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spk08: 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.
spk03: 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.
spk04: 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.
spk05: Thank you, Eric, and good afternoon. Operating revenue for the 2020 fourth quarter was $455.6 million, an increase of $6 million as compared to the year-ago quarter. The increase was primarily attributable to increased revenues in the company's brokerage division of $22.2 million, an increase of $1.2 million in truckload revenue, partially offset by decreased fuel surcharge revenues of $17.5 million. Excluding the impact of fuel surcharges, fourth quarter revenue increased $23.4 million to $428.7 million, an increase of 5.8% as compared to the prior year quarter. We posted operating income of $15.1 million in the fourth quarter of 2020, which compares favorably to operating income of $1.4 million in the 2019 fourth quarter. Our operating ratio for the fourth quarter of 2020 was 96.7% as compared to 99.7% in the prior year quarter. The primary drivers of our improved earnings were higher rate per mile and lower claims expense. Revenue protractor per week improved 11.9% in our over the road division and 1.2% in our dedicated division. While we continue to execute on our digital initiatives and fixed and variable cost control efforts. Additionally, I'm happy to report that our truckload operating ratio improved 290 basis points to 96.2% from 99.1% in the prior year quarter. While we have delivered operating ratio improvement on a year-over-year basis, we have been investing back into the business in order to drive our digital initiatives designed to improve our profitability while positioning the company for growth. this investment is suppressing the underlying margin improvement that is taking place importantly we are managing the business for long-term value creation and are confident that these investments will translate into stronger margins and growth as we move through 2021 as an example as we build the platform process and technology for variant we are investing in smart technology and people These expenses equated to approximately $0.28 per mile for the 700 tractors and variants during the fourth quarter. If we are able to scale the tractors in this division to 2,000, we believe these costs will reduce to approximately $0.09 per mile and further improve overall truckload profitability. Additionally, throughout 2021, we believe we will be able to remove meaningful costs from our organization as we continue to allocate capital to variant and it cannibalizes the legacy over the road business over time. As this division continues to become a higher percentage of total truckload revenues, we expect our truckload margins to expand and consolidated operating income to increase. Net income for the fourth quarter of 2020 was $7.6 million, which compares favorably to the $9.6 million loss that we reported in the prior year quarter. Earnings per diluted share were 15 cents. Turning to our balance sheet, we had $353.5 million of net debt and $175.3 million of liquidity, defined as cash and cash equivalent plus availability under our revolving credit facility. I'm very pleased with the progress that we have made as our leverage continued to decline to 2.4 times net debt to trailing 12-month EBITDA for the fourth quarter of 2020 compared to 4.15 times at the end of the 2020 first quarter. We believe our leverage will continue to improve over the next several quarters. Turning to net capital expenditures, they totaled $111.6 million in 2020, including a previously disclosed $20 million transaction that carried over from the fourth quarter of 2019. In the fourth quarter, net capital expenditures were $16.3 million. With that, I'd like to turn the call back to Eric Fuller for concluding remarks.
spk04: Thank you, Eric. Looking to the year ahead, our baseline assumptions for the market include a general sequential economic recovery supported by increasing inventory restocking, continued tight trucking capacity, and relatively benign cost inflation outside of driver-related and insurance premium expenses. These conditions, combined with the continued shortage of drivers, are expected to be supportive of the market and rate. As a result, we expect contract rates to increase on average by 10% to 15%, with the driver shortage likely extending the cycle, as we believe there will be up to 200,000 fewer drivers as compared to 2019. While the market should provide an accommodating backdrop for our industry, we are de-emphasizing the cycle. we are transitioning our business model from a cycle-dependent model to a model that we believe will hold a growth opportunity at an improved margin regardless of the market backdrop or the position in the cycle. As we execute on our technology-enabled platforms, we expect to begin to look more like a growth company than a cyclical company. The trucking market is an $800 billion market in which no company has meaningful share. Our large and highly fragmented sector has gained the attention of venture capital, hoping to disrupt and grab market share in what's essentially a wide-open opportunity. We believe this poses a significant risk to all incumbent companies given that rates are commoditized, margins are low, and existing operating models have been unable to scale. These market dynamics create a real opportunity for a company that can solve these issues and and aggressively scale their business and eventually push the incumbents out of the market. Clayton Christensen wrote about industry disruption in his book, The Innovator's Dilemma. The scenario that plays out over and over is that new entrants enter a market at the lower, less attractive end. Instead of meeting the disruptors head-on, the incumbents move to the more attractive part of the market and essentially cede the low end to the new entrants. The new entrants use this as a base from which to build out their capabilities and eventually move upstream, replacing the incumbents in not only the low end of the market, but