In what amounted to an “encore,” the end of the Q&A didn’t mean an end to the discussion on Variant and its role in USX’s future.
U.S. Xpress (NYSE:USX) faces multiple challenges in the rollout of its Variant initiative, which the company posits as akin to starting a new trucking company within a trucking company as opposed to just fixing what the truckload carrier already has.
One task beyond implementing the program is to convince Wall Street analysts and the investment community that Variant is going to radically change U.S. Xpress. On the company’s fourth-quarter earnings conference call, that challenge seemed to be encapsulated in one analyst suggesting he really didn’t get what Variant was all about.
Scott Group of Wolfe Research wanted to know more about a laundry list of characteristics of Variant: Do Variant trucks get spot rates? Are they contract rates? Are the trucks all new or are there repurposed old trucks in there too? In other words, as he said, the analysts needed a little “color.”
It might have been that question, and a decided lack of other analyst questions about Variant, that led to CEO Eric Fuller wrapping up the question-and-answer session with a review of what Variant is all about. Normally, the end of the Q&A on analyst sessions is the end of the call but not this time. During the call, there had been far more focus on U.S. Xpress’ struggling Dedicated division than impressive numbers spelled out about Variant, which may have frustrated Fuller.
In the post-Q&A session, Fuller turned to the president of Variant, Cameron Ramsdell, who was on his first U.S. Xpress earnings call since he joined the company in April 2019 from Coyote Logistics.
Ramsdell emphasized that U.S. Xpress has built Variant “from scratch. It’s an entirely different tailor-built model.” Bringing new technology to an existing operation, even if the overhaul is radical, still runs into “existing constraints,” Ramsdell said, and “those get built up and built upon” with the result that there is a “suboptimal product.”
Variant is not an effort at change management, Ramsdell said. Change management seeks to take an existing organization and change it. Variant is a “greenfield” initiative that is “completely unconstrained” but with the knowledge of potential “pitfalls.”
Ramsdell also said Variant is “fundamentally different” in that the segment “seeks to scale it from day one” with the “most seamless driver experience in the market.”
“This is not incremental change,” Ramsdell said. “Our mission is a step change from anything else that’s out there.”
“We expect to be more of a growth company than a cycle company,” Fuller said.
Those sorts of statements spell out the broad goals of Variant. But Fuller in his comments put some numbers on how Variant is doing, now that it is on target to be 900 trucks by the end of the quarter and is just below 800 trucks now. The year-end goal is 1,500 trucks.
Variant, Fuller said, is targeting a 2,000-basis-point improvement to the legacy OTR operations at U.S. Xpress, Fuller said. As a result, the company, which boasted of its adjusted operating ratio of 96.5% in the quarter, has a “line of sight” to an OR that is less than 90%, according to Fuller.
Eric Peterson, U.S. Xpress’ CFO, said on the call that the 700 trucks at the end of the fourth quarter were performing at an OR 1,200 basis points better than the legacy OTR fleet. Fuller said the U.S. Xpress goal is to “completely cannibalize” the existing over the road (OTR) fleet and replace it with Variant.
Fuller, asked whether the Variant model is being applied to its Dedicated division, said that for now, Variant is limited to its OTR operations. But as the company grows its Variant operations, Fuller said U.S. Xpress might get breathing room to be more aggressive in its Dedicated business.
In the past, he said U.S. Xpress had “played defensively” with its Dedicated division because it was concerned about seeing the overall truck count drop if it lost Dedicated business. But keeping a truck count high as a stand-alone goal is not part of the Variant model, and it will allow U.S. Xpress to act differently in its dedicated model. “There are some accounts that have underperformed,” he said of its Dedicated customer basis. “In the past we probably allowed that, but now [Variant] is going to give us the ability to fix that as well.”
Driver turnover in the Variant initiative is about 50% on an annual basis. By contrast, it is well over 100% in the legacy OTR unit, Fuller said.
But even with the tight driver market, Fuller said the Variant approach to fixing what he said was “driver frustration” and creating higher utilization and pay “has directly contributed to a significant drop in turnover.”
Even with the difficulty in hiring new drivers, a complaint that has echoed through quarterly earnings calls in the past week, Fuller said the Variant segment has been able to add 20 new drivers per week, which will probably allow the 900-truck target for the end of the quarter to be reached early.
But Ramsdell said the 50% number doesn’t tell the full story, because what Variant is focused on are departures on what he called a “voluntary basis.” Building Variant and its different approach to so many aspects of what the driver does means that the company has needed to “manage out” drivers who aren’t working in the system. Ramsdell said U.S. Xpress was not disclosing the voluntary turnover rate.
One analyst during the Q&A wondered why, if the Variant model was the wave of the future, it wasn’t being rolled out faster or even all at once. Fuller said U.S. Xpress wanted to be “disciplined.” “What we don’t want to do is go right to 2,000 trucks into this model and somehow it breaks, and we don’t know where it broke,” he said. By the slower rollout, he said, “if we encounter any kind of issues, we will recognize it in real time as opposed to having to go back and do analysis after the fact.”
Fuller has spoken before about how other steps the trucking industry has undertaken to change the way it does business, like consolidation, have never resulted in significant growth. But during the call, he said he thinks the environment and opportunity for disruption now is so high that in 10 years, “the market could be carved up by 25 companies,” he said. “Those that try to focus on the legacy model will not survive.”
Disclosure: FreightWaves founder and CEO, Craig Fuller, retains ownership of U.S. Xpress shares through his family trust.