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spk07: Good afternoon, ladies and gentlemen, and welcome to the U.S. Express Third 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.
spk12: Thank you, operator, and good afternoon, everyone. Welcome to the U.S. Express third quarter 2021 earnings call. Eric Fuller, U.S. Express's president and CEO, will lead our call today, followed by Eric Peterson, our CFO, who will discuss our financial results. Additionally, Joel Gard, president of Express Technologies, and Cameron Ramsdell, president of Variant, are here to answer questions. Our discussions today include forecasts and other information that are considered forward-looking statements. While these statements reflect our current outlook, they are subject to a number of risks and uncertainties that could cause actual results to differ materially. These risk factors are described in U.S. Express's most recent 10-K, filed with the SEC, and in the Form 10-Q for the quarter ended September 30th, 2021, which is expected to be filed with the SEC in the next several days. We undertake no duty or obligation to update our forward-looking statements. 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. As a reminder, a replay of this call will be available in the investor section of our website. We have also posted an updated supplemental presentation to accompany today's discussion, which is available on our website at investor.usexpress.com. We will be referencing portions of the supplement as a part of today's call. And with that, I would like to turn the call over to Eric Fuller.
spk10: Thank you, Matt, and good afternoon, everyone. This afternoon, I'll review our third quarter results and provide an update on our digital transformation. On today's call, there are five main themes that I want to discuss. First and foremost, we sequentially grew our overall truck count in the quarter, which is a key inflection point as growth in variant outpaced attrition in the remainder of our OTR fleet. The variant fleet exited the quarter with 1,283 tractors. Our brokerage segment grew revenue 62% year over year, demonstrating its ability to provide expanded capacity solutions for our customers. We made tremendous progress repricing our dedicated portfolio in Q3 and expect the full quarter of higher rates in Q4 to provide improved margins. We remain committed to investing in Variant and Express Technologies to position our company for long-term profitable growth as we focus on doubling revenue over the next four years. Turning to Variant, we continued to grow the tractor fleet in Variant during the third quarter exiting Q3 with 1,283 tractors, which represents approximately 11% growth sequentially, and we remain on track to exit 2021 with 1,500 or more tractors in the variant fleet, which would represent approximately 120% growth year-over-year. Tractor growth in our variant fleet outpaced attrition in the remainder of our OTR fleet, And I'm pleased to report that our overall truck count grew sequentially, which was what we expected coming out of the second quarter. As a reminder, we launched Variant just under two years ago with five trucks and have grown the business to an annual revenue run rate of approximately $250 million exiting Q3. We believe this is a remarkable accomplishment given the macro environment that we have been navigating over those two years. Since the end of the third quarter, we have added close to 100 additional tractors to Variant. Importantly, we have added to our tractor count while maintaining our safety stats, which is a key part of the incremental operating margin improvement in Variant compared to our legacy OTR fleet. We now expect to return to sequential total tractor growth as Variant's growth has outpaced the contraction in the remainder of our OTR fleet. Turning to Dedicated. Last quarter, we discussed addressing price to value mismatches within our dedicated portfolio of business. And I am pleased to say that the vast majority of those mismatches have been addressed, which led to an increase in overall rates across the portfolio of 3% in the third quarter. Our rate exiting Q3 was up closer to 7% sequentially. And we expect to see that rate improvement benefit our operating income beginning in the fourth quarter. These price increases were necessary to pay our professional drivers competitive wages to provide the service levels that our customers have come to expect from us. Looking ahead for this business, we expect the truck count to hold steady during the fourth quarter of 2021 with modest truck growth in future years as we believe our growth opportunities lie invariant from a truckload perspective. We expect the operating margin in the business to improve steadily long-term as we improved both the professional driver experience as well as our cost discipline and dedicated. Turning to our brokerage segment, Express Technologies grew revenue 62% year-over-year to approximately $91 million. More importantly, gross margin was up 450 basis points compared to the third quarter of 2020. The percentage of loads processed on our digital platform increased to 83% in the quarter. We are in the early innings of our transformation within our brokerage segment to establish a scalable and differentiated digital freight marketplace. We believe doing so not only creates a more resolute operational foundation for our entire business, but enables innovation into adjacent business models as deeper engagement with an expanded network of shippers and carriers is realized. In pursuit of these growth initiatives, we will continue to prioritize responsible revenue and loan growth as we work to demonstrate our value proposition to our carrier and shipper partners. As we continue to build out our network density to help ensure broader operational resilience for U.S. Express and our partners, We continue to target growing this business at a roughly break-even OR in the near term. With that, I would like to turn the call to Eric Peterson to discuss our financial results in more detail.
