Saying the U.S. Xpress Enterprises (NYSE: USX) is not leaving the Mexican market, CEO Eric Fuller told FreightWaves the decision to sell its 95 percent interest in Xpress Internacional, S.A. de C.V. is to properly align resources for capital allocation and profit improvement initiatives going forward.
“If you look at our story, it’s all about transformation and transition,” Fuller said. “When we came into our role, I think the company had some really disparate parts that were not part of our core business.”
U.S. Xpress stock was up more than 5 percent in mid-day trading to $7.54. Xpress Internacional, S.A. de. C.V. was formed in 2007 to help service the Mexican market. Together with Mexican partners, the company has moved freight across the border since then. The operation, along with the equipment – about 700 trailers – is being sold to those partners for $4.5 million in cash and an additional $8.5 million in cash to be received over 8.5 years. The deal is expected to be completed by the second quarter.
Fuller told FreightWaves this is not an effort to leave the Mexican market. “We felt if we are going to be a player in Mexico, it’s better to do that from a variable cost position,” he noted. “We aren’t saying we are not [covering] Mexico. We’re just going to use a more variable cost model, maybe third-party carriers. We’re going to see if there is a better model.”
In its press release, U.S. Xpress noted that it expects to reduce current and planned invested capital by $40 million, about half of that in savings from anticipated investments in new trailers for the division. The company also said about 300 tractors it owns will be repositioned in more profitable lanes in the U.S.
“It’s very capital-intensive [business] with fixed costs in Mexico that needed to be maintained,” Fuller explained. “There is a lot of capital needed to support this business.”
The CEO added that Xpress Internacional commitments affected other areas of U.S. Xpress’ operations.
“Often times, we would say we have to support ‘X’ amount of volume in Mexico, even if the rates out of Mexico were not as [strong],” Fuller said, adding that this will allow the company to better position equipment in areas where rates are stronger.
The Laredo terminal used in the operation will continue to be owned by U.S. Xpress, but Fuller said it will eventually be sold once the transition is complete. That terminal is valued at about $7 million.
U.S. Xpress said that, in conjunction with a disposition of its remaining 10 percent equity investment in Xpress Global Systems, it will record an approximate $12.3 million non-cash, pre-tax loss on equity investments for the fourth quarter of 2018. It will also incur a one-time expense of not more than $4 million to shut down its domestic infrastructure that supports Xpress Internacional.
The decision to potentially sell its stake in Xpress Internacional was first conceived back in 2015 when an evaluation of the entire business was done. Fuller said there were many items that were identified as needing attention to improve profitability and margins, and this was one of them.
“You just can’t do 300 things at once,” he said.
In its press release announcing the move, U.S. Xpress said the cross-border business generated approximately $50 million in revenue, “but insignificant operating income in 2018.”