U.S. Xpress Enterprises, Inc.
Q3 2019 Earnings Call Transcript

Published: 1 Nov 2019

[Operator:]

Greetings and welcome to the U.S. Xpress Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.I would now like to turn the conference over to your host, Brian Baubach, Senior Vice President, Corporate Finance. Please go ahead, with your conference, sir.

[Brian Baubach:]

Thank you, operator and good morning everyone. We appreciate your participation in our third quarter 2019 earnings call. With me here today are Eric Fuller, President and Chief Executive Officer; and Eric Peterson, Chief Financial Officer.As a reminder, a replay of this call will be available on the Investors section of our website through November 8, 2019. We have also posted a supplemental presentation to accompany today's discussion on our website at investor.usxpress.com.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 Securities Litigation Reform Act of 1995. These include remarks about future expectations, beliefs, estimates, plans and prospects. Such statements are subject to a variety of risks, uncertainties and other factors that 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 2018 10-K filed on March 6, 2019. We do not undertake any duty to update such forward-looking statements.Additionally, during today's call, we will discuss certain non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with U.S. GAAP. A reconciliation of these non-GAAP measures to the most comparable GAAP measure can be found in our earnings release.At this point, I will turn the call over to Eric Fuller.

[Eric Fuller:]

Thank you, Brian, and good morning. On today's call I will review or third quarter results and provide an update on our strategic initiatives. Eric Peterson will then discuss our third quarter financial results in more detail. I will then conclude with a comment on the market and our outlook before opening the call to your questions.As you think about our results and even more important as you consider our prospects as the trucking cycle turns, we ask that you keep in mind the following thing;First, our Dedicated business, which accounts for approximately 35% of our revenue continue to perform well through the third quarter. This is a steadier business with longer term contracts that have less exposure to business cycles. I’m pleased to report that we delivered another quarter of record performance as we achieved revenue per tractor per week in excess of $4,000.Second, we grew our truckload fleet approximately 5% versus the 2018 quarter, which we attribute to offering professional truck drivers a superior combination of training, equipment, miles, respect and stability through the business cycle, as well as the quality amongst the overall driver population.Third, we continue to execute our internal initiatives and invest in digital technologies that are designed to create efficiencies, lower costs and improve our offerings to our customers and professional truck drivers.Finally, with the improvement in our Dedicated business, a larger OTR fleet and significant non-contract exposure, we believe we are well positioned to capitalize on the eventual upswing in the freight market and take advantage of the operating leverage inherent in our revenue base.Turning to our third quarter results, we continue to see excess tractor supply in the market where overall freight volumes were relatively consistent with year ago levels. This supply demand imbalance not only pressured our revenue per mile, but also our ability to optimize the utilization of our fleet, particularly in the non-contractor portions of our over the road and brokerage operations.For the quarter, non-contracted pricing in our over the road operations declined by approximately 35% from last year's record high levels. While our spot exposure grew marginally from second quarter levels. Together with $3.1 million decline in brokerage operating income, the impact of market volatility overcame significantly better Dedicated results and the positive impact of our internal initiatives.As a reminder, our OTR segment, which is approximately 60% of our asset base fleet, has historically seen approximately 80% of its freight move under contract rates with 20% moving under non-contracted or spot rates.Year-in and year-out, the vast majority of U.S. Xpress’s spot price is made up of incremental loads or specific projects from our customers and is not necessarily comparable to the spot market information reported by various services such as DAT.As we discussed in our second quarter call, excess supply in the market combined with the relocation of capacity for my closed Mexico operations drove our spot exposure to more than 25% of our over the road miles.Through the third quarter, our exposure to spot rates marginally increased sequentially, which was largely the result of the continued soft market trends. Additionally, pricing in the spot market continues to be under unprecedented headwinds as a result of aggressive and unsustainable pressure created by new digital entrants in the market.Looking at our over the road results in more detail, our OTR contract rates were up approximately 2.6% in the third quarter on a year-over-year basis. However, our spot rates were down approximately 35% year-over-year, which puts them at an approximate 20% discount the contract.Our average spot premium has been more than 20% higher than our contract rates over the last 10 years, and our spot rates have not been below contract for any of those years. As we have said, and based on our history, we believe the market conditions experienced this year are not representative of a typical market regardless of cycle and we will continue to target approximately 20% spot exposure in our over the road operations.As a result, average revenue per tractor per week for the quarter declined 12.1% compared with a third quarter of 2018 enter over the road operations. This was the result of a 7.8% decrease in average revenue miles per tractor per week, combined with a 4.7% decrease in rate per mile.Turning to our Dedicated division average revenue per tractor per week excluding fuel surcharges increased 5.8% in the third quarter of 2019 as compared to the year ago quarter. The average revenue per tractor per week achieved in the third quarter of 2019 of over $4000 remained in record territory for the second quarter in a row.The increase is primarily the result of a 5.6% increase in the divisions revenue per mile. As we have discussed on prior calls, we have significantly improved the execution in the Dedicated division as we manage accounts to achieve a more attractive combination of rate utilization.We have been working on this initiative for over a year and are very encouraged with the results, as we have experienced four quarters of consecutive improvement and believes there is opportunity for further gains. Brokerage segment revenue decrease the $46 million in the third quarter of 2019 as compared to 65.1 million in the third quarter of 2018 on fewer lows and decreased revenue per load.We incurred an operating loss of $100,000 as compared to operating income of $3 million in the year ago quarter. This is primarily the result of a $260 drop in revenue per load partially offset by a $205 drop in cost per load.I would now like to spend a few minutes updating you on our strategic initiatives, many of which center on utilizing technology to improve our processes, accelerate the velocity of our business, improve our customers and driver satisfaction and lower costs.To further our efforts, we recruited a Chief Information Officer at the beginning of 2019 with a mandate to digitize our systems and our business. His first project has been our frictionless order initiative with an early priority on integrating our legacy systems and utilizing existing data to reduce many of the manual decisions that are made on a daily basis.Let me describe this first, just to give you a better idea of the opportunity as we work through all areas of the Company. If you look at in order, there are typically 15 touch points, from the time the customer books the order to the time that it is billed.These touch points require manual, work any times decisions by our drivers and back office personnel. This is not only time consuming, but also opens the door to both data entry errors and suboptimal decisions. Our goal is to fully automate most touch points and then optimize them.The end result will be a significant reduction in the level of work required by our drivers while in the cab, which should allow them to spend more time actually moving freight. It will also make our office employees job more efficient by removing routine work.As an example, let's take a look at Automatic arrivals. When a driver would arrive to shipper, he would meet us in the arrival macro which had to be filled out by the driver. The driver would have to input what trailer they have, the bill waiting and other information which is both time consuming and again opening the door for data entry areas.What we need to do is consolidate the information into one system, so we can auto populate all these items, so the driver doesn't have to input any information. The problem isn't that we do not have the data - that we do not have the data aggregated into one system, which our team is working on and making very good progress.In fact, we have eliminated approximately four million touches annualized with line of sight to another million over the next 30 days. Another important initiative with potentially far reaching impact has been our investment in our redeveloped driver training facilities. The first of which was opened in Tunnel Hill Georgia in February.This program provides continuous learning opportunities for new experienced drivers with the goal of providing our drivers with the knowledge, skills and abilities necessary for a successful career. While still early in its rollout, we are seeing positive results from those drivers who have completed this training. We are optimistic that overtime, this training will improve our drivers satisfaction and retention, while also reducing their accident rate and the Company's insurance and claims expense.Given the positive results that we are seeing, we opened a second facility in July and expect to open a third facility in the next few months. Our plan is to continue to upgrade our training facilities across the country. As an additional safety measure, we are moving effective immediately to hair follicle testing for all of our drivers which is up from 50% of our drivers that we have been testing through most the 2019.I would now like turn the call over to Eric Peterson for a review of our financial results.

