Q3 2021 US Xpress Enterprises Inc Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the U S Express third quarter 2021 earnings conference call. During today's presentation, all parties will be in a listen only mode. Following the presentation the conference.
<unk> will be opened for questions with instructions to follow at that time. As a reminder, this conference is being recorded I would now like to turn the call over to Matt Garvey, Vice President Investor Relations. Please go ahead Sir.
Thank you operator, and good afternoon, everyone welcome to the U S Express third quarter.
'twenty one earnings call, Eric Fuller U S Express as President and CEO will lead our call today, followed by Eric Peterson, Our CFO, who will discuss our financial results. Additionally, Joel Guard President of Express technologies, and Cameron Ramsdell President of variant are here to answer questions.
Our discussion.
<unk> today includes forecasts and other information that are considered forward looking statements. While these statements reflect our current outlook. They are subject to a number of risks and uncertainties that could cause actual results to differ materially. These risk factors are described in U S Express his most recent 10-K filed with the SEC and.
And in our form.
22 for the quarter ended September 32021.
Which is expected to be filed with the SEC in the next several days, we undertake no duty or obligation to update our forward looking statements.
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.
<unk> information should not be considered in isolation or as 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.
As a reminder, a replay of this call will be available on the investors section of our website.
We have also.
Our intent and an updated supplemental presentation to accompany today's discussion which is available on our website at investor Dot U S Express dot com, we will be referencing portions of the supplement as a part of today's call and with that I would like to turn the call over to Eric Fuller.
Thank you, Matt and good afternoon, everyone.
This afternoon.
Posted a review of our third quarter results and provide an update on our digital transformation.
On todays call. There are five main themes I don't want to discuss.
First and foremost we sequentially grew our overall truck count in the quarter, which is a key inflection point as growth in variant outpaced attrition and the remainder.
<unk> of our OTR fleet.
The variant fleet exited the quarter with 1283 tractors.
Our brokerage segment grew revenue, 62% year over year, demonstrating its ability to provide expanded capacity solutions for our customers.
We made tremendous progress repricing, our dedicated portfolio in Q3, and expect a full quarter of higher rates in Q4 to provide improved margins.
We remain committed to investing in variant and express technologies to position our company for long term profitable growth as we focus on doubling.
Over the next four years.
Turning to variant we continue to grow the tractor fleet and variant during the third quarter exiting Q3, with 1283 tractors, which represents approximately 11% growth sequentially and we remain on track to exit 2020.
<unk> <unk> with 1500 or more tractors in the variant fleet, which would represent approximately a 120% growth year over year.
Tractor growth in our variant fleet outpaced attrition in the remainder of our OTR fleet and I am pleased to report that our overall truck count grew sequentially.
<unk>, which was what we expected coming out of the second quarter.
As a reminder, we launched variant just under two years ago with five trucks and have grown the business to an annual revenue run rate of approximately $250 million exiting Q3.
We believe this is a remarkable accomplished.
<unk> given the macro environment that we've been navigating over those two years.
Since the end of the third quarter, we have added close to 100 additional tractors to variant.
Importantly, we have added to our tractor count while maintaining our safety stats, which is a key part of the incremental operating margin improvement and variant.
Complex compared to our legacy OTR fleet.
We now expect to return to sequential total tractor growth as various growth has outpaced the contraction in the remainder of our OTR fleet.
Turning to dedicated last quarter, we discussed addressing price to value mismatches within our dedicated portfolio of business.
I am pleased to say that the vast majority of those mismatches have been addressed which led to an increase in overall rates across the portfolio of 3% in the third quarter.
Our rate exiting Q3 was up closer to 7% sequentially and we expect to see that rate of improvement benefit our operating.
And net income beginning in the fourth quarter.
These price increases where necessary to pay our professional drivers competitive wages to provide the service levels that our customers have come to expect from us.
Looking ahead for this business, we expect truck count to hold steady during the fourth quarter of 2021 with modest.
<unk> growth in future years, as we believe our growth opportunities lie in variant from a truckload perspective.
We expect the operating margin in the business to improve steadily long term as we improved both the professional driver experience as well as our cost discipline and dedicated.
Brokerage segment Express technologies grew revenue, 62% year over year to approximately $91 million.
More importantly, gross margin was up 450 basis points compared to the third quarter of 2020.
In addition, the percentage of loads process on our digital.
Digital platform increased to 83% in the quarter.
We are in the early innings of our transformation within our brokerage segment.
To establish a scalable and differentiated digital freight marketplace. We believe doing so not only creates a more resolute operational foundation for our entire.
Turning but enables innovation into adjacent business model is deeper engagement with an expanded network of shippers and carriers is realized.
In pursuing these growth initiatives, we will continue to prioritize responsible revenue and loan growth as we work to demonstrate our value proposition to our carrier and ship our partners.
As we continue to build out our network density to help ensure broader operational resilience for U S Express and our partners. We continue to target growing this business at a roughly breakeven or in the near term.
With that I would like to turn the call to Eric Peterson to discuss our financial results in more detail.
Thank you Eric and good afternoon, everyone.
