and Q4 of last year. The results that we were seeing even with 25 and 50 trucks is comparable to what we're seeing with 500.
And so there is no we're not we haven't seen any kind of degradation or any kind of change in the statistics in fact, the statistics stayed pretty even pre cove. It through Covidien then during this last quarter and so we feel pretty confident that those numbers are real and they're actually Justin I mean, if you look at what we're doing I mean it seems.
Inefficiently different than how our legacy fleet is operated and we believe that all the elements of that really does drive a better product.
Great. Thank you.
Thank you.
Our next question comes from the line.
Thank you Ma'am you may begin with your question.
Great. Good afternoon, and thank you for taking my questions.
Absolutely. So it's all I guess, Eric just to maybe kind of think about it. This way you know you've got 13 or 1400.
Trucks.
In the legacy fleet left to convert over.
You know if you were to get that that group of trucks down to a 50% to 60% sort of annualized turnover can you help us think about the savings that that would generate to the organization on a consolidated basis.
Yes, I think it could be significant you're exactly right. I mean, if you look at those trucks and you get them down to 50, 50% turnover. That's just one component we said that on average it can cost up to $15000 for every driver that you have to hire and so if you're going from 150% turnover to 50% turnover.
You're hiring a third less drivers number.
Number two in converting those drivers over if you have 1300 tractors that all of a sudden increasing their utilization you about 20% that you had a two third variable and one third fixed model that group attractors, essentially got 700 basis points more profitable on utilization alone and.
Then third and this is one we're really excited about is the safety metric that we're saying if you look at our preventable accidents per million mile. This group is down to four and as Eric said, we've been seeing the same result, with 25 truck 50 truck and even today running approximately 550 tractors.
The division, we're still seeing that for accident per million mile to put that in perspective, the legacy freak weather.
With it 12 incidents per million miles in 2019.
1300 tractors, though and this is what the exciting by no longer having you have the students in this population those remaining 1300 tractors are still performing much better they are down to right under seven accidents per million mile compared to 12, but the variant trucks are just they are just outperforming them at that for a number right now.
So getting those remaining tractors.
And all the miles 1300 tractors worth of miles over that digital model is going to have a significant impact on our overall earnings.
I mean is there.
Is there something that you just kind of from a bracket perspective can you maybe Ken I think so I think that would be helpful. For folks. If we can kind of maybe think about the potential magnitude because I mean, it seems like these are awfully big numbers that could be.
Could be showing up here over the next six to eight quarters, regardless of the freight backdrop and so yes.
I know.
You don't want to get too far out on a linear but it is it is there anything you could share with us in terms just to help us quantify the potential.
Potential savings and when you sort of put all those buckets together just rough numbers.
Yes, I mean, if you look at it and you want to say that represents approximately 1500 tractors is about 25% of our fleet round numbers and the numbers I went through are probably.
1200 basis points of earnings.
So thats overall that three to 400 basis points.
On a consolidated results.
Okay.
Okay Thats helpful. Thank you, Eric and I guess, just maybe just one follow up question last one for me.
You know what do you when you think about.
The business and sort of how it should trend as you go from the third quarter to the fourth quarter.
I think if we go back.
You know quarter go to follow as we could improve operating ratio as you move through the year quarter to quarter.
Finally, there are some challenges in the Threeq you because the driver turnover and brokerage, but is there a way to kinda.
Is there a way to kind of think about what how we should be thinking about operating ratio improvement sequentially given the improvements in brokerage given the rate improvement that you guys.
I've been starting to realize in the business and I know that would be offset by bought by driver.
Driver wage inflation and things like that but can you maybe frame that up for us in terms of how we should be thinking about the sequential change.
Sure. Yes, if you will so we're still working through some issues. So there is still a little bit of that overhang that we're dealing with in Q4, but we are starting to see some momentum in Q4 relative to our recruiting initiatives in our growth within our variant. Please also.
If you look at it.
If you look at our brokerage group we're trending in fact this last week, we had our first week break even within our brokerage or been nearly a year.
And so we are trending towards a breakeven.
I think we'll be we'll be close to that exiting the year I don't know that we'll have that for the quarter were I think theres still be a little bit of noise for the core.
For the quarter from a brokerage perspective, but we're starting to trend towards more of a brigade breakeven and so I feel really good about the.
