U.S. Xpress Enterprises, Inc.
Q4 2018 Earnings Call Transcript

Published: 9 Feb 2019

[Operator:]

Ladies and gentlemen, greetings, and welcome to the U.S. Xpress Fourth Quarter and Full Year 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this program is being recorded. It is now my pleasure to introduce your host, Brian Baubach, Senior Vice President of Corporate Finance. Thank you. You may begin.

[Brian Baubach:]

Thank you, operator, and good afternoon, everyone. We appreciate your participation in our fourth quarter 2018 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 February 14, 2019. We've also posted a supplemental presentation to complement 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 final prospectus, dated June 13, 2018, and we do not undertake any duty to update such forward-looking statements. Additionally, during today's call, we will discuss certain non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with U.S. GAAP. A reconciliation of these non-GAAP measures to the most comparable GAAP measure can be found in our earnings release. At this point, I'll turn the call over to Eric Fuller.

[Eric Fuller:]

Thank you, Brian, and good afternoon, everybody. I'd like to start by reviewing our fourth quarter results and the progress that we have achieved executing upon our strategic initiatives and then conclude with a review of our market outlook. Eric Peterson will then discuss our fourth quarter financial results in more detail before opening the call for questions. I'm proud of our fourth quarter and full year 2018 results. For the fourth quarter, our adjusted operating ratio improved 280 basis points year-over-year to 92.5%. This quarter's performance represents the sixth consecutive quarter of OR improvement and is the best adjusted operating ratio that we have delivered in 20 years. Our focus has been to manage the business by core metrics, including rate, truck count, utilization and cost. We measure our success by our adjusted operating ratio that our team delivers as we work to increase earnings. 2018 was the best year in our company's history with record financial results, positive early year momentum and an improved capital structure from our June initial public offering. We are well positioned to continue to methodically manage our capital allocation, improve our operational execution and target industry-leading profitability. Turning to our segment level highlights. In our over the road division, our average revenue per tractor per week in the fourth quarter increased approximately 1%, as a result of a 5.3% increase in an average revenue per mile, partially offset by a 4.4% reduction in average miles per tractor. This decrease in utilization was primarily a result of fewer teams in the fourth quarter compared to the prior year. While the market for drivers remained challenging, we continue to see sequential improvement in retention and hiring as we execute our initiatives focused on our professional drivers by offering them attractive miles, modern equipment and a driver-centric operations team. As a result, our truck count improved from the third quarter and contributed to the momentum in our OTR division this quarter without having to increase driver pay. This momentum has continued into the first quarter as we are seeing small incremental improvement through the first 5 weeks of the year, which we expect to persist through the first quarter. Turning to our dedicated division. The average revenue per tractor per week, excluding fuel surcharges, increased 10% in the fourth quarter of 2018 as compared to the fourth quarter of 2017. This increase was primarily a result of a 9.1% increase in the division's revenue per mile. We are very pleased with the division's performance this quarter as our revenue miles per tractor per week was essentially constant on a sequential basis from the third quarter as compared to a typical seasonal fourth quarter