Chattanooga, Tennessee-based truckload (TL) carrier U.S. Xpress’ (NYSE: USX) fourth-quarter adjusted loss of 5 cents per share came in ahead of analysts’ estimates for a 9-cent-per-share loss. As many TL carriers have commented recently, U.S. Xpress expects that better days are on the horizon.
Outlook bumpy to start 2020
The 2020 outlook for U.S. Xpress calls for slow growth in shipments, a continuation of truck capacity exiting the market and rates inflecting positively at some point in the year.
Pressed for more specifics on guidance during the company’s fourth-quarter earnings call with analysts and investors, U.S. Xpress President and CEO Eric Fuller said the past four to six weeks were some of the best the carrier has seen in the past year. However, he quickly qualified that statement by acknowledging that the freight environment over the past year has been very soft.
Fuller added that the company is turning down as many as 140 loads per day currently when it took almost an entire week to turn away that much freight during the low point of the cycle over the past year. At the peak of freight activity in 2018, the carrier was turning down more than 1,000 loads a day.
While U.S. Xpress has seen volumes and demand firm modestly so far in 2020, it has not seen any improvement in rates.
In the fourth quarter of 2019, Fuller said that the company’s over-the-road (OTR) trucking unit, which relies on the spot market to keep its tractors moving, saw a 30% year-over-year decline in spot market rates. So far this year the carrier still isn’t seeing any signs of “life” in spot rates. Further, Fuller noted that the company is seeing a higher percentage of bids than it normally does at this time of year. Those contract renewals are coming in flat to slightly lower, a trend he thinks will continue in the near term with improvement being seen later in the year.
As such, the carrier has no net fleet growth plans moving forward, instead opting to continue to increase its revenue mix to favor dedicated. In the fourth quarter of 2019, U.S. Xpress reported that the tractor count increased 368 units on a year-over-year basis with the OTR fleet growing 9% while the dedicated fleet was up only 2%.
In the third quarter of 2019, Fuller said that the company would continue to add tractors to the fleet on the expectation that capacity would continue to exit the market in 2020 and rates would firm. However, the carrier is taking a more cautious approach to capacity as near-term TL fundamentals remain weak.
Fuller noted the advantages of the dedicated model, which have three- to five-year contracts with guaranteed volume commitments. The company’s goal is to increase its dedicated division to account for 50% of trucking revenue versus the current level of 42%, reducing its reliance on the spot market to just 10% of revenue.
The financial disparity between the two offerings was notable in the fourth quarter as well. Revenue per tractor per week declined 10% year-over-year in the OTR segment to $3,517 as rate per mile was 7% lower at $1.95. Conversely, the company’s dedicated trucking division saw continued improvement, with revenue per tractor per week climbing 4% year-over-year to $4,032 as rate per mile increased 3% to $2.40.
The bulk of the concern over the outlook is near term. The carrier normally sees a 150- to 400-basis point (bp) deterioration in its operating ratio from the fourth quarter to the first. Fuller said the company expects to see “normal degradation” in the 2020 first quarter but noted that this is an “atypical environment” with many questions around capacity and future rates, which have been lagging the recent improvement in demand.
This type of degradation would push the company’s OR potentially meaningfully above the 99.7% level reported in the quarter.
Cost levers and initiatives expect to drive better results
Management believes that the insurance and claims expense line can provide the biggest improvement in financial results going forward. The company has a risk mitigation initiative in place aimed at materially lowering its insurance premiums and claims expense, which was 150 bps higher as a percentage of revenue excluding fuel surcharges during the quarter at 6.4%.
U.S. Xpress has outfitted all of its tractors with event recorders and now requires hair follicle testing for all drivers. Fuller said approximately 10 driver candidates fail the hair follicle test after passing urinalysis on a weekly basis. The company tests roughly 200 drivers every week.
The company has recently reduced the number of student drivers it brings on, increasing its hiring of experienced truck drivers as a means of improving safety in hopes to mitigate future claims.
For all of 2019, insurance and claims expense represented 5.8% of revenue excluding fuel surcharges, a 60-bp increase.
In September 2019, U.S. Xpress lowered its deductible from $5 million to $3 million per occurrence for vehicular bodily injury and property damage. The carrier still has approximately $109 million in claims and insurance accruals listed as liabilities on the balance sheet, but the majority of these claims are from events that occurred prior to the change in strategy.
Management was not upset with the year-over-year increase in the insurance expense line, noting the precipitous increase in liability premiums that the trucking industry has incurred in recent years, forcing some carriers to exit the market. Additionally, they said a good portion of the headwinds facing this expense line has to do with old claims incurred prior to the initiative.
The company also has several technology and automation objectives in place aimed at achieving “frictionless order.” Like most transportation companies, U.S. Xpress is investing in technology to integrate its legacy operating systems, reduce headcount and errors through automation, and capture and better utilize the data generated across its platform.
Salaries, wages and benefits increased 280 bps as a percentage of revenue excluding fuel surcharges to 34.8%, but these headwinds are likely to ease as this market isn’t supportive of driver wage increases and the carrier likely won’t be staffing up as its guidance calls for the fleet count to remain flat.
Management believes that its cost reduction initiatives were overshadowed by the softness in the market during the fourth quarter.
Even with the outlined path to improved financial results, many analysts expressed concerns around the carrier returning to sustained profitability.
Asked to quantify its cost reduction efforts and how quickly the company could achieve a low-90s OR, Fuller said it could happen quickly in a normal market. In this hypothetical scenario, volatility is removed and the TL industry is able to capture cost inflation-plus type rate increases in the low- to mid-single-digit range. In this type of environment, Fuller believes that the company could hit this OR target in as little as four to 10 quarters.
Balance sheet and liquidity
The company ended the year with $123 million of liquidity and $390 million in net debt. U.S. Xpress announced Jan. 28 that it favorably refinanced its revolving credit facility. The new facility provides increased flexibility and lowers the company’s interest rates.
The company recorded $20 million in net capital expenditures (capex) in January, which was expected to occur in 2019, but the refinancing occurred later than expected. For all of 2020, net capex is expected to be in the $140 million to $150 million range as the carrier lowers its average tractor age and converts operating leases to owned financing. U.S. Xpress expects the average age of its tractors to be 19 months at the close of 2020, down from 21 months at the close of 2019.
Shares of USX were up more than 10% midday Thursday.
