Q4 2020 US Xpress Enterprises Inc Earnings Call
[music].
Good afternoon, ladies and gentlemen, and welcome to the U S. Xpress fourth quarter 2020 earnings Conference call.
During todays presentation, all parties will be in a listen only mode.
Following the presentation. The profit will be opened for questions with instructions to follow at that time.
As a reminder, this conference is being recorded.
Now I'd like to turn the call over to Mr. Brian Bob.
Senior Vice President corporate finance.
Please go ahead Sir.
Thank you operator, and good afternoon, everyone. We appreciate your participation and our fourth quarter 2020 earnings call with me here today are Eric <unk>, President and Chief Executive Officer, and Eric Peterson, Chief Financial Officer. Additionally, current Ram sale, President variances here and answer questions.
As a reminder, a replay of this call will be available on the investors section of our website and through February 4th 2021, We've also posted and updated and more detailed supplemental presentation to accompany today's discussion on our website at Investor Day U S. Xpress dot com, we will be referencing portions of this supplement 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 meanings of the private Securities Litigation Reform Act of 19 Mary.
These include remarks about future expectations beliefs estimates plans and prospects such statements are subject to a variety of risks uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by such statements.
Such risks and other factors are set forth on our 2019 10-K filed on March 2020.
And as supplemented by our first quarter 2020 form 10-Q filed on May six and 2020, 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.
A reconciliation of these non-GAAP measures to the most comparable GAAP measure can be found in our earnings release.
At this point I'll turn the call over the Air Force.
Thank you, Brian and good afternoon on.
Today's call I'll review, our fourth quarter results and provide an update on our digital initiatives designed to grow revenues and position the company for the future.
Eric Peterson, who 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 scaled our variant fleet by 40% sequentially from the end of the third quarter to approximately 700 tractors at the end of the fourth quarter, while maintaining the divisions improved operating metrics, including increased utilization.
Lower driver turnover and reduce costs, which all held steady from third quarter us levels.
Second we've made substantial progress evolving our variant hiring practices, which positions us to achieve our phase one goal of converting 900 legacy tractors to the division by the end of the first quarter as well as achieving our phase two goal of growing variant to more than 500 tractors by year end 2021.
<unk> transitioning our legacy OTR operations.
Third we returned our brokerage segment to profitability, while delivering 41% revenue growth and the fourth quarter as compared to the year ago quarter.
I'll spend more time on our efforts here, but this is an important part of our growth strategy powered by our new digital platform.
For us the strong strides that we have made growing variant and improving our brokerage segment margins were masked by the increased profitability and our dedicated division as a result of capacity costs accelerating faster than we were able to pass them through to our customer.
And importantly initiatives are underway to improve pricing and our dedicated accounts and we are optimistic that we will return dedicated to prior profitability levels over the next two quarters.
Lastly, we believe margins will improve through 2021, as we scale variant and it becomes a larger percentage of our truckload revenues combined with our successful efforts to improve price and get our dedicated division.
We have made the investments and our digital platforms and are on a clear inflection point as we begin to realize the scale benefits of these businesses.
To start 2020 was one of the most important years and our company's history, we successfully launched and scaled variant to nine 4% of our truckload revenues and the fourth quarter as we grew the division by approximately 200 tractors and we are.
Got it on prior calls we believe variant represents an entirely new paradigm for operating trucks and and over the road environment utilizing artificial intelligence and digital platforms to recruit planned dispatch and manage its fleet.
The division's operating model powered by cutting edge technology has generated a more than 20% improvement utilization, while significantly reducing driver turnover and preventable accidents per million miles all us compared to our legacy OTR fleet.
So continued validation for variant was the fleets ramp to approximately 700 tractors over the year.
We needed to see the divisions improved operating metrics hold steady as we grew the fleet in order to feel confident that we could truly scaled the business to much higher levels.
We remain on track and transitioned 900 tractors and total to variant by the end of March and expect to have 500 tractors and bearing it by the end of 2021, and we intend for this division to cannibalize the legacy underperforming OTR fleet.
Our vision and goal longer term is to convert our entire legacy OTR fleet to variant, which we believe will improve our truckload margins when completed regardless of the cycle.
While we believe our margins will expand and we also see a tremendous growth opportunity given the highly fragmented nature of the $800 billion U S trucking market.
Variance business model directly addresses our drivers frustration as our model delivers higher utilization and pay which has directly contributed to a significant drop and turnover.
This is an important variable and variant success and critical to our belief that variant can achieve scale organically. Unlike most competitors and our industry over the past decade.
We have also made significant strides through the fourth quarter and proving our recruiting which was a headwind and variance growth and the third quarter.
This improvement is resulting in approximately 20 drivers per week joining variant.
Day, a recruiting is focused on two channels. The first is our more traditional channel, which utilizes advertising and recruiters and delivering 12 to 15 drivers per week.
Second channel is it new recruiting platform that is technology base, and which we are building internally.
It is an innovative solution fueled by our drivers that we believe are scalable and delivering new drivers each week.
Relatively early we believe this new tech enabled model, we'll see improved results and allow us to pull back on our legacy model over time as a result, we hope to see driver recruitment accelerate while seeing costs decline.
This is an important point that I would like to touch on briefly and which Eric Peterson will discuss in more detail.
We are investing for the future because we see an enormous opportunity to scale the company.
We also believe that innovation is critical to success and those that don't have the resources to invest will have a very challenging time growing and competing in the industry.
As a result, we are building and entirely new business, which has required duplicative investments and spent reps.
Representing and near term drag on margins and <unk>.
<unk> skills that spend will be spread across a larger fleet and that is and when we expect our profitability will meaningfully expand.