[Eric Peterson:]

Thank you, Eric and good morning. Operating revenue for the 2019 third quarter was $428.5 million, a decrease of $31.7 million as compared to the year ago quarter. Excluding the revenue from a Company's Mexico operations, which as a reminder were discontinued in January of this year. Operating revenues for the third quarter decrease $18.3 million. The main driver was a $19 million decrease in brokerage revenue.In our truckload segment, we had 5.4% more trucks producing 4.7% less revenue per truck, as success in recruiting and retention came during a period of negative market conditions. Operating income for the third quarter of 2019 was $3.3 million, compared with the $22.9 million achieved in the prior quarter.We delivered a 99.2% operating ratio for the 2019 third quarter, which is an increase relative to the 95% operating ratio that we reported in a year ago quarter. Our profitability decline largely as a result of the challenging market which Eric has outlined line.Our over the road fleet saw revenue production decrease 12.1% on a per unit basis to $3479 in the current quarter, from $3957 in average revenue per tractor per week in the third quarter of 2018. This productivity degradation was partially offset by progress made in our Dedicated fleet, which saw per unit revenue production increase 5.8% to $4011, an average revenue per tractor per week.In addition, and very similar to the second quarter, driver pay increased approximately $0.06 per mile since last year's quarter as a result of wage inflation and lower utilization. Net loss for the third quarter of 2019 was $1.4 million, which compares to net income of $16.1 million in a prior quarter.Loss per diluted share in the third quarter of 2019 was $0.03 compared to earnings per diluted share of $0.33 in the prior year quarter. As our tractor and trailer delivery and trade schedules have firmed up, we have narrowed our expectations for net capital expenditures for the year to be between $100 million and $115 million dollars compared to our previous guidance of $110 million to 130 million dollars. We will continue to manage our tractors to an approximate 475,000 miles replacement cycle.We ended the third quarter with $434.2 million of net debt and had $119.2 million of cash in availability under a revolving credit facility. Our leverage ratio is calculated under our credit agreement with 2.7 to one, which remains well within the credit agreement requirements, and our comfort zone for managing the business based on our historical ability to manage at much higher leverage levels.Consistent with our strategy as stated during our IPO, we intend to delever the organization overtime towards one times. However, we expect progress will be incremental and will vary with market conditions, internal initiatives, equipment financing decisions, amongst other factors.We believe we are currently in trough market conditions and would expect our leverage to peak in the first half of 2020 before beginning to improve thereafter. Interest expense for the third quarter was $5.5 million and we continue to expect interest expense to be approximately $22 million for the full-year 2019.With that, I would like to turn the call back to Eric Fuller for concluding remarks.