the high end of the market as well. You can see this playing out today within the truckload market. The OTR market can be highly competitive, volatile, and exhibit low margins. As a result, many of the larger incumbents are walking away from this market and moving into other areas with less competition and better profitability. This is leading the OTR market to smaller, less successful incumbents, as well as new entrants. While we believe there are boundless opportunities within dedicated and brokerage, we also believe there are incredible opportunities within an OTR, particularly for a company that can produce an operating model that has a lower operating cost and proves to have significant scalability. When we started working on our hypothesis around what would eventually become our variant fleet, our focus was on building a lower-cost model that could scale. While we are still being cautious and disciplined with variance growth, everything that we are seeing at this point leads us to believe that we have succeeded. We believe that we have line of sight to an operating model that should operate more profitably than a legacy model at ultimate maturity. On top of that, we have confidence that Variant's model combined with the digital platform we're developing in our brokerage segment could significantly scale, creating a long runway for growth. We believe we can double our consolidated revenues over the next four years. In summary, these are exciting times at US Express for our people, for our customers, and we believe for our investors, as we embark on what we expect to be the most wide open growth period for our company in the past 20 years. We have the advantages of a strong capital base, strong customer relationships, and the relative stability of our dedicated division on which to build. We have the confidence gained from Variant's launch and the clear advantage over our legacy OTR model. And we have the leadership and the technology and team acquired earlier this year to propel our digital brokerage initiatives. The truckload business came about because of service and cost advantages over competitors following deregulation in 1980. The gold rush days of the 1980s and 1990s established most of the market leaders in our industry, including US Express. And we believe over the next 10 years, the industry will experience similar transformative changes. Through our investments in technology and our mindset that the old truckload model is broken, we see ourselves poised to lead this next era of growth. As a reminder, Cameron Ramsdell, president of Variant, is on the call and will be able to add color to questions on Variant as needed. Thank you again for your time today. Operator, please open the call for questions.
spk08: Thank you. And I'll be conducting a question and answer session. If you'd like to be placed in the question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 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 star one. One moment, please, while we poll for questions. Our first question today is coming from Robbie Shanker from Morgan Stanley. Your line is now live.
spk01: Thanks. Good evening, gentlemen. A couple of short-term questions and one bigger picture one. Maybe we can start with fourth quarter and dedicated. I mean, one of the beauties of dedicated business is that it's very stable, long-term contract, long-term pricing. You don't usually have driver issues in dedicated business. Can you talk about, you know, if there's any way your dedicated business might be different than what we traditionally understand dedicated to be, that you're having these issues right now and kind of how they can be solved?
spk04: Yeah, I mean, I think the issue really this year was really unique. If you look at the driver situation, I don't think we've ever seen a driver situation deteriorate as fast as we did this year. We went from a situation where it was fairly easy to find drivers, turnover was relatively low, and then within a matter of weeks, we had really flipped to probably one of the tightest driver situations that we've experienced in a long time. I think that situation kind of created a situation in which we had to go and add some extra costs, whether it be through paying drivers more, whether it be through spending more on recruiting or going and sourcing third-party capacity in order to meet our contractual obligations. and we were unable to get that back from the customer in a short period of time. Typically, when these things happen, it's progressive, and we're able to have conversations with the customer over a period of weeks and even months to get compensated for those increased costs, and that didn't happen this specific quarter. We also had one specific customer that created some headwinds through that process as well.
spk01: Okay, got it. On Variant, in this incredibly tight driver market, is Variant having an easier time finding drivers in the rest of the OTR business? And if yes, why not accelerate the rollout? And also, have you considered breaking Variant out into a separate segment?
spk04: Yeah, so I'll answer that and then I'll throw it over to Cameron to answer about the driver piece. The reason we're not going and switching all of our tractors over today is because this is a brand new model. It's brand new technology. It really is completely unique than anything out there. And so we are being very disciplined about that growth. And what I don't want to do is go throw 2000 trucks over this model and then somehow it breaks meaning we dilute our metrics at some point and we don't know where it broke so by being very deliberate it's going to be slow and it'll take us a little while to get to that final uh you know uh cannibalization of that entire fleet but By doing it this way, it'll make sure that it's sustainable and that we'll be able to recognize if we encounter any kind of issues in the growth strategy, we'll recognize it in real time and be able to fix it as opposed to having to go back and kind of do an analysis after the fact. And Cameron, do you want to hit on the driver's piece?
