Q2 2021 US Xpress Enterprises Inc Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the U S. Xpress second quarter 2021 earnings conference call. During today's presentation, all parties will be in a listen only mode. Following the presentation. The conference will be opened for questions with instructions will follow at that time as.
As a reminder, this conference is being recorded I would now like to turn the call over to Matt Garth Vice President of Investor Relations. Please go ahead Sir.
Thank you operator, and good afternoon, everyone. My name is Mark Garvey and I recently joined U S. Xpress as vice President of Investor Relations.
[noise] over from Teradata, and Enterprise software company based in California, and I'm really excited about joining U S. Xpress attached an exciting time for the industry I'm looking forward to meeting with you all in the future. We appreciate your participation in our second quarter 'twenty 'twenty 1 earnings call.
With me here today are Eric Fuller, President and Chief Executive Officer, and Eric Peterson, Chief Financial Officer. Additionally, Kamran ramped Bell President of Varian and Joel Guard President have expressed technologies are here to answer questions.
As a reminder, a replay of this call will be available on the investors section of our website through July 29th 'twenty 'twenty..1 we have also posted an updated.
Momentum presentation to accommodate today's discussion on our website at investors day U S. Xpress dot com, we will be referencing portions of the 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 meaning of the private Securities Litigation Reform Act of 1995.
These include remarks about future expectations beliefs estimates plans and prospects.
Such statements are subject to a variety of risks uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by such statements such risks and other factors are set forth in our 2020.10-K filed on March 2nd 2021 as supplemented by our first quarter form 10-Q filed on April 30.
2021 we do not undertake any duty to update such forward looking statements.
Wally during today's call, we will discuss certain non-GAAP measures, which we believe can be useful in evaluating our performance the price.
Location of this additional information should not be considered in isolation, nor it's a substitute for results prepared in accordance with U S. GAAP.
A reconciliation of these non-GAAP measures to the most comparable GAAP measure can be found in our earnings release.
At this point I'd like to turn the call over to Eric Fuller.
Thank you Matt.
This afternoon I'll review, our second quarter results and provide an update on our digital transformation, which we expect will positively impact our overall financial results beginning in the second half of the year.
Eric Peterson will then review our financial results in more detail and I will then conclude with a review of our market outlook.
On todays call. There are 3 main themes that I want to discuss first we continue to successfully grow the tractor count and variant exiting the quarter with 1160 tractors. Despite the tight driver market and various metrics continued to outperform our legacy OTR fleet.
Second Xpress technologies, our brokerage segment more than doubled revenue year over year to $96.5 million and processed approximately 75 per cent of its transactions digitally this quarter.
And lastly, we continue to make progress addressing customer pricing in certain dedicated accounts to the second quarter related to driver and capacity cost inflation.
Turning to variant I am pleased with the significant progress that we made in the second quarter as we grew the tractor count by more than 20 per cent.
During the quarter with 1160 tractors remaining on track to exit 2021 was 1500 or more tractors in the variant fleet.
It's Eric Peterson will detail later, we believe the second quarter marked the low point of our total fleet size and each incremental tractor added the variant will positively impact total company profitability going forward.
Additionally, we launched the second generation of our optimizer, and Barry which incorporates yield in miles.
Decision, making.
We saw this positively contribute in the quarter as revenue per tractor per week increased almost 20% to $4000 on 13% fewer revenue miles per tractor compared with the second quarter of the prior year.
Various revenue per mile increased 37% compared with the second quarter of the prior year.
Miles per tractor were lower.
The optimizer prioritize freight with higher yield in addition to total miles.
In the second quarter last year.
Fleet with small and we expect comparisons to become more meaningful as the optimizer feature mature and various fleet count grows.
Including our revenue per tractor per week, we now have 5 key metrics, where variant is performing better than the legacy OTR fleet we.
We continue to estimate their various delivers an operating ratio 12.
1200 basis points better than our legacy fleet, which is comprised of approximately 700 basis points improvement due to improved revenue per tractor per week.
300 bps improvement due to lower turnover.
200 bps improvement due to reduce claims expense.
Although you can't see the progress that variant is making in our second quarter consolidated financial results due to the reduction in overall fleet size from my perspective is incredibly exciting to see variant continue to achieve every milestone that we've laid out to measure the division's success.
We expect variance growth to overtake the legacy OTR attrition in the second half of the year and lead to higher overall tractor count and margin expansion as we exit 2021.