In the third quarter, we generated operating revenue of $491 1 million an increase of 13, 8% from the third quarter of 2020, excluding the impact of fuel surcharge revenue was $451 $8 million in the quarter and.
<unk> of 11, 9% year over year, driven by increases in both truckload and brokerage revenue.
And our over the road Division.
Variant Optimizer is now prioritizing for yield which is a combination of rate and utilization. This prioritization helped drive average revenue per tractor per week.
<unk> up two 4% through an 18, 3% increase in rate per mile netted against the 13, 3% reduction in utilization.
I'm really pleased to highlight the progress made in our dedicated division and increasing rates across the portfolio, which resulted in a seven 4% increase.
And rate year over year. This helped to increase average revenue per tractor per week to $4340, an increase of six 7% year over year.
Dedicated rate exiting the quarter was up approximately 7% compared to our second quarter rate and it's important to keep in mind that the rate increases.
<unk> backend loaded in the quarter, whereas we had a full 13 weeks of increased costs as we were already paying our professional drivers competitive wages ahead of receiving the rate increases from our customers.
We expect these rate increases to have a more noticeable impact on our truckload operating margin beginning in the fourth quarter.
As we turn into operating ratio adjusted operating ratio deteriorated in the quarter to 98, 5% compared to 96, 1% in the prior year quarter adjusted truckload operating ratio deteriorated to 97, 8% compared to 94, 1% in the third quarter of 2020.
The deterioration.
Patient in our operating ratio in the third quarter is primarily the result of our conscious decision to build the foundation of a company that can double its revenue over the next four years and support a fleet much larger than our current fleet size.
As a result during the transition period of building out this infrastructure ahead.
Truck count growth, our fixed costs will temporarily be too high relative to our current volumes as we continue to grow our variant fleet into the size of our infrastructure. We believe that our fixed costs will decline as a percentage of revenue and ultimately show the operating leverage in our model.
Turning to guidance.
But to help with modeling I wanted to highlight a couple of changes in our assumptions for Q4, and the full year as well as reiterate a few other points in.
In terms of total truck count in the fourth quarter, we expect modest sequential growth in overall truck count as the growth in variant has now surpassed the reduction in our remaining over the road fleet we expect.
Utilization to be flat sequentially as variant continues to optimize for yield rather than utilization alone.
We expect truckload rates to be up 2% to 4% sequentially and a modestly exceed anticipated cost inflation in the fourth quarter.
We continue to expect our full year effective tax rate of 26 to 20.
<unk> used that before any discrete items, we continue to expect net cash capital expenditures of $130 million to $150 million for the full year and we now expect interest expense to be approximately $15 million.
As a reminder, we have an equity investment in an autonomous trucking company, which we mark.
Mark to market on a quarterly basis and this can be volatile at times, we will continue to adjust this unrealized gain or loss out of our adjusted result, because it is not indicative of our operating performance with that I would like to turn it back to Eric Fuller for final comments.
Sure.
Before we open the call to Q&A I wanted to take a.
8% to discuss our outlook over the next few years, how we are measuring success and how we think you should evaluate our progress as we execute against our long term goal of doubling revenue over the next four years.
First and foremost.
While we are extremely excited about the course that we have chartered for the company over the next several years.
Couple of progress towards it we believe the trucking industry is moving closer to disruption in consolidation.
We believe it is only a matter of time before the venture capital that is flowing into adjacent industries, such as freight brokerage alternative fuels and driverless technologies make its way into traditional asset based.
And are some.
Someone will solve the scalability issues that had been inherent in our industry since its inception, and we believe our focus on building a digitally enabled fleet, which has recruited planned dispatch and managed using artificial intelligence and digital platforms is how to do it.
Therefore.
Trucking our focus remains on investing in variant and express technologies.
Metrics wise, the most important metric to follow engage us success and variance truck count.
As long as variant continues to grow we will continue to allocate our capital towards that business.
Keep in mind that each tractor added to the fleet.
The approximately $25000 of annual incremental operating income compared to the legacy fleet.
Next we continue to add truck count or a variant while keeping our safety stats in line within our long term expectations.
Preventable accidents per million miles as a leading indicator.
Azure actions today will benefit us more in future quarters as claims have a long tail.
Turnover is extremely important to our ability to scale, our business and improve profitability.
We remain confident in our long term expectations for turnover and variant.
Fact that quarter to quarter.
So a few swing, particularly as the market for professional drivers remains extremely competitive.
As we prepare for more growth in 2022 variant is focused on maintaining its driver experience, which is critical to achieving our longer term turnover expectations.
Finally on the metric.
Pay attention to revenue per truck per week and variant.
We are right takers, given the fragmentation in our industry, but variant optimizer is uniquely able to solve for how best to monetize the available freight in our network given the various constraints, including locations of trucks trailers drivers holiday schedules.
<unk> and <unk>.
This is a combinatoria problem that generates potential solution sets, which are orders of magnitude too many for humans to account, let alone calculate which is why we are using algorithms to plan our loads instead of people.
Looking ahead to 2022, we are focused on continuing to position.
