When U.S. Xpress (NYSE: USX) held its fourth-quarter earnings call a few weeks ago, the frustration of CEO Eric Fuller was palpable. He wanted to talk a lot about the company’s Variant initiative, which is building a completely different trucking company inside an existing truckload carrier. Unfortunately for Fuller, the analysts on the phone call seemed far more concerned about the short to medium-term economics of the legacy business.
Fuller and several of his management colleagues had no such problem Wednesday in making a presentation to the virtual Raymond James (NYSE: RJF) Institutional Investors Conference. The roughly 40-minute discussion was overwhelmingly about Variant. And unlike the earlier conversations on earnings calls, there were more specifics offered about the company-within-a-company and how it operates.
Previous discussions about Variant on earnings calls were not only shorter than Fuller may have wanted, they at times were long on the philosophy but could also be short on details. That was not the case with the Raymond James presentation.
Providing a lot of those details this time around was Cameron Ramsdell, the former Coyote Logistics executive who was hired by U.S. Xpress to run Variant. While Ramsdell made some comments during the fourth-quarter earnings call, he had more of a center stage Wednesday at Raymond James.
Fuller has said repeatedly that getting driver turnover down to levels far less than they have been historically is one of the keys to success at Variant. Ramsdell said the studies Variant has done with the “treasure trove” of data it had from the U.S. Xpress experience revealed several of the biggest reasons for driver turnover. Two he noted were familiar: pay and respect.
But every company can cite that; they are not particularly new concepts. What Ramsdell said Variant is attempting to do is provide more certainty to drivers because it is the lack of it that the company has determined is a key factor in retaining drivers.
Ramsdell asked the virtual audience to imagine what it was like to try to budget for a family on wages that might get paid on driving 2,500 miles one week and then 700 the next. “So you can’t just give them more miles,” he said. “You’ve got to give them more stable miles.”
Without providing much detail, Ramsdell said Variant has “architected our system to remove volatility from wages.”
Another issue is the “profound problem” around home time, Ramsdell said. “Drivers were not quitting because they wanted more home time,” he said. “They were quitting because they miss major life events. That is an optimization constraint.”
Anybody can attempt to build a software platform that attempts to fix those things. But what Ramsdell and Fuller repeatedly came back to was the idea of “utilization.” It was not specifically defined during the presentation, but it is the belief that U.S. Xpress and Variant executives have that the more advanced digitally driven approach Variant has toward fleet management can improve utilization of truckload assets to such a degree that things like getting drivers more stable wages and greater chances of being home when they really need to be home can be achieved.
That’s where the Variant approach comes in. Ramsdell noted that Variant is not housed in the U.S. Xpress headquarters in Chattanooga, Tennessee. Rather, it is in Atlanta, and as Fuller said, it is right across the freeway from Georgia Tech, which has supplied Variant with talent, including several with doctorates. The idea is to put together a staff that is completely free from prior beliefs. Most of the staff did not come out of a trucking background.
“If you look at the marketplace, it is run on ’90s technology,” Ramsdell said. “Maybe you have some from the early 2000s but it is wholly inadequate.”
Trucking “at its core,” Ramsdell said, “is a set of exceptionally challenged and interrelated math problems.” And if those math problems are solved, “there are inherent network effects you can solve.
“I think trucking companies generally fail to understand that this is really the business they are in,” Ramsdell said. “They are in the business of solving very hard and constantly changing math problems.”
One thing that Fuller has touted in the company’s earnings calls has been the reduced rate of turnover at Variant compared to the company’s legacy truckload business. Variant’s turnover has been 50% or less; the legacy business has been well above 100%.
One detail about Variant was noted by Fuller early in the presentation to drive home the point that it’s different at the company: There are no fleet managers in Variant’s structure.
“We’ve eliminated sacred cows,” Fuller said in discussing the lack of fleet managers. “It speeds velocity and removes a lot of friction.”
In the presentation, Fuller touched on some of the same themes he discussed in the recent earnings call. They come back to his belief that the trucking industry, which as he said has had essentially no growth and no change in market share for years, was vulnerable to “a lower cost, highly scalable model that could come in and drive significant market share.”
He discussed the role of venture capital into the industry. Meetings with VC entrepreneurs was something that kept him up at night. “In a commoditized market with low margins, if somebody could come in with a scalable model at a lower cost, how can you stop them?” he said. “You’re a sitting duck.”
The “highly fragmented” truckload market that is now the main feature of the industry’s structure “is going to get carved up by as little as 20 to 25 companies,” Fuller said. “We think mass consolidation is on the verge of happening because people are going to come up with business models that are highly scalable in a commoditized market and being able to lower your costs” by hundreds of basis points.
Fuller was dismissive of the gains of the large consolidations of the past, which he said amount to “1 plus 1 equals 1.5.”
Fuller has said he expects performance with full Variant success can be improved by 2,000 basis points. He laid out the road to that high goal, which would put U.S. Xpress’ operating ratio down around LTL carriers or some of the best-performing truckload carriers, like Werner (NASDAQ: WERN) in the fourth quarter or some of the best quarters of Heartland Express (NASDAQ: HTLD) in recent years. U.S. Xpress posted an OR of 96.5% in the fourth quarter of 2020, down significantly from the 99.7% a year earlier.
Improved utilization can add 700 bps on the basis of reducing costs, Fuller said. Other reductions: 200 basis points in improved insurance costs as driver turnover yields a higher-performing group behind the wheel. Better driver turnover can be another 300 points. Investing in technology to “rid us of duplicative costs” are a significant area of cost improvement, Fuller said. Other areas were cited. And beyond that, he said, “scale, scale, scale.”
In the company’s fourth-quarter earnings, U.S. Xpress said Variant’s revenue had been 9.4% of truckload revenues, up from 7.1% in the third quarter. Fuller said the number of vehicles under the Variant brand will be 900 by the end of this week, which is ahead of the prediction that the 900 number would be reached by the end of the quarter.
The goal is 1,500 Variant trucks by the end of the year. “I think we can outrun that,” Fuller said.
The average number of total tractors at U.S. Xpress in the fourth quarter was 6,144.
Ironically, the day after Fuller’s presentation, Bank of America Merrill Lynch upgraded the stock of U.S. Xpress to “buy” from underperform as part of a broader upgrade of truckload stocks. The price objective for Merrill on U.S. Xpress was lifted to $12 from $7.50. But it was the strength of the truckload market that was cited as the reason for the increase, not just at U.S. Xpress but for the other truckload companies that were mentioned. Variant was not mentioned by Merrill Lynch in its report.
But in late January, Morgan Stanley’s transportation research team issued a report on U.S. Xpress that did discuss Variant at length. “If [the Variant initiative[ is successful, the stock should be worth at least $15 on its way to $70,” the report said. The downside: “If unsuccessful, the stock probably goes back to trading at its $4 to $5 lows.”
“We like what we see thus far and will keep close tabs on management’s progress with the transformation,” the report added.
On Thursday at approximately 11:30 a.m., U.S. Xpress stock was at $10.50. It has traded between $2.65 and $11.34 in the last 52 weeks.
Disclosure: FreightWaves founder and CEO Craig Fuller retains ownership of U.S. Xpress shares through his family trust.
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