decline of approximately 5%, primarily due to the holidays. Additionally, this performance is a marked improvement from the 10% utilization decline that we experienced in the second quarter of 2018 and the 5% decline in the third quarter. Our improved utilization in this quarter is the direct result of changes that we have implemented to address certain account shipping patterns, which have not performed as we had expected. To address this issue, we increased rates and have adjusted to the change of shipping patterns. Taken together, the issue has now been largely addressed, and we do not expect it to persist into 2019. Lastly, Brokerage segment revenues increased 16.2% to $64.9 million in the fourth quarter of 2018 as compared to $55.8 million in the fourth quarter 2017. This was primarily the result of a 1.9% increase in load count and higher revenue on a per load basis, which was partly attributable to higher fuel prices. The Brokerage segment continues to provide additional selectivity for our assets optimized yield, while at the same time offering more capacity solutions to our customers. As we look ahead, we expect the rate of growth to continue to slow as comps become more difficult. At this point, I would like to spend a few minutes reviewing our decision to exit our U.S.-Mexico operations, which we announced in January. Since taking over our roles in 2015, we have performed an extensive review of our operations and identified a series of initiatives designed to improve the company's profitability. As a part of this, we evaluated our aggregate investment in our U.S.-Mexico operations, including investments south of the border, in the Laredo and in U.S. assets and personnel required to service this business. We concluded that these operations require comparatively high level of fixed investment per unit of revenue and also created lane efficiencies in the U.S. because serving freight to and from the border did not maximize revenue per mile or meet our other network planning priorities. During 2018, the combined Mexico and allocated U.S. operations failed to keep pace with improvements in the company's U.S. OTR and Dedicated truckload operations. Additionally, our subsidiary had a unique model that required a high level of fixed investment, which never achieved the scale or scope necessary to drive an adequate return for shareholders despite the market backdrop. As a result, we were transitioned to a more variable cost model to support cross-border freight with Mexico. This strategic decision reflects the latest step in the company's transformation as we methodically evaluate our capital allocation, improve our operational execution and target industry-leading profitability. Eric Peterson will review the financial implications of the exit in more detail in a moment. We continue to focus on driver retention and improving yields on a load-by-load basis as we continue to work on our existing initiatives around utilization and optimization. As we head into 2019, we will have a focus on technology, which will continue to improve our drivers' lifestyle, including digital load matching, automated load acceptance and prioritization and working towards our ultimate goal of the frictionless order. Turning to the market and our outlook. Conditions have remained constructive through the fourth quarter and into the first quarter of 2019. Since November, we've contractually agreed to rate renewals for approximately 20% of our anticipated truckload revenue for 2019, with an average rate increase of approximately 7%. While current rate increases have moderated slightly, we believe full year contract rates will increase 5% to 8%. Additionally, we expect normal seasonality for the first quarter and remain optimistic on the outlook for our business and ability to continue to drive margin improvement through 2019. I would now like to turn the call over to Eric Peterson for a review of our financial results.

