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spk06: Good afternoon, ladies and gentlemen, and welcome to the U.S. Express Second Quarter 2021 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 Matt Garvey, Vice President, Investor Relations. Please go ahead, sir.
spk05: Matt Garvey Thank you, Operator, and good afternoon, everyone. My name is Matt Garvey, and I recently joined U.S. Express as Vice President of Investor Relations. I'm coming over from Teradata, an enterprise software company based in California, and I'm really excited about joining U.S. Express at such an exciting time for the industry. I'm looking forward to meeting with you all in the future. We appreciate your participation in our second quarter 2021 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, and Joel Gard, President of Express Technologies, are here to answer questions. As a reminder, a replay of this call will be available on the investor section of our website through July 29th, 2021. We have also posted an updated supplemental presentation to accommodate today's discussion on our website at investors.usexpress.com. We will be referencing portions of the 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 meaning of the Private Security Investigation 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 could cause actual results to differ materially from those indicated or implied by such statements. Such risks and other factors are set forth in our 2020 10-K filed on March 2nd, 2021, as supplemented by our first quarter form 10-Q filed on April 30th, 2021. 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, nor 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'd like to turn the call over to Eric Fuller.
spk08: Eric Fuller Thank you, Matt. This afternoon, I'll review our second quarter results and provide an update on our digital transformation, which we expect will positively impact our overall financial results beginning in the second half of the year. Eric Peterson will then review our financial results in more detail, and I will then conclude with a review of our market outlook. On today's call, there are three main themes that I want to discuss. First, We continue to successfully grow the tractor count invariant, exiting the quarter with 1,160 tractors. Despite the tight driver market, invariance metrics continue to outperform our legacy OTR fleet. Second, Express Technologies, our brokerage segment, more than doubled revenue year-over-year to $96.5 million and processed approximately 75% of its transactions digitally this quarter. And Lastly, we continue to make progress addressing customer pricing in certain dedicated accounts through the second quarter related to driver and capacity cost inflation. Turning to Variant, I am pleased with the significant progress that we made in the second quarter as we grew the tractor count by more than 20%, exiting the quarter with 1,160 tractors, remaining on track to exit 2021 with 1,500 or more tractors in the Variant fleet. As Eric Pickerson will detail later, we believe the second quarter marked a low point of our total fleet size, and each incremental tractor added to Variant will positively impact total company profitability going forward. Additionally, we launched a second generation of our optimizer in Variant, which incorporates yield and miles into its decision-making. We saw this positively contribute in the quarter as revenue per tractor per week increased almost 20% to $4,000 on 13% fewer revenue miles per tractor compared with the second quarter of the prior year. Variance revenue per mile increased 37% compared with the second quarter of the prior year, while miles per tractor were lower as the optimizer prioritized freight with higher yield in addition to total miles. In the second quarter last year, the Variant fleet was small, and we expect comparisons to become more meaningful as the optimizer's features mature and Variant's fleet count grows. Including revenue protracted per week, we now have five key metrics where Variant is performing better than the legacy OTR fleet. We continue to estimate that Variant delivers an operating ratio 1,200 basis points better than a legacy fleet, which is comprised of approximately 700 basis points improvement due to improved revenue protracted per week, 300 BIPs improvement due to lower turnover, and 200 BIPs improvement due to reduced claims expense. Although you can't see the progress that Varian is making in our second quarter consolidated financial results, Due to the reduction in overall fleet size, from my perspective, it is incredibly exciting to see Variant continue to achieve every milestone that we have laid out to measure the division's success. We expect Variant's growth to overtake the legacy OTR attrition in the second half of the year and lead to higher overall tractor count and margin expansion as we exit 2021. Turning to brokerage, The second quarter revenues more than doubled year-over-year to $96.5 million, and our operating ratio improved 920 basis points to 99.8%. In the near term, we are happy to grow revenue at a roughly break-even OR as we build out our network density and demonstrate the value proposition of increased transportation solutions with our customers. In the second quarter, Brokerage processed approximately three-quarters of its transactions digitally, compared to 22% in the second quarter of the prior year. Our improved results were driven by operational gains as we handled freight more efficiently over our digital platform, combined with a more balanced mix of spot versus contract pricing. It's important to note that we are