spk11: Thank you, Eric, and good afternoon, everyone. In the third quarter, we generated operating revenue of $491.1 million, an increase of 13.8% from the third quarter of 2020. Excluding the impact of fuel surcharge, revenue was $451.8 million in the quarter, an increase of 11.9% year-over-year, driven by increases in both truckloads and brokerage revenue. In our over-the-road division, variance optimizer is now prioritizing for yield, which is a combination of rate and utilizations. This prioritization helped drive average revenue per tractor per week up 2.4% through an 18.3% increase in rate per mile netted against the 13.3% reduction in utilization. I'm really pleased to highlight the progress made in our dedicated division in increasing rates across the portfolio, which resulted in a 7.4% increase in rate year over year. This helped to increase average revenue per tractor per week to $4,340, an increase of 6.7% year over year. Dedicated rate exiting the quarter was up approximately 7% compared to our second quarter rate, and it's important to keep in mind that the rate increases were back-end loaded in the quarter, whereas we had a full 13 weeks of increased costs, as we were already paying our professional drivers competitive wages ahead of receiving the rate increases from our customers. We expect these rate increases to have a more noticeable impact on our truckload operating margin beginning in the fourth quarter. Turning to operating ratio. Adjusted operating ratio deteriorated in the quarter to 98.5% compared to 96.1% in the prior year quarter. adjusted truckload operating ratio deteriorated to 97.8% compared to 94.1% in the third quarter of 2020. The deterioration in our operating ratio in the third quarter is primarily the result of our conscious decision to build the foundation of a company that can double its revenue over the next four years and support a fleet much larger than our current fleet size. As a result, During the transition period of building out this infrastructure ahead of the truck count growth, our fixed costs will temporarily be too high relative to our current volumes. As we continue to grow our variant fleet into the size of our infrastructure, we believe that our fixed costs will decline as a percentage of revenue and ultimately show the operating leverage in our model. Turning to guidance. To help with modeling, I wanted to highlight a couple of changes in our assumptions for Q4 in the full year as well as reiterate a few other points. In terms of total truck count in the fourth quarter, we expect modest sequential growth in overall truck count as the growth in variant has now surpassed the reduction in our remaining over-the-road fleet. We expect utilization to be flat sequentially as variant continues to optimize for yield rather than utilization alone. We expect truckload rates to be up 2% to 4% sequentially and to modestly exceed anticipated cost inflation in the fourth quarter. We continue to expect a full-year effective tax rate of 26% to 28% before any discrete items. We continue to expect net capital expenditures of $130 million to $150 million for the full year. And we now expect interest expense to be approximately $15 million. As a reminder, we have an equity investment in an autonomous trucking company, which we mark to market on a quarterly basis, and this can be volatile at times. We will continue to adjust this unrealized gain or loss out of our adjusted results because it's not indicative of our operating performance. With that, I would like to turn it back to Eric Fuller for final comments.
spk10: Thank you, Eric. Before we open the call to Q&A, I want to take a couple minutes to discuss our outlook over the next few years, how we are measuring success, and how we think you should evaluate our progress as we execute against our long-term goal of doubling revenue over the next four years. First and foremost, we are extremely excited about the course that we have charted for the company over the next several years and our progress towards it. We believe the trucking industry is moving closer to disruption and consolidation. We believe it is only a matter of time before the venture capital that has been flowing into adjacent industries such as freight brokerage, alternative fuels, and driverless technologies make its way into traditional asset-based trucking. Someone will solve the scalability issues that have been inherent in our industry since its inception, and we believe our focus on building a digitally enabled fleet, which is recruited, planned, dispatched, and managed using artificial intelligence and digital platforms, is how to do it. Therefore, our focus remains on investing in variant and express technologies. Metrics-wise, the most important metric to follow and gauge our success is variance truck count. As long as variance continues to grow, we will continue to allocate our capital towards that business. Keep in mind that each tractor added to the fleet adds approximately $25,000 of annual incremental operating income compared to the legacy fleet. We continue to add truck count to our variant fleet while keeping our safety stats in line with our long-term expectations. Preventable accidents per million miles is a leading indicator, so fewer accidents today will benefit us more in future quarters as claims have a long tail. Turnover is extremely important to our ability to scale our business and improve profitability. We remain confident in our long-term expectations for turnover in variants, But expect that quarter-to-quarter it may swing particularly as the market for professional drivers remains extremely competitive. As we prepare for more growth in 2022, Variant is focused on maintaining its driver experience, which is critical to achieving our longer-term turnover expectations. Finally, on the metrics, pay attention to revenue per truck per week in Variant. We are rate takers given the fragmentation in our industry, but Variant Optimizer is uniquely able to solve for how best to monetize the available freight in our network given the various constraints, including locations of trucks, trailers, drivers, holiday schedules, et cetera. This is a combinatorial problem that generates potential solution sets, which are orders of magnitude too many for humans to count, let alone calculate. which is why we are using algorithms to plan our loads instead of people. Looking ahead to 2022, we are focused on continuing to position the company for long-term success by increasing the truck count in variant and continuing to grow revenue and load count in express technology. We believe we have reached the tipping point where variance growth will outpace the contraction of the legacy OTR fleet. and will result in sequential net total fleet growth over the coming quarters. And finally, as the last few weeks have shown, variance continues to grow, which we believe will ultimately be the driver of improved financial results. With that operator, we are ready to take questions.
spk07: At this time, we will be conducting a question and answer session. If you'd 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 Ken Hexter from Bank of America. Please proceed with your question.
spk10: Ken?