Turning to brokerage cause second quarter revenues more than doubled year over year to $96.5 million and our operating ratio improved 920 basis points to 99, 8%.
In the near term, we are happy to grow revenue at a roughly break even though our as we build out our network density and demonstrate the value proposition of increased transportation solutions with our customers.
In the second quarter brokerage process, approximately 3 quarters of its transactions digitally compared to 22% in the second quarter of the prior year.
Our improved results were driven by operational gains as we handle freight more efficiently over our digital platform combined with a more balanced mix of spot versus contract pricing.
It's important to note that we are committing ourselves to an aggressive yet methodical growth strategy within our brokerage segment.
For the last few quarters, we've been hard at work reestablishing a more resilient foundation for our brokerage segment, so that our investments in technology and innovation can lead to compounding success.
Significantly improved results in the last 4 quarters are indicative of these resiliency efforts taking root.
Currently we have been developing a brokerage model of the future from the ground up by utilizing technology designed to not only improve the efficiency of our operations, but also to provide a superior level of service from both our carrier network and shipper customers.
We provide our carriers with freight exclusively customized to their locations.
Hours of service and preferences, while also providing them with business and they want the tools that go beyond the usual transactional freight acquisition tool set and the traditional broker carrier relationship.
This is a key differentiator in helping us build out our carrier network density as we rapidly scale our brokerage segment.
The rapid growth in our brokerage segment is not only benefiting our marketplace of third party carriers, but it's also a key component to our broader digital strategy as.
As brokerage scales digitally we can further optimize freight selection across our assets and provide enhanced transportation solutions for our customers, which will help deepen our relationships.
Turning to the dedicated through the second quarter. The team continued to successfully address pricing in certain dedicated accounts, which led to an overall increase in rate across the portfolio of 3%.
Although we have made progress to date, there is still more work to be done.
We will continue to address price to value mismatches in our dedicated portfolio by either raising rates or exiting those accounts.
Stork, Lee, we focus too hard on maintaining the business, even if it was zero margin, but we would no longer be doing that without variant fleet growing and demonstrating continued success. We can move underperforming tractors from dedicated into variant a lever that we didn't have in the past and now let me turn the call over to Eric Peterson from.
A review of our financial results.
Thank you Eric and good afternoon, everyone.
Operating revenue for the 2021 second quarter was $475 million, an increase of $52.5 million as compared to the second quarter of the prior year.
The increase was primarily attributable to increased revenues and our company's brokerage division a $55 million and increased fuel surcharge revenues of $9 million, partially offset by a decrease of $7 million in truckload revenue, excluding the impact of fuel surcharges second quarter revenue of 430.
$7.5 million increased $43.6 million or 11, 1% as compared to the second quarter of the prior year.
Looking at our financial results in more detail, our second quarter adjusted truckload operating ratio was 97, 4%, which was a deterioration from the 94, 1% operating ratio that we achieved in the second quarter of the prior year as well.
We have been discussing over the last several earnings calls our tractor count has been declining as we reduce our underperforming legacy tractors and grow our various fleet in the second quarter. Our average over the road tractor count was down by more than 500 tractors, that's compared to the second quarter of the prior year. Additionally, we experienced an approximate 2.
200 tractor decline in our dedicated division given the more challenging driver market Lastly, our utility was also lower primarily due to an increase in unseated tractors and a change in variance optimizer that prioritize revenue per tractor. In addition to total miles per truck. This was successful in the second quarter as we grew revenue per tractor.
Fewer revenue models.
Our over the road division experienced a year over year increase in spot rates, given the favorable supply demand dynamics in the market.
Hope to drive average revenue per tractor per week higher by 7.8% as compared with the second quarter of the prior year. This was primarily the result of a 22, 8% increase in average revenue per mile partially offset by a 12, 2% reduction in average miles per tractor.
Turning to our dedicated division average revenue per tractor per week, excluding fuel surcharges increased $214 per tractor per week or 5.2 per cent to $4336 as compared to the second quarter of the prior year. The increase was primarily the result of a 4 point.
1% increase in average revenue per mile and a 1.1% increase in revenue miles per week while.
Average revenue per tractor per week increased year over year in the second quarter total revenue in the division decreased because of the fewer seated tractors due to tight driver market.
Turning to our operating income we generated operating income of $8.9 million in the second quarter of 2021.
Which compares to operating income of $16.3 million in the second quarter of the prior year, Arkansas Sedated operating ratio for the second quarter of 2021 was $98.1 per cent compared to 96, 1% in the second quarter of the prior year.