spk00: Sure. Hey, everyone. This is Cameron. Robbie, thanks for the question. I think you were asking if we're finding it easier to recruit drivers into Variant than the OTR model. The short answer is generally yes, progressively more so over time. We launched an entirely new brand, and I think at first underestimated how big of a lift and how much time it would really take to gain traction and educate a market on a unique value proposition. But we've seen sequential growth week over week, even through the holiday weeks, which was which is traditionally a time when recruiting really slows down. So we're really gaining a lot of momentum.
spk01: Great. And will you consider reporting variant as a separate segment so we can see some of the differences in numbers?
spk04: Go ahead, Eric.
spk05: I was going to say right now in our earnings supplement, you know, we're putting some of the separate stats related to turnover, utilization, and accidents per million miles on the variant fleet. As variant continues to be larger and a more meaningful part, then we'll consider breaking that out as a separate operating segment. You know, and as a reminder, you know, just 9% of revenues for the fourth quarter, so much more cannibalization to come where ultimately we'll be displaying these stats separate.
spk04: Great. Thank you. Thank you.
spk08: Thank you. Our next question today is coming from Jack Atkins from Stevens. Your line is now live.
spk02: Hey, guys. Good afternoon. Thank you for taking my questions. So I guess, Eric Peterson, when you think about the 28 cents per mile on the 700 variant trucks in the fourth quarter, I guess that's overhead. Is there a way to kind of quantify that in terms of dollars? I guess I'm just trying to figure out how many trucks do you need in the variant fleet before that fleet is accretive to earnings? How close are we to that tipping point?
spk05: Yeah, I would say, you know, Jack, thanks for the question. You know, I think as far as being accretive to earnings, that we're already there with 700. You know, because as we said, this group's performing 1,200 basis points better. just looking at the combined stats of better utilization, lower turnover, and fewer accidents per million miles. So I say we're already better than we were, you know, by replacing the student program and having those other drivers in our over-the-road fleet. As far as nominal dollars, to answer your question, that $0.28 represents for the fourth quarter about $4.5 million of expense. And when we get, you know, taking that to 2,000, you know, tractors and that investment, you know, that expense will increase, but not nearly at the rate as our revenue will increase. That drops to 9 cents per mile. You know, so you're talking about a 20-cent reduction out of the cost infrastructure over a unit. And at a rate of $2 a mile, that's 1,000 basis points alone. So we believe that we will achieve 2,000 tractors and then ultimately surpass that. We don't see a limit to scale at this time, and that cost will continue to reduce on a per-mile basis.
spk02: Okay, got it. Got it. That definitely helps. And then, you know, I guess when we think about the dedicated piece of the business, just to follow up on Ravi's question for a moment, you know, Eric Fuller, if I remember your prepared comments correctly, it sounds like you're expecting to take a couple of quarters to get the rate where you need it to make up for the cost headwinds there to seat those trucks. Why is it going to take so long, and are there things that need to change with those dedicated contracts in the future to kind of put some rate adjusters on there for situations like we're finding ourselves in right now?
spk04: No, I wouldn't necessarily say it's really taken two quarters. I think that the problem is some of the rate improvement that we need will come in. a little bit later in this quarter, right? So they'll come in maybe in the end of January, early February. Some of it gets layered in a little bit at a time. And so I think we'll fully have all the rates that we need by the beginning of the second quarter. But from the results standpoint, it will be a progression from where we were in Q4 through Q1 into Q2, if that makes sense.
spk02: Okay. Okay, I got you, Eric. And so I guess just kind of putting it all together with the additional progress at Variant over the course of the first quarter to get to 900 trucks, the rate actions at Dedicated, you know, typically I understand there's, you know, obviously some headwinds from a seasonal perspective going from the fourth to the first quarter. How should we think about that seasonal progression this year, given all the different moving pieces that we're talking about on the call right now?
spk04: Yeah. So if you look at obviously rate, there's the spot environment in Q4 to Q1, there's always a little bit of reduction from a rate perspective, right? But this year, I think you're going to have rate improvement layered in both on the OTR side and the dedicated side. But I think more significant on the contract side, but probably more significant to us is A, the dedicated techs, where I do think that we will be better from Q4 to Q1 within our dedicated operations. Secondly, we will be growing. We plan to grow to about 900 trucks invariant by the end of this quarter. And today we are just a little bit below 800. So we are tracking towards that 900. We're actually a little bit ahead of it. So we feel very confident that we can get there. And as Eric said, today we're already recognizing 1,200 basis points improvement on a truck-by-truck basis between variant and our OTR. So that will be another conversion of improvement. 200 some odd trucks that are operating at that level. So I think it's likely that, you know, we could kind of buck the normal trend of seeing that big drop off from Q4 to Q1. I think there are some headwinds in that, especially that spot rate. But I think some of the self-help things that we're doing specifically around dedicated and the variant conversion will at least keep us kind of on probably a similar level to the previous quarter.