committing ourselves to an aggressive, yet methodical growth strategy within our brokerage segments. Over the last few quarters, we've been hard at work reestablishing a more resilient foundation for our brokerage segment so that our investments in technology and innovation can lead to compounding success. Significantly improved results in the last four quarters are indicative of these resiliency efforts taking root. Currently, we've been developing our brokerage model of the future from the ground up by utilizing technology designed to not only improve the efficiency of our operations, but also to provide a superior level of service for both our carrier network and shipper customers. We provide our carriers with freight exclusively customized to their locations, hours of service, and preferences, while also providing them with business enablement tools that go beyond the usual transactional freight acquisition toolset in a traditional broker-carrier relationship. This is a key differentiator in helping us build out our carrier network density as we rapidly scale our brokerage segment. The rapid growth in our brokerage segment is not only benefiting our marketplace and third party carriers, but is also a key component to our broader digital strategy. As brokerage scales digitally, we can further optimize freight selection across our assets and provide enhanced transportation solutions for our customers, which will help deepen our relationships. Turning to dedicated, through the second quarter, the team continued to successfully address pricing in certain dedicated accounts, which led to an overall increase in rate across the portfolio of 3%. Although we have made progress to date, there is still more work to be done. We will continue to address price-to-value mismatches in our dedicated portfolio by either raising rates or exiting those accounts. Historically, we focused too hard on maintaining business even if it was zero margin, but we will no longer be doing that. With our variant fleet growing and demonstrating continued success, we can move underperforming tractors from dedicated into variant, a lever that we didn't have in the past. And now, let me turn the call over to Eric Peterson for a review of our financial results.
spk09: Thank you, Eric, and good afternoon, everyone. Operating revenue for the 2021 second quarter was $475 million, an increase of $52.5 million as compared to the second quarter of the prior year. The increase was primarily attributable to increased revenues in the company's brokerage division of $50.5 million and increased fuel surcharge revenues of $9 million, partially offset by a decrease of $7 million in truckload revenues. Excluding the impact of fuel surcharges, second quarter revenue of $437.5 million increased $43.6 million, or 11.1% as compared to the second quarter of the prior year. Looking at our financial results in more detail, our second quarter adjusted truckload operating ratio was 97.4%, which was a deterioration from the 94.1% operating ratio that we achieved in the second quarter of the prior year. As we have been discussing over the last several earnings calls, our tractor count has been declining as we reduce our underperforming legacy tractors and grow our variant fleet. In the second quarter, our average over-the-road tractor count was down by more than 500 tractors as compared to the second quarter of the prior year. Additionally, we experienced an approximate 200 tractor decline in our dedicated division given the more challenging driver market. Lastly, our utility was also lower, primarily due to an increase in unseated tractors and a change in variance optimizers that prioritized revenue per tractor in addition to total miles per tractor. This was successful in the second quarter as we grew revenue per tractor despite fewer revenue per mile. Our over-the-road division experienced a year-over-year increase in spot rates given the favorable supply-demand dynamics in the market. This helped to drive average revenue per tractor per week higher by 7.8% as compared with the second quarter of the prior year. This was primarily the result of a 22.8% increase in average revenue per mile, partially offset by a 12.2% reduction in average miles per tractor. Turning to our dedicated division, Average revenue per tractor per week, excluding fuel surcharges, increased $214 per tractor per week, or 5.2%, to $4,336 as compared to the second quarter of the prior year. The increase was primarily the result of a 4.1% increase in average revenue per mile and a 1.1% increase in revenue miles per week. While average revenue per tractor per week increased year over year in the second quarter, total revenue in the division decreased because of fewer seated tractors due to the tight driver market. Turning to our operating income, we generated operating income of $8.9 million in the second quarter of 2021, which compares to operating income of $16.3 million in the second quarter of the prior year. Our consolidated operating ratio for the second quarter of 2021 was 98.1% as compared to 96.1% in the second quarter of the prior year. The primary driver of the decline was lower fixed cost coverage as a result of our lower overall tractor count. Compared to the end of the second quarter last year, we are down 715 tractors in our fleet, approximately 500 and over the road, and a balance in dedicated. While part of this was by design, as we transitioned tractors from underperforming areas of our legacy over-the-road fleet to our variant fleet, we also experienced a reduction in our dedicated fleet, primarily due to the tight driver market. Despite