<unk> the company for long term success by increasing the truck count and variant and continuing to grow revenue and load count and express technologists.
We believe we have reached the tipping point, where various growth will outpace the contraction of the legacy OTR fleet and.
And will result in sequential net total.
Additionally growth over the coming quarters and finally as the last few weeks have shown variant continues to grow which we believe will ultimately be the driver of improved financial results.
With that operator, we are ready to take questions.
At this time, we will be conducting a question and answer session.
<unk>. Please ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Our first question is from Ken <unk> from Bank of America. Please proceed with your question.
Ken.
Yes.
Hello.
Again.
Hi, Eric and Eric how are you.
Good good.
Can you maybe just good afternoon can you talk a little bit about your.
Your move to you noted it raising driver pay at the beginning of the period.
But yet you waited until later on to start.
Countering with rate.
Rate increases we saw their carrier is obviously a bit more aggressive to do that faster.
And especially in this environment.
Provide that capacity so.
Are you doing it again are you raising pay again should we expect another overhang given this environment or are just the new rates just catching up now.
And there was a little bit of a catch up effect Ken.
We we can we always go back in.
Look at.
Our previous quarters, and how we performed and that was an area where we admittedly.
Did not get the rate that we needed in order to properly compensate our.
Our drivers and so that was an area, where we did end up given some.
And were increases prior to getting some some rate increases and we didn't get those rate increases as timely as we would like but we now feel like we are at a point from a rate perspective that we are comfortable and while there are some small increases that go into effect, we should be maintaining.
That rate from here on out and Shouldnt see additional cost increases in relation to that that those rate improvements.
So I'm sorry, So you said that there are still more small rate driver pay increases or rate.
On the <unk>.
Some marginal pay and there is always I mean.
Theres pay increases that happened.
In this environment it is happening in real time.
To say that there won't be any I don't think there'll be really any significant cost increases in that area and what we have in rate is sufficient and we will be able to maintain both the rate and.
Margins going forward into the next quarter.
So into the next quarter. If you know if these are backend weighted should we be seeing.
Mid ninety's or I mean, where do you go from a 98 it seems like you've.
Volleyed around here through this year so far.
And a great rate environment, what does it take to.
Move out of that I think 90%.
From a dedicated perspective, we're very comfortable where we are from a rate perspective, I mean, we are there it took us probably two quarters longer than we would like.
So not necessarily thrilled that it took us longer but we're there and we feel like we have the right.
For the current environment in place there is always going to be a little tweak and Theres a few accounts here and there that may get tweaked, but for the most part from a dedicated perspective, we're comfortable with where the rates are.
Okay, I'm, sorry, and did you want to hit on the or.
Is this enough to get you moving out of that upper ninety's or.
Rates, just kind of incremental so I think it's going to improve you look at dedicated it makes up about 40% of our revenues are so and the rest of the organization.
It is about growth so we're continuing to focus on.
Growth within our variant truck count and Thats the key to our operating.
As the show improvement, that's a key to our earnings and.
We still believe that we're on the right track, we believe in the story and our strategy. We think it's the right strategy.
Prove it out almost on a daily basis in our modeling and we know that we are as long as that continues to grow and we continue to add to our variant truck count fleet and we're going to be exactly.
Where we want to be in the future.
And we feel really good about the next couple of years.
One more if I may just on brokerage I just wanted to stand how you don't posted a gain in this quarter I understand you were talking about still looking for growth yet we've seen other companies that are in the midst of massive growth surprises.
<unk> really.
Larger gains than they had ever anticipated just given the strength of the rate environment. The spot market, maybe you could just walk us through your thoughts on that yes, Ken I'm going to let Joe Guard answer that one.
It's all here thanks for the question.
I mean.
He is straightforward as possible.
Uprising, thank ed, but they get sick.
We continue to be an investment stage.
Yes.
C.
Similar improvement in our freight mix and gross margin performance.
At the contract level on both sides of the business, but.
We continue to proactively invest for the future.
And that's sort of reflected the numbers for the quarter itself.
This is on the future.
Certainly a great environment right now.
Also took advantage of it.
Doing so with an eye towards where we're going over.
Over the long run.
Great. Thanks for the insight guys I appreciate it thanks, Eric.
Thank.
Sure.
Okay.
Our next question is from Ravi Shanker from Morgan Stanley. Please proceed with your question.
Hi, This is Christine mcgarvey on for Ravi how are you guys doing.
Got it.
Thanks for taking the question maybe I can follow up on <unk> question.
Thank you for asking it in a slightly different way.
They're very clearly.
Clearly on track for 500, Thats only a couple hundred away now at this point, but the margin kind.
Kind of flow through has been a little bit elusive. So it might be helpful to kind of parse out the dedicated impact that you guys have kind of discussed this.
Quarter versus the fixed cost.
As a percentage dynamic that's happening there and maybe how should we think about the <unk>.
Target kind of beyond that 500, and how you guys are thinking about the inflection.
Beyond that.
Hey, This is Eric Peterson to answer your questions at one point, we wanted to.
Is that one we're focused on the longer term, we're investing right now and we're working on our landing pad, which means that our quarterly earnings.