Primary driver of the decline was lower fixed cost coverage as a result of our lower overall tractor count.
Compared to the end of the second quarter of last year, we were down 715 tractors in our fleet approximately 500 and over the road and the balance in dedicated while part of this was by design as we transition tractors from underperforming areas of our legacy over the road fleets or variant fleet. We also experienced a reduction in our dedicated fleet, primarily due to the tight driver.
Market.
Spice the driver market conditions, we successfully grew our variant fleet by more than 750 tractors over the last 12 months.
Overall production in our tractor count it means we have fewer miles to spread our fixed cost base over and as you will see in our earnings supplement this costs are fixed cost per mile. Excluding equipment cost to increase sequentially from 39 to 42 is that.
We estimate the variant tractors generate approximately 200 basis points of additional margin compared with legacy over the road tractors or about $25000 of annual incremental operating income on a per unit basis. This is driven by improved revenue per unit due to the optimizer lower turnover and lower insurance claims expense.
As a result of a significant reduction in our accident rates. In addition, we continue to have fewer manual interventions with fleet management, which also positively impacts our P&L.
Based on these estimates that approximately 1000 tractors. The variant division began to cover its costs and each incremental tracker becomes accretive to earnings for these reasons as variant scales, we expect fixed cost per mile to drop below our historical fixed cost per mile of the legacy fleet, which was approximately 30 cents per mile.
At an average tractor count in the quarter of 5840 non tractors, our cost structure is simply too high.
This dynamic is temporary and I echo Eric's confidence in our strategy as long as the variance fleet growth will continue to invest in variance because the near term headwinds to our financial results will reverse as we approach maturity.
In terms of other meaningful items that significant increase in the price of diesel fuel during the second quarter combined with the normal lag in fuel surcharge mechanism adjustment resulted in an approximate $6 million increase in net fuel cost compared with the second quarter of the prior year and recruiting costs increased approximately $3.5 million due to the.
Tight driver market. These factors more than offset a continuation of a multi quarter trend of lower insurance and claims expense despite higher premiums.
Turning to net income net income for the second quarter of 2021 was $19.1 million compared to $9.5 million in the second quarter of the prior year, excluding the $14.9 million unrealized gain on our 2 simple investment adjusted net income for the second quarter was $4.2 million.
Which compares to $9.5 million in the second quarter of the prior year.
Earnings per diluted share were <unk> 37 for the <unk> 2021 second quarter and adjusted earnings per diluted share, which excluded the gain in our 2 simple investment where 8 cents compared to 18 sets on both a GAAP and adjusted basis in the second quarter of the prior year.
Turning to our balance sheet.
We had $328 million of net debt and $181 million of liquidity defined as cash and cash equivalents plus availability under our revolving credit facility.
I continue to be very pleased with the progress that we've made us our leverage ratio continue to decline and in the quarter at 2.3 times net debt to trailing 12 month EBITDA for the second quarter of 2021 compared to 3.3 times at the end of the second quarter of the prior year.
Finally, net capital expenditures totaled $15.2 million per year to date through the second quarter of 2021, and we continue to expect net capex of $130 million to $150 million for the full year.
And with that I'd like to turn the call back to Eric Fuller for concluding remarks.
Thank you Eric as.
As far as our expectations for the second half of the year, we hit the low point of our seated tractor fleet in the first week of June and have since increased our total seated tractor count by 130 units and our orientation pipeline continues to grow.
We believe that we are now at a point, where the buildup of variant will outpace the intentional attrition of our legacy OTR fleet and then overall tractor count will grow for the balance of the year.
As a result, our fixed cost per mile should continue to decrease and we expect sequential margin improvements in the second half of the year.
We believe that as we continue to make progress scaling our variance fleet and address our bottom performing dedicated accounts, we have line of sight to exiting the year with the truckload operating ratio in the lower nineties, and we remain committed to doubling our revenue over the next 4 years.
We expect freight demand to remain strong given the broader economic recovery combined with a continued tailwind as a result of the federal government stimulus package, which had a notable impact on our operations in the first half of this year.
Apply side the market from professional drivers remains challenging which is helping to keep a lid on supply. These conditions are expected to continue to support spot market rates in excess of contract rates and a strengthening contract renewal environment through the remainder of 2021, and which we continue to participate in.
To conclude this is a very exciting time at U S. Xpress as we believe we have hit the inflection point within our digital initiatives.
