U.S. Xpress Enterprises, Inc. Class A

Good afternoon, ladies and gentlemen, and welcome to the U.S. Express Fourth Quarter 2020 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open 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 Mr. Brian Baubach, Senior Vice President, Corporate Finance. Mr. Baubach, please go ahead, sir.

Thank you, Operator, and good afternoon, everyone. We appreciate your participation in our fourth quarter 2020 earnings call. With me here today are Eric Fuller, President and Chief Executive Officer, and Eric Peterson, Chief Financial Officer. Additionally, Cameron Ramsdell, President of Variant, is here to answer questions. As a reminder, a replay of this call will be available on the Investors section of our website through February 4th, 2021. We've also posted an updated and more detailed supplemental presentation to accompany today's discussion on our website at investor.usexpress.com. We will be referencing portions of this supplement as part of today's call. Before we begin, let me remind everyone that this call may contain certain statements that constitute forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995. These include remarks about future expectations, beliefs, estimates, plans, and prospects. Such statements are subject to a variety of risks, uncertainties, and other factors that can cause actual results to differ materially from those indicated or implied by such statements. Such risks and other factors are set forth in our 2019 10-K, filed on March 4th of 2020, as supplemented by our first quarter of 2020, Form 10-Q, filed on May 6th of 2020. We do not undertake any duty to update such forward-looking statements. Additionally, 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 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. At this point, I'll turn the call over to Eric Fuller.

