A few hours after the first trade of U.S. Xpress stock was completed–at a price higher than the $16 initial offering price–President and CEO Eric Fuller said it had been a multi-year strategy for the privately-held company to get to that point, boosted also by the shift in market fundamentals that began in the second half of last year.
Against that backdrop will be a significant reduction in the company’s debt load, a burden that Fuller said had been like “having a gun to your head, day in and day out.”
A team of USX executives and family members rang the opening bell on the New York Stock Exchange on Thursday, June 14, and saw the stock finish up at $16.57 for the day off the $16 initial offering price.
Fuller said an overhaul of USX’ management was key to getting ready to the company going public, more than 10 years after it had gone private. “The prior team was more growth-oriented,” Fuller said, a description that normally sounds positive, until Fuller modified “growth-oriented” with “run and gun.” The change in approach toward one that Fuller said is “more focused on margins, and more focused on data” saw 61 of USX’ top 94 managers leave the company since 2015.
In USX’ S-1 document, released as part of the pre-IPO filing with the Securities & Exchange Commission, USX management talked about the changes that were implemented. “We have focused on our core service offerings and refined our network to focus on shorter, more profitable lanes with more density, which we believe are more attractive to drivers. Over the last three years, we have recruited and developed new executive and operational management teams with significant industry experience and instilled a new culture of professional management.”
The goal of many of the changes, Fuller said, was to get away from metrics focused solely on volume and one that had drivers more at the center of the plan. “What is a driver-centric type of freight environment and network, and how do you have a freight network that is more conducive to a work-life balance,” Fuller said of the questions that drove the reorganization.
Or as the company said in the S-1: “During 2017, we shifted from a load planning strategy based on minimizing empty miles to one that maximizes utilization of our drivers’ available hours. We believe the focus on drivers’ hours more effectively utilizes our scarcest resource and improves driver satisfaction. Following this change, miles per seated tractor per week and driver turnover rate both improved.”
A key to that, Fuller said, will be “shortening the haul.” That sentiment is not unique; anybody listening on recent trucking company conference calls could have heard similar sentiments expressed by U.S. Xpress competitors. With many companies talking about “shortening the haul,” because those scarce driver resources want to get home at night, doesn’t that create an opportunity for those who are still looking for a place in the long-haul market?
Fuller said there is “a lot of opportunity today” in the “tweener” shipments of between 450 to 700 miles. “Those are lanes that have an outsized rate in comparison to the shorter lanes,” he said. But those might not be attractive to drivers seeking to get home at night. Ultimately, Fuller said, “it’s about making sure you have a balance in your network.”
Still, a lack of balance in the driver population helped to drive the IPO, Fuller said. Asked “why now?” about the timing of the IPO, besides talking about the management changes, Fuller said a secular shift in the supply of drivers was a key factor. “We think this is a cycle that is going to last,” he said.
U.S. Xpress’ driver turnover rate, Fuller said, “has been higher than our peer group,” but is declining. There is opportunity for improvement off that rate, and the company “is focused on trying to make the drivers’ lives easier,” Fuller said. “As we do it, we can see results improve.”
In the S-1. the initiatives cited as having improved the company’s operating metrics–and its operating ratio in the first quarter was up 300 or more basis points yer-on-year, depending on the measuring scale–were threefold:
–The previously-mentioned load planning initiative that had driver hours as the focus;
–A fleet management initiative that increased interactions between managers and drivers;
–A customer service initiative that focused on regional structuring.
“When we compare ourselves to a (Knight-Swift) and why they perform on one level and we perform on another, I don’t think it’s strategy more than just a tactical execution,” Fuller said about why U.S. Xpress, by most metrics, has lagged its peer group. “They were probably better on executing at a front-line level.”
The S-1 spells out a series of steps dealing with the company’s debt load that has been significant enough that it has taken U.S. Xpress’ operating profit into a net loss. The company’s term loan carries interest rates that are in double digits, and Fuller said paydown of debt from part of the proceeds from the IPO, as well as other recapitilization steps, will drive the interest rate on the term debt down to “the mid 4’s.”
Asked if the changes would allow the company to be profitable on a net basis, Fuller said “I think there’s absolutely the opportunity to drive that kind of result.”
The company’s debt burden did not lead to deferred capital expenditures or other similar restraints, according to Fuller, “What it did do is make you feel like you’ve got a gun to your head day in and day out,” he said. “Being able to reduce that debt load gives you breathing room, and gives us a chance to be opportunistic in the future.”
Fuller said about 35% of the company’s trucking business is dedicated. But it comes as year-on-year, U.S. Xpress saw average first quarter rate increases of 5% in the dedicated segment, and 12% in the OTR sector. Given those sorts of OTR margins, U.S. Xpress will prioritize OTR traffic “in the near term,” but further out, “having a large portion of capacity tied up in dedicated has much more consistency in margins rates and volumes, and it’s one thing we want to make sure will be a large part of our business.”
(Full disclosure: FreightWaves founder and CEO Craig Fuller is the brother of Eric Fuller).