spk02: Okay, that's very helpful. Thanks again for the time, guys.
spk08: Thank you. Our next question today is from Ken Hexler from Bank of America. Your line is now live.
spk06: Great. Good afternoon, Eric and Brian. Eric, just to clarify real quick on that 1,200 basis points, is that for variant? Is that utilization or is that an operating ratio number that you're throwing out there?
spk05: That's an operating ratio number and the components, one of which the largest is utilization. You know, it's 21% better utilization on a two-thirds variable, one-third fixed. That's 700 of your 1,200. You have another 200 basis points in insurance and claims expense that will be lower just because of the dramatic decrease in of preventable accident per million miles. And then the third component is driver turnover. You know, seeing driver turnover in that 50% range compared to that legacy group, which has been above 150%, equates to easily 300 basis points of cost.
spk06: Thank you for that clarification. So, Eric Fuller, I just want to understand, I mean, you mentioned a lot of focusing on growth in your prepared remarks. And I guess I'm a little confused by that, given, you know, if you're talking about an operating ratio in the mid to upper 90s, why would you not say there is no growth, and we're just focusing on getting the cost and the ratio into the 80s, right? I mean, wouldn't that be more meaningful than growing the fleet at this low single-digit margin?
spk04: No, I I think we're not growing at a low single digit margin. I think if you look at it, you know if you take what we said that we're at 1200 basis points improvement within the variant model that we think there's at least another 1000 basis points. improvement to come in variant model as we get to maturity, that there's no reason for us to slow down that growth. I mean, so at that point, we're running 2,000 or better basis points improvement over the legacy model. So you're no longer in the mid-90s. You're doing much better than that. And at that point, we would continue to accelerate that growth. So we have We have line of sight to an OR sub-90, and we believe that we are moving in that direction. And really what we need to continue to do is convert this fleet and completely cannibalize the legacy fleet as it exists today because it is broken and we can spend a lot of time trying to fix it and it's small incremental fixes and we'll spend the next year or two fixing it when in reality we believe that disruption is happening within the industry we think it's early days but we think there's a real likelihood that in 10 to 15 years the environment within the truckload industry is dramatically different than what it is today We think that there could even be as little. There'll be some small misses and stuff, but for the most part, we think that the market could even be carved up by as little as 20 companies. And we think that people that are going to sit here and try to operate in a legacy model will likely not survive that. And so that's why we're making this drastic change. And we believe in the direction, and we believe that it will improve our earnings.
spk06: So just to clarify, when you say growth, you mean growth switching over to variant, not growth in the total fleet? Or do you mean growth overall?
spk04: It would be growth in the total. I mean, as we surpass, so there will be a conversion period. So this year is what I would call more of a cannibalization year, where we're going to cannibalize the legacy model from the numbers perspective into variant. Once we get to that point, we're not going to stop. We're going to hit the accelerator at that point. As Eric said, we'll be sitting close to 2,000 trucks. We're going to have that fixed cost of the tech infrastructure going from $0.29 down to $0.09, and we're going to be off to the races. And at that point, as long as the model continues to scale, which we believe it will, we have no reason to slow that down.
spk06: And just to clarify on that statement, though, this is just for the OTR. It doesn't migrate to the dedicated infrastructure.
spk04: Well, we're still looking to grow dedicated, but I think what this is going to do is we grow variant that's actually going to give us opportunity and dedicated as well, because the plus with this growth in variant In the past, we have played a little bit defensive with some of our dedicated accounts because we were concerned about losing overall truck count. We believe we can continue to grow variant and we'll fill any kind of reduction that we might have to absorb within the dedicated accounts. if we get a little aggressive from a rate perspective, but we need to. So there's some accounts that have underperformed. And in the past, we probably allowed that underperformance because we were worried about our infrastructure and covering that fixed cost. Now, this is going to give us the ability to fix those as well. So I think it's a net positive for the entire company. But when we talk about doubling, we're not talking about just doubling the GRP. We're talking about doubling revenues for the entire company within four years.