To see improved results as we look forward as.
As we've discussed variant now has the scale to positively impact our financial results beginning in the third quarter. We remain on track to achieve our goal of having 1500 tractors in their various fleet by year end.
We believe we have reached an inflection point on our total company fleet and expect to return to fleet growth as we exit this year.
We continue to scale, our digital brokerage platform, having handled 75 per cent of transactions over our tech enabled platform this quarter.
And we continue to address pricing in several of our dedicated accounts, which we believe will yield positive results as the year continues.
We believe we have a powerful profit engine variant, which is set to deliver significant earnings growth per U S. Xpress as we work to add tractors to variance fleet.
As a reminder, Cameron ramsdell president of variance and Joel Guard President of Express technologies are on the call and will be able to add color to questions on variant and our brokerage segment as needed.
Thank you again for your time today operator, please open the call for questions.
At this time, we will be conducting a question and answer session.
I'd like to ask a question. Please press star 1 on your telephone Keypad, Inc.
Information tone will indicate your line is in the question queue, you may price starting to if you like to remove your question from the queue.
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1 moment, please while we poll for questions.
Uh huh.
Okay.
Our first question is from Ravi Shanker with Morgan Stanley. Please proceed with your question.
Thanks, Good afternoon, everyone.
Eric and Eric have you considered or reporting varian as a separate segment to give us a little more disclosure and kind of give investors a little more comfort on the direction of each segment.
And also just to confirm that you are saying that if variant was reported as a separate segment today it would be doing at 88 of war.
Yeah, you know the 1200 basis points us really 1200 basis points relative to where the legacy fleet was before and that's on a operating income per unit basis now as far as reported as a separate call.
Company there are separate resolved that's something we want to do in the longer term, but right now as we're tearing down 1 operation in building up a little it's an allocation game, but I don't think it would be that meaningful and so asbury and get scale that we plan on doing but right now it's in the middle of the convert as we're taking down legacy over the road and standing up variant.
Once that's pure that's something we definitely want to report on.
Okay got it.
Encouraging to see that the variant revenue per tractor per week is it's kind of much higher than the 2019 legacy but kind of is.
Is this just because the cycles and how much stronger and rates are higher or kind of how do I look at that chart.
And that's what we're really trying to disclose what variance doing on a fundamental basis. When you look at the significant increase in miles yeah, I would even argue that when it's a really hot market that theres more congestion and your utility actually goes down we've seen our utility go up.
And the other piece is to focus on to US the improvement in the driver turnover the significant increase in our safety and it as well and that's how we get to that 1200 plus basis point improvement relative to what we were doing and Thats, where I really like everyone to focus because as that contribution margin on a per unit basis hold serve and we can.
Continue to increase that division over time, it's going to eat up that high fixed costs.
Okay got it and just 1 more from me or nowhere on.
Unexpressed technologies.
How how big is that within logistics and also in the slide It says you've had 3 consecutive quarters of operating within the intendant earnings range, what is that intended earnings range.
Yeah, Hi, Robbie this is Joel.
The entirety of the brokerage segment as reported represents express technologies.
What does it is it is a combination as Eric did a good job of explaining of us kind of building back better our preexisting logistics capability as well as investing in our business model for the future.
We are as we've said in prior calls here seeking to scale revenue as aggressively to support.
Our our broader growth imperative as an organization, while maintaining a breakeven to slight profitability at the operating income line and that's why we're.
Just kind of referencing in the supplement there we've done a pretty good job of holding the line there as we've been growing over the last 3 quarters.
Orders and we will continue to shepherd the business in that direction moving forward.
But just you never know what what is the end game there.
At what point do you guys say, okay. Now we've built a big enough platform and then we pivot to profitability or kind of what's the long term strategy.
Yeah, well, obviously long term strategy is predicated upon value creation in and running a profitable business.
Thank goodness as Eric has mentioned in prior calls and even in our call. Today, we have an expectation that we will be seeking to double the size of aggregated revenues over the next 4 or 5 years and we've.
We've disclosed previously that we expect brokerage to be about a 30% share of that pie.
We reached that level of critical mass, where you expect that the investments, we're making now and true sort of the outer years of the next kind of 4 to 5 year plan.
We will give us a windfall at maturity.
Great. Thank you.
Our next question is from Jack Atkins with Stephens. Please proceed with your question.