<unk> is focused on the.
On the next 90 days as we are is where we're headed however, with that said as far as the impact of these dedicate.
It makes increases.
If you look at it on a sequential basis from the second to third quarter were up a couple percent, but were up actually close to 7% on our rate increases where we're entering the fourth quarter compared to where we were in the second quarter and so we think that will have some of that will.
Help us.
Number greater than.
Zero better than a 98 or all things constant if youre looking at the contribution from variant as we go into the fourth quarter and in the third quarter. We only grew our variant truck count.
100, approximately 120 tractors and we had grown by 470 in the first two quarters. So we didn't really get a lot of benefit.
In the third quarter from variant growth now with that said just like our dedicated price increases that were back end weighted at the end of the third quarter. So that was our growth in variant and and we've already grown at approximately 100 trucks since the end of the quarter. So.
That's something we're seeing during a transformation where I wish it was in the straight line left to.
At the same slope, but.
It's going to accelerate then it's going to slow down and then accelerate.
I'd say the last five weeks that variant truck count growth has started to accelerate.
And it's good as it becomes a higher percentage of our revenue youre going to see it have a more meaningful impact on our overall earnings.
Ray it's still less than 20% of our overall earnings were extremely excited about it.
And as it becomes a more meaningful percentage of our of our truckload revenues, we're going to see the earnings improved on a sequential basis, we feel like we've been through that hard point, where.
The tear down of our legacy over the road fleet.
Variant.
<unk> is now it's losing the rates compared to the growth with variant. So we're growing more trucks on a quarterly basis and variant than what we're tearing down the legacy fleet.
And we haven't shown sequential truck count in our over the road fleet since the second quarter of 2020, and so we think this is the inflection point quarter in Worksite.
<unk> added about the good times to come.
Just in the next couple of quarters, but over the next two years.
Got it that's very helpful to kind of think through if I could ask a follow up.
How do you think about heading into next year, an interesting comment in the deck.
You noted you expect spot rates actually exceed contract through next year.
So I'd be curious on what's giving you confidence there and any early read on what we can expect for contract rates.
<unk>.
We expect this environment to continue we don't really see the environment changing.
All that much from where we're at today. If you look at macro conditions, we think demand will stay strong well into.
So at least the first half of 'twenty, two I'd really say the second half of 'twenty to do but.
Theres always a little bit of concern about some supply chain issues and whether we end up in a situation where COVID-19 just goes away altogether do we ended up where people over index, a little bit more on experiences and things like that but.
For the most part we really don't see demand slowing down and even when the consumer slows down there is a significant restocking situation that has to happen on an inventory level that probably leads to increased demand for another six to nine months. So we don't really see demand really slowing down on the supply side.
And it is about equipment to an extent and that is creating further headwinds with trucks and trailers, but really it's all about drivers and we have a serious driver issue within the industry. We don't have enough drivers, we can't find enough people that want to do the job and we're continuing to see that struggled.
The entire industry and I don't see any catalysts that would significantly change that so I think until we were to get to what I truly believe would be.
More of a global recession, I don't see anything thats going to significantly change that driver situation.
And so that leads us to believe.
Of course, the market is going to stay strong so in regards to rates.
Spot rates are going to stay robust probably a healthy premium maybe not as big a premium is what we saw.
Last year on a percentage basis, but it's still a fairly healthy premium relative to contract rates for the majority if not the entire year next.
Leave that.
On the contract side we.
<unk> being in that high.
Hi.
High single digits, so in that 5% to 10% range on contract.
Still think theres been some pretty significant cost create both from a driver pay equipment other things that are in.
Occurred this year and so we think that its really necessary and also given the market conditions that we see a 5% to 10% rate increase on contract for 2022.
Got it that makes a lot of sense really helpful. Thank you for the time.
Yes. Thank you.
Okay.
Yes.
Okay.
Okay.
Okay.
Scott.
Yeah.
They do that they should be.
Okay.
Hey, Scott I don't know what happened to our operator, you there if so I think you can ask.
Question.
Operator.
Yep.
Yeah.
Hello.
I apologize I think we lost our operator for a second so please host cliff as this has never happened before but.
And I don't know if if theres.
Hey, there that.
Scott Group you are in the queue for the the next question. If you're there then we can go ahead and move forward.
But I don't know if the system allows you to talk or not.
Thanks.
Okay.
Okay.
Alright hold with US real quick because this is where we're trying to figure out it looks like we've lost our operator.
And.
Those into Q are not able to answer questions at this time.
So we're still kind of hold in.
Yes.
Does anybody on a holding on.
Failures.
Okay.
Well I guess.
You know it.
I'm trying to think of other questions that are or other items that we can talk about it I think one thing that I would like to mention.
Is the <unk>.
Our plan around variant is on track, we still like we said in the supplement or in the.
The prepared remarks that we still believe we're going to be over 500 trucks by the end of the year. We are on pace for that while we did have a little bit of a slowdown in Q3.
Related to a few items. So there were some macro conditions. Obviously this driver situation has gotten progressively worse and so that did create a little bit of a slowdown in our growth.