spk06: if I can just squeeze one more in, sorry, but absolutely dedicated contract rates. I just want to understand your answer to Jack and Ravi, but the dedicated rates declined. I'm a little, you know, we're down 1%. Maybe you can just, I mean, up sequentially, I guess on a, on a, cents per revenue mile basis. But is that a mix of businesses? What would cause that to go down? I mean, the contracts are structured. Why wouldn't you at least have them built in? And I don't know, Eric, if you want to throw in something on the scale of driver pay, because you mentioned the impact of drivers in there.
spk04: Yeah. It's completely a mixed issue. So if you look at the accounts in which we have a higher rate per mile, those are what I would call the more difficult accounts to staff. And so that is where we saw a reduction in our driver count. And so when you look at the mixed perspective, we had less of the higher paying revenue because we had less drivers. And that's the reason that that mix played out like that. It's strictly a mix. We didn't see reductions or anything from a rate perspective. It was strictly a mix issue.
spk06: I'm set. But if you want to just throw in a thought on the driver pay, just because Eric mentioned the driver pay, was it Is there a level you want to throw in a percentage rate increase or anything?
spk04: now we'll see so one of the things on the driver paper dedicated is because the situation deteriorated so fast we've already given in a lot of cases the the pay increase in a lot of those dedicated accounts so we're in the process now of being recouped for that from a customer perspective so i there may be some small incremental increases that need to happen on the dedicated side but at this point um i feel pretty confident that we shouldn't see too much uh in the cost from a driver perspective going into this quarter.
spk06: Eric, Eric, appreciate the time. Thanks, guys. Absolutely. Thank you.
spk08: Thanks. Our next question today is coming from Scott Group from Wolf Research. Your line is now live.
spk09: Hey, thanks. Afternoon, guys. So if I look over the last two quarters as you've really started this transition to variant, the over-the-road fleet is down 12%. What's going on there?
spk04: So we made a decision in Q2 to stop investing in what we determined was a broken fleet. We came to the conclusion that we weren't going to fix it, and that if we continue investing in this fleet, that at some point we're going to have to kind of we're going to have to fix that because we're going to keep investing and throwing good money after bad. So we made a decision in Q2, which has negatively impacted our truck count, and we recognize that, and we still believe to this day that it was the right decision. And we are now, we've kind of, I would say, plateaued on that truck count reduction, and now we're going to be building back and building back in the fleet in which we want to see growth in.
spk09: You think in the first quarter the fleet is similar size to what it is right now? I would say mostly.
spk04: I mean, yeah, I would say mostly. I mean, I think that we probably don't see net growth in the fleet probably until the following quarter. But I feel pretty confident that we'll start to see a little bit of net growth and maybe get back to similar numbers from last year at some point in the back half of this year.
spk09: Okay. I just want to understand Varian a little bit more. Is freight moving at spot rates? Is this at contract rates? Are these new trucks, brand-new trucks, or are these some of the older trucks that you're just rebranding? Just a little bit more color. Cameron?
spk00: Sure, this is Cameron. Thanks for the question. So it's a mix. We don't over-index on spot or contract rates. We've built this entire model from scratch with the intent to scale, so we knew it needed to be resilient irrespective of rate type. So the focus on the fleet certainly has an emphasis on it, but it doesn't over-index on either one necessarily. As for newer old trucks, um we have the fleet is its own unique fleet with its own unique brand um so we are in the process of cycling through some of the older equipment and bringing in new variant trucks how much of the margin differential is just that these are new trucks versus older trucks is that a factor do you think it has no it has no bearing on it whatsoever none okay okay and then um
spk09: I know you answered about first quarter trucking margins, but any thoughts on what's a realistic target for the full year trucking margins?
spk04: No, but I do think that you're going to see some progressive improvement through the year. As long as we continue to be able to grow our variant fleet count to the tune of roughly, what, 200 trucks per quarter or so, then we feel really confident that sequentially we're going to improve our earnings through the year because we're As we said, we're already getting a significantly better return on those trucks. And then as we grow, we're going to be spreading more of that fixed cost over additional units so that that delta will actually grow.
spk09: If we look in 2018, you did a 93.5 net of fuel. Can it be as good as that or better than that?
spk04: Um, you know, I'm not really in the I'm not really going to guesstimate where we may land, but I feel very confident if we meet our our goals that we said internally that I think we'll all be happy with where we end up for the year.
spk09: Okay, just last thing real quick. Um, Peterson, you have a net capex number for the year.
spk05: Yes, that's included in our supplement with all of our assumptions for next year, and that number is $130 to $150 million.