As part of our growth and investment we will also focus on developing and more professional sales organization, which can build deep relationships with customers as we scale on our platform.
Today, we are a 40 person sales force, which we need to expand in order to support the growth that we know we can achieve over the next decade.
As a part of this we just hired Jake Lawson as our Chief commercial officer from outside the industry to help us develop a best of breed sales organization to support and accelerate growth.
Turning to our fourth quarter results, our fourth quarter truckload operating ratio improved to 96, 2% or 290 basis points improvement over the prior year.
This improvement was primarily the result of a higher rate per mile combined with lower claims expense, partially offset by fewer average tractors and the quarter.
Our over the road segment experienced a year over year increase and spot rates, given the favorable supply demand dynamics and the market.
This helped to drive average revenue per tractor per week higher by 11, 9% as compared with the year ago fourth quarter. This is primarily the result of 11, 1% increase and average revenue per mile and a <unk>, 8% increase and revenue miles per tractor per week.
Overall, I'm very pleased with how our over the road segment performed this quarter.
Turning to our dedicated division average revenue per tractor per week, excluding fuel surcharges increased $49 per tractor per week, or one 2% as compared to the year ago quarter.
This average revenue per tractor per week achieved and the fourth quarter of 2020 was over $4000. The increase was primarily the result of a two 3% increase and revenue miles per tractor per week, partially offset by a 1% reduction and average revenue per mile and.
And a one 4% decline and average tractors and the quarter.
While the market was strong through the quarter and contributed to improved demand and spot pricing qualified driver availability continues to be challenging which contributed to higher driver pay and recruiting costs.
Additionally, the lack of driver availability forced us to source third party capacity at a cost significantly higher than expected.
Over a typical cycle. It takes several quarters for pricing to increase which provides ample time to adjusted the changing environment.
Looking back to July spot pricing rapidly increased each month pressuring the cost of our dedicated business without the opportunity to increase customer pricing given the contracted nature of the business.
As a result, we have cost increase while rates remained flat contributing to an approximate 400 basis point sequential decline and the division's operating margins and the fourth quarter compared to the third quarter.
Importantly, the division is performing well as we continue to deliver average revenue per tractor per week and excess of $4000. The challenge is adjusting pricing as fast as this cycle change and we are actively engaged with our dedicated customers discussing these issues, we expect to resolve these inefficiencies.
Fees and believe our corrective actions will allow the division to return to historical margins over the next two quarters.
Turning to our brokerage segment, we appointed Joe Guard as President and the second half of 2020.
His prior experience and a global brokerage organization was instrumental and leading his team to improving profitability and accelerating growth, which we have tasked them to accomplish your U S. Xpress.
And Pat can already be seen in our fourth quarter results were brokerage segment revenues increased 41% to $76 4 million as compared to $54 1 million and the fourth quarter 2019, primarily driven by increased revenue per load and importantly, our team made significant strides.
<unk>, improving our mix of business towards spot and away from contract pricing as we work to achieve a better balance and our business.
This shift delivered a dramatic improvement and profitability as the brokerage segment operating ratio improved 920 basis points to 98, 9% as compared to the third quarter of 2020.
As a result.
We delivered operating income of $800000 as compared to an operating loss of $4 $5 million and the third quarter of 2020, and a loss of $2 million and the year ago quarter.
A key driver to the brokerage segment growth. This quarter was our decision to move the business towards a digital platform in order to position. This segment for profitable growth and in April of 2020, we purchased a small business and the southwest which was a technology platform with an experienced and talented team.
Their approach to the brokerage business just to utilize the digital framework for handling transactions, which are scalable.
Importantly, we believe this platform will enable our team to continue scaling the business and drive a high level of growth from the years to come.
Let me now turn the call over to Eric Peterson for a review of our financial results.
Thank you Eric and good afternoon operating revenue for the 2024th quarter was $455 $6 million and increase of $6 million as compared to the year ago quarter. The increase was primarily attributable to increased revenues and the company's brokerage division of $22 $2 million.
And increase of $1 2 million and truckload revenue, partially offset by decreased youll start fuel surcharge revenue of $17 $5 million excluding.
The impact of fuel surcharges fourth quarter revenue increased $23 4 million.
$428 $7 million and increase of five 8% as compared to the prior year quarter.
We posted operating income of $15 $1 million and the fourth quarter of 2020, which compares favorably to operating income of $1 $4 million and the 2019 fourth quarter, our operating ratio for the fourth quarter of 2020 was 96, 7% as compared to 99.
<unk>, 7% and the prior year quarter.
Mary drivers of our improved earnings were higher rate per mile and lower claims expense.
Revenue per tractor per week improved 11, 9% and our over the road Division and one 2% and our dedicated division, while 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 290 basis points.
To 96, 2% from 99, 1% and the prior year quarter.
While we have delivered operating ratio improvement on a year over year basis, we have been investing back into the business in order to drive our digital initiatives designed to improve our profitability while positioning the company for growth.
This investment is depressing the underlying margin improvement that is taking place and.
Importantly, we are managing the business for long term value creation and are confident that these investments will translate into stronger margins and growth as we move through 2021.
As an example, as we built the platform process and technology for variant, we are investing and smart technology and people. These expenses equated to approximately 28 cents per mile from the 700 tractors and bearing and during the fourth quarter.
If we are able to scale the tractors and this division to 2000, and we believe these costs will reduce to approximately nine cents per mile and further improve overall truckload profitability. Additionally.
Additionally throughout 2021, we believe we will be able to remove meaningful costs from our organization as we continue to allocate capital the variance and it cannibalize us the legacy over the road business over time.