Since the end of the quarter, we have added nearly 100 drivers to variant and so if you look at over three weeks timeframe.
Frame, we've added nearly 100 trucks. So we're on a run rate right now of adding 30 net trucks and variant over the last say three to four weeks, we think that absent holidays. We can continue something in that range hopefully.
And so that should give us a pretty you know hopefully over 500, we believe over 500.
Trucks by the end of the year and also put us on a trajectory going into Q1.
Where we think we will continue the growth in variant well for really for the entire balance of the year in 2022. So.
Our strategy is in line, we still think we're on the right path and.
That things are moving forward. The way we are we have anticipated and hoped we also.
There's been questions I know about express technologies in our brokerage division and as Joe mentioned, we're on pace there as well we are in an investment phase, we're continuing to invest in our business invest.
Growth and we're focused on that three year build and we're moving in the right direction.
I've got a couple of questions. Oh go ahead. This is Robert we do apologize for the technical difficulties. Our next question is coming from Scott Group from Wolfe Research. Your line is now live.
And Hey, guys can you hear me now yeah, we got you Scott sorry about that okay.
Cool alright so.
The I know you talked to a few times about the sequential margin improvement can you just help maybe just put some expectations around it is it 100 basis points more or less I'm just not.
Trying to think about it.
Yeah, I mean, if youre looking at the dedicated with those rate increases heading up there.
At 40% and you all things cost since that could give us a 100 to 200 basis points improvement from those rate increases alone and then I think in your model at the volume play with those variant tractors you know it's going.
Down to that ending count.
Where that run.
And Scott I hear you. It's just it's tough for me to <unk>.
Give guidance on these 90 day scorecards win.
Management team, we're really focus on the Atlanta pad of what we're doing at scale right now our fixed costs as a percentage of revenue as you know there.
Sure.
700, plus basis points too high is because we have this foundation that we can really grow on so on a sequential basis with this transformation. We will have quarters that are perceived by people looking at this 90 day scorecards more disappointing than others, but our scorecard that we're focused on is growing the variant truck count.
Keeping the safety stats in keeping the driver experience one that will have relatively low turnover of significantly lower turnover than the industry average and that's our focus then.
The numbers in the longer term are going to more than take care of themselves.
Okay.
Are we still seeing that big Delta.
Between utilization on variant versus legacy Chucks, just because the mix is obviously go on more and more to variant, but the utilization is.
Not it's still going down.
Yeah, we're really measuring the revenue per truck per week, and so we're continuing to see that delta as it relates.
Rates to revenue per truck per week, as we optimize for margin and so we feel we were still move in the right direction in regards to our our older legacy fleet and our variant truck fleet.
Like I said in regards to the revenue per truck so.
The item that we're really watching obviously utilization is a component of that but also being able to optimize the right freight that's priced in the right manner is going to give us the best result, and Thats, where we are optimizing today for.
Okay.
Other trucking revenue was up a lot.
Last.
Last year's second quarter any color on what's going on in there.
We don't breakout the individual components of that revenue, but.
Scott So, but yes. It's just it's just miscellaneous revenues that are that are increasing not necessary.
Daily related to direct truckload operations.
Is that a does this new run rate continue I'm, just I'm not even sure what's in this business and what's in this segment so.
That run rate will continue.
As an overall percentage to are those revenues are not in our truckload. That's our revenue per tractor per week, it's more miscellaneous revenue.
What's in that bucket is lease revenue from our independent contractor program.
And those types of revenues, but yes, I think you can expect that run rate to continue.
Okay, and then last thing the just on the drivers side. So it sounds like you've seen things pick up a little bit in the last few weeks.
<unk> do you think that there is some some improvement in driver market and then I'll just marry that with your thoughts on any kind of vaccine mandate and how.
You may or may not respond yes, yes. So on the first part of the question.
I don't think the market's gotten better I mean, we.
So a lot of peers, especially private peers and benchmark with a lot of people and I'm hearing that the environment has not gotten better now I believe we have done some things in our individual business that is improving the driver hiring situation and also improving some of our.
Attrition issues so.
So we've put together some plans and some processes in place that we think are helping us and that's the reason we're seeing growth, but I don't think that this is somehow a market condition, where things have loosened up because we're not hearing that from others.
In regards to the vaccine mandate we are waiting.
On the Osha ruling.
You are in that it's eminent at some point over the next week or so.
We are anticipating that not being something we want to see we would love to see truck drivers have a carve out.
No that Canada had a vaccine mandate and I believe truck drivers.
Carved out, but I do not get the feeling that drivers are going to be carved out of this mandate, so where we're waiting and anticipating if the mandate goes out the way we see.
Suspect.
Yeah, we are concerned I think theres, a fair amount of drivers that are kind of.
By nature by the nature of kind of their personality and the reason they migrate to this industry in a ways as you know they don't necessarily want to be told what to do and this is one of those items and so I think youre going to see a pretty significant pushback from the driver population and we're at the point I'm trying to figure out okay. So.
If we if there if we have to test on a weekly basis, what are we going to do what's the process what kind of.