The things that we've been focusing on and brokerage and and I think we have the fix in place and it's going to take a little bit of time for that to continue to play out.
If you look at the overall fleet dedicated still running strong so our biggest opportunity is really that conversion.
So I think that if you look at it from an earnings perspective, I think we'll see sequential improvement but.
But I still think that we're in the early stages of recognizing the full impact of our.
All of this transformation.
Okay got it.
Thank you guys.
Our next question comes from the line of Paul Coster of Bank of America Little Bookkeeping question.
Hey, great. Good afternoon, Eric Eric maybe you could just give us a quick refresher on what it takes to convert the fleet and given the six cents.
Why you can't go maybe perhaps a bit faster here.
Yes, so the conversion at this point, so we moved over.
50 to 500 trucks.
That were in that were internal drivers. So we can burn and drivers over into this model and there is a specific type of driver that we're looking for they have to be a little bit more digitally native they have to be willing to operate in a little bit more of a.
An environment, where they there isn't as much hand, holding and so it does take someone who.
Who has some experience in the industry and so it is a specific type of driver into we converted about 500 or so internally, but then we needed to go externally to start to drive growth further and that traction off from a recruiting perspective didnt happen as fast.
Would've liked and like I said earlier, it's the launch.
Launching a new brand launching a new model and then trying to explain the drivers why its different and how it's different.
I was a little more difficult and I think we appreciate it but I think now we're we now have momentum and now we're past that.
So you are on page would have Chuck grom.
Seven where you have the turnover you were just talking about the 48 driving 10 weeks for variant and you're at a 50% turnover rate, but I'll begin with an annual rate as Debbie do you just had a handful of of maybe a couple of drivers that have turned over it there and then a post mortem with them as well.
What was wrong I mean, just given it was a couple of them to or is there any anything to figure out about why that turnover is that.
Sure when we think about drivers gentlemen.
Yeah, right, we have been and one of the best indicators as we have yet to see on a large scale any kind of issues related to us through the fleet no when we go and do.
This morning, with some of the U.S. Express drivers there is a lot of there is a lot of negativity. There's a lot of hey. This happened. This habit I'm frustrated I didn't get a mild whatever those are not the kind of things were hearing from our very late some of whom are some of them are terms that we make whether it be safety related or things like that on the other hand typically.
Wouldn't drivers are self selecting to lead its usually a personal reasons theyre going off the road for you know they want to be with their family or truck is not for them. They decided to go to construction or whatever so for the most part that's the reason we're seeing attrition, it's either in voluntary or involuntary it's something that wasn't related to.
US it was more a personal issue for the driver.
Okay last for me just to clarify Gary are you are you.
With the new branding for the tractors or is this just a name brand internally and then my other question.
My other question is right.
Well just found the branding piece and then you said driver only facing brand, but it is a completely new brand detractors or gray, they're not read.
We we believe this model is so different and so unique from our legacy brands that we felt it was necessary to have a completely new brand.
Out there in the market. So we're recruiting for this brand specifically the there is a different I mean, there is everything for the driver is completely different how they interact with the office how they get how they do their day to day the type of tractor their end to color the tractor the whole works.
Lastly from me as the miles I just want understand is this solely because of lack of drivers that were seeing miles down at that.
Just I guess, given the need for utilization with inventory levels. So low.
Is that a seated tractor count is there or is it just the drivers.
What is it it's mostly unseated tractor count and due to the driver situation. We didn't we have seen through the last probably 90 days some issues with some of our shippers where detention times are going up it's taken longer to load tractors and unload tractors not think it's due to labor shortages and a lot of our customer.
We're done so we are hearing that feeling that on a regular basis, which may have a little bit of an impact, but I think the biggest impact was was the driver situation and the fact that we have more unseated tractors than we normally would carry.
All right Wonderful day and you include that in your in your numbers right. If you count all tractors, even if they're on it right now.
No.
Appreciate that thank you.
Our next question comes from the line of Brock.
Well. Thank you Sir you May proceed with your question.
Hey, Thanks afternoon, guys. So we have to talk about just a follow up there so.
Utilization down one in the third and rates up seven when you.
When do you think is a good expectation for both of those in the fourth.
Oh.
Probably similar results, maybe a little bit better results from a utilization perspective, we.
We are currently addressing some rate on the contract side.