the driver market conditions, we successfully grew our variant fleet by more than 750 tractors over the last 12 months. The overall reduction in our tractor count means we have fewer miles to spread our fixed cost base over, and as you will see in our earnings supplement, this costs our fixed cost per mile, excluding equipment costs, to increase sequentially from 39 to 42 cents. We estimate that variant tractors generate approximately 1,200 basis points of additional margin compared with legacy over-the-road tractors for about $25,000 of annual incremental operating income on a per-unit basis. This is driven by improved revenue per unit due to the optimizer, lower turnover, and lower insurance claims expense as a result of a significant reduction in our accident rates. In addition, we continue to have fewer manual interventions with fleet management, which also positively impacts our P&L. Based on these estimates at approximately 1,000 tractors, the variant division begins to cover its costs, and each incremental tractor becomes accretive to earnings. For these reasons, as variance scales, we expect fixed costs per mile to drop below our historical fixed costs per mile of the legacy fleet, which was approximately 30 cents per mile. At an average tractor count in the quarter of 5,849 tractors, our cost structure is simply too high. This dynamic is temporary, and I echo Eric's confidence in our strategies. As long as the variant fleet grows, we'll continue to invest in variants because the near-term headwinds to our financial results will reverse as we approach maturity. In terms of other meaningful items, the significant increase in the price of diesel fuel during the second quarter combined with the normal lag in fuel surcharge mechanism adjustment resulted in an approximate $6 million increase in net fuel costs compared with the second quarter of the prior year, and recruiting costs increased approximately $3.5 million due to the tight driver market. These factors more than offset a continuation of our multi-quarter trend of lower insurance and claims expense despite higher premiums. Turning to net income, net income for the second quarter of 2021 was $19.1 million compared to $9.5 million in the second quarter of the prior year. Excluding the $14.9 million unrealized gain on our two simple investments, adjusted net income for the second quarter was $4.2 million, which compares to $9.5 million in the second quarter of the prior year. Earnings per diluted share were $0.37 for the 2021 second quarter, and adjusted earnings per diluted share, which excludes the gain in our two simple investments, were $0.08 compared to $0.18 on both a gap and adjusted basis in the second quarter of the prior year. Turning to our balance sheet. we had $328 million of net debt and $181 million of liquidity defined as cash and cash equivalents plus availability under our revolving credit facility. I continue to be very pleased with the progress that we have made as our leverage ratio continued to decline and in the quarter at 2.3 times net debt to trailing 12-month EBITDA for the second quarter of 2021 compared to 3.3 times at the end of the second quarter of the prior year. Finally, net capital expenditures total $15.2 million for year-to-date through the second quarter of 2021, and we continue to expect net CapEx of $130 to $150 million for the full year. And with that, I'd like to turn the call back to Eric Fuller for concluding remarks.
spk08: Thank you, Eric. As for our expectations for the second half of the year, We hit the low point of our seeded tractor fleet in the first week of June and have since increased our total seeded tractor count by 130 units and our orientation pipeline continues to grow. We believe that we are now at a point where the buildup of variant will outpace the intentional attrition of our legacy OTR fleet and that overall tractor count will grow for the balance of the year. As a result, Our fixed cost per mile should continue to decrease, and we expect sequential margin improvements in the second half of the year. We believe that as we continue to make progress scaling our variant fleet and address our bottom-performing dedicated accounts, we have line of sight to exiting the year with a truckload operating ratio in the lower 90s, and we remain committed to doubling our revenue over the next four years. We expect freight demand to remain strong given the broader economic recovery combined with the continued tailwinds as a result of the federal government's stimulus package, which had a notable impact on our operations in the first half of this year. On the supply side, the market for professional drivers remains challenging, which is helping to keep a lid on supply. These conditions are expected to continue to support spot market rates and excess to contract rates. in a strengthening contract renewal environment through the remainder of 2021 and which we continue to participate in. To conclude, this is a very exciting time at US Express as we believe we have hit the inflection point within our digital initiatives and are set to see improved results as we look forward. As we have discussed, Variant now has the scale to positively impact our financial results beginning in the third quarter. We remain on track to achieve our goal of having 1,500 tractors in our Variant fleet by year-end. We believe we have reached an inflection point on our total company fleet and expect to return to fleet growth as we exit this year. We continue to scale our digital brokerage platform, having handled 75% of transactions over our tech-enabled platform this quarter.