How are we going to set that up and at this point I would tell you Scott I don't know the answer but we're working on it.
But it's something we're definitely.
Nervous about I guess this is probably a fair way to put it I think that we will be able to come.
Come up with a way in order to deal with it and handle it but.
Could have a pretty large impact on the driver population as we go forward.
And then maybe just last thing real quick how are you. What are you hearing if anything about hours of service given supply chain and with the government is trying to do right now.
Theres been a little bit of talk.
About some relaxation of hours of service or even relaxation of driver requirements for people coming into the industry and I know that.
I believe the secretary of Transportation has made a couple of comments in that regard I am not aware of anything subs.
<unk> at this point that's either been set are decided so at this point, it's been just dialogue from the secretary and that's really all we have heard and I don't believe even ATCA I really has anything at this point of note.
Waiting to see if there is something that does either get announced or go into effect.
Okay.
Thank you guys appreciate it.
Thanks Scott.
Thank you. Our next question today is coming from Jack Atkins from Stephens. Your line is now alive, Okay, great. Thanks, and good afternoon.
So I guess my first question is.
<unk>.
Revenue per truck per week in the OTR.
Yeah.
When I look at sort of the two year stack. There I think it's up 2% third quarter versus <unk> 19, just to kind of take the volatility of the last year out and we've seen other folks report.
A two year stack growth rate in terms of revenue per truck per week.
Teens mid teens.
Yes.
Can you walk us through maybe some of the puts and takes why you guys arent seeing that type of improvement there on a two year stack basis.
Having to do with the transition or just trying to understand why we're not seeing a little more rate benefit there I understand utilization or miles per miles per truck.
And.
Yes Jack.
This is Eric Peterson Fair question I think if you look at the overall transformation of our over the road division today versus where it was two years ago I think we need to remember that we're no longer feeding that division with student drivers when youre feeding that division with student drivers you get the organic creation of the team's truck that's going to run more miles.
Miles on a weekly basis, so what it's doing for utility, it's making those comps look like the like theres not as much improvement of what's going on in the industry and you're exactly right, but part of the answer is that we have significantly fewer teams and we don't have students in the truck where you have a super so lower team asset generating more miles.
Both on a weekly basis.
Number two is intentional and by design as it relates to our variant fleet. If you look at our variant fleet and the optimizer, what it's doing now is it's not saying Hey go get the most models you can all those truck. This week is saying hey, how can we create the best yield and Thats a combination of both the miles.
And the rate and so I think when doing some of those comparisons youll, probably see that as far as our rate per mile where this shows up quantitative instead of my qualitative answer youll see that our rate per mile is probably outperforming on two year increases on what they've done over 24 months and the offset then the utility.
Okay.
But keep in mind too we've had our net truck count.
Component has come down over the last year and we are in the process of building and growing that back and so that's having.
Fact on that number as well.
Okay got it got it.
And I guess maybe.
Follow up question for Joe on the brokerage side of the house.
You talk about investing for growth, they're keeping the business at.
100, or breakeven level as you're as you're doing that well what do you. What do you mean exactly when you say invest for growth.
Is that.
So where volume is that.
I'm just trying to understand exactly what that means because I am a little bit.
I would've expected I guess.
Invest for growth phase with breakeven awards, we'd have faster volume growth than we saw in the.
The quarter can you kind of walk us through what you mean by that.
That's going to look over the next couple of years as you scale.
Sure Yes.
A couple of things Jack I think that the biggest thing to start with is just sort of acknowledging some of the historical context, the brokerage business has been maturing strom.
And as a historical sense it hasn't always been.
A leading competency for the business and so the underlying operating model.
Hi.
We had some work to do with it in order to kind of really get it fit for scale right. So some of the investments that Dave has been in things like a transition in the portfolio.
<unk> factoring things like freight mix really kind of bringing some level of health of the underlying fundamentals of the operating model. So that we had a better foundation.
Model to grow into as we think about proactive investment on a go forward basis, and that's just really what's been layered in over the last three or four quarters.
A lot of that is in technology.
Enhancement or growth of the dedicated technology team building proprietary.
Products for our shippers.
To carriers and employees as well as enhancements to our head count it within our sales and operations group to be able to stay in front of the growth that we anticipate in the years to come. So those are really kind of the high notes right. So we've been going through.
Level of transformation improvement and just sort of setting up the underlying operating model.
And then as that foundation started to take root over the last year year and a half.
We've been proactive in getting out in front of doing these things from an investment perspective, the people equal yield additional volume in future quarters. So that volume comp is really a function of.
Lots of trading.
For scum unhealthy business over the course of the last few quarters.
And we're now in a place where the foundation is ready to be leaning into okay. Okay. That's great. That's great to hear and I guess as you think about the next couple of years and scaling that business we've seen some other.
Truckload carriers with.
<unk> fridge subsidiaries really sort of scale there.
And hook.
Operations over the last 18 months.
How are you thinking about that opportunity for <unk>.
Operation over the next couple of years.
Yes, well.