spk09: And that's the cash, that's the net capex?
spk05: Net capex. That's correct. And that also includes our investment into our technology platforms as well.
spk09: Okay. Thank you, guys. Appreciate it.
spk05: Thank you.
spk08: Thank you. Our next question is coming from Brian Ostenbeck from JP Morgan. Your line is now live.
spk07: Hey guys. Good evening. So just maybe picking up on the assumptions in the, in the appendix, um, truckload rate per mile, uh, expecting mid single digit increase. That seems, uh, I guess I don't know how to interpret that because you're looking at 10 to 15% increase on contracts, uh, spot still going to be pretty strong. And I think in 2018, it did like 12% X fuel. So what am I missing there? Because that seems a lot lower than I would have thought on mid-single.
spk04: We don't anticipate dedicated being to the tune of 10% to 15%. So with the dedicated piece in aggregate, then that's kind of where you end up.
spk07: Okay. Even with the – and I was looking at the 12%, I think it was on a consolidated basis with dedicated in 18, which was up like 8 or so percent. Okay. Shouldn't you be able to get a better rate if you've got the catch-up in some of the cost inflation in 2021?
spk04: On the spot side, though, you've really got two quarters where you've got a big difference, and then you've got two quarters where you had really high spot rates where the year-over-year comparison is not going to be as extreme. For the most part, the spot rates were you had a really strong spot rate environment on a comparison basis through that entire year.
spk07: Okay. Okay. Got it. And then the truck count, modest growth. Sounds like you're going to start off a little bit slower and then build through the year and maybe hit flat in the back half of the year. So I guess is the delta, I think that was mostly on OTR commentary, but is the delta on dedicated?
spk04: Yeah, I mean, I think dedicated, we'd like to see a little bit of growth, but that's probably, you know, going to be small. And where it makes sense, obviously, we're going to grow in dedicated opportunistically. But the OTR fleet, the conversion over into variance is where we're going to see that improvement and that growth.
spk07: All right. And then just one last one on variance. Maybe you can talk about the The turnover in the fleet, what type of folks you're getting in that stay, and how many are leaving and why, and then just the investment needed to build out the automated recruiting for variant. It sounds like that's just getting live right now. So how far are you on that, and what do you think that will end up costing to fully develop?
spk04: Yeah, I'll let Cameron answer those. Cameron?
spk00: So the turnover and the variance, we look at turnover a couple different ways. The most important way that we look at it is from a voluntary basis standpoint, right? So what we're intensely focused on is bringing down the total number of voluntary drivers that voluntarily leave the company. So in total, those numbers we published in the supplement, It's right about 50% right now, but on a voluntary basis, it's just important to note that included in that 50% number are the drivers that we are managing out, drivers that deliver late for shippers or don't have a great on-time or safety record. We are terminating. So that's baked into that number. Also baked into that number is anybody that may have actually had an accident. So we are intensely focused on reducing the voluntary attrition levels. We don't publish that number at this time, but it is meaningfully lower than the total number. And everything that we're doing from a technological standpoint is really either directly or indirectly aimed at enhancing the driver satisfaction, thereby reducing that number. As far as the total investment, you know, the right answer is it depends. We take kind of a much more agile approach to development, so right now what's in scope for that platform. couple million bucks maybe at the most. But what's interesting about the model itself is it's predicated upon the belief that the best recruiter for a new variant driver is a happy existing driver. And we have many of those as indicated by the voluntary attrition number. So what we try to do is provide a brand new revenue stream to them while simultaneously creating a community for them. So it makes a big company feel much smaller. And what's unique about that is it is actually scalable and comes at a lower cost. So what you're seeing is actually a displacement of cost from the traditional models into this new model.
spk07: Okay, great. And then maybe just one more quick one on margin profile logistics, 60% automated in the quarter. How do you think of that scaling, I guess, into the numbers when it comes to reducing headcount and getting better productivity, probably a combination of both.
spk04: Yeah, that's really going to fuel our growth. So as we as we grow this year, we can anticipate some pretty significant revenue growth within the brokerage segment. We will be able to leverage that digital platform to grow without being as capital intensive as we would have been in a traditional sense. So we're still going to be adding people, but we'll be adding people probably at a slower level than we would have because we are able to leverage that digital platform. So not only is it going to fuel growth, but over time it's going to lead to a better return from an OR perspective because we're not going to need as many people on a dollar-by-dollar basis that we would in the traditional.
spk07: Right. Okay. Thank you for the time. Appreciate it.