Likelihood if they use those rate improvements go in it's in the back half of the quarter. So probably doesn't greatly impact the quarter. So I would say peak season has the potential to drive spot rates higher than we saw in Q3, So I would say a little bit of improvement on the rate and.
And may be some small incremental improvement utilization.
So when do we actually see utilization inflect positive.
Once we start getting some positive net growth in our truck count.
I think we can probably see that into into Q1 I think this quarter were still working through that but like I said the last couple of weeks, we're starting to see the appropriate momentum there and we believe we're kind of over that hump, we're definitely past the stage, where we're losing seated truck count we stabilize we can start growing.
Our seated truck count back and I think that we'll probably see that hopefully at some point in Q1.
Just because so are you talking about the grow the unseeded can't grow the seated count or grow the they reported truck count that we say, yes, no grow the seated count because as we grow the seated count obviously that impacts our utilization to grow in the seated count that we have no plans at this point the gross to net the net amount in fact, we probably.
We'll try to take down that net number to an extent because of the unsi.
Right and then I don't know if this is a silly question or not but.
There's a lot of talk about the old fleet vary, but what's the typical driver turnover for a new driver versus an experienced driver forget if they're on varying or not just what's the typical generic I'm guessing yeah.
Yes, so when we were doing the student program. Prior we are turnover was running north of 200% pursuits, probably closer to that 150 ish range for experienced so the students turnover was significantly higher.
So I guess I'm I'm like you're so it sounds like even on the old fleet or the.
For the treated the legacy for whatever you want to call. It there was a 50 point spread and driver turnover.
I guess I'm not really sure what's so different about that then varian.
Well because we're only hired external you know we only have experienced drivers within our solo legacy fleet today, we're running still north of 150% or so.
So if you look at the the student population that we had prior going in it was still a smaller percentage of the overall until.
And so the net the net was and then some some quarters, we had run as high as 170, and 180% turnover, partially with that mix and say a 158 experience and 200 plus students, but we're still seeing north of 150% today and our legacy population.
Yeah.
Okay, and then just last thing real quick Eric.
I thought I heard something about 500 basis points of margin improvement in brokerage firms that are.
Financial comments silica or one of those three are or is it closer to the breakeven I'm just not sure.
Yes, averaging for the fourth quarter were saying, we did a 108 in the third quarter and that the comment was that will be 500 basis points better not sequentially in the four so.
I'd be a 103 Anadarko mentioned last week in that division, we're to a 108.
Okay. Thank you guys.
Thank you.
Our next question comes from the line of Boulder block with Stifel Nicholas.
Good question.
Yes, good afternoon gentlemen.
You talked about converting.
Some of your drivers into variant that then needing to go external so easily.
You go external what happens to the drivers.
It had been driving in the underperforming over the road fleet.
Yes, so over time as the attrition takes five kind of somewhat happened this last quarter.
We had a couple of decisions to make as we saw that we were not getting traction on the front end would variant.
We had kind of de prioritize recruiting for our legacy fleet, because obviously, our long term plan was to move drivers into the Newfleet.
We kind of we kind of had a sanity check early in the quarter, saying, Hey, we're not getting traction should we go back and start recruiting for this legacy fleet and where we landed was that at.
At that eventually will want to get out of that fleet.
In whole anyway, and so we decided that wasn't the right decision that we needed to stick with our strategy of recruiting for variant not recruiting to that legacy fleet. So that's why we saw that the truck count drop, but we still think that was the right decision and over time as attrition takes place.
As we bring in new drivers, we will bring them into the new digital we not into the old legacy fleet. The overtime the amount of tractors that we have in that we'll we'll obviously shift over into Berry.
Yes.
The current or for the variant fleet.
Okay.
Now you know right now we're focusing on the product and the product is increasing the utilization and lowering the overall driver turnover. So in effect, where we're standing up near to infrastructures one for the digital and one for the legacy Yeah, Thats something that as we get further in the transition will be able to we'll be able to do.
Skus.
Yes, I think.
Hi, guys I was going to say I was going to say, David what they is it yet.
Yes, exactly what Eric said is we're doubling up costs in a number of areas in order to grow and build this and so.
Our landing pad long term at maturity, we think we can be as much as 15 under the 2002 basis points better than the legacy fleet, but there is an investment period and we're in the middle of that investment period right now.