spk05: And,
spk08: We continue to address pricing in several of our dedicated accounts, which we believe will yield positive results as the year continues. We believe we have a powerful profit engine in Variant, which is set to deliver significant earnings growth for U.S. Express as we work to add tractors to Variant's fleet. As a reminder, Cameron Ramsdell, President of Variant, and Joel Gard, President of Express Technologies, are on the call and will be able to add color to questions on Variant and our brokerage segment as needed. Thank you again for your time today. Operator, please open the call for questions.
spk06: At this time, we will be conducting a question and answer session. If you would like to ask a question, 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 would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question is from Ravi Shankar with Morgan Stanley. Please proceed with your question.
spk01: Thanks. Good afternoon, everyone. Eric and Eric, have you considered reporting variant as a separate segment to give us a little more disclosure and kind of give investors a little more comfort on the direction of each segment? And also just to confirm that you are saying that if variant was reported as a separate segment today, it would be doing –
spk09: Yeah, the 1,200 basis points is really 1,200 basis points relative to where the legacy fleet was before, and that's on an operating income per unit basis. Now, as far as reporting as a separate company or separate results, that's something we want to do in the longer term. But right now, as we're tearing down one operation and building up a little, it's an allocation game, and I don't think it would be that meaningful. And so as variant gets scaled, that's what we plan on doing. But right now it's in the middle of the convert as we're taking down legacy over the road and standing up variant. Once it's pure, that's something we definitely want to report on.
spk01: Okay, got it. I mean, it's encouraging to see that the variant revenue per tractor per week is kind of much higher than the 2019 legacy, but is this just because the cycle is now much stronger and rates are higher? How do I look at that chart?
spk09: No, and that's what we're really trying to disclose, what variant's doing on a fundamental basis. When you look at the significant increase in miles I would even argue that when it's a really hot market that there's more congestion and your utility actually goes down. We've seen our utility go up. And the other pieces to focus on, too, is the improvement, the driver turnover. the significant increase in our safety as well. And that's how we get to that 1,200-plus basis point improvement relative to what we were doing. And that's where I'd really like everyone to focus, because as that contribution margin on a per-unit basis holds serve and we continue to increase that division, over time it's going to eat up that high fixed cost.
spk01: OK, Garth, just one more for me before I turn it over. On Express Technologies, How big is that within logistics? And also, in the slide, it says you've had three consecutive quarters of operating within the intended earnings range. What is that intended earnings range? Yeah. Hi, Robbie.
spk04: This is Joel. The entirety of the brokerage segment, as reported, represents Express Technologies. which is a combination, as Eric did a good job of explaining, of us kind of building back better our pre-existing logistics capability as well as investing in a business model for the future. We are, as we've said in prior calls here, seeking to scale revenues aggressively to support our broader growth imperative as an organization while maintaining our break even to slight profitability at the operating income line, and that's what we're kind of referencing in the supplement there. We've done a pretty good job of holding the line there as we've been growing over the last three quarters, and we'll continue to shepherd the business in that direction moving forward.
spk01: What is the end game there? I mean, at what point do you guys say, okay, now we've built a big enough platform, and then we pivot to profitability, or kind of what's the long-term strategy?
spk04: Yeah. Well, obviously, long-term strategy is predicated upon value creation and running a profitable business. I think, as Eric has mentioned in prior calls and even in the call today, we have an expectation that we will be seeking to double the size of aggregated revenues over the next four or five years. We've disclosed previously that we expect brokerage to be about a 30% share of that pie. And as we reach that level of critical mass, we expect that the investments we're making now and through sort of the inner years of the next kind of four to five-year plan will give us a windfall at maturity.
spk06: Great. Thank you. Our next question is from Jack Atkins with Stevens. Please proceed with your question.
spk10: Okay, great. Good afternoon, everyone. I guess just to go back to the brokerage comments for a moment, and Joel, I'd love to get your input on this as well, but when we kind of look at the operating expenses per load, on a year-over-year basis, they're up 33% within Express Technologies, but you're doing a lot more digital matching, I think 75% versus 22%. So Well, you know, with that much more digital matching going on, why aren't we seeing more operating leverage there? I'm having trouble following why there's not more profit flow through on such a significant increase in revenue.