And this division continues to become a higher percentage of total truckload revenue, we expect our truckload margins to expand and consolidated operating income to increase.
Net income for the fourth quarter of 2020 was $7 6 million, which compares favorably to the $9 $6 million loss that we reported and the prior year quarter earnings per diluted share were <unk> 15.
Turning to our balance sheet, we had $353 5 million of net debt and $175 $3 million of liquidity defined as cash and cash equivalents plus availability under our revolving credit facility.
I'm very pleased with the progress that we have made us our leverage continue to decline to two four times net debt to trailing 12 month EBITDA for the fourth quarter of 2020 compared to $4. One five times at the end of 'twenty and 'twenty first quarter, we believe our leverage will continue to improve over the next several.
Quarters.
Turning to net capital expenditures, they told US based total $111 $6 million and 2020, including a previously disclosed $20 million transaction that carried over from the fourth quarter of 2019, and the fourth quarter net capital expenditures were $16 $3 million with that I'd like to.
Turn the call back to Eric Fuller for concluding remarks.
Thank you Eric looking.
And looking to the year ahead, our baseline assumptions for the market, including general sequential economic recovery supported by increasing inventory restocking and continued tight trucking capacity and relatively benign cost inflation outside of driver related and insurance premiums and expenses.
These conditions combined with a continued shortage of drivers are expected to be supportive of the market and rates. As a result, we expect contract rates to increase on average by 10% to 15% with the driver shortage likely extending the cycle as we believe there will be up to 200000 fewer drivers and this compared to <unk>.
2019.
While the market should provide and accommodating backdrop for our industry. We are deemphasizing the cycle and fact, we're transitioning our business model from a cycle dependent model to a model that we believe will hold a growth opportunity added and improved margin regardless of the market backdrop was the position.
And in the cycle.
As we execute on our technology enabled platforms, we expect to begin to look more like a growth company than a cyclical company.
The trucking market is the 800 billion dollar market and which no company has meaningful share.
Recently at a large and highly fragmented sector has gained the attention of venture capital and hoping to disrupt and grab market share and what's essentially a wide open opportunity.
We believe this poses a significant risk to all incumbent companies given that rates are commoditized margins are low and existing operating models have been unable to scale.
These market dynamics create a real opportunity for a company that can solve these issues and aggressively scale their business and eventually pushed incumbents out of the market.
Quite and Christiansen wrote about industry disruption and his book the innovators dilemma.
And the scenario that plays out over and over is it new entrants interim market at the lower less attractive in instead of me and the Disruptors head on the incumbents moved to the more attractive part of the market and essentially see the low end to the new entrance the.
And the new entrants use this as a base from which to build out their capabilities and eventually move upstream, replacing incumbents and not only the low end of the market, but the high end of the market as well.
You can see this playing out today within the truckload market.
Oh TR market can be highly competitive volatile and exhibit low margins as a result, many of the larger incumbents are walking away from this market and moving into other areas with less competition and better profitability. This is leaving the OTR market to smaller less successful incumbents as well as new entrants while we.
We believe there are boundless opportunities within dedicated and brokerage. We also believe they are incredible opportunities within the OTR, particularly for a company that can produce and operating model that has a lower operating cost and proves to have significant scalability.
When we started working on our hypothesis around what would eventually become our variant fleet. Our focus was on building a lower cost model that can scale well.
We are still being cautious and disciplined with variance growth everything that we are seeing at this point leads us to believe that we have succeeded we.
We believe we have line of sight and operating model that should operate more profitably depending on legacy model and ultimate maturity.
On top of that we have confidence that variance model combined with the digital platform, we are developing and our brokerage segment can significantly scale, creating a long runway for growth.
We believe we can double our consolidated revenues over the next four years and.
In summary, these are exciting times at U S. Xpress for our people for our customers and we believe for our investors as we embarked on what we expect to be the most wide open growth period for our company and the past 20 years.
And the advantages of a strong capital base and strong customer relationships and the relative stability of our dedicated division on which to build.
We have the confidence gained from variance launch and a clear advantage over our legacy OTR model.
And we have the leadership.
And the technology and team acquired earlier this year to propel our digital brokerage initiatives.
And <unk> business came about because of service and cost advantages over competitors following deregulation and 1980.
The gold rush days of the 19, $80 and 19 nineties and established most of the market leaders and our industry, including U S. Xpress and we believe over the next 10 years the industry will experience similar transformative changes.
Our investments and technology and our mindset that the old truckload model is broken.
We see ourselves poised to lead this next era of growth.
As a reminder, Cameron ramsdell President of variant is on the call and we will be able to add color to questions on variances needed. Thank.
Thank you again for your time today.
Operator, please open the call for questions.
Thank you I will now be conducting a question.
And if you'd like to be placed and the question queue. Please press star one on your telephone keypad.
And from Asia tone will indicate your line is and the question queue. You May press star two if he'd like to remove your question from the queue for participants using speaker equipment may be necessary to pick up your handset before pressing star one one moment. Please pull for questions. Our first question today is coming from Ravi Shanker from.
Morgan Stanley Your line is now live.
Thanks, Good evening gentlemen.
A couple of short on questions and one bigger picture, one and maybe you can start with the fourth quarter and dedicated and one of the beauty of the dedicated business is that it's it's very stable and long term contracts and long term pricing you don't usually have a driver issues and the dedicated business can you talk about.
If theres any way your dedicated business might be different and what we traditionally I understand indicated to me that you are having these issues right now and kind of how they can be solved.
Yeah.
Bobby I think.
Yes.
Really.
If you look at the driver situation I don't think we've ever seen and driver situation deteriorate as fast as we did this year. We went from a situation where it was fairly easy to find drivers turnover was relatively low and then within a matter of weeks, we had really flipped to probably one of the tightest driver sits.