Okay, great. Good afternoon, everyone. I guess definitely go back just to go back to the to the brokerage comments for a moment it and enjoy it I'd love to get you in and put on this as well but.
When we kind of look at the operating expenses per load on a year over year basis, they were up 33%.
Within express technologies, but you're doing a lot more digital matching I think 75 per cent versus 22%. So well you know.
With that much more digital matching going on why are we seeing more more operating leverage there.
I'm, having trouble following why quad.
Why there's not more profit.
Flow through on such a significant increase in revenue.
Sure Yeah, no I appreciate the question I think.
<unk> established here is we're still very much in the early days of the investment cycle here right itself.
We've disclosed rather transparently in the supplement.
There's.
Players have automation associated with the management of digitizing the legacy business and we've seen some some early benefit there already I can tell.
Al you amongst our income bench.
Work force marginal productivity has improved to the tune of about a 120% compared to this time last year or so.
Where we've been focused on on precision and the investment we're already seeing a benefit in totality. It's still early days and we expect more of what youre seeing or referencing there too.
Create the desired benefit from an operating leverage perspective over the next little while.
Okay, Alright, so is it I mean.
If I'm understanding you correctly, Joel theres been sort of a necessary investment in back office technology et cetera to create the platform for the revenue growth but.
As we scale from here.
There could be more operating leverage in this brokerage model it doesn't have to necessarily be breakeven as you are rapidly growing revenue.
Yeah, that's correct I mean, I think that the.
The crux of the prior comment was really rooted in <unk>.
Ensuring that the sort of foundational elements the fundamentals of a traditional brokerage model are healthy and robust to be able to allow.
Allow us to expand margins over time as this investment takes wrote.
You look at.
Sort of our revenue next year on year, we've done a lot of work to run that Isa from preexisting challenges that were limiting us from a profitability and growth perspective.
As we layered on the technology investment itself, absolutely room to breathe, we're not constraining ourselves to us too.
Breakeven margin and us seeking to sub optimize the arris if opportunities present itself, we just want to be realistic and setting expectations for our growth strategy here over the next few quarters.
And we're early.
Early days on some some pretty positive and what we believe are accretive elements of our long term strategy and those will start to take growth here.
In due course, okay, okay that makes sense and I guess, maybe taking a step back.
And kind of pivoting towards the the trucking business from for a moment you know I think everyone understands.
Did you guys are bearing.
A significant amount of startup costs related to vary and it sounds like we're at the tipping point from beginning to see some operating leverage associated with that which is great.
That'll show up in the second half of this year and into next year, but I guess, when we think kind of.
Bigger picture about the entire fleet you know obviously, we have a very strong market out there right now.
Well why are we seeing a more significant improvement in profitability on sort of the legacy fleet, while you're scaling variant like why why can't we have both at the same time like variant very it's going to be.
Sort of the growth engine for the future and that's all that's important to scale, but why why arent the legacy trucks more profitable this year versus say.
Over the last several quarters, just just given the robust rate environment.
There right now.
Yeah. So a couple of things on the dedicated side I mean, we look at the legacy businesses, obviously dedicated as a big proportion of that and there are some things that we saw some incremental improvement in dedicated but we still have a little bit of ways to go on getting some of those accounts setup in the manner that we wanted that we need to.
From a rate perspective, and we believe that this next quarter, we'll be getting the proper momentum there to get those accounts better align.
On the OTR legacy side, I mean, we're really in the process of kind of bringing that down and really focusing on variance and we are making decisions on a quarter by quarter basis to set ourselves up for the future and so instead of trying to know if theres opportunity.
The market, obviously, we're going to take advantage of that but we're really focused on the long term build and that long term build is we believe appropriate to set us up for performance in the future and so that's where the main focus is and what we don't want to do is throw what I would say us good money.
After bad and spending a lot of time and energy and resources Propping up a division that ultimately we will be.
Exiting over the next couple of quarters.
Okay. Okay.
I'll leave it there and I'll turn it over thanks, so much.
Thanks Jack.
Okay.
Our next question is from Scott Group with Wolfe Research. Please proceed with your question.
Hey, guys. How are you I'm not sure if I'm getting this right, but there's still over 2000 legacy trucks in the over the road fleet. If if we're getting rid of 2000 trucks over the next few quarters.
How are we at the inflection point and that the overall fleet.
So we look at that 2000, and there's a little bit over 1000 net are incredibly healthy that are getting the results that we want and desire for the rest of the fleet and so if we look at what needs to kind of get replaced it's probably less than 1000 trucks at this point.