[Eric Fuller:]

Thank you, Eric. Turning to the market and our outlook. The freight environment has remained challenging as we enter the fourth quarter, due to pressure from new capacity added to play 2018 strong spot market and new digital entrants with transactional customer relationships.We expect the fourth quarter of 2019 to exhibit a continuation of negative market conditions experienced through October. Our prior guidance of a full-year 2019 adjusted operating ratio of 95.5% to 97.5% was predicated on an assumption of flat or improving market conditions versus the conditions in June and July.Instead, freight rates declined and peak season freight has been slow to develop. To provide contexts if a current market environment experienced through October persist through year end, our adjusted operating ratio for the full-year would approximate 98.5%.In the longer term, we remain positive on outlook for our industry. And U.S. Xpress has given this significant capacity we will be able to deploy against the next freight up cycle and the growing rate of capacity exit from the industry.We believe the recent combination of falling new truck orders, growing backlog of used trucks for sale, regulatory constraints and skyrocketing insurance premiums for smaller carriers all indicate the early stages of the capacity exiting the market. Additionally, the drug and alcohol clearing house is expected to go live in January, which we believe will be a major event for the industry and further squeeze capacity out of the market overtime.To include, we continue to have significant opportunity to improve our operations and our profitability through this cycle as we execute upon our initiatives. I remain confident in our team, our strategy and the outlook for our business.Thank you again for your time today. Operator, please open the call for questions.

[Operator:]

Thank you. [Operator Instructions] Your first question comes from the line of Jack Atkins with Stephens. Please proceed with your question.

[Jack Atkins:]

Hey, guys, good morning. Thanks so much for taking my questions.

[Eric Peterson:]

Good Morning.

[Eric Fuller:]

Good morning Jack.

[Jack Atkins:]

So, I guess let me just start off with kind of thinking through Eric your outlook commentary about the full-year with approximately a 98.50 for the for the full-year that would imply something north of a 100 maybe a 101, 102 for the fourth quarter, which there is some sequential deterioration there. Can you talk about, A is that the right way to think about it and B, what is driving that deterioration profitability sequentially into the fourth quarter. I know that most folks aren't seeing much of a peak, but what we are hearing about at least a little bit of a peek out there. Can you just talk about that and what can you do to mitigate some cost pressure as we head into the first half of next year?

[Eric Peterson:]

Yes, thanks, Jack. I think what we are trying to say there is that if market conditions stay consistent exiting the third quarter and starting the fourth quarter, that would be more in that mid - we did a 99.2 for the third quarter, that would be a comparable result for the fourth quarter, which would approximated at 98.5 on the year.As far as what we can do to mitigate that, our initiatives that we are looking for over the longer term, primarily looking at our insurance and claims expense, we believe we are making progress there and have an opportunity on that line item. Those are more longer term initiatives, where the progress is going to come overtime and not necessarily be immediate shown in the numbers from a quarter-to-quarter.I think also on the cost side, what we are doing on the digitization of the platform, as Eric Fuller mentioned earlier, that is going to continue to take friction out of the cost from order to cash of our loads, which ultimately as those become efficient that is going to take cost out of the organization as well. Once again, that is a longer term initiative where I can’t show you hockey stick type results from quarter-to-quarter. But it's something that I’m seeing in the number.Really I think the biggest thing is that deterioration in the market, conditions in our exposure to the spot market primarily in our over the road fleet, which has been the headwinds on our current earnings, which we believe to be temporary in nature based off the prior cycles that we have managed through.

[Jack Atkins:]

Okay, got it. Got you. But I mean, I guess just to make sure I understand, Eric, the guidance or that the our commentary, I guess to be more specific correctly, you know the 98.5, does that assume any sort of seasonal uptick, into the back couple months of the year or does that assume that the September October levels, just persists on through. I'm just trying to figure out what is assumed in that 98.5 number.