spk04: Sure. Yeah, no, I appreciate the question. I think, you know, what's key to establish here is we're still very much in the early days of the investment cycle here, right? As we've disclosed rather transparently in the supplement, there's layers of automation associated with the management of digitizing the legacy business. We've seen some early benefit there already, I can tell you, amongst our incumbents. workforce marginal productivity has improved to the tune of about 120% compared to this time last year. So where we've been focused on precision in the investment, we're already seeing a benefit in totality. It's still early days, and we expect more of what you're seeing or referencing there to create the desired benefit from an operating leverage perspective over the next little while.
spk10: Okay. All right. So is it – I mean, if I'm understanding you correctly, Joel, there's been sort of a necessary investment in back office technology, et cetera, to create the platform for the revenue growth. But, you know, as we scale from here, there could be more operating leverage in this brokerage model. It doesn't have to necessarily be break-even as you're rapidly growing revenue.
spk04: Yeah, that's correct. I mean, I think the – The crux of the prior comment was really ensuring that the foundational elements, the fundamentals of a traditional brokerage model are healthy and robust to be able to allow us to expand margins over time as this investment takes root. If you look at our revenue mix year on year, we've done a lot of work to remedy some pre-existing challenges that were limiting us from a profitability and growth perspective. as we layered on the technology investment. So absolutely room to breathe. We're not constraining ourselves to a break-even margin and seeking to self-optimize there if opportunities present itself. We just want to be realistic in setting expectations for our growth strategy here over the next few quarters. And to that end, we're early days on some pretty positive and what we believe accretive elements of our long-term strategy, and those will start to take root here. um, into course.
spk10: Okay. Okay. That makes sense. And I guess maybe taking a step back, uh, and kind of pivoting towards the, the trucking business for, for a moment, you know, I think everyone understands that you guys are, are bearing, uh, you know, a significant amount of startup costs related to the very end. And it sounds like we're at the tipping point for beginning to see some operating leverage associated with that, which is great. And that'll show up in the second half of this year and into next year. But, but I guess when we think kind of bigger picture about the entire fleet, you know, obviously we have a very strong market out there right now. Why are we seeing a more significant improvement in profitability on sort of the legacy fleet while you're scaling variant? Like, why can't we have both at the same time? Like, variant's going to be, you know, sort of the growth engine for the future, and that's important to scale. But why aren't the legacy trucks more profitable this year versus, say, you know, the last several quarters, just given the robust rating environment that's out there right now.
spk08: Yeah, I mean, so a couple things. On the dedicated side, I mean, we look at the legacy businesses. Obviously, dedicated is a big proportion of that, and there are some things that we saw some incremental improvement in dedicated, but we still have a little bit of ways to go on getting some of those accounts set up in the manner that we wanted, that we need to from a rate perspective, and we believe that this next quarter we'll be getting the proper momentum there to get those accounts better aligned. On the OTR legacy side, I mean, we're really in the process of kind of bringing that down and really focusing on variance. And we are making decisions on a quarter-by-quarter basis to set ourselves up for the future. And so instead of trying to – now, if there's opportunity in the market, obviously we're going to take advantage of that. But we're really focused on the long-term build, and that long-term build – is we believe appropriate to set us up for performance in the future. And so that's where the main focus is. And what we don't want to do is throw what I would say is good money after bad and spending a lot of time and energy and resources propping up a division that ultimately we will be exiting over the next couple quarters.
spk10: Okay. Okay. I'll leave it there and turn it over. Thanks so much.
spk08: Thanks, Jack.
spk06: Our next question is from Scott Goop with Wolf Research. Please proceed with your question.
spk03: Hey, guys. How are you? I'm not sure if I'm getting this right, but there's still over 2,000 legacy trucks in the over-the-road fleet. If we're getting rid of 2,000 trucks over the next few quarters, how are we at the inflection point in the overall fleet?
spk08: So we look at, of that 2,000, there's a little bit over 1,000 that are incredibly healthy, that are getting the results that we want and desire for the rest of the fleet. And so if we look at what needs to kind of get replaced, it's probably less than 1,000 trucks at this point. And so that, over the next couple of quarters, we should start a couple of things. We should start inflecting positive on a net basis. as well as seeing continual growth in variance. So part of what's happened over the last couple of quarters is the attrition in our legacy tractor fleet has happened at a faster pace than we could grow. And based off of the fact that we are down to a size where the attrition, just from a mass perspective, will tread out slower, we'll start to see net positive growth in our truck tractor count, and that's positive for a lot of reasons. One, because we're going to have more trucks invariant, but two, it will obviously spread that fixed cost over more units, and so we'll start to see net growth in our tractors.