So if thats the case that's.
Thats way better than even.
Even the non underperforming over the road tractors, so wouldn't all 30 50 move to variant.
So yeah. So our strategy obviously, we're focused on those that I would say are losing money today, but we're always going to be looking at that that tail and obviously trying to improve a kind of a capital allocation strategy is is improve our earnings through allocating capital to the more profitable groups so out.
We would make a decision at some point and say late 2021 do we then convert the rest of those tractors over or you know at that point does it make sense to start into a growth strategy, because we have a scalable model and if the market. If it makes sense from a market perspective than we may look to grow in that fleet.
Or I guess as you talk about.
Variant recruiting and planning and managing dispatching.
If it's operating as as well as you say in that much better is there anything you can just.
Learn from what's going on with the AI to have your your people operate more efficiently or do things differently in the legacy fleets that you actually get the benefit there even before you would ever convert.
And to an extent so we've done some of that we've learned some things and tried to apply it to our legacy business, but.
At the end of the day.
The amount of transactions that take place in the amount of of touch points that take place and in day to day running a fleet of that size a computer with artificial intelligence can do so much more than a person from an annual perspective, and so I think there are some things that we can learn but the full benefit.
What is really the digital model really helps us to recognize that full benefit.
And last question just for Pietersen on the finance finance.
Financial net.
With the insurance renewal was there any change in the deductible for your excess coverage that went along with the premium increase.
Yes, we did lower our overall, our lower our overall power, but as far as the deductible amount it stayed at the $3 million.
Okay. Thank you.
Our next question comes from the line of buying open back.
Okay few Morgan you May proceed with your question.
Hey, Thanks, good evening.
Eric for can you just talk about if you're hearing any any real changes on the RFP in a bid cycle. If there if there's going to be something different this time.
At this time Im sure Theres more many bids out there you said you are working on some of those right now but is there.
As this this is just one of those things we hear about when when capacity is tight.
And the cycle is closer to a peak or at least being very well or.
Or do you think is actually do some structural change.
Through technology or through the capacity constraints, we're seeing that the people just want to transact differently.
Anything on that front would be helpful.
Yes, I think that we will see some structural changes in RFP process over the next three to five years I wouldn't say that this year is the year where that really.
It is a significant difference I think this year.
Everybody is really focused from a shipment perspective around trying to capture capacity doing everything they can to capture capacity because of concerns about capacity, they're going to be ongoing into 2021.
I would say that it's going to be more of a focus than doing anything transformational around the RFP process. So I will say that I think over the next three to five years and some of this has been pushed by digital brokers in new entrants into our market.
I do think that.
Patient around technology and technology alignment between the the carrier or the provider and the shipper is that expectation has gone up significantly and I think that will continue to increase and so I think as we go forward over the next three to five years I think the expectation is going to be a more of a digital.
Full engagement and I think that will probably change a little bit of the traditional RFP process.
Okay got it.
A couple more on variant.
Just wondering when you go to the old trucks to the to the new ones I think as we're integrating a different capabilities of course, and then the new ones.
Is there a used truck overhang or how are you managing any sort of residual risk that that might be there as you as you transition from one to the other.
No I think if you look at our general trade cycle essentially what happened is when a direct truck gets traded out a great truck comes and so.
No, it's really not going to change the amount of used equipment that we have on that we have that were.
I have to offload so essentially what we're not doing is we're not marketing the entire red truck fleet out of cycle seller.
Selling it all and bringing in great. We're sticking with our normal trade cycle.
Okay got it.
Part when you think about recruiting for the new platform I get that it's very different than the current legacy fleet.
Yes express, but the how much of an edge and like if you think you have on your and your peers. What are you hearing from some of these other experienced drivers be thereafter, I'm sure they've got a lot more attention and focus on offers on them.
These last couple of weeks and more so in the future.
Then you getting the sense that someone else could could replicate this.
I guess what are the common common reason to hear that you get turned down from someone that you're you're trying to pursue with this new model.
Yes, I think the biggest thing is skepticism right I mean, if you look at if you were to go out and look at all appetite that's out there from a truck perspective is there is a lot of noise and everybody kind of advertise is kind of the best in class type stuff and so we were out there talking about our utilization is talking about how would your drivers then.