[Eric Peterson:]

Yes. In September, we saw a little bit of life in the market. I would call it kind of seasonal life, starting to feel a little optimistic about where the market was headed. October, unfortunately, felt a lot weaker than what we would like a normal October to feel. So I think that probably put a little bit more cautious approach to our outlook.As you mentioned earlier, we still see that there is going to be a peak, I think it's a very muted peak. And I don't think it's going to be anything like we have seen probably in the last couple years. But I do think that there are some peak opportunities and we are seeing some projects and pop ups and things like that.So I think really the guidance was based on the fact that if things did not see any type of movement as we go into November and December. Unfortunately at this point, I will tell you, we are not seeing improvement that is worth noting.But we still have some cautious optimism that with some of our dialogue with our customers that we will see a little bit of pickup relative to the peak season. And so that is the reason we are being a little cautious on how we approach this guidance for the fourth quarter.

[Jack Atkins:]

Okay, got you. One last one, and I will turn it over. But, when we look at the fleet sequentially within the OTR business, it was up I think 174 trucks on average 2Q to 3Q. Can you talk about the fleet plans there, why not maybe look at to shrink that fleet or keep it stable? Why are we are growing that when sequentially such a challenging market, because I would guess the OTR business is probably - the consolidated company is a 99.02, the OTR is over a 100.

[Eric Fuller:]

Yes, admittedly the OTR Group is really giving us a lot of headwinds at this point. But if we go back and look really over the last 20 years and I would even throw 2008, 2009 into this conversation, you typically only see a few quarters of rates that were spot rates are running counter to contract rates, and we are now running three to four quarters where we have been in that scenario.So we believe that the upside opportunities if we look over a long period of time are far greater with larger truck counts, as opposed to keeping our truck counts reduced and so from our approach, we think it's prudent when there is opportunity to grow truck count to do so, because we think coming out of this cycle there will be a lot of upside opportunity for us.And one other thing Jack, I did want to mention also is Dedicated. We saw some good bit of growth in Dedicated. But we also anticipate additional growth in Dedicated over the next couple of months, we do have a number of accounts that we have already sold, that are going in over the next 90 days that will allow us to continue to grow our Dedicated. So we feel very optimistic about Dedicated opportunities and so our ability to grow with it over the road and then shift those drivers and trucks into Dedicated also leads us to go ahead and grow that fleet now.

[Jack Atkins:]

Okay, got you. Thanks again for the time this morning, guys.

[Eric Fuller:]

Great.

[Operator:]

Your next question comes from the line of Scott Group with Wolfe Research. Please proceed with your question.

[Scott Group:]

Hey, thanks, good morning, guys. Just so I understand that last point, are you going to take the trucks and add over the road and put them into Dedicated as these contracts begin?

[Eric Fuller:]

We would. Now if there is an opportunity to grow both with our belief that the market has trough and that the market will turn in a relatively due time, we would take the opportunity to grow both, but our first intention would be to move those drivers and those assets out of over the road and into Dedicated.

[Scott Group:]

So what does this mean for CapEx and I understand this year, but what is the preliminary thought on cash CapEx for next year?

[Eric Peterson:]

Yes, we are going to stick to the equipment cycles side 475,000 and we are still going through what is going to be leased and what is going to be earned. But I think obviously, when you are going to look at our earnings, we are going to be prudent and to the extent we have more cash earnings and better results we will see a higher percentage of that we will be with debt financing compared to leases.

[Scott Group:]

Okay, and then I just want to clarify what you guys are saying about the fourth quarter, just so we all have the right expectations. So are you saying - I guess Eric Peterson you made a comment that fourth quarter OR should be similar to third quarter, that wouldn't get you to a 98.5. Just so I'm not sure we are getting to a 98.5 for the years, or should we be modeling fourth quarter OR similar to third, I just want to make sure we understand what your guidance?

[Eric Peterson:]

We are saying approximately a 98.5, so I mean to the extent that you are in that mid - similar results in the fourth quarter compared to the third. That is going to approximate 98.5, I think to your point it might be slightly lower.

[Scott Group:]

Okay. And then the rate per mile in over the road down eight and utilization downs five and third, how are you thinking about those two metrics in the fourth?

[Eric Fuller:]

Yes, I mean, we still anticipate some peak season rates that will boost that up a little bit. But I think at this point, we probably anticipate similar results.

[Scott Group:]

Okay. And then just, lastly, depreciation took a bit of a step up. I'm guessing, is that more just losses on sales? Can you give us a number on that and how we should think about residuals loss on sales going forward?

[Eric Peterson:]

Yes, I would say that putting some equipment that we took out during the third quarter. There were some losses there that really drove that. Depreciation up by a couple of million dollars. But on a go forward basis. Yes, I would expect that number to be, lower than what we experience in the third.