Broke toy I think it's the nexus to being able to drive additional selectivity for variance. So it's absolutely on our radar I think one of the things that we don't often give ourselves credit for enough externally is to the extent that the power only business that our brokerage segment is supporting today.
It's not the overwhelming majority.
Truth, depending on where we are seasonal or you can make up anywhere between 15 and 30% of our daily volumes. So there's a.
Theres a competency there that were actively seeking to enhance we've.
Hired some talent from outside of our company, but from within the industry to help.
Help scale.
Power only product.
In a formal sense and build upon some of the tribal knowledge, we have already but absolutely a huge part of our roadmap on a go forward basis.
That's helpful. And then I guess last question and I'll turn it over but just back to Eric your comments on the vaccine mandate.
Obviously, a lot of unknowns about that.
Citi bike ramifications that could that could have on the broader truckload market.
How do you think it would affect U S Express business, specifically I mean in terms of your drivers your driver pool.
Would you expect some attrition there.
Any sort of color you can add.
It's hard to speak for the broader industry, but.
How do you think it would impact U S Express in particular.
I think there is some concerns from a number of people that I've talked to the.
The industry could lose five to maybe as much as 8% to 10% of the driver population. They may choose to go elsewhere.
Meaning leave.
The industry.
Because theres not enough small carriers with excess capacity that can absorb those.
That may leave the larger carriers, if that were to occur and there were some steadfast drivers that would not get vaccinated and there is not a sufficient testing.
Structure that could accommodate them or they may not even want to get tested.
And so a fallout of 5% to 10% and our driver pool wood.
Thanks, everybody.
I think that is an area that would would be very difficult.
To operate in.
It's something that at this.
It's where we're prepared to do and.
We're working on ways to try to mitigate some of that driver attrition that could occur but it is an area of concern and I think it could be fairly catastrophic if we were to lose even 5% of the drivers that.
That we have within the.
The industry today at the levels that we're already at I don't know, how we absorb that.
Yes, that'd be really tough okay. That's really helpful. Thanks. Thanks, so much for the time guys.
Thanks.
Thank you. Our next question today is coming from Brian Austin back from JP Morgan. Your line is now live.
Hey, good evening, thanks for taking.
A question here, maybe just one more on the vaccine mandate to wrap it up hopefully.
Given what you just said about the potential catastrophic impact potentially in the industry.
I guess I'm surprised why why there isn't a bigger push or traction to get some sort of exemption you mentioned the one in Canada I think the.
Got.
The truckers were exempt from the the mass mandate that came out earlier.
So are you have you seen Eric Peterson.
Forward excuse me pretty confident that.
There is some thinking that works to hope for so maybe if you can just elaborate on that please yes.
No I've been very involved in converse.
Stations with HCA and with others.
Trust me there is a lot going on behind the scenes to say that there isn't a.
Push to try to get drivers carved out is not the case.
He is very involved there are many others that are very involved in trying to.
Get some sort of a carve out or.
Concessions for drivers Unfortunately.
That at this point is just not feeling all that likely and so now we're having to figure out how to deal with it right.
We could be surprised the thing can come out tomorrow and it could have drivers carved out we would all be fine.
But.
We're at the point, where we're just not real confident of that with everything that we're hearing back channel and but there's no lack of trying to make that happen and with supply chain being top of mind.
Both from an economic standpoint, and a political standpoint.
It does give me a little bit of hope that.
It could occur, but I would say my confidence is fairly low given just some of the the back channel conversations and other things that I'm hearing. So we're preparing for a mandate that could if go into effect could have some pretty seismic results on the driver population and we're getting ahead of it and starting to have conversations.
<unk> and figuring out how to deal with it.
Yes. So I was wondering if the supply chain top of mind with all the push there that this would kind of go against.
Different goal of the administration, obviously, there's a lot.
Going on but.
And I know the industry has been pushing I'm just surprised you haven't had as much traction or felt.
As much traction.
Yep.
Okay.
Quick follow up on variant in General maybe you can just talk about acquisition costs of the drivers in this in this environment, maybe some of the turnover and if you can elaborate just what happened in the last quarter because it does look like you're making some pretty good progress quarter.
Like if things slow down in <unk>.
We have re accelerated if you can elaborate on that yes.
Yeah, Brian I'll have Cameron answer that if that's all right.
Hi, This is Cameron and thanks for the question.
You're absolutely right to point out that we definitely saw a small uptick in turnover quarter over quarter as we talked about during the.
They're over quarter bar, we have grown maryanne really as a startup in Atlanta from essentially the last two years from $0 in revenue too.
Trying to exit the year at about $300 million.
Forward looking revenue run rate. So as you can imagine when you add near 1400 drivers too to the.
The earlier short period of time, we absolutely experienced some growing pains that eroded the driver experience what I'm really happy to report that our leadership team identified a lot of these problems worked tirelessly throughout Q2, and Q3 to resolve them and I think thats, what youre seeing is our accelerated growth in October where we've added essentially.
Fleet and there's not the same number of drivers as we add in the entire quarter. So I feel like a lot of those are behind US. We are we are watching it very very closely but.
We feel very confident in the continued growth of the driver base now.