spk05: Yeah. Hello?
spk10: Hey, Ken.
spk05: Hey, Eric and Eric, how are you doing? Good. Good. Can you maybe just good afternoon? Can you talk a little bit about your your move to you noted raising driver pay at the beginning of the period, but yet you waited until later on to start countering with with rate increases? We saw their carry is obviously a bit more aggressive to do that faster, and especially in this environment, to provide that capacity. So are you doing it again? Are you raising pay again? Should we expect another overhang given this environment, or are just the new rates just catching up now?
spk10: No, and there was a little bit of a catch-up effect, Ken. I mean, look, we always go back and look at our previous quarters and how we performed, and that was an area where we admittedly did not get the rate that we needed in order to properly compensate our players. our drivers. And so that was an area where we did end up giving some driver increases prior to getting some rate increases. And we didn't get those rate increases as timely as we would like. But we now feel like we are at a point from a rate perspective that we are comfortable. And while there are some small increases that go into effect, we should be maintaining the that rate from here on out and shouldn't see additional cost increases in relation to those rate improvements?
spk05: I'm sorry. So you said that there are still more small rate driver pay increases or rate increases on those?
spk10: I mean, some marginal pay. And there's always, I mean, there's pay increases that happen. I mean, in this environment, it's happening in real time. But to say that there won't be any, I don't think there'll be really any significant cost increases in that area. And it what we have in rate is sufficient, and we will be able to maintain both the rate and the margins going forward into the next quarter.
spk05: So into the next quarter, if these are back-end weighted, should we be seeing mid-'90s OR? I mean, where do you go from a 98? It seems like you've volleyed around here through this year so far in a great rate environment. What does it take to now move out of that up to the mid-'90s?
spk10: I mean, I think from a dedicated perspective, we're very comfortable where we are from a rate perspective. I mean, we're there. It took us probably two quarters longer than we would like, so not necessarily thrilled that it took us longer, but we're there and we feel like we have the rates for the current environment in place. There's always going to be a little tweaking. There's a few accounts here and there that may get tweaked, but for the most part, from a dedicated perspective, we're comfortable with where the rates are.
spk05: Okay, I'm sorry. And did you want to hit on the art thoughts? You know, is this enough to get you moving out of that upper 90s? Or is this just kind of incremental?
spk10: I think it's going to improve. You know, you look at dedicated, it makes up, what, about 40% of our revenues or so in the rest of the organization. You know, it is about growth. So we're continuing to focus on growth within our variant truck count. And that's the key to our operating ratio improvement. That's the key to our earnings. And we still believe that we're on the right track. We believe in the story. in our strategy. We think it's the right strategy. We prove it out almost on a daily basis in our modeling. And we know that as long as that continues to grow and we continue to add to our variant truck count fleet, then we're going to be exactly where we want to be in the future. And we feel really good about the next couple of years.
spk05: One more, if I may, just on brokerage. I just want to understand how you don't post a gain in this quarter. I understand you were talking about still looking for growth, yet we've seen other companies that are in the midst of massive growth, you know, surprisingly post larger gains than they had ever anticipated, just given the strength of the rate environment, the spot market. Maybe you could just walk us through your thoughts on that.
spk10: Yeah, Ken, I'm going to let Joel Gard answer that one.
spk03: Thank you, Joel, here. Thanks for the question. I mean, to be as straightforward as possible, I think the biggest thing here is that we continue to be in the investment space. You know, we've seen... Similar improvement in our freight mix and gross margin performance at the contract level on both sides of the business, but continue to proactively invest for the future, and that's sort of reflected the numbers for the quarter. So eyes is on the future. We have certainly a great environment right now that we also took advantage of, but doing so with an eye towards where we're going over the long run.
spk01: Great. Thanks for the insight, guys. Appreciate it. Thanks, Eric. Eric.
spk07: Thank you. Our next question is from Ravi Shankar from Morgan Stanley. Please proceed with your question.
spk00: Hey, this is Christine McGarvey on for Ravi. How are you guys doing?
spk07: Hey, Christine. Good.
spk00: Thanks for taking the question. Maybe I can follow up on the OR question or ask it in a slightly different way. The varying track count, you know, clearly on track for 1,500. That's only a couple hundred away now at this point, but the margin... you know, kind of flow through has been a little bit elusive. So it might be helpful to kind of parse out, you know, the dedicated impact that you guys have kind of discussed this quarter, you know, versus the fixed cost, you know, as a percentage dynamic that's happening there. And, you know, maybe how should we think about, you know, the target kind of beyond that 1500 and how you guys are thinking about the inflection beyond that.