<unk> that we've experienced and a long time.
I think that situation.
Kind of created a situation in which we had to go and add some extra costs, whether it be through pay and drivers more whether it be through extending more on recruiting or going and sourcing third party capacity in order to meet our contractual obligations and we were unable to get.
Back from the customer and a short period of time typically when these things happen, it's progressive and we're able to have conversations with the customer over a period of weeks and even months to get compensated for those.
<unk> cost and that didn't happen and this.
Specific quarter, we also had.
One specific customer that created some headwinds through that process as well.
Okay got it.
On the Varian.
And this incredibly tight driver market is very and having an easier time, finding drivers and the rest of the OTR business and if yes, why not accelerate the rollout and also have you considered breaking variant on the separate segment.
Yeah, So I'll answer that and then I'll throw it over to Cameron to answer a profit driver piece, there and we're not going and switch and all of our tractors over to day is because this is a brand new model, it's brand new technology.
It really is completely unique than anything out there and so we are being very disciplined about that growth and what I don't want to do is go through 2000 trucks over this model and then somehow it break meaning we dilute our metrics at some point and we don't know where it broke so by being very deliberate it's going.
To be slow and it will take us a little while to get to that final.
Cannibalization of that entire fleet, but.
And doing it this way it will make sure that it is sustainable and that we'll be able to recognize.
If we encounter any kind of issues and the growth strategy, we will recognize that and real time and be able to fix it as opposed to having to go back and kind of do a.
And analysis after the fact and Cameron do you want to hit on the geography.
Sure Hey, everyone and as Cameron Robyn. Thanks for the question I think you were asking if we are finding it easier to recruit drivers into there and then the OTR model. The short answer is generally yes progressively more so over time revenue launched an entirely new brand and I think at first underestimated how big of a lift and how much time it would really.
Take to gain traction and educate the market on a unique value proposition, but we've seen sequential growth week over week, even through the holiday weeks, which is traditionally a time when recruiting really slowed down and so we're really gaining a lot of momentum.
Great and would you consider reporting and a separate segment. So we can see some on the differentials and numbers.
Yes.
Okay.
Go ahead Eric.
And I'd say right now and our earning supplement we're putting some of the separate SaaS related turnovers utilization and <unk>.
Accidents per million miles on the variant fleet as variant continues to be larger and a more meaningful part.
And we will consider breaking that out as a separate operating segment and as a reminder, nine.
9% of revenues for the fourth quarter, so much more cannibalization and the com, where ultimately will be display and SaaS separately.
Great. Thank you.
Thank you.
Our next question and say is coming from Jack Atkins from Stephens. Your line, there's not a lot.
Guys. Good afternoon, and thank you for taking my questions.
And yet so I guess, Eric Peterson and when you think about the 2008 cents per mile on the 700 variant trucks and.
And the fourth quarter and I guess, that's overhead is there a way to kind of quantify that in terms of dollars I guess I'm just trying to figure out how many trucks do you need and the very and fleet before debt.
Net debt that fleet is accretive to earnings how close you are weighted to that tipping point.
Yes, I would say Jack.
Thanks for the question I think as far as being accretive to earnings that were already there with 700.
Because as we said thats, great performing 200 basis points better just looking at the combined stat to better utilization lower turnover and fewer accidents per million miles. So I'd say, we're already better than we were.
By replacing the student program on.
And having those other drivers and our over the road fleet as far as nominal dollars to answer your question that 28 that represents for the fourth quarter about $4 $5 million.
The expense and when we get taken out to 2000 tractors and that investment that expense will increase but not nearly at the rate as our revenue will increase that dropped to nine cents per mile and so youre talking about a <unk> 20 reduction out of the cost infrastructure over a unit and at a rate of.
And $2 a mile that's a 1000 basis points of what so.
But we believe that we will achieve 2000 tractors and then ultimately surpass that we don't see a limit to scale at this time and.
And the cost will continue to reduce on a per mile basis.
Okay got it got it.
And that definitely helps and then I guess, when we think about the dedicated piece of the business just to follow up on Robbie's question for a moment.
And.
Eric.
Remember your prepared comments correctly, it sounds like Youre expecting us to take a couple of quarters to get get the rate, where you need it to make up for the cost headwind there to seek those trucks, what why is it going to take so long and on.
Are there things that need to change, although dedicated contracts and the future to kind of put some some.
Rainer just for us on there for situations like we're finding herself and right now.
No I wouldn't necessarily say, it's take it really taken two quarters I think that will the problem is some of <unk>.
Some of the rate improvement that we need will come in.
A little bit later in this quarter right and they'll come in and maybe in the end of January early February and some of it gets layered in a little bit at a time and so I think we will fully be have all of the rate that we need by the beginning of the second quarter, but from a result standpoint, it will be a progression from where.
And we were in Q4 through Q1 into Q2, if that makes sense.
Okay.
Okay, I got you, Eric and so I guess, just kind of put and putting it all together with the additional progress at variance over the course of the first quarter to get us on how to trucks.
The rate actions and dedicated.
Typically I understand there is some obviously some headwinds from a seasonal perspective going from the fourth to the first quarter, how should we think about that seasonal progression. This year given all the different moving pieces.
And we're talking about on the call right now.
Yes, so if you look at obviously right.
The spot environment and Q4 to Q1, there is always a little bit of reduction from a rate perspective, Brian but this year I think youre going to have rate improvement layered and both on the OTR side and on the dedicated side, but I think more significant.
On the contract debt, but probably more significant to us is the Abi dedicated tax where I do think that we will be better on a Q from Q4 to Q1 within our dedicated operation.
