Q1 2022 US Xpress Enterprises Inc Earnings Call
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Following the presentation. The conference 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 of Investor Relations. Please go ahead Sir.
Thank you operator, and good afternoon, everyone and welcome to the U S Express first quarter 2022 earnings call, Eric Fuller U S. Xpress as president and CEO will lead our call today, followed by Eric Peterson, Our CFO , who will discuss our financial results.
Our discussion 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 can 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 10-Q for the quarter ended March 31, 2022 that 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 helpful in evaluating our performance.
The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with 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 posted an updated supplemental presentation to accompany today's discussion also available on our website at Investor Dot U S. Xpress dot com, we will be referencing portions of this supplement as 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 today I would like to provide an update on the sequential improvement we saw in the first quarter.
Highlight key achievements in the quarter from our other business segments and following Eric Peterson for a discussion of our financial results provide our market outlook for the remainder of 2022.
As a reminder, I spent much of the first quarter in Atlanta with her.
Reviewing the business and determining where we needed to focus our time efforts and resources to turned the corner from a nimble startup to a sustainable growing business and ultimately improve the profitability of the division.
Variance is the growth engine for our company and improving its financial results is critical to our long term success.
We continue to believe there is a large customer needs for one way freight movement and that we can implement technology to improve capacity cost and service levels for our customers while at the same time, improving the experience for our professional drivers.
Various generated operating revenue of $84 million in the first quarter net of fuel an increase of 17% sequentially compared to the fourth quarter of 2021.
The increase in revenue was primarily due to the 9% increase in tractor count combined with a 4% increase in average revenue per mile.
Exiting the first quarter variant is approximating a $360 million run rate business.
In the first quarter, we were able to increase the amount of freight optimizer was able to select from which contributed to revenue per tractor per week, increasing 9% sequentially to 4065.
The increase was due to a 5% increase in utilization and a 4% increase in average revenue per mile.
We saw utilization improved in the quarter as we reorganized our fleet operations to establish single threaded accountability, which helped to sequentially improve driver availability and lower deadhead.
During the quarter, we added 136 tractors to the variance fleet exiting the quarter with 1691 tractors in our fleet. Although we grew our fleet in the quarter, we didn't grow as much as we would've liked.
Variance turnover spiked in the first quarter to 148% due to process changes, we implemented in the quarter, which we expect will have an overall positive impact on turnover in the coming quarters.
However.
In the short term, we saw an increase in turnover as we transitioned to operating workflows, which brought more structure and discipline to our fleet operations.
Turning to achievements in our other business segments in our dedicated division revenue per tractor per week increased 13% year over year to $4709 and was up 2% sequentially from the seasonally stronger fourth quarter the.
The increase in revenue year over year was due to an due to an 18% increase in average revenue per mile, which was partially offset by a 4% decline in utilization.
Declining utilization was partially caused by the number of drivers off due to COVID-19 in the early part of the quarter.
The division performed strong in March.
Our focus for dedicated going forward is to continue optimizing the portfolio for profitability and as such we expect modest growth in tractor count.
Our brokerage segment generated revenue of $94 million, an increase of approximately 15% year over year.
It was driven by a 15% increase in revenue per load.
This segment produced a small operating loss in the quarter, but was within our expectations of being approximately breakeven.
We continue to expect this segment to breakeven for the remainder of 2022.
Before I turn the call over to Eric Peterson to discuss our financials I want to thank all of our employees, who worked tirelessly over the last quarter to accelerate our transformation at U S. Express we made a lot of progress in one quarter, which gives us confidence that we are moving in the right direction.
With that I would like to turn the call over to Eric Peterson.
Thank you Eric and good afternoon, everyone.
This afternoon, I would like to discuss our financial performance in the first quarter and capital allocation priorities as well as provide some financial guidance before turning the call back to Eric to provide our market outlook.
Turning to our performance in the first quarter, we generated revenue of $464 $3 million, excluding revenue associated with our fuel surcharge program, an increase of 11, 2% year over year the.
The increase in revenue was primarily the result of a $34 6 million or 10, 3% increase in truckload segment revenues and a $12 1 million or 14, 8% increase in brokerage segment revenues.
Turning to adjusted operating expenses.
It'll adjusted operating expenses were $461 6 million, an increase of 12, 7% or $51 9 million compared to the first quarter of 2021.
This excludes $3 million and noncash write offs, which we recognized in the quarter as.
As a reminder, Erik and I spent the last 90 days reviewing variant, including our technology stack is variant transition from a nimble startup to a scalable business. The team has instituted a more disciplined management approach focused on key metrics and earnings growth.