[Scott Group:]

Do you think we should start to move to appreciation lower again, starting in the fourth?

[Eric Peterson:]

Slightly.

[Scott Group:]

Okay. Alright. Thank you guys.

[Eric Fuller:]

Thank you.

[Operator:]

Your next question comes from the line of Ravi Shanker with Morgan Stanley. Please proceed with your question.

[Ravi Shanker:]

Thanks, good morning gentlemen. Just a little follow-up here. One is going of your response to the first question. I'm still having a little difficult time understanding why the right strategy here is kind of staying where you are and waiting for the market return. Rather than kind of trying to go where the market is where - I think just you previously telling that some of your peers are doing. I understand what you are saying about if the market comes back hard, you are going to be in a great place which you will be, but the market may not come back for a while just giving the macro we are in right now. And so what does that scenario look like?

[Eric Fuller:]

Right, yes. So I mean, we are working diligently to move our over the road assets, either into Dedicated opportunities or into consistent contract freight, that will give us more consistency both on the utilization side and on the rate side. And so we believe we can accomplish that while seeing some truck count growth.Again, I understand the approach I would say that our network and we have run numerous scenarios is our network has not built to where if we were to shrink the fleet that we could improve our profitability through shrinking.And, part of it is an infrastructure issue and so if we look at our overall fixed costs from our infrastructure, putting more revenue and more miles over that infrastructure is a better model for us and so for us, we believe that there is opportunity to grow truck count that it's prudent to do so.

[Ravi Shanker:]

Okay. And maybe a follow-up to that is I mean I hear what you are saying on repositioning the truck fleet and such, but are there more decisive cost actions that you guys can take. I mean, you are doing a lot of good things on tech which is great. But is there any other like big cost items. I know you spoke about the long-term cost initiatives or anything in the short-term we can do to predict -.

[Eric Fuller:]

We have taken down. So if you look at, I think one of the bright spots for us is we look at our overhead and our SG&A within our operations group and though the truck count, the truckload group - though the truck count has grown, we have been able to maintain that headcount. And so we are not having to increase headcount in order to handle the additional trucks. So I think that is significant and that will lead to better results down the road.We are continuing to focus on our insurance costs, that is a major area that is getting a ton of attention within the company and we have seen some positive results in that area, in fact, we haven't had the level of catastrophic accidents that maybe we had had in the past. And so we believe that will continue, especially as we move into hair follicle testing and have a better quality driver that comes in the door. So we feel really optimistic there.And then the frictionless order process that we are really focused around automation and optimization, I believe that this next two quarters is where we are really going to start to see the impact, we have been working on it for about three quarters now.And a lot of it was what I would call kind of rudimentary stuff, just trying to maybe do some things that maybe we did heard or hadn't done in the past. Now, we are really focused around some things that I think will really start to bear some significant results in our financials.

[Ravi Shanker:]

Very good. Thanks guys.

[Eric Fuller:]

Thank you.

[Operator:]

Your next question comes from the line of David Ross with Stifel. Please proceed with your question.

[David Ross:]

Good morning, gentlemen.

[Eric Fuller:]

Good morning.

[Eric Peterson:]

Good morning.

[David Ross:]

Eric, I wanted to talk a little about drivers. Are you seeing any pay pressure this year?

[Eric Peterson:]

You know, we are not, this year with the driver situation. I look at it as a couple things. And then obviously we are focused around changing things within the Company to make us easier to deal with. That frictionless piece, I think is really starting to help us get a little bit more traction from a driver perspective, particularly in recruiting.But also what we are seeing in the market broadly is more of what I call a little bit of a flat equality as the market continues to feel weak, then you typically see drivers move to the larger carriers where there is more stability, and we are seeing that as well. And so that we are not feeling any pressure to increase wages in order to bring drivers in.

[David Ross:]

And with the extra trucks and the declining utilization is it just hard to get them the miles, because their pay in serious down year-over-year now.

[Eric Peterson:]

So if we look at where we were, if we were to go back and look at our over the road group, two quarters ago, in roughly the same operating environment, our utilization was comparable. So we do not believe that we are seeing a significant degradation in utilization related to truck count growth. And again because of the irregular route network, it is difficult to be affected on one way or the other.So we are able to continue to bring in revenue that is getting the same amount of utilization. So if you look at on a truck-by-truck basis, I don't think that the drivers necessarily are making significantly less. And in fact, I would say probably around the same and so that hasn't affected that. And we don't think that will affect us going forward either.

[David Ross:]

And then on the hair follicle testing, do you anticipate any material, incremental costs from that before you get any benefit?