And secondly, we will be growing we plan to grow to about 900 trucks and varies by the end of this quarter and today. We are just a little bit below 800. So we are tracking towards that 900 and actually a little bit ahead of it. So we feel very confident that we can get there and is there said today were already recognized and 200.
And points improvement and on.
On the truck by truck basis between variant and our OTR, so that will be another converged and the 200 and some on trucks that are operating at that level. So I think it's likely that we could kind of bucked the normal trend of sea and that big drop off from Q4 to Q1.
I think there are some headwinds and that especially that spot rate, but I think some of the self help things that we're doing specifically around dedicated and the conversion will at least keep us kind of on probably a similar level to the previous quarter.
Okay. That's very helpful. Thanks, again from the time guys.
Okay.
Thank you and ask questions today from.
And from Capex or from Bank of America. Your line is now live.
Great Good afternoon, Eric and Eric and Bryan Eric just to clarify real quick on on that 200 basis points does that for.
And for Varian is that utilization or is that and operating ratio number that you throw on epic.
And some operating ratio number and the components, one of which the largest us utilization.
21% better utilization on a two thirds variable one third fixed debt.
700 of your 1200, you have another 200 basis points and insurance and claims expense and it'll be lower just because of the dramatic decrease.
Preventable accident per million miles and then the third component is driver turnover same driver turnover and that 50% range compared to that legacy group, which has been above a 150%.
Equate to easily 300 basis points of cost.
Thank you for that clarification.
So.
Eric Fuller I, just wanted to understand and you mentioned a lot of focusing on growth and your prepared remarks, and I guess I'm a little confused by that given if you are talking about and operating ratio and the mid to upper 90 spot why would you not say there is no growth and <unk>.
Just focusing on getting the cost and the ratio and debt 80 spread I mean wouldn't that be more meaningful than and.
Growing the fleet at this low single digit margin.
No I think we're not growing at a low single digit margin I think you would be look at it and if you take what we said that we're at 200 basis points improvement within the variant model that we think there's at least another 1000 basis points improvement to come and variant model as we get to maturity debt.
And there's no reason for us to slow down that growth I mean, so at that point, we're running two or 2000 or better basis points improvement over the legacy model. So youre no longer and the mid nineties, you're doing much better than that and at that point, we will continue to accelerate that growth. So we have we have line of sight to do.
And then tune or.
Sub 90, and we believe that we are moving that direction and really what we need to continue to do is convert this fleet and completely cannibalize the legacy fleet as it exists today because it is broken and we can spend a lot of time trying to fix it and it's small incremental fixes and will spend the next year or two fixed and it.
And the reality, we believe that disruption that's happening within the industry and we think it's early days, but we think theres, a real likelihood that and 10 to 15 years the environment within the truckload industry is dramatically different than what it is today, we think that there could even be us little there'll be some small niches and stuff, but from the most part we think that.
The market could even be carved up as little as 20 companies and.
We think that people that are going to sit here and try to operate and a legacy model will likely not survival and so that's why we're making this drastic change and we believe and the direction and we believe that it will improve our earnings.
So just to clarify when you say growth you mean growth switching over to variant outgrowth and the total fleet or do you mean growth overall.
And it would be growth and the total.
As we surpassed so there will be a conversion period. So this year is what I would call more of a cannibalization here, we're going to cannibalize the legacy model from a numbers perspective into various what we get to that point, we're not going to stop we're going to hit the accelerator at that point as Eric said, we will be sitting close to 2000 and.
<unk>.
We're going to have debt that fixed cost of the tech infrastructure going from 29, six and nine cents and.
And we're gonna be after the races and at that point as long as the model continues to scale, which we believe it will we have no reason to slow that down.
And just to clarify on that statement, though this is just the OTR. It does it migrate to the dedicated.
Well, we're still looking to grow dedicated but I think what this is going to do as we grow very that's actually going to give us opportunities dedicated as well because the plus with Eric.
With this growth and variant and.
And the path, we have played a little bit and defensive with some of our dedicated accounts because we were concerned about losing overall truck count. We believe we can continue to grow variance and we will still any kind of reduction that we might have to two.
Absorbed within the dedicated accounts, if we get a little aggressive from a rate perspective, but we need to so there are some accounts that have underperformed and in the past and you probably allowed that underperformance because we were worried about our infrastructure and covering that fixed cost now isn't going to give us the ability to pick those as well. So I think it's a net.
Positive for the entire for the entire company, but when we talk about doubling and we're not talking about just doubling their DRP and we're talking about doubling revenues for the entire company within four years.
If I can just squeeze one more im sorry, but absolutely dedicated contract rates and I just want to understand your answer that Jack and Ravi but.
Dedicated rate decline and I'm, a little without 1%, maybe you can just I mean up sequentially I guess on us.
Pence per share.
Revenue mile basis, but is that mix of business and what would cause us to go down I mean, the contract cash structure and why.
And you will be from built in and on.
Eric if you want us on something on the scale of driver pay because you mentioned the impact of drivers and there.
And I thought.
It's completely a mix issue.
And if you look at the accounts and which we have a higher rate per mile those on.
What I would call the more difficult accounts to staff and so that is where we saw a reduction and our driver count and.
So when you look at the mix perspective, we had less of the higher paying revenue and.
We had less drivers and that's the reason that that mix played out like that its strictly and mix, we didn't see reductions or anything from a rate perspective, it was strictly a mix issue.
And quick onset, but if you want to just put on a thought on the driver pay just as already mentioned and the driver pay with it was it.
Is there a level you want us rolling out percentage rate increase or anything.