[Eric Peterson:]

Thank you, Eric, and good afternoon. As Eric discussed, we are pleased to announce record adjusted net income and profitability for the fourth quarter and look forward to the prospects of further realizing the benefits of our initiatives. We believe there is a significant opportunity ahead for continued profitability improvement. I'm going to spend a few minutes summarizing our results for the quarter. Total revenue for the fourth quarter of 2018 increased by $38.0 million to $469.2 million compared to the fourth quarter of 2017. The increase was primarily the result of a 7.2% increase in our rate per mile, a 16.2% increase in brokerage revenues to $64.9 million, and a $5.9 million increase in fuel surcharge revenues. Excluding the impact of fuel surcharges, fourth quarter revenue increased $32.0 million to $422.5 million, an increase of 8.2% compared to the year-ago quarter. Operating income for the fourth quarter of 2018 was $21.1 million compared to the $12.5 million achieved in the fourth quarter of 2017. Excluding the $10.7 million loss related to the sale on exit of our fixed cost investment and our cross-border Mexico operations in the fourth quarter of 2018 and the $6.1 million in unfavorable fuel purchase commitments in the fourth quarter of 2017, adjusted operating income for the fourth quarter of 2018 increased 72% to $31.8 million compared to $18.5 million in the prior year quarter. Our adjusted operating ratio was 92.5% for the quarter, representing a 280 basis point improvement compared to the fourth quarter of 2017. For the full year, we achieved a 94.1% adjusted operating ratio delivering a 330 basis point improvement compared to 2017. Net income for the fourth quarter of 2018 was $7.0 million compared to $9.5 million in the prior year quarter. Adjusted net income in the fourth quarter was $19.5 million, which compares favorably to the $900,000 in the prior year quarter. In addition to record adjusted operating income, our interest expense was $8.3 million lower compared to the same quarter in the prior year, resulting in adjusted earnings per share of $0.39 for the fourth quarter of 2018. We believe the exit of our fixed cost investment and our cross-border U.S.-Mexico operations will be a win, win, win from an earnings, capital allocation and customer perspective. From an earnings perspective, we will eliminate a certain amount of cross-border revenue as well as associated expenses in both Mexico and The United States. The first 2 quarters of 2019 will incur a small negative impact as revenue decline faster than expenses. By the third quarter, we expect a neutral impact and thereafter expect to build to an approximately $10 million annualized operating income benefit. From a capital perspective, we expect to receive approximately $30 million in net proceeds over 8.5 years, and the exit will also eliminate approximately 700 trailers, which we would have had to replace with over $20 million of new trailers over the next 2 years given their age. As a result, we expect to increase our income with less capital deployed over the next year and beyond. Finally, we will offer customers both additional capacity within our core U.S. lanes and continue to access the cross-border coverage through an asset-like alternative. Excluding the impact of the adjustments to our pretax income, the effective tax rate for the quarter was approximately 26% and we anticipate our effective tax rate to be between 27% and 29% for the full year 2019 with our cash tax rate in the low single digits. Turning to our fleet. We continue to manage our tractors to a 475,000 mile replacement cycle, and we are converting a portion of our leased tractors to owned and will spend approximately $170 million to $190 million in net CapEx for 2019 to execute that strategy, with approximately $45 million of the total related to replacing leased equipment with owned. As a result of our 2019 replacement cycle, which is above normalized levels due to a large purchase of more fuel-efficient tractors approximately 4 years ago, we expect the average age of our company tractor fleet to reduce from 28 months to approximately 18 months as we exit 2019. When thinking of free cash flow, a normalized net CapEx figure, over a 4-year period, is approximately $115 million, and we expect our net CapEx to revert to more normalized levels in 2020 and 2021. In regards to leverage, we ended the year with $416.0 million of net debt and had a $139.9 million of cash and availability under our revolving credit facility. We expect interest expense to approximate $22 million for the full year of 2019. Looking to 2019, we continue to expect our adjusted operating ratio to improve each quarter on a year-over-year basis. As expected, we have not seen a significant financial impact as a result of the recent installation of event recorders in our tractors; however, we continue to believe we have an opportunity to meaningfully lower our insurance and claims expense as this initiative continues. Additionally, we believe we continue to have opportunities as our existing driver-centric initiatives around utilization and retention mature. We continue to target a goal of delivering a 93% adjusted operating ratio for 2019. With that, I'd like to turn the call back to Eric Fuller for concluding remarks.

[Eric Fuller:]

Thank you, Eric. As we have discussed, we have a set of strategic initiatives in place that were developed with an emphasis on managing the business by core metrics, including rate, truck count, utilization and cost. We have designed and implemented initiatives to improve these core metrics and to continue to improve our profitability. While we continue to make progress, we have much work left to do in order to achieve our goal and drive optimal performance over time. Thank you, again, for your time today. Operator, please open the call for questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Scott Group from Wolfe Research.

[Rob Salmon:]

It's Rob Salmon, on for Scott. Eric, with a clarification question on the guidance of a roughly 93% OR. Can you provide a little bit more granularity if this is contemplated on a wholly consolidated basis? Or this is just the Truckload segment? And whether or not it's gross or net of fuel?

[Eric Peterson:]

It is consolidated, Rob, and it's net of fuel.

[Rob Salmon:]

And in terms of you guys gave us some nice color on the pricing as we progress throughout, beginning in 2019. I was hoping you could give us a sense of how the pricing comps compare to the 7% that you guys have realized since November on the first 20% of the bids? Kind of how that's scaled over the course of the year?

