Analysts’ reaction to US Xpress’s third-quarter earnings brings to mind a term that CEO Eric Fuller frequently uses: inflection point.
After quarterly earnings, Fuller spoke mainly about the future that traditional measures could only describe dismal, especially as numerous other freight businesses are reporting stellar results. And Wall Street analysts who were largely uninterested a year ago in U.S. Xpress’ (NYSE: USX) digital transformation, which included the Variant “truckload carrier within a truckload carrier” plan, were more interested in that message than in the company’s third-quarter results.
On the analyst call, Fuller stated, “We believe we have reached the tipping point where Variant will surpass the regular business.”
Fuller pushed a number of indicators to show that the digital transformation effort was beginning to bear fruit. The number of tractors in the company, in particular, increased for the first time since the second quarter of 2020. End-of-quarter tractors in the second quarter of this year totaled 5,849. That number had risen to 5,933 by the end of the third quarter.
Fuller stated that Variant ended the third quarter with 1,328 tractors, an increase of 11% sequentially and lower than recent quarters. He noted that the pace of new hiring and new trucks with the Variant brand picked up late in the third quarter. Variant has added about 100 trucks since the end of the third quarter, according to Fuller.
He added that Variant’s growth outperformed the attrition in the legacy over-the-road company for the first time. VAs Fuller has stated for months, variants are on track to sell 1,500 tractors by the end of the year.
According to Fuller, the variant had an annual run rate of around $250 million as of the third quarter.
He cited average revenue per tractor each week as a crucial statistic for comparing Variant’s performance to the legacy business. This amount increased to $4,012 from $3,843 for the consolidated truckload segments.
“We are still progressing in the correct route,” he stated, without specifying the distinctions between Variant and the heritage division in that category. That is something we pay close attention to.”
U.S. Xpress’s typically sluggish brokerage segment, which operates as U.S. Xpress Technologies, is another component of the company’s reinvention. Fuller praised the division’s performance, which saw operating revenue of $90.8 million, up 62.3 percent from the previous year. The company still lost $1.45 million in operating income, but it was $4.5 million a year ago.
“We’re just getting started on building a scalable digital marketplace,” Fuller added.
However, analysts on the call did not dismiss the company’s poor financial performance.
In the third quarter, one analyst compared U.S. Xpress’s performance to that of other truckload carriers, noting that while Variant may be on schedule to have 1,500 trucks by the end of the year, the company’s expansion isn’t showing up’s profitability.
The company’s CFO, Eric Peterson, hammered home the notion of long-term growth while also ang analysts that things would improve soon.
For example, he and Fuller indicated that significant raises of 7% or more in dedicated division contracts usually went into effect near the end of the quarter. In contrast, passes for drivers began near the beginning of Q3.
According to Peterson, the company’s adjusted third-quarter truckload operating ratio deteriorated to 97.8 percent from 94.1 percent, which could be attributed to a reduction in the number of team drivers as new trainees are kept out of the legacy business sent to Variant training instead.
The major message, though, was that this would take time. “We’re focused on the long term,” Peterson explained, “which means our quarterly results aren’t as focused on the next 90 days as they are on where we’re going.”
U.S. Xpress, he said, has reached a “critical stage… where the old business is losing the race.”
In terms of the company’s performance, expenses were a significant factor in the third quarter, as operating income fell for the second consecutive quarter.
The freight carrier’s operating income dropped $9.25 million to $6.635 million in the third quarter of 2020, down from $15.89 million in the previous quarter. Operating income fell to $8.9 million in the second quarter from $16.28 million the last quarter.
Purchased transportation expenditures increased $33.1 million from a year earlier to $159.1 million. Purchased transportation expenditures at US Xpress outstripped sales, wages, and other compensation, totaling $158.9 million, up from $137.5 million the previous year.
Purchased transportation also outstripped pay in the second quarter.
According to SeekingAlpha, the revenue of $491.1 million was $11.5 million higher than expected. Fuel and fuel taxes totaled $46.7 million, with $39.3 million in fuel surcharge receipts, leaving $6.4 million in U.S. Xpress fuel expenses not covered by the premium.
Most other significant expenses were kept to a minimum by US Xpress. Insurance costs increased by less than a half-million dollars, but general and administrative expenditures decreased by around the same amount.
U.S. Xpress lost 11 cents per share in net income, owing in part to a charge of 18 cents per share for an “unrealized loss on a strategic equity investment,” according to the company. In the third quarter of last year, U.S. Xpress earned 22 cents per share.
“The third-quarter performance is mostly as a result of a conscious decision to construct a foundation for a firm that can grow its revenue over the next four years,” Fuller said. As a result, he continued that U.S. Xpress is still in a time when its fixed expenses are high in compared volume.
There were several queries about the imminent Occupational Safety and Health Administration regulation that would require immunization at organizations with more than 100 employees on the analyst call. Fuller described it as “something we don’t want to see” and expressed his hope for a truck driver exemption. He also claimed that efforts are underway behind the scenes to gain the trucking business some respite from the mandate, which he claims might cost the industry as much as 10% of its driver pool.