So.
Over the next couple of quarters, we should start.
A couple of things, we should start reflecting positive.
On a net basis as well as seeing continual growth in variance so.
Part of what's happened over the last couple of quarters is the attrition.
In our legacy tractor fleet has happened at a faster pace than we could grow and based on from the fact that we are down to a size where the attrition just from a math perspective.
A trade out slower we'll start to see net net positive growth in our truck tractor count and that's positive for a lot of reasons are 1 because we are going to have more trucks and variant, but 2 it will obviously spread that fixed cost over more units and so we'll start to see net growth.
In our tractors.
What's a realistic target for net fleet growth in the third quarter.
I don't know if were really putting targets out there for net growth in tractor count, but we believe that we have momentum.
Ghosn I think it is a 100.
104 hundred 120 tractors from the bottom and the bottom was in that mid say June timeframe.
We've grown off of that and so I think that we believe we can probably maintain that level of momentum through the rest of this quarter and through the fourth quarter as well.
And I think you said Erik we'd get to a low nineties.
By the end of the year for truckload and any thoughts on how much improvement we should see in the third quarter should we be.
Should we be in the mid Ninety's for truckload are in the third.
I think we could see some incremental improvement.
So again, we're coming from you know our truck count is still a little depressed from where we were needed to be so as we grow out of those earning net earning profile will improve over the next couple of quarters, but.
It's probably.
We're probably not necessarily splitting the difference but were moving incrementally into a better operating environment in Q3.
Okay and then just last 1 from me when I look at the day over the road utilization. It was down sequentially. A couple percent I guess I would've thought with the mix of more variant and legacy that that mix would have taken utilization higher and what why is it still.
Going lower as we're mixing up more towards variant.
Yes.
If you look at the amount of unseeded tractors because of of that transition we've had more unseated tractors than what we have had typically and so that has created because we've kind of we hit the bottom in Q2 from a truck count seated truck count standpoint and Thats.
Where youre seeing a big impact from the from from utilization.
Alright. Thank you guys I appreciate it thank you.
Thank you.
And our next question is from Brian <unk> with Jpmorgan. Please proceed with your question.
Hey, guys. Good afternoon, thanks for taking the question.
When does it go back to dedicated for a minute here.
It sounds like I guess.
Bigger question is like do you have confidence that this is.
These pricing issues and these contracts are are contained or you're finding that as the driver market gets tighter that.
This is becoming a bigger problem I think last couple of quarters, we've heard it.
It's supposed to be getting better and it sounds like maybe it is on the margin, but it's also not.
Not quite there yet so.
Maybe you can comment on that and then just as a little.
Using this to me that you can't quite get the pricing, but you also can't quite get the tractor seeded so I thought there would be kind of mutually exclusive like if things are pretty strong as you get you get the pricing, but it seems like you're not getting the price or where the tractor has seen it. So you can elaborate on that I'd appreciate it.
Yeah on the <unk>.
Dedicated piece we were.
Yeah.
As you go through and reprice a lot of this business I mean, it takes time.
Started a lot of that process in Q1 and.
Some of that takes a little bit longer than probably we would like.
And Thats why we started seeing some more of that getting layered into Q2, but it may be it wasn't for the entire quarter of Q2.
We will see more of that coming into Q3 from a pricing perspective. So that's a portion of it if you're looking at from an operating ratio standpoint, I mean, the driver situation has progressively gotten worse than some of our dedicated accounts. Unfortunately.
1 of our dedicated operation are in what I would call less attractive.
Our markets or.
Types of operations and so it's been been a little more difficult to source driver capacity and those different types of accounts and so that's created some headwind as it relates to cost and we've had to give some driver increases even in the last say 90 days in certain.
Accounts since the us created a little bit of headwind, where we still have to go back and get back from the customers. So I think it's a combination of the 2.
But we feel confident that as we move into Q3 that we will get our rates in.
In the area that we needed to be in order to get the performance that we're looking for.
Okay. So do you feel like at this point, you've got a good sense is too low.
What type of contracts could be it.
Could be affected and are actively getting ahead of them now so you feel like it's contained.
There's still a little bit just catching up to do here just by the nature of the.
Paying now and trying to get it back later.
It's I would say it's contained but theres always in this market as things progress from a driver perspective, there is theres always a little bit where there is things moving fluidly.
In that market that we have to make sure that we're repricing.