That was one of the things on the driver pay per dedicated is because the situation deteriorated. So fast we've already given and a lot of cases.
The pay increase and a lot on those dedicated accounts. So we're in the process now of the recoup for that from.
Customer perspective, so there.
And there may be some small incremental increases that needs to happen on the dedicated side, but at this point I feel pretty confident that we shouldn't see too much.
Increase and the costs from a driver perspective going into this quarter.
Alright, I appreciate the time thanks, guys.
Yes, absolutely we can see.
Thank you. The next question today is coming from Scott Group from Wolfe research providers and our lives.
Hey, Thanks afternoon guys.
And so.
If I look over the last two quarters as you really started this transition to variant.
Over the road fleet is down 12%.
What's going on there.
Yes.
So we so we made a decision and Q2 to stop investing and what we determined was a broken fleet.
And that we were no longer that we came to the conclusion that we werent going to fix it and then if we continue investing and this fleet that at some point, we're going to have to kind of.
And we're gonna have to fix that because we're going to keep investing and throwing good money. After bad. So we made a decision in Q2, which has negatively impacted our truck count and we recognize that and we still believes in this day and it was the right decision.
And we are now.
And you've kind of I would say plateaued on that truck count reduction and now we're going to be building back and building back in the fleet and which we want to see growth on.
So you think and the first quarter the fleet and similar size to what it is right now.
I won't say growth I mean, yeah, I would say, it's mostly I mean I think that.
And you probably don't see net growth in the fleet probably until the following quarter.
But.
And I feel pretty confident that we'll start to see a little bit of net growth and maybe get back to a similar numbers from last year at some point and the back half of this year.
Okay, I, just want to understand bearing and a little bit more.
Are his freight moving at spot rates and this is contract rates are these new trucks, new trucks or are these.
Some of the older trucks that Youre just rebranding.
I'll share more color.
Kevin.
Sure. This is Cameron thanks for the question so it's a mess.
We don't over index on spot or contract rates.
We've built this debt.
And tire model from from scratch with the intent to scale. So we knew it needed to be resilient irrespective of rate type.
And so the focus on the fleet is is certainly have an emphasis on it but it does and that over index on on either one necessarily as for newer old trucks.
We have the fleet is its own unique fleet with its own unique brand. So we are and the process of cycling through some of the older equipment and bringing in new variant trucks.
How much of the margin differential and is just that these are new trucks versus older trucks was that a factor do you think.
And has no it has no bearing on it whatsoever.
Okay.
Okay and then.
And I know you answered about the first quarter trucking margins, but any thoughts on what's a realistic target for the full year trucking margins.
And no, but I do think that youre going to see progressive improvement through the year as long as we continue to be able to grow our very fleet count.
To the tune of roughly what 200 trucks and a quarter or so then we feel really confident debt sequentially, we're going to improve our earnings through the year because as we said we're already getting a significantly better return on those trucks and then as we grow we're going to be spread more of that fixed cost over additional unit so that that Dell.
And we will actually growth.
So if we look in 2018, you did on 93 and a half.
Net of fuel.
Can it be as good as that or better than that.
From.
And I'm not really in the and I'm not really going to guesstimate, where we may land, but I feel very confident if we meet our.
Our goals that we set internally debt I think we'll all be happy with where we ended up for the year.
Okay, and just last thing real quick.
Eric Peterson.
Net capex number for the year.
Yes that is included in our supplement with all of our assumptions for next year and that number is $130 million to $150 million.
And that's the cash that's the.
Net cash capex.
Right.
And that also includes our investment into our technology platforms as well.
Okay. Thank you guys appreciate it.
And <unk>.
Thank you. Our next question is coming from Brian Olsen and back from Jpmorgan. Your line is that a lot.
Hey, guys good evening.
So just maybe picking up on the assumptions and the and the appendix.
Truckload rate per mile.
<unk> and mid single digit increase that seems.
And I guess that on and interpret that because youre looking at 10% to 15% increase on contracts spot still going to be pretty strong and I think and 2018, it did like 12% X fuel.
And what are what am I missing there because that seems a lot lower than I would've thought on midstream and you've got and debt, we don't anticipate dedicated to being to the tune of 15%.
The dedicated piece and aggregate than that that's kind of where you end up.
Okay, even with the and I was looking at the 12% I think was on a consolidated basis with dedicated and <unk>, which was up like eight or so percent. So.
Shouldn't you be able to get better right, if he's got to catch up and some of the cost inflation.
And in 'twenty and 'twenty one.
On the spot side, though you really got two quarters, where you've got a big difference and and then you got two quarters, where you had really high spot rates, where it is.
The year over year comparison is not going to be as extreme or <unk>.
Yeah for the most part.
What rates were you had a really strong spot rate environment on a comparison basis through that entire year.
Okay got it and then the the truck count modest growth it sounds like youre going to start off a little bit slower and then go through the year and maybe hit flat and the back half of the year.
So I guess as to us that Delta I think that was mostly on OTR commentary, but.
Is the delta on that.
Indicated.
Yes, I mean, I think dedicated we'd like to see a little bit of growth, but thats, probably going to be small and where.
It makes sense, obviously, we're going to grow and dedicated opportunistically, but the the OTR fleet conversion over into variances wherever we're going to see that improvement.
And that growth.
Alright, and then just one last one on on variant.
Maybe you can talk about the.
Turnover and the.
<unk>.
And what type of folks who are getting and that stay and and how many are for leaving and <unk>.
And then just the.
Investment needed to build off the automated recruiting for variant it sounds like Thats just getting getting.
And getting live right now so far youre on and what do you think that will end up costing to fully develop.
