U.S. Xpress Enterprises, Inc. Class A

Greetings and welcome to U.S. Express fourth quarter and full year 2021 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone to require operator assistance during a conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Matt Garvey, Vice President of Investor Relations. Thank you. You may begin.

Thank you, operator, and good afternoon, everyone. Welcome to the U.S. Express fourth 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. Our discussion today includes 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 Forms 10-K and 10-Q filed with the SEC, and in the Form 10-K for the year ended December 31, 2021, that is expected to be filed with the SEC in the coming weeks. 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 on the investor section of our website. We have also posted an updated supplemental presentation to accompany today's discussion on our website at investor.usexpress.com. we will be referencing portions of the supplement as part of today's call. And with that, I would like to turn the call over to Eric Fuller.

Thank you, Matt, and good afternoon, everyone. Today, I would like to highlight some of our key achievements in the fourth quarter, provide an update on Variant and our path forward, and after Eric Peterson discusses the financials, I will provide our outlook for 2022. Turning to our fourth quarter achievements in Variant we added 272 trucks to the fleet in the quarter, exiting the year with 1,555 tractors and achieving our target to have more than 1,500 tractors invariant by year end. Variant tractor count growth helped to drive a sequential increase in our overall tractor count of approximately 300 tractors. As a result, we were able to increase our average tractors in the fourth quarter to 6,147 which not only represented growth sequentially, but also year-over-year growth for the first time since the second quarter of 2020. And as a reminder, our terminal network, technology platforms, and key personnel are capable of handling over 8,000 tractors. So growing our fleet back to and beyond historical levels is key to realizing the operating leverage in our model. In dedicated, we experienced a full quarter of the rate increases that we achieved actually in the third quarter, which contributed to an incremental $10 million in revenue sequentially. In brokerage, we continued to grow revenue as revenue for load was up approximately 27% and load count was up approximately 15%. Operating income was $3.1 million and benefited from surge capacity that we provided for some of our customers during the holiday season. Turning to variant, 2021 was a successful year for variant in terms of drug count growth. ending the year at 1,555 tractors and establishing itself as a standalone business unit. However, during the second half of the year, the business began to deteriorate, as shown in our utilization, turnover, and revenue per truck per week, and these trends accelerated in the fourth quarter. Before we get into the issues and remediation efforts, I want to touch upon a couple of key points that were reinforced with me while I spent time with the team in Atlanta over the past couple of months. we remain confident in Varian's business model and continue to believe that we can use technology to better serve our customers while providing a better experience for our professional drivers. With a few refinements to our technology and a little more structure and discipline in our processes, we believe we can get back on track quickly. Through the work of Clayton Christensen and other academics, we have seen examples of how disruption can be managed successfully within a large business. One fundamental principle is to break free from legacy business constraints. We took it to heart, and that's why we incubated Variant outside of our headquarters and non-traditional infrastructure with individuals new to the industry and gave it the autonomy and funding necessary to build something substantial. This is where most companies fail, but where we feel that we excelled. Another fundamental principle is identifying the point when the new venture moves towards maturity and needs to make the transition from nimble startup to a sustainable growing business. This can involve transitioning some leadership, moving away from a grow at all costs startup mentality, and implementing a more disciplined management approach focused on metrics and earnings growth. We believe Variant reached the transition point during the second half of 2021, and we are rapidly transitioning from growing an emerging company in its own ecosystem to integrating what is now a sizable company with defined parts of the broader organization to drive cost reduction and operational efficiency while maintaining the integrity and culture of the new model. In the disruptive startup model, history shows there is risk to acting too early or too late and in integrating too much or too little. Based on the growth of Variant to 1,550 tractors in less than three years, the immediate progress in restoring operating metrics this past month, and the strong cooperation and unified teamwork between Variant and other trucking experts, I believe Variant has progressed better than most efforts at internal disruption, although it has not been, and we never thought it would be, a straight line forward. The first issue was that as Variant grew, it did so without properly increasing the balance of domain expertise, which led to a lot of innovative approaches to the business and the need recently to modify some of these approaches. Variant will continue to be based in Atlanta. But I have reorganized Variant, bringing together the Atlanta-based technology team with the U.S. Express operations team, which has domain expertise in trucking. These groups will report directly to me, and I will provide overall accountability for Variant and ensure we remain balanced in our approach to using technology to provide a better product at Variant. As a reminder, we built Variant purposely outside of U.S. Express with a team that had technology expertise. The team had a little trucking experience, which was by design, so that as they worked to build a technology-enabled OTR fleet, they wouldn't be held back by any preconceived notions about trucking. We understand that as variants scale, they would need to work more closely with those in U.S. Express who understand our core business of delivering freight for our customers and supporting our drivers. During the fourth quarter, we reached a point where the coordination needed to ramp up. the focus on long-term automation needed to be reduced, and the focus on near-term metrics and the driver experience needed to increase. We're in the process of blending what's good with the old along with the innovative new way of doing things. The second issue that we found during our operational review was that not all of our freight in our funnel was running to the optimizer. As background, we built a freight funnel designed to allow our OTR fleet to have first selection of the freight that fits best within our network. We designed it this way to maximize selectivity for our assets while at the same time providing additional capacity for our customers. There was a flaw in the funnel, which meant that the optimizer was not picking from a complete population of freight. This was not an issue when Variant was initially scaling as there was more than enough quality freight that the optimizer could see to produce strong results. But as Variant continued to grow, it became more and more impactful. We quickly identified why the freight was not visible to the optimizer and have initiated multiple work streams to address refining the technology and are already seeing positive results in January as a result of these changes. Third, as part of our deep dive into Variant, we determined there were several logic rules that needed refinement in the optimizer that became more meaningful with more tractors to optimize. We have made refinements in the logic rules already, which we believe are contributing to the better results we're seeing in January. Finally, as issues continued to grow, the team at Variant disproportionately continued to work on longer-term solutions rather than focus on remediation efforts related to the current deterioration in the business, which resulted in an inability to adequately resolve driver issues. As the fleet grew, so did the issues from our drivers, which led to deterioration in response times, an increased driver frustration, and a decrease in driver availability as there wasn't a single line of accountability for the driver. We continue to believe in an exceptions-based approach to fleet management, which will scale better and at a lower cost than the traditional fleet manager model. As part of our improvement initiatives, we are making some refinements to our operations specialist model at Variant. which includes combining specialists currently employed at Variant and others from U.S. Express who manage other fleets in the company. We believe this approach will drive better accountability within the fleet and help improve availability, reduce driver frustration, and ultimately contribute to better revenue per tractor per week and a lower driver turnover in the quarters ahead. Before I close and turn the call over to Eric Peterson to discuss the financials in more detail, I want to thank our shareholders for your continued support and patience as we execute on our multi-year transformation at US Express.