[Eric Peterson:]

Sure. I mean, As we kind of go into '19, we do believe that, that rate will moderate a little bit at least in the near term. And so we are seeing, if you look at the rates, the bids that are coming in are probably coming in at a little bit below that 7% now. And so a lot of that was on the front-end, but we still see a strong rate, and we still feel very comfortable that our overall rate improvement on a year-over-year basis will land in that, from a contract perspective will land in that 5% to 8%.

[Rob Salmon:]

And Eric, on the, in the fourth quarter, in the Over the Road truckload segment, you guys saw about 5% blended rate per loaded mile. Why shouldn't we think that, that decelerates further off of some pretty tough comps in the first half of the year, frankly, that kind of built as '18 went along?

[Eric Peterson:]

Yes. So keep in mind, we're talking contract rates. So the contract increases versus your overall blended rate, which is affected by our exposure to spot market. Now our spot market exposure, again, is managed to that 10%. But spot market rates have come down substantially from where they were in the first half of '18 and even into the third quarter of '18. And so we have seen some moderation in that area, which will impact the overall model. So we still think that contract rates will continue to be strong, but that spot market rate is going to be an impact to the overall blended rate.

[Rob Salmon:]

And I guess, when I kind of, when we combine the impact of just the weaker spot that we've been seeing in the low board data as well as I guess, less of a mix of your teams, how should we think about just the consolidated rates in the back half of the year? Do you think they kind of remain positive throughout? Or is there a risk that we could actually dip negative when we contemplate the impact of those 2 things?

[Eric Peterson:]

No. We think they're going to continue to be positive. We think that for the entire year, quarter by quarter, we'll continue to see some strong rates versus year-over-year comps. And I actually feel confident that the market will continue to be strong throughout '19, and we will see spot market rates start to come back up.

[Operator:]

Our next question comes from the line of Brad Delco from Stephens.

[Brad Delco:]

Mr. Peterson, I will say, you provided us some color on leverage. Do you have a target, and I apologize if you said this. Do you have a target on where you think your, that will be and it sounds like you said, CapEx will be a little bit higher, you'll be replacing some leased equipment with owned. Is that right, with $45 million? Can you just remind us of what you just said on that?

[Eric Fuller:]

Yes, that's exactly right. If you look at the guidance that we gave, $45 million of that number is just a conversion of lease to own. So I don't have the benefit of that depreciation on the books now when you're comparing my net CapEx to depreciation run rate. If you back that out to compare it against my depreciation, it's a little higher. And the reason it's higher, it's just cycling in this new equipment. You'll see the average age of our equipment drop by approximately 10 months as we exit '19 to an average age of 18 months. We think this strategy makes much sense when we're looking at the condition of the used market. Right now, we don't see any deterioration there, so to go ahead and cycle out this older equipment with the used market is stable when we are purchasing our new tractors. We think this makes much sense for us as we enter 2020 and 2021 with an 18-month old fleet and lower CapEx requirements, required in those out years.

[Brad Delco:]

Okay. And then the 93% OR target for the year, it seems like that's unchanged from your earlier guidance, but you're going to get, it sounds like, about $5 million of benefits from exiting these Mexican assets. Just make sure is there anything offsetting the benefit you should get from that? Or I'm assuming the 93% is on an adjusted basis, so we'll be backing out some of the expenses associated with the exit of that, those assets in the first and second quarter?

[Eric Fuller:]

That's correct. What we disclosed in the initial release on that transaction is that we could potentially incur up to $4 million of expenses during this transition, and we expect to have that done as we start the third quarter and then I'll start getting that benefit in the third or fourth quarter.

[Eric Peterson:]

And Brad, there'll be a little bit of a lag as you phase out freight from the Mexican operation and then I need to phase in freight from more of a domestic operation. There could be a little bit of a slight lag in that process that could affect things on the margins.

[Brad Delco:]

Okay. And then not that on meeting quarterly guidance, but a 93% OR suggest about 100 basis points of improvement. 110, let's say, to be more exact. Do you feel like that will be pretty consistent throughout the year? Do you think just based on rate momentum now, it will be more weighted towards the front half of '19?

