If you had doubts that the Variant initiative at US Xpress was dead, look for the word Variant in the company’s most recent earnings report or supplemental slide show.
You will not find it.
Seven weeks after CEO Eric Fuller told analysts on a conference call that U.S. Xpress was “skinny down” the Variant technology-driven initiative, the truckload carrier’s third-quarter earnings report released Thursday suggests that while there may be trucks on the road with the Variant name and gray coloring, it has no future.
That call came in early September, announcing a major restructuring and numerous layoffs. Fuller stated in it that the company was returning to “blocking and tackling.” The company stated in its quarterly earnings supplement that “our ‘back to basics message to our customers is resonating well.”
With Variant out of the way, Fuller’s summary statement following the earnings call with analysts could be read as a manifesto for a company that turned in an operating ratio well over 100% in the quarter. However, that was impacted by a pair of large insurance claims totaling $25.7 million.
“We are committed to turning this model around and operating at a high margin and profitability,” he said. Fuller said the company had gone through a quarter “where we had to do some things to take costs out and focus on a cleanup quarter,” referring to the layoffs announced in early September. Making changes will result in a company where “we will have a cleaner income statement to work with after a few more quarters.”
The initial cost savings from the September reorganization were cited as $25 million, but US Xpress said the company had identified an additional $3 million in costs.
One significant change is that US Xpress intends to keep its fleet size constant. During the quarters when the Variant model was implemented, a larger fleet was touted as necessary for Variant to reduce overhead costs per truck. The fleet size will remain unchanged for the time being. U.S. Xpress reported a fleet of 6,648 tractors, up from 5,933 a year ago.
This kind of decision to forego growth as a goal prompted Fuller to outline its plans for the near future further. “We’re looking at costs and margins, and we’ll get this model to a healthy level over time, and then we’ll figure out where to go from there,” he explained.
U.S. Xpress’s bottom line was an operating loss that would have been a small profit if not for the insurance claims. The company’s operating loss was $22.7 million, less than the insurance claims. With that loss, the company’s consolidated adjusted operating ratio was 104.5%, up from 98.5% the previous year.
Revenue increased from $491.1 million to $547.8 million. This figure includes revenue from fuel surcharges. Without the effect of fuel, revenue was $477.4 million, up from $451.8 million the previous year.
Fuller repeatedly mentioned the need to improve utilization during the call, which data can be found in the average revenue miles per tractor per week. Its over-the-road division was unchanged year on year at 1,558 miles. This is a slight increase from the 1,537 recorded in the previous quarter.
Utilization in the Dedicated division fell to 1,632 average revenue miles per tractor per week from 1,717 a year ago. This was a decrease from 1,704 in the previous year. According to the company’s prepared statement, the drop in Dedicated unit utilization was “due to customer mix shift towards more discount retail and grocery business in the quarter.”
U.S. Xpress stated in the supplemental statistical and commentary report issued in conjunction with the earnings that its goal is to return to the company’s OTR utilization of an average of 1,825 miles.
The freight market’s outlook was mostly bleak. Fuller talked about a “nonexistent peak season.”
While no figures were provided on driver turnover rates at US Xpress, a perennial issue that Variant appeared to be resolving until it deteriorated significantly, Fuller did say that the company’s “ability to source professional drivers has improved” as the market has weakened. He added that as driver availability increases, so will the need to book more freight and increase utilization.
Fuller also noted the impact of brokers in the trucking industry, a viewpoint that echoed what independent owner-operators have frequently said about the intermediates community — in other words, the so-called “broker wars.”
Fuller predicted that truckload capacity would be reduced due to rising costs and falling rates. The impact of brokers is one of the reasons there isn’t a direct correlation between costs and rates — a divergence at the heart of an analyst’s question.
“Brokers have gotten a larger piece of the pie than ever,” Fuller said.
Because of this increased market share, there is more transparency and rates that more accurately reflect supply and demand. “The brokers created this dynamic of true supply and demand, as well as the volatility in the spot market,” he explained. “You can see that in the last five to six years of unprecedented volatility.”
Fuller attributes this to the “emergence of many big brokers.” “At the end of the day, brokers are looking for what they can buy capacity for and aren’t concerned with what it costs on the back end in equipment.”
According to Fuller, this runs up against the reality of “a lot of unsophisticated carriers” who don’t fully understand their cost basis. “And they will continue to struggle and most likely go out of business due to the broker market.”
According to one analyst, the decision by US Xpress to launch its initial public offering in 2018 was made to reduce the company’s debt load. However, the company’s net debt load was listed as $278.7 million in its third-quarter 2018 earnings — its second as a public company. The company’s net debt was listed at $341.8 million in the most recent quarterly report, up from $313.2 million at the end of 2021.
Given the rise, Fuller was questioned about debt reduction: What else are you capable of?
Among the factors he cited for a possible debt reduction was that its fleet is “in really good shape from an age perspective,” at about two years old. In addition, the company expects to reduce capital spending and is considering divesting some non-core real estate properties. “Several steps can be taken to reduce the overall debt.”