[Eric Peterson:]

I mean, minimal. I mean, obviously right now, the government still requires us to do both hair follicle and hair analysis which is unfortunate. And we are still trying - we are a part of a request with a number of other carriers to get that listed so we can do just hair follicle. But I think those costs are not significant.Outside of that, we believe because we are a little bit later than some of the other peers who saw a significant degradation in their truck count when they went to hair follicle. We believe that we won't see as significant of a reduction if a reduction at all in our truck count relative to hair follicle.And also keep in mind we have had about half of our drivers hair follicle tested up to this point. So it's not like one of these other carriers that went from zero to 100 two or three years ago and saw a huge hit. We believe that, we can maintain our truck count.But I will say that part of our strategy on boosting up our truck count was anticipation of hair follicle testing. So, if we do see some slight degradation in our recruiting classes, we are doing it with a higher number of trucks versus being at a lower number and then see a degradation from there and we thought that was a better strategy as well.

[David Ross:]

Excellent. Thank you.

[Operator:]

Your next question comes from line over Brian Ossenbeck with JP Morgan. Please proceed with your question.

[Brian Ossenbeck:]

Hey, good morning. Thanks for taking the questions. Just to cap off that last chance I thought. It sounds like the over the road fleet you have upsized maybe a little bit in terms of putting more Dedicated tractors from there on the road in the future. Obviously, you get the view on the cycle to put in that as well, and then maybe a little bit of a headwind from hair follicle testing going to 100% depending on how that plays out. If there is any of your buckets in there, please add to them. But could you kind of rank order those in terms of the size? How much Dedicated is growing for example? Is that the biggest factor here or is it really more of your view on the cycle and wanting to be in the right place at the right time?

[Eric Fuller:]

Yes, I mean, look, our long-term strategy is still to grow Dedicated and have a higher concentration to Dedicated. We are still run in roughly that 35% we would like to see it be closer to 50. So we are focused around growth there.Our line of sight of growth within Dedicated is probably, we can see anywhere from 5% to 10% growth over the next quarter, quarter and a half within that group. And, we are continuing to be aggressive out in the market to try to bring other opportunities in within Dedicated, because I think that is going to be very impactful regardless of where the cycle goes right.The hair follicle testing is something that will give us a benefit longer term. I think that once you have a higher quality of driver for a period of time, then you will start to see less accidents, less catastrophic accidents, definitely, you usually see less turnover, you see better service so we think it all really interplays.But as one of those deals where we would get an impact day one. absolutely not. I look at that probably as more of a longer tail in the impact. But, as it relates to cycle, we still long-term want to focus on building that Dedicated up to say 50%.But then also, we are still committed long-term to keeping our spot within that 10%, so trying to get back to that level on a total revenue basis and stay there, regardless to cycle their long-term strategy.

[Brian Ossenbeck:]

Okay, so when you talk about Dedicated going to 50% overtime and being more aggressive perhaps in the near-term for the pipeline. Can you just put some context around that in terms of what else you are looking to grow, how big the pipeline is relative to last quarter or so and then if there is any other verticals, geographies, end markets that you are looking at, in terms of other growth opportunities?

[Eric Fuller:]

Yes, I mean, so Dedicated opportunities, I would say, a lot of opportunities within our current customer base. I think the interesting thing last year was there was a number of customers that opened up their carrier base within Dedicated, they seem to have retracted in large part, that strategy and has gone back to trying to do a lot with a few and those are the few that kind of understand their business and can perform at a high level.So I think that benefits us because of our large presence within Dedicated, so we think we could see some decent growth within the current customer base. There is also some opportunity for us and some other verticals within Dedicated, specific more towards different types of products and not like we are not saying we are going into last mile or any kind of that, but into other types of products, whether it be maybe different types of electronics or consumer products and things like that.We have been very heavy discount retail, and grocery up to this point we can we will continue to prioritize that, but I think there is other opportunities. So I would say the pipeline was interesting enough. It definitely is the pipeline from an overall opportunity standpoint is down significantly.But like I said, what we are seeing is better opportunity, because there is less carriers in those opportunities as well. And so from a growth perspective, I think we feel just as bullish now in Dedicated as we probably did 12 months ago.

[Brian Ossenbeck:]

Okay, thanks for that update there. May be one for Peterson. If you can just give us context on raising the leverage ratios for the credit facility, I know you give some color earlier about where you think the ratio will top out in the first half of the year, just like you got some headroom already, but you took that up a little bit further at the end of September. So maybe you can give us a little more context as to why you felt that was needed, it was an abundance of caution and maybe how close you think you are going to be to the new ceiling, given your guidance for the first half topping out. Thank you.