spk11: Yeah, hey, this is Eric Peterson. You know, to answer your question, so, you know, one point we wanted to make, you know, is that, one, we're focused on the longer term. We're investing right now. We're working on our landing pad, which means that, you know, our quarterly earnings, you know, not as focused, you know, on the next 90 days as we are is where we're headed. However, with that said, you know, as far as the impact of these dedicated price increases, you know, If you look at it on a sequential basis from the second to third quarter, we're up a couple percent, but we're up actually, you know, close to 7% on our rate increases where we're entering the fourth quarter compared to where we were in the second quarter. And so we think that we'll have some of that will help us, you know, a number greater than zero, better than a 98 OR, all things constant. If you're looking at, you know, the contribution from variant as we go into the fourth quarter, And in the third quarter, we only grew our variant truck count by approximately 120 tractors, and we had grown by 470 in the first two quarters. So we didn't really get a lot of benefit in the third quarter from variant growth. Now, with that said, just like our dedicated price increases that were back in weighted at the end of the third quarter, so was our growth in variant. And we've already grown approximately 100 trucks. Since the end of the quarter. So, you know, that's something we're seeing during a transformation where I wish it was in a straight line left to right at the same slope, but it's going to accelerate. Then it's going to slow down and accelerate. And I would say the last five weeks, you know, that variant truck count growth has started to accelerate. And as it becomes a higher percentage of our revenue, you're going to see it have a more meaningful impact on our overall earnings. You know, variance is still less than 20% of our overall earnings. We're extremely excited about it. And as it becomes a more meaningful percentage, you know, of our truckload revenues, we're going to see the earnings improve on a sequential basis. You know, we feel like we've been through that hard point where the teardown of our legacy over-the-road fleet is is now it's losing the race compared to the growth of variance. So we're growing more trucks on a quarterly basis in variance than what we're tearing down in legacy fleet. And we haven't shown sequential truck count in our over-the-road fleet since the second quarter of 2020. And so we think this is the inflection point quarter, and we're excited about the good times to come, you know, not just in the next couple of quarters, but, you know, over the next two years.
spk00: Got it. That's very helpful to kind of think through. If I could ask a follow-up. As you think about heading into next year, an interesting comment in the deck, I think you noted you expect spot rates to actually exceed contract through next year. Just would be curious on what's giving you confidence there and any early read on what we can expect for contract rates in 2022.
spk10: Yeah, we expect this environment to continue. We don't really see the environment changing all that much from where we're at today. If you look at macro conditions, we think demand will stay strong well into at least the first half of 22. I'd really say the second half of 22, too, but... You know, there's always a little bit of concern about some supply chain issues and whether we end up in a situation where if COVID just goes away altogether, do we end up where people over index a little bit more on experiences and things like that. for the most part, we really don't see demand slowing down. And even when the consumer slows down, there is a significant restocking situation that has to happen on an inventory level that probably leads to increased demand for another six to nine months. So we don't really see demand really slowing down. On the supply side, It is about equipment to an extent, and that is creating further headwinds with trucks and trailers, but really it's all about drivers. We have a serious driver issue within the industry. We don't have enough drivers. We can't find enough people that want to do the job. We're continuing to see that struggle across the entire industry. And I don't see any catalyst that would significantly change that. So I think until we were to get to what I truly believe would be more of a global recession, I don't see anything that's going to significantly change that driver situation. And so that leads us to believe that this market is going to stay strong. So in regards to rates, Spot rates are going to stay robust, probably a healthy premium, maybe not as big a premium as what we saw last year on a percentage basis, but still a fairly healthy premium relative to contract rates for the majority, if not the entire year next year. On the contract side, We anticipate being in that high single digits, so in that 5% to 10% range on contract. We still think there's been some pretty significant cost creep, both from the driver pay, equipment, other things that have occurred this year. And so we think that it's really necessary, and also given the market conditions, that we see a 5% to 10% rate increase on contract for 2022.
spk00: Got it. That makes a lot of sense. Really helpful. Thank you for the time.
spk10: Yeah, thank you. Scott?
spk08: No digging that. He should be in. Okay.
spk10: Hey, Scott, I don't know what happened to our operator. Are you there? If so, I think you can ask a question.
spk04: Operator?
spk06: Hello?
spk10: I apologize. I think we've lost our operator for a second, so please hold with us. This has never happened before. And I don't know if there's anybody there that – Scott Group, you were in the queue for the next question. If you're there, then we can go ahead and move forward. But I don't know if the system allows you to talk or not.
spk08: This has never happened before.
spk10: All right, hold with us real quick because this is, we're trying to figure out, it looks like we've lost our operator, and those in the queue are not able to answer questions at this time, so we're still kind of holding on. Well, I guess, you know, I'm trying to think of other questions or other items that we could talk about. I think one thing that I would like to mention is Our plan around variant is on track. We said in the prepared remarks that we still believe we're going to be over 1,500 trucks by the end of the year. We are on pace for that. While we did have a little bit of a slowdown in Q3 related to a few items, so there were some macro conditions, obviously, with driver situation. has gotten progressively worse. And so that did create a little bit of a slowdown in our growth. Since the end of the quarter, we have added nearly 100 drivers to Variant. And so if you look at over three weeks' time frame, we've added nearly 100 trucks. So we're on a run rate right now of adding 30 net trucks in variant over the last, say, three to four weeks. We think that absent holidays, we can continue something in that range, hopefully. And so that should give us a pretty, you know, hopefully over 1,500, we believe, over 1,500 trucks by the end of the year, and also put us on a trajectory going into Q1 where uh where we think we will continue the growth and variant well if for really for the entire balance of the year in 2022 so um our strategy is in line we still think we're on the right path and uh that things are you know moving forward the way we have anticipated and hoped. We also, there's been questions I know about Express Technologies and our brokerage division, and as Joel mentioned, we're on pace there as well. We are in an investment phase. We're continuing to invest in our business, invest in our growth, and we're focused on that three-year build, and we're moving in the right direction. I got a couple questions.