[Eric Fuller:]

Yes. When I'm looking at the seasonality, if you look back to 2018, that's something that's probably more normal with our model. I think the first quarter of 2018, we were at 96.1%, and we ended up at 94.1% for the year. When I look at the insurance line item and we made some great progress during 2018 changing our program where we could have -- we eliminated the potential for a $10 million claim per occurrence down to $3 million claim per occurrence, but $3 million is a still significant line that could have different -- create some volatility in the quarters, and that's why we look at that line on an annualized basis. But in general what happens is what you saw happened in 2018. Our first quarter is usually the lowest quarter of the year. Our fourth quarter is usually the best quarter of the year and the second and third quarters battle back and forth for supremacy. I mean, one year it's the third, the next year it's the second.

[Brad Delco:]

But in terms of the actual rate of change to get to your 93%, I guess, the question I'm asking is, do you think you'll see greater improvement in margins in the first half of the year against your first half of '18? Or -- and potentially see less margin improvement or may be margin deterioration in the back half of '19? I'm trying to figure out the cadence of that margin improvement?

[Eric Peterson:]

Brad, I think it's going to be consistent through quarters.

[Brad Delco:]

Okay. Thanks, guys. I’ll get back in queue. I appreciate it.

[Operator:]

[Operator Instructions] Our next question comes from the line of Ken Hoexter from Merrill Lynch. You are now live.

[Ken Hoexter:]

Eric Peterson, I guess, just when you talk about the 93% operating ratio target, I guess, just to delve into that a little bit more, what are you including your target? Is it a focus on driver turnover, efficiency gains or tractor utilization? Or is it simply just rates? I just want to understand how much of the programs that you've talked about engaging that you flowed through into the targets? And what the upside potential could be?

[Eric Peterson:]

Sure. I mean, we continue to think that the -- our initiatives that we put in place last year will continue to bear fruit into 2019. That will lead to some small marginal improvement in our overall truck counts as we start to get some wins. We've seen some decent improvement in our driver turnover in the back half of '18 and even further into '19. We think that will continue, and we think that'll lead to some small improvements in our overall truck count. We also think that we can start getting some traction in our utilization metrics. So obviously, we had a little bit of a headwind there from the team piece and OTR, but we're seeing some good improvement in Dedicated. We think that momentum will continue, and we think we can start getting some improvement in utilization that will lead to some improvement in our overall revenue. On the cost side, as Eric mentioned, we believe that this is the year that we will start to see some improvement in our insurance related to the forward-looking event recorders. And we think that we've already seen some what I will call kind of lead measures in that number related to our accident rates, and we think that's going to lead to lower insurance costs into this year. We think that's going to be an impactful piece of this as well.

[Ken Hoexter:]

And so just mostly the insurance side or I can see the flow through on improved operations as well?

[Eric Peterson:]

Yes, I think, it's everything. I think, it's improved operation. I think it's improved revenue with utilization and the truck count. I think it's reduced cost with the, on the interest line item, but also reduced cost with our headcount. We're managing head count better than we ever have so trying to lower cost in a lot of different line items. And with that turnover coming down, we will see cost in a lot of different line items come down as we get better return over and we feel confident that we're moving in the right direction there.

[Ken Hoexter:]

And have you quantified what the level of turnover is now versus before?

[Eric Peterson:]

That's not something we necessarily release, but we do, we are seeing some decent improvement and we think that, that momentum will continue into 2019, as we continue to roll out more initiatives related, around our drivers, and we think that we'll end '19 at a better level than we started '19 on driver turnover. We feel confident with that.

[Ken Hoexter:]

Okay. And how about on driver pay? Can you kind of quantify the changes? I mean that was something we talked a lot about last year in terms of the different programs, so you need to raise rates as much as may be some peers given the utilization you are more focused on. May be you can kind of take a step back at that how did that, ultimately, end up? And what do you think is built-in on rate increases into the 93% OR?