Yeah.
Okay, and any comments on acquisition costs as you find the right channels.
Yeah.
To get these folks and to retain them sure. So we have we have two primary channels that we recruit gyro from and they are very different acquisition costs. One is entirely variable lies.
I think it's very unique to the model we got two to variant we call. It the Varian Ambassador model. So again, that's a variable model, where we have evangelize many.
However, as to go out and recruit new drivers that comes at a far lower acquisition costs.
We've hired we launched that program a little over a year ago. This week, we just hired our 300 drivers through it. So we're seeing some tremendous acceleration it took us about nine months to figure out how to get the first hundred drivers into that program and we've hired 300 now and we did that about two.
Our dry months, so we're seeing some acceleration there and then again in the variable cost model and it's far less than the traditional kind of programmatic media spend that that U S Express in the broader industry really rely on to bring in the lion's share of their drivers.
Okay and then last quick question, if you can sticking with variant.
If you can just tell us how you're benchmarking and managing that through some of these growing pains.
Commentary in the slide deck, I think it's improved a 100 basis points or <unk>.
Quarter over quarter, we've seen the impact of the optimizer, but how do you benchmark and compare that and tweak those as you continue to.
Two and a half a fleet what are you what are you measuring internally that we don't see externally.
Yes, as far as you know that's really tracking that optimizer theres all of those levers and it's something we're going to get smarter and smarter on it as we continue forward, we were able to increase our overall rate on the variant tractors in the third quarter compared to the second.
The scale of over 3% and that cost us about 7% utilization, but when you look at the net result, with two thirds variable and one third fixed costs you take that seven.
That 7% loss in utility and you lose a third of that the earnings to offset that rate increase the combination of those two was.
100 basis point, better result than what I would tell you the comparable market and so I think thats more you always talk about macro issues in mere issues and to me that's more of a mirror accomplishment something that that we did on our own and a consistent macro environment.
Okay.
Thank you for your time appreciate it thanks, Brian.
Thank you. Our next question is coming from Felix <unk> from Raymond James Your line is now live.
Hey, good afternoon, everybody good afternoon.
Hey, I just have a sort of a big picture one it's the only one but I really want to better understand how we should think about.
Some of these tech investments around variant going forward. It seems like last quarter, we might have been close to an inflection point, meaning variant outgrowing its fixed cost base.
Don't think that is the case.
And just how should we think about these tech investments heading maybe into 2022 as you continue to refine the model there.
I think.
Think from.
From an inflection point, where there. It's just we've got to continue that growth right.
Q3 was a little bit of a difficult growth environment for us for a number of reasons mostly macro.
As I said, I think we solve that and figured it out but it created some issues in the problem was we kind.
Installed that truck count out to an extent right on top of that inflection point and so we didn't get necessarily the benefit that we had hoped for had we grown a few more 100 trucks. We are now growing and we feel like as we continue to grow we will further.
Distance ourselves from that inflection point with.
We still think occurred in Q3.
And so we will continue as we grow continue to move away and start to see the results start to fall to the bottom line.
In regards to further investment I mean, I think for one way to look at it as the run rate that we have will.
With you.
This is a model, where we think that we will forever and always be built.
Building technology, it's not one of those type of deals where you have an IGT build the system and then go do something else and we're always iterating and always trying to build out a continual technology.
Continue within this operating model and so that's going to continue I don't think that youre going to see that run rate necessarily go up all that much there might be some small incremental increases but for the most part we're at a healthy run rate, where we feel comfortable with the investment that's in place and that investment will continue but again that inflection point versus.
Our adjustment occurred in Q3, and we're going to be at a point as we move forward.
The growth will benefit the bottom line as we move forward.
Okay. That's helpful. So it doesn't sound like much change on the cost side, its all about spreading that tractor count additions above that fixed cost base now yes. That's.
Is that a bad I mean, like I said, theres always going to be there could be some small incremental increases as Cameron.
<unk> to look at maybe I've got out of developer here and there, but nothing that's going to really move the needle on a dramatic basis. Our cost is what our cost is at this point and now we've just got to outrun it from a growth perspective.
Were very helpful. I appreciate it.
Thanks, Alex.
Thank you we've reached end of our question and answer session I'd like to turn the floor back over to management for any further or closing comments.
Alright, well, thank you hey, really apologize for those technical issues not exactly sure what happened.
But I appreciate everybody sticking through.
That was a little bizarre, but we got through it.
So anyway I look forward to talking more about this next quarter.
Again, just to recap as far as we're concerned we're on pace, we're happy maybe not happening necessarily with the results maybe from an earnings perspective, but we're happy with where we are in our strategy around our growth in <unk>.
That they are happy around our strategy around our growth.
Express technologies, our brokerage division and we're also happy about where our rates are now in our dedicated division.
Little little painful of our process may be getting us to the point, where we are today, but we feel very comfortable where we are and feel very confident.
About the next couple of quarters as we move forward. So I appreciate everybody listening to the call and we will do it again in 90 days. Thanks, so much.
Thank you that does conclude today's teleconference. Webcast. You may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.
Yes.