spk08: Thank you. The next question is to me from Nick Farwell from Arbor Group. Your line is now live. Eric and Eric, I just have a couple of clarification. Did I hear correctly that you felt that this lag in pricing or price adjustment and dedicated might be no more than one to two quarters? Typically it takes longer than that, especially as my recollection, especially if it starts in the beginning for whatever series of reasons earlier in the year and you have a number of contracts that may come up in the spring or the early summer.
spk04: No, most of these issues were where we incurred a new or additional cost that we typically, in a normal cycle, would go back and get recompensated from the customer. And what normally would happen is this would happen progressively, and we would see it, and we would go and have dialogue over a period of time with the customers. and say, we need to give a driver a wage increase, and they would kind of agree with us. And so in that scenario, you would see the rate follow suit, usually kind of in conjunction. However, this happened so quickly that we were forced to go and kind of chase the rates And in that same scenario, we were not able to recoup the costs as quickly. But now we have gone out of cycle. And in most cases, we have those increases either in place or going in place.
spk08: Oh, I got it. Okay. So one might say you were far more proactive than prior cycles. That's a gross statement, recognizing the squeeze that was taking place in such a short period of time.
spk04: It happened quicker than I think than normally where you would have a little bit more time. This one just happened so quick, and it happened on a large scale. So I think it's why it impacted us so much. But I think it also is going to be easier and quicker to fix.
spk08: Just conceptually, how do you see yourselves benefiting the dedicated side of the business from what you've learned digitizing over the road? I'm being a little gross in my statements, but I think you understand the context. Yeah.
spk04: I do, and I would say that today that is not on our roadmap. However, I would say that within a year and a half, two years, as we get the variant model to what we would call maturity, not only from a size perspective, but from a technology platform perspective, we will look to see where else we can apply this level of technology and business model, and dedicated would be an obvious place to look. So not on our roadmap today. But definitely in the back of our minds as a possible place to take an approach like this down the road.
spk08: And taking that same thought process and characterizing it as suitable for over the road, to what degree is this a way of sort of working your anticipating, I guess is a better word, ultimately the implementation of EV trucking?
spk04: Yeah, I think it actually aligns quite well with all of the different types of technology that are going to be coming down the pike, whether it be new types of fuel from a tractor perspective or even autonomous trucks. We think that by leveraging technology, leveraging an optimization system that is really not dependent on people, we could build the most defined network possible to take advantage of new technology from an equipment standpoint that we expect to come out over the next five to 10 years.
spk08: So we're really looking out to be there about this prior mid to late 2020s before you really see the autonomous truck on certain lanes, you know, on an ongoing commercial basis. Is that sort of your hunch?
spk04: Yeah, I would say that you might see a couple here and there by 2025 or before, but not on a large scale. But I think. between 2025 and 2030, I think it's likely that you'll start to see a lot more autonomous vehicles on the road. And we think that the system that we're building within Variant really translates well to that environment. I don't envision it like just taking over and replacing drivers. It's more on a specific kind of area or niche basis. But there's going to be certain applications that are going to really align very well with an autonomous unit.
spk08: Yeah. And then the last question, I just wanted to make sure I understood yours and Peterson's general comments about 21, that the OR will improve in some measure because of as variant grows, you cover the incremental fixed costs. And then dedicated pricing and the improvement that you've characterized earlier in this conference call. But you didn't mention, or maybe I missed it, the swing in brokerage. I mean, that alone, given what the fourth quarter manifested, would be could be a rather substantial swing going into this particular year compared to a difficult first two, three quarters last year, right?
spk04: Yes, I would agree. However, we are continuing to, much like we have done previously with the technology platform, we are investing in that area. We are anticipating some pretty aggressive revenue growth, not only this year, but in subsequent years, and we are building out the platform in order to facilitate that. And so while we don't believe we will slip down back into the red, I think that the next year, 2021, will be an area where we are going to have some additional costs coming into that model that may make that model, from a revenue growth standpoint, we anticipate some pretty aggressive growth, but from an improvement in OR, we don't anticipate, that being a big part of 2021 within that brokerage division. So, basically, it's an investment year. It is, but it's going to be a year and a half. It is in that area, but I think the harvest year, if you will, and the variant model is 2021. Okay.
spk05: Yeah, Nick, I think to your point, we don't anticipate having a 106 operating ratio in our brokerage division in 2021. Okay. So there will be that year-over-year improvement.
spk08: Right. And I say that, but what you're saying is basically it's break-even maybe and make a little money. It's not going from negative six to positive five. Yeah, I would agree with that, yeah. Yeah, okay. And then the last question I have, when you say cap spending, I assume you meant net cap spending of 130 to 150. Maybe I just missed that.