[Eric Fuller:]

Yes. I think, yes, Ken, away for modeling purposes, how we're looking at our driver wage cost per mile at our operators, cost per mile and our rate per mile as we really look at those 3 in the aggregate. So to the extent we get pressure on wages, generally, we more than recover that on the rate side. And to really get the challenge in pressure on driver wages essentially means that there'll be a supply constraint and we'll cover it in rate. So I don't see a lot of risk to those 3 line items in the aggregate because that type of market has traditionally performed.

[Ken Hoexter:]

Okay. And lastly, for me just on the 5% to 8% outlook that you gave on rates. I just want to understand what the mix there? Was that a mix between Over the Road and Dedicated? Or was that more focused on one segment or the other?

[Eric Fuller:]

No. That's full truckload. Again that's contract rates, but that's full truckload. We feel that when it's all said and done, we'll be within that 5% to 8% range for the year.

[Operator:]

Ladies and gentlemen, we have no -- my apologies. Our next question comes from the line of Austin Remey from Stifel.

[Austin Remey:]

Can you guys hear me?

[Eric Peterson:]

We can.

[Austin Remey:]

Okay. When you guys think about longer-term business mix in terms of total percentage of revenue in your Trucking segment between Over the Road and Dedicated, what's your goal?

[Eric Peterson:]

So our long-term goal will be to float that up closer to that 50%. Not something that will definitely be done this year, but that's an area that over, our long-term goal is to focus on getting to that 50% level. We think that's kind of a prudent level to be both in good times, but also in slower economic conditions as well. So that's where we're trying to manage to.

[Operator:]

Our next question comes from the line of Scott Group from Wolfe Research.

[Scott Group:]

Obviously, we saw quite a bit of harsh weather in the Midwest last week, I was curious to get your perspective if you're seeing this kind of continue to follow through in your customer demand? Or if you think that was kind of more of a weather-type blip that happened?

[Eric Peterson:]

Yes. I mean, we are seeing, weather of that kind of magnitude, typically, will tighten things up for a little while. And so we are seeing some pin-up demand from that situation that is leading into a little bit better market in the near term. I don't think it's going to be a 2014 polar vortex, where it took us months to clean up, but I do think that it could have some positive impact on the spot market and overall demand for a couple of weeks.

[Scott Group:]

Eric, that perspective is helpful. And another follow-up is, just within the truckload fleet, we did see utilization constrained in the quarter. And I think you called out mix and, obviously, you guys are lapping some tough comps. How should we think about the utilization opportunities we look out in 2019? Are you still confident that you can grow utilization given the internal opportunities of reducing turnover? Or is that something you think is going to be a bit tougher here?

[Eric Peterson:]

Yes. So we think, so if you look at it on, so breaking up the 2 segments. We think we will continue to see some good momentum in our Dedicated utilization as we continue to reap the full benefits of the improvements, specifically, with that one customer in Dedicated. So we do think that there is still some improvement there. On the Over the Road side, as we mentioned on the mix side, it is really related to less teams than what we have last year. We are still currently dealing with that issue, but we are trying to address. We're trying to build our team fleet back, and if we can get that mix back then we can give better back on track, but we're going to have a little bit of headwinds as we do that. But I think we can get into the back half of '19 and start to see some wins in the OTR utilization as well. It's just, unfortunately, it's not something you can fix overnight, but we think we can again see some build back in that team fleet as we get into the latter half of the year.

[Operator:]

Thank you. Ladies and gentlemen, we have no further questions in queue at this time. I'd like to turn the floor back over to management for closing comments.

[Eric Fuller:]

Great. All right. We appreciate everybody joining us. And we look forward to doing this again in a couple of months. Thank you.

[Operator:]

Thank you, ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your line at this time. Thank you for your participation, and have a wonderful day.