<unk> reviewed determined that to turn the corner, we need to prioritize advancing our freight optimization engine and returning our product index to previous levels.
As such certain longer term technology initiatives, which when it advance our optimization engine or directly contribute to improving our product quality index would no longer be funded these write offs relate to such projects, but represent only a small percentage of our internally developed technological solutions.
In the first quarter salary wages and benefits increased $27 million compared to the first quarter of 2021 due to increased wages for our professional drivers from both the increase in company miles driven in the quarter as well as from higher driver pay per mile. In addition, head count growth and wage inflation.
Greg.
This fleet growth contributed to improve fixed cost coverage in the quarter as fixed costs, excluding revenue equipment related costs as a percentage of revenue decreased sequentially to 29.1% from 31% in the fourth quarter.
As Eric mentioned, we would have liked to have seen more tractor crows invariant in the quarter. However, seen modest fleet growth in a better fixed cost coverage is positive we continue to see opportunities to further reduce our fixed costs as a percentage of revenue as we grow our overall fleet size and improve our cost disciplined throughout the company.
As a reminder, each 1% decrease in our fixed cost as a percentage of revenue contributes approximately $14.8 million pretax earnings contribution net a field.
Following are 90 day review it variant we continue to believe that our current infrastructure is capable of handling more than 2000 additional seat attractors without adding additional meaningful infrastructure. This would bring our total seat a tractor count to 8000 total seat attractors and equate to an additional $425 million and truckload rep.
Renews net of fuel relative to where we are today.
Turning to capital expenditures net proceeds for the first quarter net capital expenditures, which relate primarily to tractors and trailers.
Was $39.3 million compared to $2 million in the first quarter of 2021 the.
The increase in net Capex was primarily due to deliveries of equipment, which were previously anticipated in 2021 as well as from fewer net proceeds from the sale of used equipment in the quarter in terms of capital allocation priorities will continue to Prioritise investment in our fleet as well as our technology initiatives across the company.
Turning to net debt.
At the end of the quarter net debt, which redefined as long term debt, including current maturities less cash balances was $408.1 million at the end of the first quarter compared to 369 $8 million at the end of 2021, our leverage ratio was four six times at the end of the first quarter and we expect.
To decrease as our earnings growth overtime.
Turning the guidance.
To assist with your models, we expect the following a blended low double digit increase in truckload average rate per mile with OTR contract rates up approximately 10% for the full year likely higher than that in the second quarter, but potentially lower in the second half of the year due to the tougher comps and the back half of the year.
Modest sequential growth and overall truck count through 2022, primarily driven by variant fleet growth.
We expect to see modest sequential improvement in utilization in the coming quarters in.
In addition, we continue to expect an effective tax rate between 22, and 24% before any discrete items interest expense of approximately $16 million for the full year and net capital expenditures between 130 and $150 million, assuming no additional unknown supply chain issues in the coming months.
We continue to believe that our thesis remains intact and variant will continue to improve sequentially as the remediation efforts. We have undertaken continued to take cole continued.
Sequential improvement in variant combined with sequential overall fleet growth are the key to improve financial result in the quarters ahead with that I will turn the call back to Eric Fuller for outlook.
Thank you here.
In terms of the overall market. We don't expect is favorable of a market backdrop in the coming quarters compared to previous quarters as we have seen a slowdown in demand exiting the first quarter.
The consumers feeling pressure whether from general cost inflation higher interest rates are concerns around the geopolitical environment.
We are seeing more congestion in the port outside Shanghai due to the Lockdowns in China. However, we expect that pendulum to swing back and an increased need to move that freight once China opens back up although the timing of this dynamic is uncertain.
In addition, we are also cautious of a more structural shift to experience based spending as COVID-19 restrictions become more relaxed and potentially fewer discretionary.
Allocated to tangible goods.
On the supply side seating tractors has become somewhat easier across the larger carriers in our industry.
While early this may be a consequence of the rotation out of the spot market business and back into company fleet for some professional drivers.
In addition, as the.
Cycled turns we expect some drivers will find work in other fields, such as construction, which could help to needs the impact of softening demand along with continued supply chain issues in the equipment market.
Finally, we are seeing increased inflationary pressures throughout the business wages both office in driver are increasing.
New equipment prices insurance maintenance and fuel expenses are all up and taken together.
Whether the cost of doing business is increasing across our industry.
This cost inflation can't easily be retracted and therefore should help to support contract rates in the coming quarters.