spk05: Yeah, that's correct. That's net capital expenditures of 130 to 150.
spk08: And what portion of that would be, if you could characterize the investment in technology as opposed to fixed equipment, if you will?
spk05: Yeah, I would say during 2020, $13 million of our net capex number were around the technology platform that we built. And we could expect another comparable to a little higher during 2021. Great.
spk08: I thank you very much for taking my questions.
spk05: Yeah, absolutely.
spk08: Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to management for any further closing comments.
spk04: Great. I think one thing that we did not cover on this call that I think is really important is to really define a little bit quickly how this model that we're building with Invariant is different than what maybe others are applying from a technology standpoint. So, Cameron, briefly, could you describe what we are doing and how it's different than other models that may be out there? Sure.
spk00: So there are a few, I'd say, three or four critical differences. The first is that we built this entirely from scratch. It's an entirely different, tailor-built operating model that's digitally native. So if you think about applying technology solutions in an existing business, you inherently design around the existing constraints. And those constraints get built upon and built upon over time, and you end up usually over-indexing on them and getting a suboptimal product as a result. Also, when you apply technology to an existing business, especially a people-heavy business, the change management effort is profound and can derail the initiative entirely, and we fundamentally did not do that. We built this, again, in a completely greenfield environment, in a completely unconstrained environment, with all the benefit of the knowledge of those pitfalls, which I think has really yielded a remarkably different product for the problems we're trying to solve. So that's one, that's just the starting place for Variant, the genesis of Variant is different from anything else out there that at least I've seen. The second is that the mission is fundamentally different. We built this with the intent to scale it from day one, and we built this with the intent of creating the most seamless and superior driver experience in the marketplace. Most other large providers that are leveraging technology try to drive incremental change, and what our mission has been since day one is a step change from anything else that's out there, so it's a much broader mission. The third is that the team of people that are executing this strategy are fundamentally different. So, for example, I'm not in Chattanooga. I'm 100 miles south down I-75. I'm in Atlanta across the street from Georgia Tech. We're in a little part of the city here called Tech Square. It's home to a number of innovation centers from Fortune 500 companies and a bunch of startups. So it's a great place to incubate something like this. And we have an incredible team of technologists ideating and building these systems that we've discussed on this call. We've created, I'd say, a culture of innovation here comprised of very bright people from very diverse backgrounds in product, data science, software engineering, data engineering, analytics, and more. all co-located with the operating group. So there are very tight feedback loops. So when a driver called in and there's an issue or something with our optimization system goes wrong, it is immediately identified, if not proactively identified. And there is someone sitting right there that is able to communicate with one another, albeit in this age in a digital world with COVID. But the feedback loop is very tight. So you have this kind of co-located operations with the technical operating group. And the final piece is that the fundamental operating model is different. This is not just an app. Of course there's an app. It's not some bolt-on optimization software. I think anyone can do that, and I think some do leverage some types of optimization software in some capacity. But it's more about how we built and integrated a holistic operating model that's particularly special. So for example, every trucking company I know of, and in my last life I dealt with a lot of them, they have load planners. We do not. We have algorithms. And these algorithms automatically orchestrate the movement of the assets dynamically, regardless of demand asymmetry or disruption. So traffic, weather, whatever happens, instantaneously processed and propagated through the fleet. Most trucking companies have fleet managers and dispatchers. We do not. We have a driver concierge and an omni-channel engagement model for those drivers. These specialists are armed with technology designed to predict disruptions and, ideally, automatically resolve those problems before human interaction is necessary. This is trucking, things happen, and sometimes you do need to intervene. So what we try to do is triage those as quickly as possible with our algorithms, understand the problem, and direct them to the specialist that is empowered to handle whatever problem comes up. So everything that we build within Varian is either for, you know, rapid proof of concept to make our drivers better or improve our operating metrics like utility, attrition, accidents, or to scale at an unprecedented rate.
spk04: All right, Cameron, thank you. All right, I just want to thank everybody for being on the call today. Again, 2021 is a big year for us. I mean, we've been investing in this and building this for the last few years. We really think this is the year we really harvest all of that investment, and it really starts to show in the numbers, starts to show in the growth. As we've stated multiple times, we plan on seeing revenue growth double within the next four years, and we believe we built a platform to do that. Thank you. Thank you.
spk08: That does conclude today's conference. Let me just connect your line at this time and have a wonderful day. We thank you for your participation.
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