In real time, and we've got our arms around us we feel very confident that we will get the pricing that we need.
Overall, so not going to take our eye off the ball as we look at.
The driver situation in each 1 of these individual accounts.
Okay.
Also on drivers can you just talk about the.
Acquisition cost of a variant driver.
Maybe how that's been trending us in this in this tight market.
It doesn't seem like it's hindering the fleet growth, but maybe from a cost perspective. If you can just give some clarity in terms of what that what that trend looks like if it's getting.
Easier as it scales are still expensive because there are still drivers and they're hard to get hold of especially ones that are higher I experience.
Safer drivers.
Yes, I think from a from an acquisition cost for the very drivers, we haven't seen that necessarily come down.
The driver situation is very difficult is highly competitive we are.
Also have a new brand out in the market.
And so we are still in the process of kind of introducing ourselves to the driver market now that we ever 1000 trucks, but youre talking about a market with millions of truck drivers and so getting name recognition is still an issue for us and so getting our name out there in the market and our reputation out in the market is a big important part of the.
The strategy, but also a costly portion of the strategy as well and so I would say we've not hit a point to where we are seeing a cost benefit on recruiting I think we can get there and we have some strategies around multi level recruiting and other things that we think will give us the net benefit.
Net cost reduction as we go forward, but.
We're definitely not there at our current size I mean, we probably think that.
That probably happens as we get a few more thousand tractors in our fleet, where we can get a significant decrease in our recruiting costs relative to what we typically spend.
Yes.
Alright last question on that point to just the whole cost structure, maybe for Eric Peterson.
When you talk about <unk>.
Purposes, the cost structure.
Is it really just the duplicative costs is it really just about volume at this point and more more tractors more miles or or is there are you getting to the point, where you've got some visibility so maybe.
Repurpose or or.
Maybe teardowns not the right word but.
Is it is it really just.
More miles or are you do you have some levers you can pull to kind of rightsize the business as well.
Yeah, I would say from a fixed cost perspective, the biggest piece of it is just getting not just more miles, but more variant miles. If you look at the number of terminals. We have the size of our organization and this foundation that we've built has very broad shoulders now to <unk>.
Please handle several thousand more tractors before we're having to do it and so you know, we're we're really encouraged us as long as the variant truck count trends up.
We're going to.
If not we'll grow into our fixed cost infrastructure to where it was up.
Up to 13 cents per mile lower on a per mile basis, and then we think it can scale, even more than that and the way you think about that if every to set us a 100 basis points going from 43.
A mile to 30 miles of over 600 basis points of earnings once we just get back to the legacy side that we've been before so we know at a minimum we can get there and then we'd like to accelerate and keep scaling very and on top of that so it's just growing into the footprint that we have today.
You could what I can't do right now is just take that footprint down to match the revenue only they have to build it back up in 12 months with nonsensical and Thats why were looking through some of these quarters, where maybe our earnings arent as ideal relative to the market, but as long as we're focused on the build in that landing pad so to speak.
That we're heading down, but we're really excited about where we're going.
Okay. Thank you for your time.
Thank you.
And as a reminder, if you have any questions you May press star 1 on your telephone keypad going sole insurer respond in the question and actually queue. Our next question is from Kenn Hoekstra with Bank of America. Please proceed with your question.
Hey, Eric Eric can seem good afternoon.
Just want a decelerating pace that at variance. So if you had 1100.60 tractors you're targeting.
Up to or over 1500. It seems like you added about $4.65 in the first half targeting $3.40 in the second or are you prepared now to raise that 500 target.
Yeah, I wouldn't say, we're raising it but I feel very very confident that we will outrun it.
We internally, we have lofty goals than that and we think that we will hit those but.
For for a goal that we're setting out there from the public markets I mean, we're still saying 500, but.
I feel very confident that we will out run that.
Okay.
Irrespective of I guess, the the decline in the over the road right. That's just completely separate.
Yes, yes.
So you talked about Eric Peterson, you talked about allocation to get to the 200 basis points, how do we get visibility on what we'll look at than when you fully allocate the differential right. So if you've got to take that overhead now to put it onto onto Varian I guess, what gives you the confidence confidence in that and just following on.
That the costs well I'll stop there and then I'll move on to a wage wage question right.
Yeah, I think while we feel confident there's a bit of us a math exercise if we know what our fixed costs are on their constant and we're able to shoulder more tractors and I know that I'm, putting these variant contribution on a per unit basis of over $25000 on a per unit basis of what was there historically as we grow variant from a 100 <unk>.