[Eric Peterson:]

Yes, thanks. And to everyone, just reminder, we did amend our credit facility. We would like to, we have great financial partners U.S. Xpress on our term loan, and we are continually monitoring the market conditions.And as the market conditions have deteriorated, we thought it was prudent to go ahead and adjust the financial covenant requirements in the facility regarding where that could go, and where that could peak in the second half or in the second quarter of 2020.As I mentioned, it’s really going to depend on the market conditions. And so that is something that we are going to monitor closely and keep our eye on it and I would like to remind we have never been in breach of the financial covenant because of our strategy with our financial partners to try and stay ahead of that.Our strategy really hasn't changed since the IPO. We would like to mark the organization to one times levered organization, but we realize right now that is longer term and that is going to depend on the market conditions, and how successful we are in our initiatives.But obviously, the market conditions are going to play a large part in that. So we'll continue down that path and where that number peaks I was going to say it is largely dependent on where the markets going to be and that is something that I don't think anybody has a perfect line of sight to right now.

[Brian Ossenbeck:]

Alright guys. Thanks for the time.

[Operator:]

Your next question comes from line of Ken Hoaxter with Bank of America Merrill Lynch. Please proceed with your question.

[Ken Hoaxter:]

Hey, good morning Eric and Eric. I guess after listening I’m still confused a little bit on the wire increasing the tractors so much in the quarter. I get that you want to be primed. But I guess going back to Ravi's comment on if the conditions continue a bit longer, why not maybe react to the market? And then I guess just a follow-up on that. If you are expanding the fleet and you are anticipating that there is going to be some negative reaction from the hair follicle testing, even though you are going from 50% to 100%.Why would you expand the fleet in face of what would be a decline in driver assets? Why wouldn't you want to be reducing the fleet in preparation for losing some capacity there?

[Eric Fuller:]

Yes, so I think a couple things. One, we do have a business in Dedicated that is already sold. And just hadn't started yet. So as we onboard those opportunities, we will move those truck out of over the road. When we are building Dedicated opportunities, and a lot of these opportunities can take a little while to SAP up.So by going ahead and staffing early will allow us to go ahead and be at full capacity quicker than probably typically we would anticipate. And so we view that as a positive with the opportunities that we have in the pipeline. And so I think that is one piece. I think the other piece is-.

[Ken Hoaxter:]

But Eric, can I just jump in there because what I guess - we have heard so many questions on this. When you have other peers that are operating at, 15 percentage points difference. I mean, if you are at that point, I guess you could say, Okay, I can expand because it makes sense, but at a 99% to 100% OR. I mean if you have got the risk that you have got more of this spot pressure and it is pressuring your margins, why not decrease your exposure to that market, and move. I get that you want to be prepared, but there is always the ability to add capacity if the market calls for it when things are changing?

[Eric Fuller:]

Yes, it means with the Dedicated piece It is really about having the capacity. These Dedicated opportunities are on-boarding over the next 90 days. And so being able to shift trucks out. But I think the other big piece is this hair follicle testing is, if you go back and look historically, at our peers that went to hair follicle testing, some saw as much of a drop as five to some as high as 10% in their truck count for a periods a quarters after they went to hair follicle testing.So if we were to reduce our fleet and then go to hair follicle testing, and take a huge hit, then that would be a significant hit to our overall revenue. And we believe our costs infrastructure will suffer. And so by being able to boost our truck count now, in anticipation and try to mitigate that loss of potential revenue and loss of coverage of our fixed costs infrastructure we believe is the right strategy as we go to hair follicle testing.

[Ken Hoaxter:]

I mean, that is even more confusing to me, because then you are stuck with even more tractors, if you are losing drivers, if you are expanding your fleet as opposed to fewer tractors at risk, and with a 99 OR you figured you would want to try to minimize that. No.

[Eric Fuller:]

Yes. So two different situations, right. So, when we look at the assets, we look at the physical truck assets, we have very little concern that if we saw a degradation that we could reduce the fleet, that is not the problem with our trades, and with the number of trades that constantly come up, we could pull back some additional orders and additional new tractors that we are bringing on and naturally bring that truck count down. So it's not an asset issue its a driver issue.So allowing us to have the drivers is the reason that we would do that. The asset play is very fairly easy to manage and we can reduce the number of tractors as it's actually occurring by just reducing the number of trucks we take, or by increasing the number of trades that we put out into the market.

[Ken Hoaxter:]

Okay, so is that kind of timing any leases or operating leases or CapEx going into the end of the year, is there a kind of a timing into peak season that we should look that you could adjust at a faster speed?

[Eric Peterson:]

Yes you know really, just to add to the last answer from Eric. If we look at the financial impact of this incremental truck count, I think a point that Eric made earlier on the call as it relates to SG&A and our overhead is that we were able to add this truck count without increasing our fixed cost.So the incremental trucks are actually accretive to our earnings, even in the challenging market with a primarily two-thirds variable one-third fixed costs infrastructure. And so I would say that in a down market where the volumes and the rates are suffering a little over the road that those incremental trucks help offset some of those headwinds and actually become a tailwind.And also, if you look at our strategy, we are looking long and we understand where we are in the market right now. But if you look historically on the cycles and how long the rates in the spot market have stayed lower than the contract, we believe if we follow historical cycles that we should be coming out of this in the next couple of quarters.

