U.S. Xpress' first post-IPO earnings report has two significantly better numbers: OR and debt

  Photo: truckstockimages.com

Photo: truckstockimages.com

U.S. Xpress (NYSE:USX) late Thursday released its first quarterly earnings statement since it went back to public equity markets in early June, and there were several positive steps.

Most significantly for the truckload carrier is that its long-term debt levels, which were a legacy from a decision to take the company private in 2007, have been significantly reduced as a result of both the public offering and the replacement of other debt instruments with more favorable funding sources. In the earnings statement, the company’s long-term debt at the end of the second quarter was $282.2 million, down from $473.2 million a year earlier.

Interest expenses did not drop significantly relative to the second quarter of 2017, presumably because the IPO was fairly late in the three-month period. The second quarter 2018 net interest expense was approximately $12.2 million. But CFO Eric Peterson said on the earnings call with analysts that U.S. Xpress expects to see its consolidated debt payments down to about $5 million in the third quarter.

The other financial figures reported by U.S. Xpress were all strong. Total operating revenue was up 21.4% from the second quarter of 2017; operating income was up more than sevenfold to $20 million.

More significantly, U.S. Xpress reported an adjusted operating ratio of 93.4% (and 92.7% in the truckload division), which was more than 500 basis points better than the corresponding quarter of 2017.  CEO Eric Fuller said recent history is that U.S. Xpress has tended to lag its truckload peers on OR by as much as 700 basis points.

Fuller said the OR was the lowest for U.S. Xpress since 1998.

Unusual for an earnings call, but understandable given that it was the company’s first since its IPO, Fuller reviewed a history of U.S. Xpress and how it got to where it was…and is.

Fuller said the company, founded in 1985, had been focused on revenue growth, making numerous acquisitions and becoming what he said was the fastest trucking company to hit $1 billion in revenue. But between 2000 and 2015, it had an average OR of 98% “as management tried but was unsuccessful in growing the company to consistent profitability.”

That resulted in a shakeup in 2015 when Fuller and Peterson joined the company’s management. “Our clear mandate was to implement a complete overhaul of the company’s strategy and operations to improve execution and profitability,” Fuller said. During the next few years, 61 of the company’s top 94 managers were replaced by both internal promotions or external hires, he added.

A variety of initiatives have been implemented since then, targeted at fleet management and load planning. The focus is not solely on growth but on new core goals: rates, truck count utilization and cost. “We’ve implemented sustainable initiatives with the goal of improving these core metrics and boosting our OR,” Fuller said.

For example, Fuller said a load planning initiative launched last September resulted in an immediate 5% utilization improvement. “As that rises, so does driver pay,” he said.

Fuller addressed several other operational issues at U.S. Xpress:

  • Between the company’s two truck segments, Over the Road and Dedicated, the current focus is on building the former, “unless we can earn a 15% to 20% margin on new dedicated contracts,” Fuller said. Most of the U.S Xpress OTR contracts average a year in length, without volume or capacity guarantees. Dedicated is usually a 3-5-year contract, with committed rates and volumes. Customer renewal rates have historically been in excess of 95%, Fuller said, “which provides solid visibility and helps them manage through cycles.” Spot market exposure is normally in the 10% range, Fuller added.
  • The company recorded an 11-percentage point improvement in driver retention in the quarter, though the specific numbers were not disclosed. Fuller cited some of the earlier-mentioned initiatives as reasons why retaining drivers was easier. Fuller said the fleet manager initiative, in particular, will be “most impactful..it’s changed how we operate on how to manage drivers. It’s much more proactive and it is leading to less driver frustration.” Earlier in the call, Fuller said various changes have led to drivers in the OTR division increasing their weekly take home pay by 15% from last year. “That’s a significant increase,” Fuller said. “I’m not going to say we’re not going to need to increase wages, but we feel fairly comfortable with where the market is today and I think we can keep things consistent.” On dedicated driver pay, Fuller said the company can be “made whole” on any increases it gives to its drivers.
  • Fuller was dismissive of the suggestion that big order numbers for class 1 vehicles meant any easing of capacity. "What I see in our recruiting department is the most difficult environment I’ve ever seen, “ he said. Speculating about new capacity based on the truck build numbers ignores the fact that “it’s going to be difficult to find drivers.”
  • Some recent renegotiations in the dedicated division have resulted in a 3.5% increase in rates, Fuller said.  Longer term, he said that the “rate improvement environment we will see in the next six quarters will outrun cost inflation.”
  • U.S. Xpress is in the process of installing external event recorders throughout its fleet to improve its safety record and presumably lower its insurance costs as well. But Fuller said it takes a year after full implementation of the devices before it begins to change driver behaviors and by extension the company’s safety record and its insurance premiums.
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