spk03: What's a realistic target for net fleet growth in the third quarter?
spk08: You know, I don't know if we're really putting targets out there for net growth and tractor count, but we believe that we have momentum. You know, we've gone, I think it's 120 tractors from the bottom, and the bottom was in that mid, say, June timeframe. And we've grown off of that. And so I think that we believe we can probably maintain that level of momentum through the rest of this quarter and through the fourth quarter as well.
spk03: And I think you said, Eric, we'd get to a low 90s by the end of the year for truckload. Any thoughts on how much improvement we should see in the third quarter? Should we be in the mid-90s for truckload OR in the third quarter?
spk08: I think we can see some incremental improvement. Again, our truck cap is still a little depressed from where we would need it to be. As we grow out of it, that earning profile will improve over the next couple of quarters. We're probably not necessarily splitting the difference, but we're moving incrementally into a better operating environment in Q3.
spk03: Okay, and then just last one for me. When I look at the over-the-road utilization, it was down sequentially a couple percent. I guess I would have thought with the mix of more variant and legacy that that mix would have taken utilization higher. Why is it still going lower as we're mixing up more towards variant?
spk08: Yeah, I mean, if you look at the amount of unseated tractors because of the that transition, we've had more unseated tractors than what we have had typically. And so that has created, because we hit the bottom in Q2 from a truck count, a seeded truck count standpoint, and that's where you're seeing a big impact from the utilization.
spk03: All right. Thank you, guys. Appreciate it. Thank you.
spk06: And our next question is from Brian Olsenbeck with JP Morgan. Please proceed with your question.
spk02: Brian Olsenbeck Hey, guys. Good afternoon. Thanks for taking the question. I wanted to go back to dedicated for a minute here. It sounds like – I guess the bigger question is, like, do you have confidence that this is – these pricing issues, these contracts are contained? Are you finding that as the driver market gets tighter that this is becoming a bigger problem? I think last – A couple quarters we've heard it's supposed to be getting better, and it sounds like maybe it is on the margin, but it's also not quite there yet. So maybe you can comment on that. And then just it's a little confusing at least to me that, you know, you can't quite get the pricing, but you also can't quite get the tractor seated. So I thought that would be kind of mutually exclusive. Like if things are pretty strong, you get the pricing, but it seems like you're not getting the price or the tractor seated. So you can elaborate on that. We appreciate it.
spk08: Yeah, on the dedicated piece, as you go through and reprice a lot of this business, it takes time. We started a lot of that process in Q1. some of that takes a little bit longer than probably we would like. And that's why we started seeing some more of that getting layered into Q2, but it maybe wasn't for the entire quarter of Q2. We'll see more of that coming into Q3 from a pricing perspective. So that's a portion of it. If you're looking at from an operating ratio standpoint, I mean, the driver situation has progressively gotten worse in some of our dedicated accounts. Unfortunately, a portion of our dedicated operation are in what I'd call less attractive markets or types of operations. It's been a little more difficult to source driver capacity in those different types of accounts. That's created some headwinds as it relates to cost, and we've had to give some driver increases even in the last, let me say, 90 days in certain accounts. And so that's created a little bit of headwind where we still have to go back and get back to the customer. So I think it's a combination of the two. But we feel confident that as we move into Q3 that we will get our rates in the area that we need it to be in order to get the performance that we're looking for.
spk02: Okay. So do you feel like at this point you've got a good sense as to – you know, what type of contracts could be affected and are you actively getting ahead of them now so you feel like it's contained or you think there's still a little bit of catching up to do here just by the nature of the paying now and trying to get it back later?
spk08: I would say it's contained, but there's always, you know, in this market as things progress from a driver perspective, there's always a little bit where, you know, there is – things moving fluidly in that market that we have to make sure that we're repricing in real time. And so we've got our arms around it. We feel very confident that we will get the pricing that we need. But we're also not going to take our eye off the ball as we look at the driver situation in each one of these individual caps.
spk02: Okay. Also on drivers, can you talk about the acquisition cost of a variant driver. Maybe how this has been trending is in this in this tight market. It doesn't seem like it's hindering the fleet growth, but maybe from a cost perspective, you can just give some clarity in terms of what that what that trend looks like if it's getting easier as it scales or still expensive because they're still drivers and they're hard to get hold of, especially ones that are higher, higher experience, safer drivers.