[Ken Hoaxter:]

Okay, Just maybe switching to another topic for a quick second. You kind of highlighted in the spot that the given - I think Eric you mentioned early on the brokerage exposure for the spot really pressured rates. Is there something you can do to work your spot exposure away from the brokerage market maybe on your own salesforce on current customers and anything you can do to decrease that exposure I get not necessarily on the spot rate but maybe on your exposure to the brokerage segment.

[Eric Fuller:]

Yes, and we look at spot as not brokerage, how we define spot would be anything we don't have a long-term contract with, so spot could come from one of our major directs - or one of our major customers, and it just not have a rate and the reason we call that spot is because that is usually predicated on the supply demand at that specific time in which we quote that order.Most of our spot as we define it does not come from brokerage just to clarify, but we are working towards getting more contracted business. Over the last nine-months, we have made some pretty big changes or 12 months within our sales group. And, I think it was about 12 or 14 months ago, we made a change within our Chief Marketing Officer and so that is really starting to show some significant improvement.We also opened up an inside sales group that is on the phones, going after smaller customers, something that U.S. Xpress has not traditionally done, which is focused on that tail of small, small customers people that may have a $10 million or $20 million spend. We typically focused on the kind of the mega shippers. And so now we have built a group around trying to bring in smaller shippers and help to fill gaps.We are seeing some pretty significant wins. That group just launched within the last 90 days. So there wouldn't be really in their last quarter’s numbers. But we are starting to see some wins from that group. And I think over the next couple quarters, we are going to be able to fill more of the trucks that are going out in the spot with some consistent contract business through that program.

[Ken Hoaxter:]

Just so when you said the pricing on the spot was under unprecedented headwinds created by new digital entrants. I just want to clarify you are just talking about the entire spot market pricing not just your exposure to the digital engine.

[Eric Fuller:]

Yes, I mean if you look at the digital brokers that are out there. They are shoving rates through the floor and it is unsustainable. They are taking negative gross margins to try to grab market share. And apparently they have unlimited cash, don't have to make any money. And so these guys are very aggressive in the market. And they are creating this situation in my opinion.I think without those type of brokers in the market, you would not have this market behaving like it does. Because I think if you look at the normal supply demand situation it's not as bad as the market makes it look because of how these digital brokers are aggressively trying to buy market share.

[Ken Hoaxter:]

So with that comment though and just looking at what is happened with, JV Hunt noting that they are willing to spend money and lose operating - for the next 12 to 18 months. I think they said, you have got over afraid convoy, Amazon all coming out and staying around. But yet you are saying we expect the markets that to - or prepping ourselves for rebound very shortly. Wouldn't you in light of the unlimited capital that you just mentioned, believe that you should be cutting the fleet to prepare for maybe a longer cycle on the market pressure there?

[Eric Fuller:]

Yes. So I think you got you got have two situations. Yes, you have these digital brokers that are pushing rates to what we would call unprecedented levels. But on the flip side, they are also pushing out their own capacity. Because of the rates that they are taking into market, they are pushing these small marginal carriers out of business in a quicker fashion than we believe we have seen in a long time as well.And so I think that even though they are aggressive in the market from a price perspective. I think they are also really hurting themselves in the back end, because they are killing their own capacity. So we still believe with everything that we are seeing in the market that this thing will self correct in a relatively short period of time. And I think that scenario, it will probably speed that correction.And then at some point, I mean you look at it, you also see, you know, I don't think this endless supply of cash and never having to make money is going to last forever. And I think this whole rework thing, obviously, was kind of the beginning of that. And I think we are starting to see that from Venture capital and from private equities this capacity to just never make a profit. I think that world is changing a little bit.

[Ken Hoaxter:]

Thanks, guys. I appreciate the time. Thank you very much.

[Eric Fuller:]

Thanks Ken.

[Operator:]

Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back over to management for closing remarks.

[Eric Fuller:]

Great. Alright. I appreciate everybody on the call. One thing I do want to - that didn't come up on the call, I just want to mention, as we go into 2020, we do have the drug and alcohol clearing - that goes into effect in January, we still believe that is going to have a significant impact and in fact, I would say much larger impact than what may some of you may haven't anticipated.And so we think that is going to have probably going to push this market towards back in a favorable position for the asset guys in quicker fashion than maybe would normally occur because of this regulatory situation. So I just want to bring that up.But anyway, I appreciate everything and we'll talk to you guys in few months. Thank you.

[Operator:]

This does conclude today's conference, you may disconnect your lines at this time. Thank you for your participation.