spk08: Oh, go ahead. This is Robert. We do apologize for the technical difficulties. Our next question is coming from Scott Group from Wolf Research. Your line is now live.
spk09: Hey, guys. Can you hear me now?
spk08: Yeah.
spk09: We got you, Scott. Sorry about that. Okay. Cool. All right. So I know you talked a few times about just sequential margin improvement. Can you just help maybe just put some expectations around it? Is it 100 basis points, more or less? I'm just not sure how to think about it.
spk11: Yeah, I mean, if you're looking at the dedicated with those rate increases, you know, heading up, there's, you know, at 40%, you know, all things constant, that could, you know, give us, you know, 100 to 200 basis points improvement from those rate increases, you know, alone. And then I think in your model it's a volume play with those variant tractors. You know, it's going to come down to that ending count, you know, and where that runs. And, Scott, I hear you. It's just it's tough for me to, you know, give guidance on these 90-day scorecards when, you know, as a management team, we're really focused on this landing pad of what we're doing to scale. You know, right now our fixed cost as a percentage of revenue, as you know, they're probably 700-plus basis points too high because we have this foundation that we can really grow on. So on a sequential basis with this transformation, You know, we'll have quarters that are, you know, perceived on people looking at this 90-day scorecard, you know, more disappointing than others. But our scorecard that we're focused on is growing the variant truck count, keeping the safety stats, and keeping the driver experience one that will have relatively low turnover, significantly lower turnover than the industry average. And that's our focus. And, you know, the numbers in the longer term are going to more than take care of themselves.
spk09: Okay. Are we still seeing that big delta between utilization on variant versus legacy trucks? Just because the mix is obviously going more and more to variant, but the utilization is still going down.
spk10: Yeah, we're really measuring the revenue per truck per week, and so we're continuing to see that delta as it relates to revenue per truck per week as we optimize for margin. And so we feel we're still moving in the right direction in regards to our revenue older legacy fleet and our variant truck fleet, like I said, in regards to the revenue per truck. So that's the item that we're really watching. Obviously, utilization is a component of that, but also being able to optimize the right freight that's priced in the right manner is going to give us the best result, and that's where we're optimizing today for.
spk09: Okay. The other trucking revenue was up a lot. from last year, second quarter, any color on what's going on in there?
spk11: We don't break out the individual components of that revenue, but Scott, it's just miscellaneous revenues that are increasing, not necessarily related to direct truckload operations.
spk09: Is that a Does this new run rate continue? I'm not even sure what's in this segment.
spk11: Yeah, that run rate will continue. And as an overall percentage to our – those revenues are not in our truckload stats, our revenue per tractor per week. It's more miscellaneous revenue. What's in that bucket is lease revenue from our independent contractor program and those types of revenues. But, yeah, I think you can expect that run rate to continue.
spk09: Okay. And then last thing, just on the driver side, so it sounds like you've seen things pick up a little bit in the last few weeks. Do you think that there's some improvement in driver market? And then I'll just marry it with your thoughts on any kind of vaccine mandate and how you may or may not respond to that.
spk10: Yeah, so on the first part of the question, I don't think the market's gotten better. I mean, we talk to a lot of peers, especially private peers, and benchmark with a lot of people, and I'm hearing that the environment has not gotten better. Now, I believe we have done some things. in our individual business that is improving the driver hiring situation and also improving some of our attrition issues. So we've put together some plans and some processes in place that we think are helping us, and that's the reason we're seeing growth. But I don't think that this is somehow a market condition where things are loosened up because we're not hearing that from others. In regards to the vaccine mandate, we are waiting on the OSHA ruling. I keep hearing that it's imminent at some point over the next week or so. We are anticipating that not being something we want to see. We would love to see truck drivers have a carve-out mandate. I know that Canada had a vaccine mandate and I believe truck drivers were carved out, but I do not get the feeling that drivers are going to be carved out of this mandate. So we're waiting and anticipating if the mandate goes out the way we suspect, Yeah, we're concerned. I think there's a fair amount of drivers that are kind of by nature, by the nature of kind of their personality and the reason they migrate to this industry in a way is, you know, they don't necessarily want to be told what to do, and this is one of those items. And so I think you're going to see a pretty significant pushback from the driver population and We're at the point of trying to figure out, okay, so if we have to test on a weekly basis, what are we going to do? What's the process? You know, what kind of – how are we going to set that up? And at this point, I would tell you, Scott, I don't know the answer, but we're working on it. But it's something we're definitely – nervous about. I guess it's probably a fair way to put it. I think that we will be able to come up with a way in order to deal with it and handle it, but it could have a pretty large impact on the driver population as we go forward.