60 factors 2000 tractors at 3000 tractors to 4000 tractors and were able to maintain that fixed cost that's going to be very accretive to earnings Yeah. I think as a reminder, as we said with our revenue target to double our revenues.
Over the next 4 years and we broke down the individual components is over $1 billion of that was on the truckload segment.
Which equates to an additional 5000 tractors from where we are today and that's what we're building and with that size and scale and superior earnings on a per unit basis, all of a sudden what that's going to do is it's going to make that fixed cost in that overhead are much smaller smaller smaller percentage of overall revenues.
Okay.
I guess caution, though just give us.
Given what we saw with Swift when it just went for scale right. It it still takes us focus on on the margins along the path I think that was important to.
To learn that it's more of the profits along the way right not just just scale.
Ken I think Thats, a great point and that's why in this scale something that we watch.
Very closely is what we call our product index and we don't want dilution at that we don't just want revenue, but we want earnings and so while we feel confident that as long as we maintain on a per unit basis that superior safety record that lower turnover.
And the higher revenue productivity.
We're going to we're going to not just deliver revenue, but we're going to deliver earnings as well, we're not just going to grow revenue to grow revenue at a 98 operating ratio right. That's not the plan at all we're going to maintain that product index, we're going to scale variant and will deliver stronger earnings at maturity much stronger.
Okay Alright.
Just it looks like wage inflation was up 6% sequentially yields up to where you may be just over 3.5% sequentially just given the market exposure. What why do you think you werent able to adjust fast enough I guess, we've seen a couple of others report, where we saw the rates adjusted and given I thought you had a little bit of spot exposure.
Or why do you think the <unk>.
You weren't able to adjust the costs as quickly as your I'm sorry. Your revenue this quickly as costs.
Yeah Yeah.
It's really it's really based on the fact that the driver of the acquisition cost for the drivers have gone up significantly and we're trying to build.
And so that is the focus had been more in a maintain basis, we probably could've kept.
The cost a little bit lower and matched with the right, but like we said we're really in a.
We have them.
Our mindset about looking towards the future and not necessarily focused in the near term and that was the right strategy for us in this quarter.
I think that Youll see as we go forward that cost of line, a little bit better with the rate, but in this last quarter like I said, we were focused on continuing to build which we think is really crucial to us.
Our long term prospects.
So I guess non if I could just finish with a follow up to that Erik I think you talked about getting rid of 200 tractors that were the worst performing and yet still deteriorated I think to Jack's question before in this kind of market.
Even kind of it seems like just being in the market you would see the benefits from that during the IPO you talked a lot a lot of us.
The cost that you were focused on that we're going to come down like insurance and things like that are those I get the whole focus on what that's going to do with improving performance, but are those other plans to fix anything at the legacy <unk>.
All gone and why wouldn't you know if youre getting rid of the worst performing you said, we're not taking a.
Breakeven.
Business anymore, where we got rid of 200 underperforming tractors, just wondering why the legacy wouldn't wouldn't have outperformed a little bit more than we saw.
So we continue to focus on cost and reducing cost I think that we will start to see some improvement as it relates to the safety line item, we see improved results in our safety results. If you look at over the last couple of months we've seen.
Much lower accident rate a lot of that is due to the variant but not all of it.
Then what we have previously run and so we think we will start to see some some decent savings.
That line item over the next couple of quarters.
But the real issue with the model as it shows in Q2 is really about fixed costs and the fact that we lost.
Enough trucks on a net basis to where our fixed costs were not spread across enough units and thats really the issue and that that's the crux of the ore issue. If we had a few 100 more trucks in our fleet than our earnings would've looked.
Much more improved.
But but like I said, we still believe that we are removing the right trucks and replacing them with much more profitable trucks and on the backside of this while it's a painful process. While we're in the middle of it will show significant earnings improvement as we go forward.
I appreciate it good luck with the with the conversion.
Thanks for the time.
Thank you.
And we have reached the end of the question and answer session and I will now turn the call over to the management for closing remarks.
Alright, well, thank you for attending and we will.
As we look forward we're very.
Very very optimistic to where we're headed I know.
It's a painful process for us as well as we're in the middle of it and this transition is not something that necessarily us is it easy transition or a linear transition, but as we go forward. We feel very confident that we will be moving into a much greater improved earnings profile as we move into the next couple of quarters. Thank you.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
Okay.
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Yeah.
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