spk08: Yeah, I think from an acquisition cost for the various drivers, we haven't seen that necessarily come down. The driver situation is very difficult. It's highly competitive. We also have a new brand out in the market, and so we are still in the process of kind of introducing ourselves to the driver market now that we have over 1,000 trucks. But you're talking about a market with millions of truck drivers, and so getting name recognition is still important. an issue for us. And so getting our name out there in the market and our reputation out in the market is a big important part of the strategy, but also a costly portion of the strategy as well. And so I would say we've not hit a point to where we are seeing a cost benefit on recruiting. I think we can get there. And we have some strategies around multi-level recruiting and other things that we think will give us a net benefit and a net cost reduction as we go forward. But we're definitely not there at our current size. I mean, we probably think that that probably happens as we get, you know, a few more thousand tractors in the fleet where we can get a significant decrease in our recruiting costs relative to what we typically spend.
spk02: All right. Last question on that point too, just the whole cost structure, maybe for Eric Peterson. We talk about repurposing the cost structure and, Is it really just the duplicate of costs? Is it really just about volume at this point and more tractors, more miles, or is it getting to the point where you've got some visibility to maybe repurpose or maybe teardown is not the right word, but is it really just more miles or do you have some leverage you can pull to kind of right-size the business as well?
spk09: Yeah, I would say from the fixed cost perspective, the biggest piece of it is just getting, you know, not just more miles, but, you know, more variant miles. If you look at the number of terminals we have, you know, the size of our organization and this foundation that we've built has very broad shoulders now. We believe handle, you know, several thousand more tractors before we're having to do it. And so, you know, where we're really encouraged is as long as the variant count trends up, you we'll grow into our fixed cost infrastructure to where it's up to 13 cents a mile lower on a per mile basis. And then we think it can scale even more than that. And the way you think about that, if every two cents is 100 basis points, going from 43 cents a mile to 30 cents, a mile to over 600 basis points of earnings, you know, once we just get back to, you know, the legacy size that we've been before. So we know at a minimum we can get there, and then we'd like to accelerate and keep scaling variant on top of that. So it's just growing into the footprint that we have today. What I can't do right now is just take that footprint down to match the revenue, only to have to build it back up in 12 months was nonsensical. And that's why we're looking through some of these quarters where maybe our earnings aren't as ideal relative to the market. But as long as we're focused on the build and that landing pad, so to speak, that we're heading down, we're really excited about where we're going.
spk02: Okay. Thank you for the time.
spk06: Thank you. And as a reminder, if you have any questions, you may press star 1 on your telephone keypad, going to ensure you're spotting the question and asking Q. Our next question is from Ken Hoekstra with Bank of America. Please proceed with your question.
spk07: Hey, Eric, Eric, Cam, and team, good afternoon. Just why the decelerating pace at variance? So if you're at 1,160 tractors, you're targeting up to or over 1,500. Seems like you added about 465 in the first half. targeting 340 in a second, or are you prepared now to raise that 1,500 target?
spk08: I wouldn't say we're raising it, but I feel very, very confident that we will outrun it. Internally, we have loftier goals than that, and we think that we will hit those. But for a goal that we're setting out there for the public markets, I mean, we're still saying 1,500, but I feel very confident that we'll outrun that.
spk07: Okay. Irrespective of, I guess, the decline in the over the road, right? That's just completely separate. Yes. Yeah. So you talked about, Eric Peterson, you talked about allocation to get to the 1,200 basis points. How do we get visibility on what it will look at then when you fully allocate the differential, right? So if you've got to take that overhead now to put it onto variance, I guess what gives you the confidence in that and just But following on that, the cost, well, I'll stop there and then I'll move on to a wage question. Go ahead.
spk09: Yeah, I think while we feel confident, there's a bit of a math exercise. If we know what our fixed costs are and they're constant and we're able to shoulder more tractors, and I know that I'm putting these variant contributions on a per-unit basis of over $25,000 on a per-unit basis of what was there historically, as we grow variant from 1,160 tractors to 2,000 tractors to 3,000 tractors to 4,000 tractors and we're able to maintain that fixed cost, that's going to be very accretive to earnings. Yeah, I think it's a reminder, as we said, with our revenue target, you know, to double our revenues, you know, over the next four years. And we broke down the individual components. There's over a billion dollars of that was, you know, on the truckload segment. which equates to an additional 5,000 tractors from where we are today, and that's what we're building. And with that size and scale and superior earnings on a per-unit basis, all of a sudden what that's going to do is it's going to make that fixed cost and that overhead a much smaller, smaller, smaller percentage of overall revenues.