spk09: And maybe just last thing real quick, what are you hearing, if anything, about hours of service given supply chain and what the government's trying to do right now?
spk10: Yeah, there's been a little bit of talk about some relaxation of hours of service or even relaxation of driver requirements for people coming into the industry. And I know that I believe the Secretary of Transportation has made a couple comments in that regard. I'm not aware of anything substantive at this point that's either been said or decided. So, you know, at this point it's been just dialogue from the secretary, and that's really all we've heard. And I don't believe even ATA really has anything at this point of note. And I think everybody's waiting to see if there is something that does either get announced or go into effect.
spk08: Okay.
spk09: Thank you, guys.
spk08: Appreciate it. Thanks, Scott. Thank you. Our next question today is coming from Jack Atkins from Stevens. Your line is now live.
spk04: Okay, great. Thanks, and good afternoon. So I guess my first question is, you know, about revenue per truck per week in the OTR segment. When I look at sort of the two-year stack there, I think it's up 2% third quarter versus 3Q19, just to kind of take the volatility of the last year out. We've seen other folks report, you know, sort of a two-year stack increase, growth rate in terms of revenue per truck per week in the teens, you know, mid-teens. You know, can you walk us through maybe some of the puts and takes, why you guys aren't maybe seeing that type of improvement there on a two-year stack basis? Is it having to do with the transition or just trying to understand why we're not seeing a little more rate benefit there? I understand utilization of miles per truck are a headwind.
spk11: Yeah, Jack, this is Eric Peterson. Fair question. I think if you look at the overall transformation of our over-the-road division today versus where it was two years ago, I think we need to remember that we're no longer feeding that division with student drivers. When you're feeding that division with student drivers, you get this organic creation of a team truck that's going to run more miles on a weekly basis. So what it's doing for utility is it's making those comps look like there's not as much improvement of what's going on in the industry, and you're exactly right. But part of the answer is that we have significantly fewer teams and we don't have students in the truck where you have a super solo or team asset generating more miles on a weekly basis number two is you know it's intentional and by design as it relates to our variant fleet if you look at our variant fleet you know in the optimizer what it's doing now is it's not saying hey go get the most miles you can on this truck this week It's saying, hey, how can we create the best yield? And that's a combination of both the miles and the rate. And so I think when doing some of those comparisons, you'll probably see that as far as our rate per mile, where this shows up quantitative instead of my qualitative answer, you'll see that our rate per mile is probably outperforming on two-year increases on what they've done over 24 months, and the offset's been the utility. Okay.
spk10: But keep in mind, too, we've had our net truck count seeded component has come down over the last year, and we are in the process of building and growing that back. And so that's having an effect on that number as well.
spk04: Okay. Got it. Got it. And I guess maybe a follow-up question for Joel on the brokerage side of the house. I mean, You talk about investing for growth there, keeping the business at sort of a 100 OR break-even level as you're doing that. Well, what do you mean exactly when you say invest for growth? I mean, is that more volume? I'm just trying to understand exactly what that means because I'm a little bit – I would have expected, I guess, in a best-for-growth phase with a break-even OR, we'd have faster volume growth than we saw in the quarter. Can you kind of walk us through what you mean by that and how that's going to look over the next, call it, couple years as you scale that business?
spk03: Sure, yeah. A couple things, Jack. I think the biggest thing to start with is just sort of acknowledging some of the historical context that the brokerage business has been maturing from. You know, in a historical sense, it hasn't always been a leading competency for the business, and so the underlying operating model had a – we had some work to do with it in order to kind of really get it fit for scale, right? So some of the investment today has been in things like a transition in a portfolio, refactoring things like freight mix, really kind of bringing some level of health to the underlying fundamentals of the operating model so that we had a better foundation to grow into. As we think about proactive investment on a go-forward basis, and this is really what's been layered in over the last decade, three or four quarters. A lot of that is in technology and the enhancement or growth of the dedicated technology team building proprietary products for our shippers, carriers, and employees, as well as enhancements to our headcount and within our sales and operations group to be able to stay in front of the growth that we anticipate in the years to come. So Those are really kind of the high notes, right? So we've been going through a level of transformation improvement and just sort of setting up the underlying operating model for scale. And then as that foundation started to take root over the last year, year and a half, we've been sort of proactive in getting out in front of doing the things from an investment perspective that we believe will yield additional volume in future quarters. So that volume comp is really a function of you know, us substituting some unhealthy business over the course of the last few quarters. And we're now in a place where the foundation is ready to be winning into.
spk04: Okay. Okay. That's great. That's great to hear. And I guess as you think about the next couple of years and scaling that business, you know, we've seen some other truckload carriers with brokerage subsidiaries really sort of scale their power only or drop it hook operations over the last 18 months. How are you thinking about that opportunity for your brokerage operation over the next couple of years?