There's a lotta yet everybody said that and so there's a little bit of Hey, you got a proven to me.
Then really distinctive piece about this model over the long term is we're also applying the same strategy technology to recruiting and so we are going over time to to to minimize that traditional recruiting piece as much as possible and really leverage the the.
Drivers, because we think that thats really where the value of kind of convince and somebody's there, but this is new and it's different than its innovative.
That's where we're going to get the real value and we're actually started in the early days of seeing traction to that and I think one of the things that excites us. The most is one of the big limitations. Just scalability is the fact that even even if you're running a low turnover you are still going to have a lot of churn and that churn obviously requires a.
Got a replacement drivers and you've got to have a large infrastructure of recruiting and then you've got to have a large advertising budget to drive apps into that recruiting department. We think that this model over the long term and we're in the early days like I said have rolled this piece out we think that that solves a lot of those issues and actually.
We will allow us to scale in a much much.
Much less costly manner and actually scaled quicker. So not only is this an operational play from a technology perspective, but all aspects of this model Leverages technology.
Okay, and do you feel like Theres, any any sort of competitive offering out there in the market.
I just want to maybe not branded.
Revenue has the same way, but have you run into any of that as you're trying to recruit.
I have no doubt that some of our better in class peers are applying some of this same type of technology to their legacy fleet. I think the difference is we have completely redesigned the business model from cradle to grave and is it truly is significantly different now it ops.
Rates and I think the drivers see it and feel it and so I think that while there will be some incremental improvement by applying different and new technology I do think that our model. The cradle to grave type solution of its kind of a greenfield approach I think is unique I don't think anyone else is doing that out in the market and I think that will give us.
A better benefit because of that approach.
Hi last quick one for me back on the brokerage margin you mentioned, a few things you're doing to.
Get that moving in the right direction.
From a month improvement.
What sort of initiatives have you put in place. So I would assume that just based on commentary from peers and just how the markets moving that you achieve margin improvement anyway, so what above and beyond just the market conditions. As you have you seen that can impact here into the fourth quarter in brokerage.
Sure. So we put some a new management into our brokerage group around at kind of Q1.
Of this year, we're starting to get some significant traction around that change and so that's starting to bear fruit and improved a lot of our results. Our operations. Our margins are also we are shifting a little bit of our model, where I think we were over exposed to contract business within our brokerage group and obviously.
When the market turned significantly like it did than that having too much exposure to contract is negative and so were trying to emphasize more spot business trying to go out into the market and be a little more opportunistic from that perspective, and so thats, helping us to drive better gross margins, which will drive better properties.
It will be as we go forward.
Okay.
Thanks, guys for the time appreciate it all right. Thank you.
Our next question comes online of luck follow up you May proceed with your.
You May proceed with your question.
Eric Thank you for taking the question Im curious how this demand cycle appears if it does much different than more recent economic recoveries. For example, the impact of the huge inventory replenishment cycle is that skewing demand in some unusual ways.
Are there other other ways you can characterize this.
Period of recovery versus the say the last two or three.
Yes, I think from a demand perspective is a very unique environment. So you've got you really kind of have the haves and have not one you look at retail retail booming we see.
We see the retail sector their demand is really high while you see maybe industrial and some of the other sectors are actually below where they were pre kobin.
Retail has not only rebound to where they were pretty good over there actually outpacing pretty go bid. But then you also look at the haves and have nots within the retail segment and you've got some retailers that are booming. In fact, we have some larger retailers that are seen 20, 30% type of year over year increases in their volumes and so there is.
Big significant increases while we have other retailers that are off as much as 50 or 60% and so I think those retailers more smaller regional retailers are niche retailers or clothing retailers are definitely hurting while more of the big box retailers are booming. So you've got that aspect I think the other big piece and I actually think it's a bigger pie.
Based on this cycle is really the supply cycle, where you have over 30000 drivers in the drug and alcohol clearinghouse you had one.
At least a 100000 less CDL issued to date than you did last year and then I think we'll have more drivers go into the drug and alcohol and I actually think that due to the fact that the schools. Some of the schools are shut down and those that haven't shut down are running and social doesn't think then I think you'll probably have another anywhere from 40 to 50000.
Lets cbls issued on the back half of this year and so likely we will exit.