spk07: Okay. I guess caution, though, just given what we saw with Swift when it just went for scale, right, it still takes the focus on the margins along the path. I think that was important to learn that it's more the profits along the way, right, not just scale.
spk09: Yeah, and Ken, I think that's a great point, and that's why in this scale, something that we watch very closely is what we call our product index. And we don't want dilution at that. We don't just want, you know, revenue, but we want earnings. And so why we feel confident that as long as we maintain on a per-unit basis that superior safety record, that lower turnover, and the higher revenue productivity, that we're going to not just deliver revenue, but we're going to deliver earnings as well. We're not just going to grow revenue to grow revenue, you know, at a 98-offering ratio, right? That's not the plan at all. We're going to maintain that product index. We're going to scale variant, and we'll deliver stronger earnings at maturity, much stronger.
spk07: Eric Fuller, just looks like wage inflation was up 6 percent sequentially, yields up maybe just over 3.5 percent sequentially. Just given the market exposure, why do you think you weren't able to adjust fast enough? I guess we've seen a couple others report where we saw the rates adjust. And given I thought you had a little bit of spot exposure, why do you think you weren't able to adjust the costs as quickly as your – I'm sorry, your revenues as quickly as costs?
spk08: Yeah. Yeah, I mean – It's really based on the fact that the acquisition costs for the drivers have gone up significantly, and we're trying to build. And so that is the focus. Had we been more in a maintained basis, we probably could have kept the cost a little bit lower and matched with the rate. But like we said, we're really in a And we have a mindset about looking towards the future and not necessarily focused in the near term. And that was the right strategy for us in this quarter. And I think that you'll see as we go forward that costs align a little bit better with the rate. But in this last quarter, like I said, we were focused on continuing to build, which we think is really crucial to our long-term prospects.
spk07: Thank you. I guess if I could just finish with a follow-up to that, Eric. I think you talked about getting rid of 200 tractors that were the worst performing, and yet the OR still deteriorated. I think to Jack's question, before in this kind of market, even kind of it seems like just being in the market, you'd see the benefits from that. During the IPO, you talked a lot about the cost that you were focused on that were going to come down, like insurance and things like that. Are those – I get the whole focus on varying what that's going to do with improving performance, but Are those other plans to fix anything at the legacy all gone? And why wouldn't, you know, if you're getting rid of the worst performing, you said we're not taking, you know, break-even business anymore where, you know, we got rid of 200 underperforming tractors. Just wondering why the legacy wouldn't have outperformed a little bit more than we saw.
spk08: Yeah, so we continue to focus on cost. and reducing costs, I think that we will start to see some improvement as it relates to the safety line item. We see improved results in our safety results. If you look at over the last couple of months, we've seen a much lower accident rate. A lot of that is due to variant, but not all of it, than what we have previously run. And so we think we'll start to see some decent savings in that line item over the next couple of quarters. but the real issue with the model, as it shows in Q2, is really about fixed costs and the fact that we lost enough trucks on a net basis to where our fixed costs were not spread across enough units, and that's really the issue. That's the crux of the OR issue. If we had a few hundred more trucks in our fleet, then our earnings would have looked – much more improved. But like I said, we still believe that we are removing the right trucks and replacing them with much more profitable trucks. And on the backside of this, while it's a painful process, while we're in the middle of it, we'll show significant earnings improvement as we go forward.
spk07: Appreciate it. Good luck with the conversion. Thanks for the time.
spk06: Thank you. And we have reached the end of the question and answer session. And I'll now turn the call over to management for closing remarks.
spk08: All right. Well, thank you for attending. And we'll, as we look forward, we're very, very optimistic to where we're headed. I know it's a, It's a painful process for us as well as we're in the middle of it, and this transition is not something that necessarily is an easy transition or a linear transition, but as we go forward, we feel very confident that we will be moving into a much greater improved earnings profile as we move into the next couple of quarters. Thank you.
spk06: This concludes today's conference, and you may disconnect your line at this time. Thank you for your participation.
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