spk03: Yeah, well, truthfully, I think it's the nexus to being able to drive additional selectivity for variants. It's absolutely on our radar. I think one of the things that we don't often give ourselves credit for enough externally as the extent of power-only business that our brokerage segment is supporting today. It's not the overwhelming majority, but depending on where we are seasonally, it can make up anywhere between 15% and 30% of our daily volume. So there's a competency there that we're actively seeking to enhance. We've hired some talent from outside of our company, but from within the industry to uh, help, uh, scale, uh, uh, you know, a power only product in a formal sense and, and, uh, build upon some of the tribal knowledge we have already, but absolutely a huge part of our roadmap on a go forward basis.
spk04: Okay. That that's helpful. And then I guess last question and I'll turn it over, but just back to, you know, Eric, your, your comments on the vaccine mandate, um, you know, obviously a lot of unknowns about that and sort of the ramifications that could, that could, uh, have on the broader truckload market. I mean, what, How do you think it would affect U.S. Express's business specifically? I mean, in terms of your drivers, your driver pool, would you expect some attrition there? You know, any sort of color you could add. I know it's hard to speak for the broader industry, but, you know, how do you think it would impact U.S. Express in particular?
spk10: Well, I think there is some concerns from a number of people that I've talked to that the industry could lose five to maybe as much as eight to 10% of the driver population that may choose to go elsewhere, meaning leave the industry, because there's not enough small carriers with excess capacity that could absorb um those that may leave the larger carriers if that were to occur and there were some steadfast drivers that would not get vaccinated and there's not a sufficient testing uh structure that could accommodate them or they may not even want to get tested and so a fall out of five to ten percent in our driver pool would uh affect everybody um i i think that is uh an area that would would be very difficult um to operate in. It's something that at this point we're prepared to do, and we're working on ways to try to mitigate some of that driver attrition that could occur. But it is an area of concern, and I think it could be fairly catastrophic. If we were to lose even 5% of the drivers that we have within the industry today at the levels that we're already at, I don't know how we absorb that.
spk04: Yeah, that'd be really tough. Okay, that's really helpful. Thanks so much for the time, guys.
spk08: Thanks. The next question today is coming from Brian Austin Beck from J.P. Morgan. Your line is now live.
spk06: Hey, good evening. Thanks for taking the question here. Maybe just one more on the vaccine mandate to wrap it up, hopefully. Given what you just said about the potential catastrophic impact potentially in the industry, I guess I'm surprised why there isn't a bigger push or traction to get some sort You mentioned the one in Canada. I think the truckers were exempt from the mask mandate that came out earlier. So you seem, Eric Peterson, pretty confident that there isn't something in the works to hope for. So maybe you can just elaborate on that, please.
spk10: Yeah, no, I've been very involved in conversations with ATA and with others working Trust me, there is a lot going on behind the scenes to say that there isn't a push to try to get drivers carved out is not the case. I mean, ATA is very involved. There are many others that are very involved in trying to get some sort of a carve-out or concessions for drivers. Unfortunately, at this point, it's just not feeling all that likely, and so now we're having to figure out how to deal with it, right? So it's... We could be surprised if things could come out tomorrow and they could have drivers called out, we would all be fine. But we're at the point where we're just not real confident of that with everything that we're hearing back channel. But there's no lack of trying to make that happen. And with supply chain being top of mind, both from an economic standpoint and a political standpoint, It does give me a little bit of hope that it could occur, but I would say my confidence is fairly low given just some of the back-channel conversations and other things that I'm hearing. So we're preparing for a mandate that could, if go into effect, could have some pretty seismic results on the driver population, and we're getting ahead of it and starting to have conversation and figuring out how to deal with it.
spk06: Yeah, so I was wondering with the supply chain top of mind with all the push there that this would kind of go against a different goal of the administration. Obviously, there's a lot going on, but any of the issues they've been pushing, I'm just surprised you haven't had as much traction or felt like you've had as much traction.
spk10: Yeah.
spk06: Okay. Just a quick follow-up on variant in general. Maybe you can just talk about acquisition costs of the drivers in this environment, maybe some of the turnover. And if you can elaborate just what happened in the last quarter, because it did look like you're making some pretty good progress quarter of a quarter and things slowed down and have re-accelerated. So if you can elaborate on that.
spk10: Yeah, Brian, I'll have Cameron answer that if that's all right.
spk02: Hey, this is Cameron. Thanks for the question. You're absolutely right to point out that we definitely saw a small uptick in turnover quarter over quarter. As we talked about during the earlier remarks, we have grown Varian really as a startup in Atlanta from essentially in the last two years from $0 in revenue to trying to exit the year at about $300 million on a lot of forward-looking revenue run rate. So as you can imagine, when you add near 1,400 drivers to the fleet in a short period of time, we absolutely experienced some growing pains that eroded the driver experience. What I'm really happy to report is that our leadership team identified a lot of these problems, worked tirelessly throughout Q2 and Q3 to resolve them, and I think that's what you're seeing is our accelerated growth in October where we've added essentially almost the same number of drivers as we had in the entire quarter. So I feel like a lot of those are behind us. We are watching it very, very closely, but we feel very confident in the continued growth of the driver base now.
spk06: Okay. And any comments on acquisition costs as you find the right channels to get these folks and to retain them?