2020, with about 200000 less drivers in the market than we entered 2020 with that is significant and that deficit is not going to come back in the short term, we're not going to able to build back that Devin it's partially because of schools don't have the capacity and so I think that that's going to prolong the cycle more than anything.
And is there a regional aspect to that it doesn't sound like it like gateway versus internal just to be.
Very gross.
The graphic moment.
You might see some you know some lumpiness here in there given you know certain weeks that stuff, but for the most part I would say, it's really a universal across the whole network.
And then my last question is dedicated versus over the road, especially long haul teams or otherwise.
Can you talk a little bit about rates and those two sectors of your business.
Sure. Yes, you are dedicated very you know you're going to have a lot more stability typically we're working on three to five year contract and so that is stability.
It is not going to be as volatile when you see this like this market.
Turn like it has and so I think you'll see probably a normal course of of the rate increases that are necessary and then some that are related to driver pay and dedicated because the driver situation is getting very competitive it's not think you'll see some increases to support driver way are a driver wage increase on the LCR side is where we are getting just increase.
This volatility the spot rate is the spot market is spiking, probably higher than I've seen in a long time, there's a lot of volatility in that market. The contract rates I think you're going to have to go to a fairly significant change really.
Really for the Big reason is we went through to bid cycles, where we had flat negative rates and you have quite a bit of cost pressure along with those negative does negative bid cycles and so there is a catch up that has to happen here and I think we'll probably see it through this bid cycle. So the last.
So the last question is in the dedicated is your Rebidding.
How should we looking at different contracts to what degree are you and others in the industry embedding surcharges for truck driver pay availability of capacity.
In other such factors that are reflective of the unknown.
Capacity and demand environment much beyond say the next three to six months when you win any dedicated or at least two to three years, you mentioned five I didn't know that but.
But somehow you have to take into account for capital reasons.
And commitments of capacity and drivers at a time when its or you. Just you have no clue what it can be like 18 months are now much less three or five years.
Well thankfully, we have good relationship solid long term relationships with our customers on the dedicated side and so as we see these types of situations usually.
In almost an almost in every case, we are able to go to that customer discuss what we're dealing with talk about how we feel we need to address it in a driver pay is an issue then we go to them and a lot of cases, we make that driver pay decision in conjunction with the customer we talk about the market, we're talking about the region its operating.
In the competition, we are dealing with and we'll go to the customer and show them all the facts and say look we need to give a leading him a 10% rate increase in this market and usually we will get we will ask the customer to kind of make us whole from that perspective, and as long as we've done our work and we showed that that that the the income.
Hi, this is necessary in usually we don't get a lot of pushback.
Thank you very much appreciate it.
Absolutely.
Ladies and gentlemen.
On todays call Shannon that's helpful I'll turn the call back.
Philip for closing remarks.
All right. Thank you add one thing I do want to address.
If you look at this quarter actually believe that Theres a lot of positive things in this quarter you look at our insurance costs you look.
You look at the fact, we're able to continue to grow and our digital fleet without degrading. Our statistics there is a lot a really positive thing.
That that happened in the quarter and.
And that that's not to say that we're not disappointed by the end result.
And with that with the kind of momentum we saw on the rate side. We would have liked to have had a little bit better they are.
Kind of a bottom line, but at the end of the day. It. This is really the long game and we're really focused around our long term results and trying not to get too caught up in quarter to quarter. I mean, we could have easily meet jerk them.
June and reinstituted, a student training program and Dennis a couple of other things to try to get our truck count our seated truck count back up.
We don't believe that would have been the right decision and at some point, we would have had to go back in and fix that problem. So we're really focused on the long term and we think that we're on the right path and again as we even mentioned in the last quarter. These type of things aren't linear we're talking about a massive transformation and so.
There is always going to be some peaks and valleys and and that process. We're we're fully capable and aware of.
That situation and what we're going to be dealing with over the next couple of quarters, but we feel really confident that what we are setting up is the right structure for the future deals Express we're really excited about it one other thing is we continue to pay down debt and so as we look at our leverage obviously, we believe we will exit this.
Last year was significantly less leverage than what we had had in the past. So we're excited about.
Continuing to pay down debt and continue into to set this company up for the future.
So with that thank you.
And look forward to doing it again next quarter.
Thank you beginning at today's difficult.
This conference you may disconnect your lines at this time.
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