Thank you, Brian, and good afternoon. On today's call, I'll review our fourth quarter results and provide an update on our digital initiatives designed to grow revenues and position the company for the future. Eric Peterson will review our financial results in more detail, and I will then conclude with a review of our market outlook. The five main themes that we hope you take away are, first, We scaled our variant fleet by 40% sequentially from the end of the third quarter to approximately 700 tractors at the end of fourth quarter while maintaining the division's improved operating metrics, including increased utilization, lower driver turnover, and reduced costs, which all held steady from third quarter's levels. Second, we made substantial progress evolving our variant hiring practices. which positions us to achieve our phase one goal of converting 900 legacy tractors to the division by the end of the first quarter, as well as achieving our phase two goal of growing variant to more than 1,500 tractors by year end 2021 through transitioning our legacy OTR operations. Third, we returned our brokered segment to profitability while delivering 41% revenue growth in the fourth quarter as compared to the year ago quarter. I will spend more time on our efforts here, but this is an important part of our growth strategy powered by our new digital platform. Fourth, the strong strides that we have made growing variant and improving our brokerage segment's margins were masked by decreased profitability in our dedicated division as a result of capacity costs accelerating faster than we were able to pass them through to our customer. Importantly, initiatives are underway to improve pricing in our dedicated accounts. And we are optimistic that we will return dedicated to prior profitability levels over the next two quarters. Lastly, we believe margins will improve through 2021 as we scale variant and it becomes a larger percentage of our truckload revenues combined with our successful efforts to improve pricing in our dedicated division. We have made the investments in our digital platforms and are at a clear inflection point as we begin to realize the scale benefits of these businesses. To start, 2020 was one of the most important years in our company's history. We successfully launched and scaled Variant to 9.4% of our truckload revenues in the fourth quarter as we grew the division by approximately 200 tractors. As we've discussed on prior calls, we believe Variant represents an entirely new paradigm for operating trucks in an over-the-road environment utilizing artificial intelligence and digital platforms to recruit, plan, dispatch, and manage its fleets. The division's operating model, powered by cutting-edge technology, has generated a more than 20% improvement in utilization while significantly reducing driver turnover and preventable accidents per million miles, all as compared to our legacy OTR fleet. The continued validation for Variant was the fleet's ramp to approximately 700 tractors over the year. We needed to see the division's improved operating metrics hold steady as we grew the fleet in order to feel confident that we could truly scale the business to much higher levels. We remain on track to transition 900 tractors in total to variant by the end of March and expect to have 1,500 tractors in variant by the end of 2021 as we intend for this division to cannibalize the legacy underperforming OTR fleet. Our vision and goal longer term is to convert our entire legacy OTR fleet to variant, which we believe will improve our truckload margins when completed, regardless of the cycle. While we believe our margins will expand, we also see a tremendous growth opportunity given the highly fragmented nature of the $800 billion U.S. trucking market. Variant's business model directly addresses our drivers' frustrations as our model delivers higher utilization and pay, which has directly contributed to a significant drop in turnover. This is an important variable in Variant's success and critical to our belief that Variant can achieve scale organically, unlike most competitors in our industry over the past decades. We have also made significant strides through the fourth quarter, improving our recruiting, which was a headwind to variance growth in the third quarter. This improvement is resulting in approximately 20 drivers per week joining variance. Today, our recruiting is focused on two channels. The first is our more traditional channel, which utilizes advertising and recruiters and is delivering 12 to 15 drivers per week. The second channel is a new recruiting platform that is technology-based and which we are building internally. It is an innovative solution fueled by our drivers that we believe is scalable and delivering new drivers each week. While still relatively early, we believe this new tech-enabled model will see improved results and allow us to pull back on our legacy model over time. As a result, we hope to see driver recruitment accelerate while seeing costs decline. This is an important point that I would like to touch on briefly, in which Eric Peterson will discuss in more detail. We're investing for the future because we see an enormous opportunity to scale the company. We also believe that innovation is critical to success, and those that don't have the resources to invest will have a very challenging time growing and competing in the industry. As a result, we are building an entirely new business, which has required duplicative investment and spend. representing a near-term drag on margins. As variance scales, that spend will be spread across a larger fleet, and that is when we expect our profitability will meaningfully expand. As part of our growth and investment, we will also focus on developing a more professional sales organization, which can build deep relationships with customers as we scale our platform. Today, we have a 40-person sales force, which we need to expand in order to support the growth that we know we can achieve over the next decade. As a part of this, we just hired Jake Lawson as our chief commercial officer from outside the industry to help us develop a best-of-breed sales organization to support and accelerate growth. Turning to our fourth quarter results, our fourth quarter truckload operating ratio improved to 96.2% or 290 basis points improvement over the prior year. This improvement was primarily the result of a higher rate per mile combined with lower claims expense partially offset by fewer average tractors in the quarter. Our over-the-road segment experienced a year-over-year increase in spot rates given the favorable supply-demand dynamics in the markets. This helped to drive average revenue per tractor per week higher by 11.9% as compared with the year-ago fourth quarter. This was primarily the result of 11.1% increase in average revenue per mile and a 0.8% increase in revenue miles per tractor per week. Overall, I'm very pleased with how our over-the-road segment performed this quarter. Turning to our dedicated division, Average revenue per tractor per week, excluding fuel surcharges, increased $49 per tractor per week, or 1.2% as compared to the year-ago quarter. This average revenue per tractor per week achieved in the fourth quarter of 2020 was over $4,000. The increase was primarily the result of a 2.3% increase in revenue miles per tractor per week, partially offset by a 1% reduction in average revenue per mile and a 1.4% decline in average tractors in the quarter. While the market was strong through the quarter and contributed to improved demand and spot pricing, qualified driver availability continued to be challenging, which contributed to higher driver pay and recruiting costs. Additionally, the lack of driver availability forced us to source third-party capacity at a cost significantly higher than expected. Over a typical cycle, it takes several quarters for pricing to increase, which provides ample time to adjust to the changing environment. Looking back to July, spot pricing rapidly increased each month, pressuring the cost of our dedicated business without the opportunity to increase customer pricing given the contracted nature of the business. As a result, we had costs increase while rates remained flat. contributing to an approximate 400 basis points sequential decline in the division's operating margins in the fourth quarter compared to the third quarter. Importantly, the division is performing well as we continue to deliver average revenue per tractor per week in excess of $4,000. The challenge is adjusting pricing as fast as this cycle change, and we are actively engaged with our dedicated customers discussing these issues. We expect to resolve these inefficiencies and believe our corrective actions will allow the division to return to historical margins over the next two quarters. Turning to our brokerage segment, we appointed Joel Gard as president in the second half of 2020. His prior experience in a global brokerage organization was instrumental in leading his team to improving profitability and accelerating growth, which we have tasked him to accomplish here at U.S. Express. His impact can already be seen in our fourth quarter results, where brokerage segment revenues increased 41% to $76.4 million as compared to $54.1 million in the fourth quarter 2019, primarily driven by increased revenue per load. Importantly, our team made significant strides improving our mix of business towards spot and away from contract pricing as we work to achieve a better balance in our business. This shift delivered a dramatic improvement in profitability as the brokerage segment's operating ratio improved 920 basis points to 98.9% as compared to the third quarter of 2020. As a result, we delivered operating income of $800,000 as compared to an operating loss of $4.5 million in the third quarter of 2020. and a loss of $2 million in the year-ago quarter. A key driver to the brokerage segment's growth this quarter was our decision to move the business towards a digital platform in order to position the segment for profitable growth. In April of 2020, we purchased a small business in the Southwest, which was a technology platform with an experienced and talented team. Their approach to the brokerage business is to utilize the digital framework for handling transactions which is scalable. Importantly, we believe this platform will enable our team to continue scaling the business and drive a high level of growth in the years to come. Let me now turn the call over to Eric Peterson for a review of our financial results.