Beyond the industry factors discussed above which we consider to be largely out of our control. We are focused on the company's specific factors, which we believe are underground control.
Primarily improving variant key metrics and sequentially growing overall tractor fleet.
During the month of April we saw variance turnover decline as well as improvement in our safety staff.
Further progress on our remediation efforts will be appearing in variance turnover.
Utilization revenue per truck metrics, and eventually total seeded tractor count, which we expect to improve sequentially throughout the year.
And with that operator, we are ready to take questions.
We will now begin the question and answer session.
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Our first question will come from Scott's group with Wolf Research you May not go ahead.
Hey, Thanks afternoon.
Eric <unk>.
Lots of focus on spot market weakness.
Just curious your views.
Are you seeing any signs of stabilization rebound and spot and.
Any signs that the weaker spot is starting to have an impact on <unk>.
Contractual pricing and just more broadly any anything you want to add on that discussion.
Sure Yeah, I mean, obviously we've C.
Missing the spot market almost right there to the week of the Ukrainian invasion was when we started seeing a slide and we've been sliding almost from week to week, it's kind of gotten sequentially a little bit worse, each week from a pricing perspective, and maybe even volume perspective just needed.
There's not as many loads out there available on the spot market is maybe there was previous.
And so we have seen a good bit of weakness now I think the positive is I think there's some real concerns on both the carrier side in in the shipper side that the market. This this war weaker market that we're in right now is potentially short lived.
I think we have some real concerns from a capacity standpoint, as we get into.
Late summer and early fall, if we start to see China come back on line and start to see shipments hitting the the ports and so I think there are some real concern that you could see a lot of tightness. So communication with a lot of the customers is more about <unk>.
Concern around making sure that we maintain capacity that there are still a number of trucks to handle.
Any types of surge or excess demand and so at this point, we're not seeing a lot of pressure on the contract side and I think that it's the nature of this cycle and some concerns about the cycle.
B not as long as previous cycles on the downside that I think customers are being a little bit more mindful in this cycle and I do believe that.
There's a lot of macro conditions that could lead this cycle to be fairly short lived.
And then just along those lines anything that gives you confidence that sort of that spring uptick may June beverage season produce season or whatever.
You are going to kick in or not kick in any any confidence one way or the other.
[laughter].
We really haven't seen a big surge and produce season, and we should start to have been feeling it but now I think we may see a little bit of a spike as we get in may be into beverages, but.
I think the weakness that's being caused by the shutdown in China, which really we still haven't really felt yet <unk>.
Probably keeps a lid on some of that strength occurring in the front half of the summer.
Okay and so maybe my last question what does this mean from a margin standpoint should we do you think we'll see margin improvement a truckload sequentially from from that.
99 cent range in lung cancer.
Yeah.
Two ways Scott.
For us, we're making some significant improvements in our overall results are growing our truck count and we've talked about spreading that cost over more units and so for us.
We feel confident that we can see some some some improvement in our earnings in a sequential basis.
I, even think broadly that his longest contract rates are able to sustain that most truckload carriers would probably see more positive flat earnings from cute <unk>.
Into Q2 from Q1.
What are you thinking about you think there's a chance for some year over year margin truckload for you this year.
We do yeah.
Our motto was definitely about spreading more costs and.
And our costs infrastructure.
Really we're looking heavily at our call see where we can take down costs, but also trying to spread that cost over more units were growing we've actually added an additional 100 seat and truck since the.
Of the Q1, and so really what is it three weeks or so we're actually five weeks, we've been able to add a little bit over 100 trucks. So we feel very confident that we can continue to add and that's going to help.
Earnings for Us as we go into the back half of the year, because we're going to have a lot more trucks.
Spread that cost out.
Okay. Thank you for the time I appreciate it thank you.
Our next question will come from Brian O as in back with J P. Morgan you May now go ahead.
Hey afternoon, and thanks for taking the question.
I wanted to ask more about the the turnover and I guess, the incremental changes you're making at variance anything elaborate on.
The organization was in and changing some of the some of the process flows because it looked like turnover did spike.
Quite a bit and then if you can follow up with just where that's trending in April cause. It does sound like there was some agreement yes, yes. So.
We had we have an internal process engineering teams that we had go and do so as we made those changes in December of last year with variant on from a management perspective, we had a process engineering team go in and do an analysis on the workflow and the processes and what we identified was none.
<unk> as we have mentioned previously there was a lack of domain knowledge and so there was.
