If there was any doubt that the Variant initiative within U.S. Xpress was dead, just search for the word Variant in the company’s latest earnings release or its supplemental slide show.
You won’t find it.
Seven weeks after CEO Eric Fuller told a conference call with analysts that U.S. Xpress was “skinnying down” the Variant technology-driven initiative, the utter lack of a mention in the truckload carrier’s third-quarter earnings report released Thursday suggests that going forward, there may be trucks on the road with the Variant name and gray coloring but it has no part in the company’s future.
That call in early September was in conjunction with the announcement of a significant restructuring and numerous layoffs. In it, Fuller said the company was returning to “blocking and tackling.” In its earnings supplement released for the quarter, the company declared that “our ‘back to basics’ message to our customers is resonating well.”
With Variant out of the way, Fuller’s summation statement following the earnings call with analysts could be read as something of a manifesto for a company that turned in an operating ratio in the quarter well in excess of 100%, though that was impacted by a pair of large insurance claims that hit the bottom line for $25.7 million.
“We are absolutely on getting this model turned around and operating at a high margin and high profitability,” he said. Referencing the layoffs announced in early September, Fuller said the company had come through a quarter “where we had to do some things to take costs out and really focus on a cleanup quarter.” Making changes will result in a company in which after a few more quarters “we are going to have a cleaner income statement to work with.”
The initial cost savings from the reorganization in September was cited as $25 million, but U.S. Xpress said the company has identified an additional $3 million in costs.
One significant change is that U.S. Xpress plans on keeping its fleet size flat. During the quarters when the Variant model was being implemented, a larger fleet to help reduce the overhead costs per truck was touted as necessary for Variant to succeed. Now the plan is for the fleet size to stay unchanged. U.S. Xpress reported it had 6,648 tractors in its fleet, up from 5,933 a year ago.
It’s that sort of decision to forego growth as a goal that led Fuller to further lay out its plans for the immediate future. “We’re looking at costs and margins and we’re going to get this model to a really healthy level over time, and then we can figure out where to go from there,” he said.
The bottom line at U.S. Xpress was an operating loss that would have been a small profit had it not been for the insurance claims. The operating loss at the company was $22.7 million, which is less than the insurance claims. With that loss, the company’s consolidated adjusted operating ratio was 104.5%, compared to 98.5% a year ago.
Revenue rose to $547.8 million, up from $491.1 million. That figure includes fuel surcharge revenue. Without the impact from fuel, revenue was $477.4 million, up from $451.8 million a year ago.
On the call, Fuller repeatedly mentioned the need to improve utilization, data for which can be found in the average revenue miles per tractor per week. For its over-the-road division, it was flat year on year at 1,558 miles. That is a slight improvement over the 1,537 recorded in the second quarter.
In the Dedicated division, utilization was down to 1,632 average revenue miles per tractor per week from 1,717 a year ago. Sequentially, that figure was down from 1,704. In its prepared statement released with the earnings, the company said the drop in the Dedicated unit’s utilization was “due to customer mix shift towards more discount retail and grocery business in the quarter.”
In the supplemental statistical and commentary report issued in conjunction with the earnings, U.S. Xpress said its goal is to get back to the company’s OTR utilization of an average 1,825 miles.
The outlook on the freight market was mostly grim. Fuller referred to a “nonexistent peak season.”
While no figures were given on driver turnover rates at U.S. Xpress, a perpetual problem that Variant looked like was succeeding at fixing until it deteriorated significantly, Fuller did say that the company’s “ability to source professional drivers has improved” with the weaker market. With increased driver availability will come a need to book more freight and increase utilization, he added.
Fuller also observed the impact of the role of brokers in the truck business, a perspective that had echoes of what independent owner-operators have often said about the intermediates community — in other words, the so-called “broker wars.”
Fuller said he expected there will be a reduction in truckload capacity from the combination of rising costs and falling rates. And one of the reasons there isn’t a direct correlation between costs and rates — a divergence that was at the core of a question asked by an analyst — is the impact of brokers.
“If you look at brokers, they have gotten a larger part of the pie than they ever have had,” Fuller said.
That growing market share has led to transparency and rates that more accurately reflect supply and demand. “The brokers really created this dynamic of true supply and demand and created the volatility in the spot market,” he said. “You can see that in the last five to six years of volatility like we’ve never had before.”
The “emergence of a lot of big brokers” is a key reason for that, Fuller said. “At the end of the day, brokers are looking for what they can buy capacity at and don’t worry about what it costs on the back end from the equipment standpoint.”
That runs into the reality of “a lot of unsophisticated carriers” that don’t fully understand their cost basis, Fuller said. “And they will continue to struggle and they will probably go out of business, and I think it’s the broker market that creates that.”
One analyst noted that the U.S. Xpress decision to roll out its initial public offering in 2018 was to lower its debt load. But the net debt load for the company was listed in its third-quarter 2018 earnings — its second as a public company — as $278.7 million. In the latest quarterly report, the company’s net debt was listed at $341.8 million, up from $313.2 million at the close of 2021.
Given the increase, Fuller was asked about debt reduction: What else can you do?
Among the factors he cited for a possible debt reduction was that the age of its fleet, at about two years, is “in really good shape from an age perspective.” The company also expects to reduce capital spending and is looking at divesting some noncore real estate properties. “There are a number of actions that can be taken to lower that overall debt number.”
Disclosure: FreightWaves founder and CEO Craig Fuller retains ownership of U.S. Xpress shares through his family trust.