spk02: Sure. So we have two primary channels that we recruit drivers from, and they have very different acquisition costs. One is entirely variabilized, and I think it's very unique to the model we call it the variant ambassador model. So, again, that's a variabilized model where we have evangelized many of our drivers to go out and recruit new drivers. That comes at a far lower acquisition cost, and, you know, we've hired – We launched that program a little over a year ago this week. We just hired our 300th drivers through it, so we're seeing some tremendous acceleration. It took us about nine months to figure out how to get the first 100 drivers in through that program, and we've hired our 300th now, and we did that in about two and a half months. So we're seeing some acceleration there, and that, again, is a variabilized cost model, and it's far less than the traditional kind of programmatic media spend that U.S. Express and the broader industry really rely on to bring in the lion's share of their drivers.
spk06: Okay, and last quick question. If you can just tell us how you're benchmarking and managing that through some of these growing pains. I saw a commentary in this slide deck. I think it's improved 100 basis points OR quarter over quarter. We've seen the impact of the optimizer, but how do you benchmark and compare that and tweak those as you continue to scale the fleet? What are you measuring internally that we don't see externally?
spk11: Yeah, as far as, you know, that's really tracking that optimizer. You know, there's all of those levers, and it's something where we're going to get smarter and smarter on it as we continue forward. You know, we were able to, you know, increase our overall rate, you know, on the variant tractors in the third quarter compared to the second by right over 3%. And that, you know, cost us about 7% utilization. But when you look at the net result, you know, with two-thirds variable and one-third fixed cost, you take that 7% that 7% loss in utility and you lose a third of that, you know, the earnings to offset that rate increase, the combination of those two was 100 basis points, you know, better result in what I would say is a comparable market. And so I think that's more of, you know, I always talk about macro issues and mirror issues, and to me that's more of a mirror accomplishment, something that we did on our own in a consistent macro environment.
spk06: Okay. Thank you for the time. Appreciate it.
spk08: Thanks, Ryan. Thanks. Our next question is coming from Felix Borges from Raymond James. Your line is now live.
spk01: Hey, good afternoon, everybody.
spk08: Good afternoon.
spk01: Hey, I just have a big picture one. It's the only one, but I really wanted to better understand how we should think about some of these tech investments around variant going forward. It seems like last quarter we might have been close to an inflection point, meaning variant outgrowing its fixed cost base. Do you still think that is the case? And just how should we think about these tech investments heading maybe into 2022 as you continue to refine the model there?
spk10: Yeah, I think from a from an inflection point, we're there, it's just we've got to continue that growth, right? And Q3 was a little bit of a difficult growth environment for us for a number of reasons, mostly macro. And like I said, I think we solved that and figured it out, but it created some issues. And the problem was we kind of stalled that truck count out to an extent right on top of that inflection point. And so we didn't get necessarily the benefit that we had hoped for had we grown a few more hunter trucks. We are now growing, and we feel like as we continue to grow, we will further outdistance ourselves from that inflection point, which we still think occurred in Q3. And so we will continue as we grow, continue to move away and start to see the results start to fall to the bottom line. In regards to further investment, I mean, I think for one way to look at it is the run rate that we have will continue. This is a model where we think that we will forever and always be building technology. It's not one of those type of deals where you have an IT team build a system and then go do something else. We're always iterating and always trying to build out continual technology within this operating model, and so that's going to continue. I don't think that you're going to see that run rate necessarily go up all that much. There might be some small incremental increases, but for the most part, we're at a healthy run rate where we feel comfortable with the investment that's in place, and that investment will continue. But, again, that inflection point versus that investment occurred in Q3, and we're going to be at a point as we move forward that the growth will benefit the bottom line as we move forward.
spk01: Okay, that's helpful. So it doesn't sound like much change on the cost side. It's all about spreading that tractor count additions above that fixed cost base now.
spk10: Yeah, that's where we're at. I mean, like I said, there's always going to be – there could be some small incremental increases as Cameron, you know, starts to look at maybe I've got to add a developer here and there, but nothing that's going to really move the needle on a dramatic basis. Our cost is what our cost is at this point, and now we've just got to outrun it from a growth perspective.
spk01: Helpful. I appreciate it.
spk08: Thanks, Felix. 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.
spk10: All right. Well, thank you. I really apologize for those technical issues. I'm not exactly sure what happened, but I appreciate everybody sticking through that. That was a little bizarre, but we got through it. So anyway, I look forward to talking more about this next quarter. Again, just to recap, as far as we're concerned, we're on pace. We're happy, maybe not happy necessarily with the results, maybe from an earnings perspective, but we're happy with where we are. in our strategy around our growth in Variant. We're happy around our strategy around our growth in Express Technologies, our brokerage division, and we're also happy about where our rates are now in our dedicated division. A little painful of a process, maybe getting us to the point where we are today, but we feel very comfortable where we are and feel very confident about the next couple of quarters as we move forward. So I appreciate everybody listening to the call, and we'll do it again in 90 days. Thanks so much. Thank you.
spk08: That's it for today's teleconference webcast. Let me just connect your line at this time and have a wonderful day. We thank you for your participation today.
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