Some broken processes and so we re engineered a lot of the processes of the workflow went back and kind of changed a little bit of a structure to to have these what we call community smaller groups managing a group of trucks. So that we could kind of have some connectivity with the dry.
River connectivity with the drugs and having a line of accountability and that got started the first fleet got rolled out in February , but we had a number of them that got rolled out in April and.
March and March we had a good bit of our employees and training to to.
To be in training for the new work flow of the new processes that we're implementing and so what that meant was that we had a lot of people off the floor we saw.
Spike in our call wait time, we saw a spike in a number of other metrics that we look at because we have less people on the floor and I think we can attribute a good part of that increase in turnover to that situation as we've gotten into April now we have all of those communities rolled out everybody's trained.
A good significant improvement in our turnover in April relative to March.
And we feel confident that as this.
This new structure has further time to kind of make we'll see even better improvements because that one community that re rolled out in February we're seeing substantial improvement in their statistics across the board whether it be utilization, whether it be deadhead turnover really.
Everything that we look at looks positive in that community relative to everything else and I think as we get more time under our belt with the rest of the communities will see some <unk>.
Similar results.
So it sounds like.
For the turnover on the driver's side was maybe they just didn't want to go through the training or they're doing things differently.
Maybe I'll just put a finer point on that like yes.
We're getting more efficient.
Cause I believe.
Yeah. So it was more about.
In March we had people off the floor and so there was some frustration for the drivers because let's say you had let's say, we average answered a phone call within 30 seconds well when we had a good portion of our people off the floor. So they were training for this new workflow that call wait time spiked up in drivers were getting more frustrated easier and <unk>.
<unk> and so we had drivers leaving because.
They worked satisfied with their day to day interaction with our fleet now that we have the everybody back in not in training and back on the floor and working under this new structure. We think we're going to see some significant improvements that we've already seen it.
Early side of it.
Okay got it.
And then just on the breakeven point.
And where you think you can get there how.
How many trucks has that changed the number of seeded trucks in terms of.
Where you need to hit before you get to that breakeven point and.
Has changed what are some of the dynamics that have come in to that fixed cost structure that you think you can have a good chances of pulling out rather than just spreading it out over more trucks.
I think that that fixed costs inflection point, Brian is where we talked about it before and I would like to guide you to slide fix in our supplement where in the fourth quarter. We said our fixed costs as a percentage of revenue. We are just too high and that was a 30% number and we basically guided that for every 250 trucks we added.
Withdraw.
Between one and a half and 2% are fixed costs as a percentage of revenue and what you saw happen in the first quarter as we increased our our average seat attractors by 170, and they dropped by by 1% and so that's the proof for you that we were at that inflection breakeven point, where the extra volumes are going to.
Contribute to earnings on the bottom line so.
We're continuing to grow in the quarter and so we still have a similar trajectory of growth and so we should cause you can watch that line. That's our success as you CRC detractors grow that we talk about on every corner, that's where you'll see that the margin expansion.
Okay, and then just one quick follow up if I could just.
Data.
Trends within brokerage.
Came in a little bit weaker than the heaviest we were expecting it.
It seems like a pretty good time to be <unk>.
Okay. So an update on that and where you see that going throughout the rest of the year, if anything maybe hit crimped that volume growth.
Starting off here in the first quarter. Thank you yeah. Yeah. So it was volumes were flat and Q1 relative to the previous year.
We.
We intend how we manage our brokerage obviously is a component of it is trying to maximize the selectivity for our trucks and so as we get into cycles were maybe we're not.
Getting the full volume from our customers, we may have to dip a little bit into that brokerage volume. So there could be some headwinds there on an overall volume perspective and brokerage as we.
Try to maximize the utilization and this'll activity for assets first and foremost.
But with that said.
We are moving into a much more favorable market, we are seeing opportunity to source capacity much easier than what we had seen really up until probably March.
So we anticipate being <unk>.
Positive territory for the rest of the year in our brokerage division.
Okay. Thanks for that I appreciate it.
Our next question will come from Ravi Shankar with Morgan Stanley .
Now go ahead.
Hey, guys. This is Christine Garvey on for robbing and thanks for taking my question.
Just wanted to circle back to one of your comments earlier in the call about.
You're kind of thought there might be a fairly short lived kind of downcycle here, hoping you can impact that for us a little bit more maybe with a particular eye to capacity I think traditional wisdom has died down take us that long tail goes away, but we also haven't seen an influx of capacity in the uptake also how are you guys thinking about that.
[noise] playing out.