Right, Yeah, I'll have I'll, let Cameron answer that Kevin.
So the turnover and the various things, we look and turn it over a couple of different ways. The most important way that we look at it.
From a voluntary basis standpoint, right. So what we are intensely focused on and.
Bringing down the total number of voluntary fibers that voluntarily and lead the company and so in total and.
And those numbers, we published in the supplement and its right about 50% right now but.
On a voluntary basis and just important to note that included in that 70% number are the drivers that we are managing out.
The drivers that deliver late and for shippers or don't have a great on time or our safety record we are terminating.
So that's baked into that number also make into that number and anybody that may have actually had an accident and so.
We are intensely focused on reducing the voluntary attrition levels, we don't help us that number at the time, but it is meaningfully lower than the than the total number and everything that we're doing from a technological standpoint is really either directly or indirectly aimed at enhancing the driver satisfaction and thereby reducing that number.
As far as the total investment.
<unk>.
And the right answer and it depends and we.
Take.
Kind of a much more agile approach to development so right now what's in scope.
For for that platform.
Couple of million Bucks, maybe at the most but what's interesting about the model itself. It is predicated upon the belief that the best recruiter for a new variant driver as a happy existing driver and you have many of those as indicated by the voluntary attrition number. So what we tried to do is provide a brand new revenue stream to them.
And while simultaneously, creating a community for them. So it makes us a big accompanies feel much smaller and what's unique about that is it is actually scalable and comes at a lower cost. So what youre seeing is actually a displacement of cost from the traditional model into this new model.
Okay, Great and then maybe just one more quick one on margin profile of logistics and 60% automated.
And the quarter, how do you think of that scaling I guess into into the numbers and excuse me when it comes to.
Reducing head count and getting better productivity and probably a combination of both.
And that's really going to fuel our growth. So as we as we grow this year and we can anticipate some pretty significant revenue growth within the brokerage segment.
We will be able to leverage that digital platform to grow without being as capital intensive as we would've been in a traditional sense.
So.
We're still going to be at and people, but we will be adding people probably at a slower level than we would have because we're able to leverage that digital platform. So not only us theyre going to fuel growth and over time, it's going to lead to a better return from.
Our perspective, because we're not going to need as many people on a dollar by dollar basis that we would and the <unk>.
Traditional.
Right Okay.
Okay.
Thank you for the time I appreciate it.
Thank you.
The next question is coming from Nick Farwell from Arbor Group. Your line is now live.
Eric and Eric I, just have a couple of clarification did I say and correctly that you said.
And that this lag and pricing or price adjustment and dedicated white be no more than one to two quarters typically it takes longer than that especially.
And my my recollection, especially if it starts from the beginning for whatever series of reasons earlier and the year and you have a number of contracts that may come up and the spring or early summer.
No. Most of these issues were and where we incurred new or additional costs that we typically and a normal cycle, we would go back and get recouped.
Compensated from the customer and.
And what normally would happen is this what happened progressively and we would see it and we would go and have dialogue over a period of time with the customers and say we need to get we need to give it a driver wage increase and day.
They would kind of agree with us and so in that scenario you would see the the rate followed suit and usually kind of in conjunction however, this happened. So quickly that we were forced to go and kind of changed the rate and and that same scenario, we were not able to recoup the cost and as quickly but now.
Now we have gone out of cycle and in most cases, we have those increases either in place are growing and place.
Got it okay. So one might say you were far more proactive than prior cycles to be debt gross statement recognizing the squeeze that was taking place and such a short period of time.
It happened quicker than I think than normally where you have a little bit more time. This one just happened so quick and I think thats and it happened on a large scale. So I think it's why it impacted us so much but I think and it also is going to be easier and quicker and effects.
Conceptually, how do you see yourselves benefiting the dedicated side of the business from what you've learned digitizing over the road, if I'm being little gross and my statements, but I think I understand the Congo.
I do and I would say that today that is not on our roadmap.
However, I would say that within a year and a half two years as we get the variant model to what we would call maturity not only from a size perspective, but from a technology platform perspective, we will look to see where else. We can apply this level of technology.
And business model and dedicated would be and obvious place to look so not on our roadmap today.
But definitely in the back of our minds as a possible place to take approach like this down the road.
And taking that same thought process and characterizing it has.
Suitable for over the road to what degree is this a a way of sort of working you're anticipating I guess is a better word ultimately the implementation of heavy trucking.
Yes, I think it actually aligns quite well with all of the different types of technology that are going to be coming down the pike, whether it'd be new types of fuel from attracting perspective, or even autonomous trucks, we think that by leveraging technology leveraging and optimization.
And system that is really not dependent on people.
We can build the most defined network possible to take advantage of new.
New technology from an equipment standpoint that we expect to come out over the next five to 10 years. So we're really looking out for it to be.
They're about this prior year and.
Mid to late 2000, Twenty's before you really see the autonomous truck on.
On certain lanes and all.
Ongoing commercial basis is that fair to your hunch, yes, I would say that you might see a couple here and there, but 2025 and before but not.
Not on a large scale, but I think between 2025 and 2030 I think its likely that youll start to see a lot more autonomous vehicles on the road and we think that the.
And net we're building within variant really translates well to that environment I don't envision it like just taken over and replacing drivers. It's more on a specific kind of area and niche spaces, but theres going to be certain applications that are going to really align very well with an autonomous unit.
No.
And then the last question I, just wanted to make sure I understood Yours and Eric Peterson.
Channel comments about 'twenty, one debt or will improve and.
And some measure because of US variant gross you cover the incremental fixed cost and.
And then dedicated pricing and the improvement that you've characterized earlier and this conference call, but you didn't mention or maybe I missed it the swing and brokerage I mean that alone given what the fourth quarter manifest it would be.