Yeah.
Thickly what it takes.
From from peak to trough it's.
About six quarters or so.
And typically is supply driven so you have supplied starting to bleed out of the market and then kind of thinks that amount of time I think we have some interesting dynamics. This cycle won a lot of the new interests that came men came at a very high price point until they were buying tractors, maybe off the used market.
Maybe a few in the <unk> in the new market, but most likely the used market, but still buying at premiums, so lockett and equipment cost and both on the truck truck and trailer side at a very high point.
They are also paying very high fuel rates right now and they're seeing depress rates in the spot market and I think that <unk>.
Most new entrants, probably don't know how to whether that and.
This scenario and I think that they are seen a higher cost than what we've seen in prior cycles relative to the spot rates and so I think one I think you'll probably see capacity start to matriculate out quicker than what you've seen in prior cycles. I think right now there is still a strong used truck market. So you may see.
Take advantage of that and try to put trucks back out into the used truck market quicker to walk in.
Those those prices and not be exposed to the market. So we.
Dissipate from a supplier to perspective that supply could come out much much quicker now demand I think is the big question, Mark, but we do think that as we see China coming back on line and maybe shipments starting to hit the U S. Maybe August or early September we could start to see.
Kind of that pendulum swing, where there is pent up demand because there hasn't been a number of things that haven't been shift starting to hit the shore and so you start to see demand spikes. So.
That's where we had a scene there could be a little bit of a perfect storm that flips this market relatively quickly.
Got it that's really helpful and and maybe I can ask one more just about the fixed cost as a percentage of revenue dynamic.
Is there a scenario, where you know slightly loose term market.
To enter that kind of actually helps on that front, because ah seating tractors becomes easier getting tractors she comes easier.
Or any sort of softer backdrop push that part of the story out as well.
You are exactly right to the extent, we can accelerate our growth.
That makes our fixed costs.
On a per unit basis that we have to clear lower and so.
As much as that worked against us when the market was so tough and we dropped 900 seat attractors over a period of period of a year, where it worked against US a softer market would actually be very favorable for this purpose.
Got it really appreciate the time I will leave it that thank.
Thank you.
Again, if you have a question. Please press start in one or.
Our next question will come from Adam Moszkowski with Bank of America, you May not go ahead.
Hey is adamant Cassie on for 10 texture. Thanks for taking my question.
You.
You mentioned on the brokerage business you expect breakeven for the rest of the year.
But that there's upsides to load growth so I.
I guess the question is what is it going to take.
To get this business.
To get some leverage in this business and then another one is just can you remind us what percentage of the over the growth truckload businesses.
Yeah. So on the brokerage fees were focused on driving profitability in that in that business unit and so I feel confident that we can drive profitability and and potentially.
Greatly improve profitability from where we're at now there's.
Obviously, we were.
We were.
From a volume perspective, because we are.
Prioritizing our trucks first and foremost and we are seeing a little bit of of pressure there from a volume perspective relative to wherever we were last year and.
And so we're like again.
Again, I think will be profitable I think we have a line of sight may be being up.
Even further improve then.
Maybe what we are anticipating today, but we are working through those items and hopefully over the next couple of quarters, we can see some significant improvement in that brokerage profitability.
As it relates to spot.
As a percentage of our overall revenues I think we typically run in that 10% to 15% range.
But as <unk>.
Percentage of our OTR, it's more like 25% and sometimes can spike up towards 30%.
Gotcha and then just following up on the brokerage question, but basically breakeven operating ratio of the rest of the year.
But positive volume momentum.
Got it from here on out to the back half is that the right road.
<unk>.
I think positive momentum as it relates to profitability I think there is some constraints around volumes potentially as we.
Like I said prioritize our assets and so I think there could be some some headwinds as it relates to overall volumes and brokerage, but I think profitability, we feel very very confident that we can drive profitability through the rest of the year in our brokerage division and and I think there's some opportunity to further improve upon that.
Okay. Thank you.
Thank you.
Okay.
That concludes our question and answer session I would now like to turn it over to Mac <unk> Pardon me, Eric Fuller for closing remarks.
Thank you everyone for your participation today.
Before we close I want to reiterate that these internal improvements, we're making invariant are well within our control and we've seen significant improvements are key metrics in April and we feel very confident that we are going to drive the type of results that we're focused on we're focused on making the right changes and focused on driving derived metrics and we.
As a team very dialed in to what we need to deliver going forward.
We thank you for your support and we look forward to providing the progress of data on our second quarter call. Thanks, So much.
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