Could be a rather substantial swing going into this particular year compared to a difficult.
First two three quarters last year.
Alright.
Yes, I would agree however.
We are continuing to much like we have done previously with variance.
With the technology platform, we are investing in that area. We are anticipating some pretty aggressive revenue growth not only this year, but and subsequent years and we are building out the platform and.
And in order to facilitate that and so while we don't believe we will sit down back into the red.
And I think that the next year or 2021 will be an area, where we are going to have some additional costs coming into that model net that may make that model from.
On a revenue growth standpoint, we anticipate some pretty aggressive growth, but from a improvement and OS.
We don't anticipate that being a big part of 2021 within debt brokerage division. So basically it's an investment here.
It is but it's going on here and a half.
And it is and that area, but I think the.
Harvest year, if you will and the various model is 2021.
Yes, Nick I think to your point, we don't anticipate having a 106 operating ratio and our brokerage division and 2021.
And so there will be that year over year improvement right right and I.
Say that but what youre, saying is basically it's breakeven maybe and make a little money here, it's not going from negative six to a positive five just.
I would agree with that yes, yes, Okay and then the last question I have when you say cap spending I assume and net cap spending of 130 to 150, maybe I just missed that.
Yeah, that's correct US net capital expenditures of 130 to 150 and what portion of that would be if you could characterize the investment and technology as opposed to fixed.
Equipment, if you will.
Yeah, I would say, yeah, I would say during <unk>.
2020.
$13 million of a net capex number we're around the technology platform that we built and we could expect another comparable.
Two a little higher during 2021.
Thank you very much for taking my questions.
Yes, absolutely.
Thank you we reached end of our question and answer session I would like to turn the floor back over to management for any further or closing comments.
Great and I think one thing that we did not cover on this call that I think is really important is to really define a little bit quickly.
How this model that we're building within variant is different than what maybe others are applying from a technology standpoint, So Cameron and briefly could you describe what we're doing and how it's different than other models that may be out there.
Sure. So there are a few I'd say three or four critical differences.
First is that and we built this entirely from scratch, it's an entirely different tailor build operating model that is digitally native and so if you think about applying technology solutions and an existing business you inherently designed around the existing constraints and those constraints getting built upon and builds upon over time and you end up.
And usually over indexing on them and getting us up at the optimal product as a result.
Also when you apply technology to an existing business, especially people having business and the change management effort is profound and can derail initiative entirely and we fundamentally did not do that.
We dealt us again in a completely greenfield environment and a completely unconstrained environment with all the benefit of the knowledge of those pitfalls, which I think has really yielded a remarkably different products on the problems, we're trying to us all.
And so thats, one and that's just starting place for Varian, the Genesis of Varian and different from anything else out there that at least I've seen.
The second and the submission is fundamentally different and we built this with the intent to scale. It from day, one and we built this on the incentive creating and most seamless and superior driver experience and the marketplace. Most other large providers that are leveraging technology and try to drive incremental change and our mission has been since day, one as a step change from anything else that's out there. So it's a much.
Broader mission.
The third is.
The team of people that are executing the strategy are fundamentally different and so for example, I'm not in Chattanooga and.
100 miles south.
And I 75, I am and Atlanta across the street from Georgia.
And we're in a low part of the city here called cash square.
Got it home to a number of innovation centers from Fortune 500 companies and a bunch of startups and so it's a great place to incubate something like us.
And we have an incredible team of technologists Ideating and building the system that we discussed on this call. We've created I'd say a culture of innovation here comprised of very bright people from very diverse backgrounds and product data scientists software engineering data engineering analytics and more all co located with the operating groups. So there are.
Very tightened feedback loops that when a driver called and there is an issue or something with our optimization system goes wrong is immediately identified if not proactively identified and there is somewhat sitting right. There that is able to communicate with one another albeit and this and.
And this agent and digital world with Covid, but the feedback loop is very tight. So you have this kind of co located on.
Operations with.
Technical operating growth.
And the final piece is it.
Fundamental operating model is different this is not just in and of course, there is an app, it's not some bolt on optimization software.
I think anyone can do that and I think some deleveraging and some some types of optimization software and some capacity, but it's more on how we built and integrated a holistic operating model and that's particularly special. So for example, every trucking company I know and and <unk>.
<unk> dealt with a lot of them. They have low players we do not we have algorithms and these algorithms automatically orchestrate the movement of the assets dynamically regardless of demand and penetrate or disruption, so traffic, whether whatever happens instantaneously process and and propagate into the fleet.
Most companies and most trucking companies have fleet managers and dispatchers, we do not we have a driver concierge and omni channel engagement model for those drivers. So these specialists are armed with technology designed to predict disruptions and ideally automatically resolve those problems before him and interaction is necessary, but this is dropping things happen.
And sometimes you do need to intervene and so what we try to do us triage those as quickly as possible with our algorithms understand the problem and direct them to our specialist that is empowered to handle whatever problem and comes up.
And so everything that we build within Varian is either for rapid proof of concept to make our drivers better and improve our operating metrics like utility Patricia and accidents or to scale on an unprecedented rate.
Alright, and Kim and thank you all.
Alright, I just want to thank everybody for being on the call today.
Again in 'twenty and 'twenty, one is a big year for us I mean, we've been investing and this and building. This for the last few years. We really think this is the year, we really harvest all of that investment and it really starts to show and the numbers start to show and the growth as we've stated multiple times, we plan on fee and revenue growth doubled.
And within the next four years and we believe we built the platform to do that.
Thank you.
Thank you that does conclude today's teleconference. You may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation.