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Edited Transcript of USX earnings conference call or presentation 6-Feb-20 1:30pm GMT

Q4 2019 US Xpress Enterprises Inc Earnings Call

Chattanooga Feb 18, 2020 (Thomson StreetEvents) -- Edited Transcript of US Xpress Enterprises Inc earnings conference call or presentation Thursday, February 6, 2020 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian Baubach

U.S. Xpress Enterprises, Inc. - SVP of Corporate Finance & IR

* Eric A. Peterson

U.S. Xpress Enterprises, Inc. - CFO, Treasurer & Secretary

* William Eric Fuller

U.S. Xpress Enterprises, Inc. - President, CEO & Director

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Conference Call Participants

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* Brian Patrick Ossenbeck

JP Morgan Chase & Co, Research Division - Senior Equity Analyst

* Jack Lawrence Atkins

Stephens Inc., Research Division - MD & Analyst

* Ravi Shanker

Morgan Stanley, Research Division - Executive Director

* Scott H. Group

Wolfe Research, LLC - MD & Senior Transportation Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the U.S. Xpress Fourth Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference call over to Mr. Brian Baubach, Senior Vice President, Corporate Finance. Please go ahead.

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Brian Baubach, U.S. Xpress Enterprises, Inc. - SVP of Corporate Finance & IR [2]

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Thank you, operator, and good morning, everyone. We appreciate your participation in our fourth quarter 2019 earnings call. With me here today are Eric Fuller, President and Chief Executive Officer; and Eric Peterson, Chief Financial Officer. As a reminder, a replay of this call will be available on the Investors section of our website through February 13, 2020. We've also posted supplemental presentation to accompany today's discussion on our website at investor.usxpress.com.

Before we begin, let me remind everyone that this call may contain certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include remarks about future expectations, beliefs, estimates, plans and prospects. Such statements are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by such statements. Such risks and other factors are set forth in our 2018 10-K filed on March 6, 2019, our other SEC filings and our press releases. We do not take any duty to update such forward-looking statements.

Additionally, during today's call, we will discuss certain non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with U.S. GAAP. A reconciliation of these non-GAAP measures to the most comparable GAAP measure can be found in our earnings release. At this point, I'll turn the call over to Eric Fuller.

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William Eric Fuller, U.S. Xpress Enterprises, Inc. - President, CEO & Director [3]

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Thank you, Brian, and good morning. On today's call, I will review our fourth quarter results and provide an update on our strategic initiatives. Eric Peterson will then discuss our fourth quarter financial results in more detail. I will then discuss the market and our outlook before opening the call to your questions.

As we have spoken about on prior calls, our industry has been severely impacted by increased capacity relative to volumes that have driven spot rates down to levels we haven't seen in over 10 years, not to mention the disruption created by trade tensions and new digital brokers operating at unsustainable negative margins. This environment continued to pressure spot pricing and our Over-the-Road results through the fourth quarter.

Last year, we discussed a wide range of initiatives that we had implemented, such as a redesigned fleet renewal and maintenance program an asset optimization program, a load planning initiative and a fleet management program, all of which are critical to improving our operations and closing the profitability gap with our peer group over time.

These initiatives set the foundation for further improvement in the future as we continue to advance our company. That said, we have much left to accomplish in order to achieve our goal, and I'm very disappointed with our results.

To adapt and succeed in an environment like we experienced in 2019, we must continue to execute on our current initiatives, while also finding new ways to operate and improve our efficiency, which is the focus of our executive management team in 2020. There are 4 themes that I would like you to keep in mind as we review our results this morning.

First, our Dedicated business, which accounts for more than 40% of our available tractors continued to perform well through the fourth quarter. The initiatives implemented in late 2018, delivered record results as we achieved revenue per tractor per week in excess of $4,000 again this quarter. Our Dedicated segment is a steadier business and an area that we are focused on growing.

Second, we continue to manage the challenging market environment that has impacted our Over-the-Road division. The severe decline in spot rates, combined with spot exposure in excess of our approximate 20% target of total over-the-road miles or approximate 10% target of total miles has impacted our profitability and weighed on our financial results.

Third, we remain an advocate for increased safety in the industry and implemented hair follicle testing for all of our drivers in the fourth quarter. We remain committed to increasing the safety of our fleet and our roads, which we also believe will positively impact our insurance and claims expense over time.

Finally, we continue to implement our internal initiatives and invest in digital technologies that are designed to create efficiencies, lower costs and improve our offerings to our customers and professional truck drivers.

Our results this quarter are drawing attention away from the progress that we have achieved, and we remain optimistic that they will become more evident in our operational results through 2020.

Turning to our fourth quarter results, our Over-the-Road segment experienced an approximate 30% year-over-year decline in spot rates, given the persistent oversupply of tractors relative to market demand. This supply-demand imbalance pressured our average revenue per mile, down by 7.3% as compared to the 2018 fourth quarter while our average revenue miles per tractor per week decreased by 3.2%.

Our contract rates also modestly declined, down 1.3% year-over-year. This was largely due to freight mix related to the addition of incremental contract business as we work to reduce our exposure to the spot market, which continues to be a priority of our team.

In our Dedicated division, average revenue per tractor per week, excluding fuel surcharges, increased 4.2% in the fourth quarter of 2019 as compared to the year ago quarter. The average revenue per tractor per week achieved in the fourth quarter of 2019 of over $4,000 remained in record territory for the third quarter in a row. The increase was primarily the result of a 5.1% increase in the division's revenue per mile.

As we have discussed on prior calls, we have significantly improved the execution in the Dedicated division as we manage accounts, achieve a more attractive combination of rate and utilization. We've been working on this initiative for over a year and are very encouraged with the results as we have experienced 4 quarters of consecutive improvement and believe there's opportunity for further gains.

As we look forward, our goal is to organically grow our Dedicated division to more than 50% of total company tractors. The Dedicated division's customers are generally on 3- to 5-year contracts with guaranteed volumes, rates and price escalators built-in. This provides more stability through economic cycles and will help reduce the volatility in our business like what we experienced through 2019.

Given the nature of the Dedicated business, you need to have excess capacity in order to handle increases in customer volumes through the year. That said, we know that we need to reduce our current spot exposure.

Brokerage segment revenue decreased to $54.1 million in the fourth quarter of 2019 as compared to $64.9 million in the fourth quarter of 2018 on fewer loads and decreased revenue per load. We incurred an operating loss of $2 million as compared to operating income of $3 million in the year ago quarter, primarily as a result of lower gross margins. This was the result of a strategy to reduce our spot exposure within our asset division by capturing more contract business through the quarter.

Due to the competitiveness of the market, we made the decision to get more aggressive from a rate perspective. However, this new business was at a significant premium relative to the freight that we were taking at the time in the spot market. As the market tightened through the fourth quarter, we had opportunities with projects and other ad hoc freight at higher rates than this new business, therefore, we outsourced this business into a brokerage market where capacity was tightening and costs were higher.

Overall, the challenging market environment negatively impacted our OTR and brokerage operations and outweighed the very strong results in our Dedicated division. This environment also obscured the many successes that we achieved implementing our internal initiatives over the last year.

We believe these initiatives are gaining traction and are set to impact our financial results more visibly through 2020 and beyond. One initiative is our focus on lowering our insurance and claims expense which we have been working on over the last 2 years. This initiative has several components, including the installation of event recorders across our fleet, which we completed in 2018.

Our expectation was that it would take about a year for the event recorders to change driver behavior, and we are encouraged with the results that we have started to experience.

The second component was the successful launch of our redeveloped driver training facilities that we have had underway for the past year, having opened 2 facilities in 2019. Our plan is to open two more facilities by the end of the first quarter with the goal of using this new training for 100% of our drivers over time.

The third component was our decision to implement hair follicle testing for all of our drivers in the fourth quarter of 2019. This has started to have a positive impact as our health -- hair follicle testing is disqualifying drivers that successfully passed through urinalysis test, ultimately making our roads safer. We continue to believe that the combination of these initiatives will lower our insurance and claims expense over time.

A second initiative of our management team has been the utilization of technology to improve our process, accelerate the velocity of our business, improve our customers' and driver satisfaction and lower costs. Central to this effort has been our efforts to digitize our systems and our business with the goal of delivering the frictionless order.

The first step has been to integrate our legacy systems and utilize existing data that is trapped across our company in order to reduce many of the manual decisions that are made on a daily basis. These manual touch points require input by our drivers and back office personnel, which is not only time-consuming, but also opens the door to both data entry errors and suboptimal decisions.

Our goal is to fully automate most touch points and then optimize them. This will significantly reduce the level of work required by our drivers, allowing them to spend more time actually moving freight. It will also make our office employees' jobs more efficient by removing routine work.

The frictionless order is just one of many initiatives that we have underway as we drive technology across our operations. We are exploring new ways to operate our business, improve efficiency and even think about new business models that can better compete in today's rapidly changing market.

Central to this initiative was the hiring of Cameron Ramsdell this past April to lead the company's effort of exploring new business models utilizing technology. While still early, we believe this will drive improved profitability for the company, and we expect to have more tangible results to discuss with the investment community in the second half of this year.

I would now like to turn the call over to Eric Peterson for a review of our financial results.

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Eric A. Peterson, U.S. Xpress Enterprises, Inc. - CFO, Treasurer & Secretary [4]

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Thank you, Eric, and good morning. Operating revenue for the 2019 fourth quarter was $449.6 million, a decrease of $19.6 million as compared to the year ago quarter. Excluding the revenue from the company's Mexico operations, which as a reminder, were discontinued in January of 2019, operating revenue for the fourth quarter decreased $6 million. The main driver to the decline was a $10.7 million decrease in our brokerage revenues.

In our Truckload segment, we had 5.8% more trucks, producing 4.2% less revenue per truck year-over-year. Sequentially, however, our truck count was relatively stable from the 2019 third quarter's level with a higher number of tractors being allocated to our Dedicated operations.

Operating income for the fourth quarter of 2019 was $1.4 million compared to the $21.1 million achieved in the prior year quarter. We delivered a 99.7% operating ratio for the 2019 fourth quarter, which is an increase relative to the 95.5% operating ratio that we reported in the year ago quarter.

Our profitability declined largely as a result of the challenging market conditions impact on our Over-the-Road division, which Eric has outlined. Our Over-the-Road fleet saw revenue production decrease 10.3% on a per unit basis to $3,517 on a per week basis in the current quarter from $3,919 per week in average revenue per tractor for the fourth quarter of 2018. This productivity degradation was partially offset by progress made in our Dedicated fleet which saw per unit production increase 4.2% to $4,032 in average revenue per tractor per week.

Our insurance and claims expenses increased approximately $5.2 million year-over-year, with approximately half of the increase related to an incident incurred in a prior year policy period where our exposure was $10 million per occurrence and due in part to a 6% increase in total miles.

For the full year, our insurance and claims expense was $89 million or approximately $0.135 per total mile as compared to $85 million or approximately $0.132 per total mile in the prior year.

While we are not happy with our performance, we believe holding cost essentially constant for the full year of 2019 versus 2018 in a year with industry-wide cost inflation for excess insurance premiums and higher settlements as a result of a more costly litigation environment -- this demonstrates the progress is being made on our initiatives to reduce our insurance and claims expense, which Eric touched on earlier. Looking forward, we continue to believe that we have opportunities to reduce our insurance and claims expense on a per mile basis.

Additionally, and as a reminder, we reduced our per occurrence exposure to $3 million in September of 2018, which we believe will reduce volatility in the liability portion of our insurance and claims expense.

Our depreciation expense, net of gains and losses was $19.8 million or $6.8 million lower than the third quarter primarily as the result of an approximate $2.7 million gain on the sale of our Laredo terminal that was closed as a result of our exit of our U.S.-Mexico cross-border business earlier in the year and an approximate $1.2 million gain realized on the execution of a sale leaseback transaction related to 3 of our terminals.

Net loss for the fourth quarter of 2019 was $9.6 million, which compares to net income of $7.0 million in the prior year quarter. Excluding a $6.8 million impairment charge for an equity method investment, our adjusted net loss for the fourth quarter was $2.8 million or $0.05 per diluted share.

Turning to our balance sheet. We announced in January that we have refinanced our senior credit facility into a new $250 million credit facility. The new credit facility has improved pricing and provides us with greater flexibility to execute upon our many strategic initiatives, including our plan to convert a significant portion of our fleet from operating leases to owned equipment in order to optimize our tax and trade-in positions.

Importantly, the new facility single financial covenant, fixed charge coverage tested only if available borrowings falls below a threshold amount will afford us significant flexibility toward executing this plan. We continue to appreciate the support and confidence of our lenders in our business plan and strategy to improve our operations.

At year-end 2019, we had $390.4 million of net debt and had $123 million of cash and availability under our revolving credit facility. As we have disclosed subsequent to year-end, we expect the availability under our new credit agreement to be in excess of $100 million upon completion of real estate perfection and other post-closing items.

Interest expense for the fourth quarter was $5.3 million, and we expect interest expense to be approximately $22 million for the full year of 2020. We also anticipate our effective tax rate to be between 24% and 26% for the full year of 2020 with our cash tax rate to remain in the low single digits.

In 2019, our capital expenditures, net of proceeds related primarily to tractors and trailers were $81.6 million, excluding equipment financed under operating leases. We also had approximately $20 million of net capital expenditures close in early January, which were originally planned to close in December and which would have brought our 2019 capital expenditure spend to $101.6 million.

Looking forward to 2020, excluding any lease conversions, we will spend approximately $140 million to $150 million in net capital expenditures through 2020 with approximately $20 million of the total related to the fourth quarter transaction referenced above that closed in January of this year.

As a result of our 2020 replacement cycle, we expect the average age of our company tractor fleet will reduce modestly from 21 months to approximately 19 months as we exit 2020. When thinking of free cash flow, a normalized net CapEx figure over a 4-year period is approximately $115 million.

With that, I'd like to turn the call back to Eric Fuller for concluding remarks.

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William Eric Fuller, U.S. Xpress Enterprises, Inc. - President, CEO & Director [5]

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Thank you, Eric. Turning to the market and our outlook. Market conditions are modestly lower relative to the conditions that we experienced through the third and fourth quarters of 2019 and consistent with normal seasonality.

Looking out to the full year, our baseline assumptions for 2020 include slow growth in industry-wide truckload shipments combined with a continued reduction of total truckload capacity from the market. We expect this improving supply-demand environment to drive an inflection in pricing later in the year with cost inflation remaining benign.

It is important to remind you that the first quarter is generally our weakest quarter of the year as we experience lower revenue per tractor and higher costs than the other quarters due to seasonal freight fluctuations and harsher operating conditions.

While we see positive trends in certain areas, there continues to be uncertainty in the short-term environment, which will impact the actual sequential margin deterioration in the first quarter. We continue to believe that market conditions will improve in the back half of 2020. The timing and magnitude of market changes will have a significant impact on our quarterly results given our substantial operating leverage.

Over the long term, I remain positive on the many initiatives that we continue to implement, which are designed to improve our operations and our profitability through the cycle. I remain confident in our team, our strategy and the outlook for our business. Thank you again for your time today. Operator, please open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Scott Group with Wolfe Research.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [2]

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Can you help us think about a fair expectation, fair range for the first quarter operating ratio? And then strategically, if you think the market's bottoming, why such a push to get out of the spot market now?

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William Eric Fuller, U.S. Xpress Enterprises, Inc. - President, CEO & Director [3]

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Well, yes, Scott. So this is Eric Fuller. If you look at our typical OR performance from fourth to first, it ranges anywhere from 150 basis points to as much as 400 basis points degradation from fourth to first in a typical environment.

Now I would tell you, this is probably an atypical environment in that we have -- there's a lot of questions around where the market is. And I think where we sit, we feel a little bit better about the environment, but I think we also have a lot of questions and I also think that rates seem to kind of be lagging any kind of turn in the market.

So at this point, we think that a normal degradation is probably more likely than anything else, but -- from an OR perspective, but obviously, this market is unique in that it's a lot more kind of muddy than what we would typically have a month into a quarter. So I know that doesn't exactly answer your question, but it's kind of where we sit at this point from that perspective.

And then on the spot side of the business, it's not like we're trying to get out of spot, but we really believe that being in that 10% of our total revenue is the right answer regardless of cycle. And with that exiting Mexico and a few other things, the spot percentage has gone up, and we would like to see that go down a little bit.

I mean, Spot is still running at an incredible discount to contract at this point. And while we believe it will start to move back towards equilibrium, we're nowhere near that at this point. And so it's prudent for us to get back into a normal cycle, which would be around that 10% of our total revenue.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [4]

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Okay. I think you gave the contract pricing for the fourth quarter. Do you have any early update on bids or contract pricing for first quarter?

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William Eric Fuller, U.S. Xpress Enterprises, Inc. - President, CEO & Director [5]

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We are seeing probably a higher percentage of bids. A lot of customers are pushing bids earlier. So we're seeing probably more opportunity, we're also aggressively trying to bring new business, new customers in. So there's more opportunity in the hopper today than we've seen in a long time.

With that said, we're still kind of eying in this current situation, flat to maybe slightly down on a contract renewal basis. But as the year obviously goes forward, we think that will move into positive territory.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [6]

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Okay. And then for Eric Peterson. So the -- if I heard net CapEx is $140 million to $150 million, but that's -- I think you said excluding lease conversions, I thought you said earlier, though, that with the new -- the plan is to do more lease conversions. So what is a realistic all in net CapEx number for you guys?

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Eric A. Peterson, U.S. Xpress Enterprises, Inc. - CFO, Treasurer & Secretary [7]

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Yes, that's going to depend as the year went. We just closed this new credit facility that's going to give us that flexibility. So every quarter, when I disclose our net CapEx, I'll let you know what amount of that was a lease conversion. As a reminder, the financial commitment, whether it's a lease or whether we convert it is symmetrical. It's just putting them on the book so it will be the depreciation instead of the rent.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [8]

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And then the last thing, just with that, like the interest expense guidance you gave us, does that contemplate taking on debt for the increased CapEx relative to cash from ops?

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Eric A. Peterson, U.S. Xpress Enterprises, Inc. - CFO, Treasurer & Secretary [9]

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A portion of that, yes. Because we -- as we said in the new credit facility, we are able to get favorable pricing relative to where we were on that facility, and that's why you don't see that interest expense number dropping as much on a year-over-year basis.

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Operator [10]

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Our next question comes from the line of Jack Atkins with Stephens.

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [11]

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So I guess, Eric, if we could maybe start first and just kind of think about fleet growth from where you ended the fourth quarter. How are you guys thinking about that moving forward? We've been growing the fleet into the teeth of a pretty tough market. It sounds like you're beginning to see some green shoots out there. But I mean, how are you guys thinking about fleet growth as we sort of move through the first half of 2020?

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William Eric Fuller, U.S. Xpress Enterprises, Inc. - President, CEO & Director [12]

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Yes. I would say, mostly flat. And I think the big reason -- a couple of factors. One, you typically see a spike on the Dedicated side, where Dedicated demand spikes near the fourth quarter, and so some of that comes off in the first. So you have a little bit of less, I'd say, demand on actual truck count in your Dedicated division going into first and then it starts to build back up.

The other factors we have is we went to hair follicle testing for all of our drivers in November. While we were able to maintain truck count we didn't see a big degradation in truck count. We didn't see -- once we made that decision we didn't add incremental trucks. And so I think adding incremental trucks, is a little more difficult because we've pared down our pool a little bit.

The other thing is we are looking at reducing some of our exposure to student hires and trying to really focus on more experienced hires on a go-forward basis and that is going to reduce a little bit of our pool of drivers as well. We think we can maintain truck count with that.

That will help us to reduce our cost because you typically have students are much more expensive. Obviously, you have a lot more safety issues. You usually have higher turnover. So trying to reduce our overall exposure to students, while not eliminating it, will help us take some cost out, but we think we can maintain truck count by doing so.

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [13]

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Okay, got you. Got you. And then, I guess, just going back to the January trends for a moment. Could you maybe talk about some of the -- some of the encouraging things you're seeing out there? You referenced some in the press release, I guess, from a high level, just curious if you could kind of go into a little bit more detail there.

And then, I guess, as you sort of think about the next several months here. Where do you think the market is in terms of how far out of balance is it? Is there a way to kind of think about that? It feels kind of like we're a little bit more imbalanced today than we were, call it, 60 days ago, but would just be curious to get your thoughts on that?

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William Eric Fuller, U.S. Xpress Enterprises, Inc. - President, CEO & Director [14]

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Yes. I would take November and December, which obviously have some seasonal demand situation that's different. But if you take those months out, I mean, I probably feel a little bit better from a supply-demand perspective over the last 4 to 6 weeks than we probably have for really the last year.

Now with that said, it's nothing to get overly excited about, right? We've been in an incredibly depressed situation for the last year. And so marginal improvement. Where we're seeing that improvement is probably more on the volume side, where there are certain markets that we are coming in every day that are either even or slightly overbooked. Last year, it felt like everything was underbooked nationwide, and we are coming into pockets of overbook situations. So that's a positive.

We also -- we closely track our turndowns on a day-to-day basis. And there were weeks last year. In fact, the majority of the weeks last year where we were turning down maybe less than 150-or-so loads a week. For the year so far, we've been averaging closer to 140 or 150 turndowns a day. So I think there's some -- there's a -- the volumes are a little bit better.

Now with that said, I'm not seeing any life in the rates at this point. So the rates are not reacting to that situation at this point. The rates are still highly depressed, spot rates, highly depressed. And so at this point, until rates start to move in accordance with the volumes is before I'm really going to say that this market is really starting to really significantly turn a corner.

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [15]

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Okay. Got you. Got you. And then last question for me, and I'll turn it over, is on brokerage. $2 million operating loss there. It sounds like that was because of some strategic decisions in terms of how to allocate your company metal.

But are there anything -- are there any specific actions you can take to mitigate that loss as you sort of move into the first half of 2020? Or if we think about the market tightening up, is that loss there, brokerage actually going to get worse before it gets better. Can you help us think through that?

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William Eric Fuller, U.S. Xpress Enterprises, Inc. - President, CEO & Director [16]

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Yes. So the best way to look at it is as -- we got overly exposed to the spot market on the asset side of our business last year. We talked about the divestiture of Mexico and a few other factors. And so around late summer last year, we got aggressive in the market trying to find contract business that we could average our rates up. And we did that by going in and finding some opportunities that -- and these were opportunities that if we couldn't put on the assets, we could outsource.

And I would say that we got aggressive from a rate perspective. But again, those rates were better than what we were just getting out in the spot market. What occurred at the end of the year is as the markets started to firm up a little bit, and as we had better project opportunities then that freight fell to brokerage. And because of the lower-rated nature of that freight, the gross margins were a good bit less than what our typical gross margins were and so put some pressure on us.

We're still seeing that a little bit right now, and so we're in the process of evaluating that freight to see where we go and what makes sense, and how we'll handle that freight going forward because we still think it was the right decision to try and get out of as much spot as possible in a depressed market. But obviously, we don't want to run losses within our brokerage division as well.

I think the other thing to mention in brokerage is just a sheer amount of competition that's occurring in that market. So anything that is so-called broker-able, and usually, it's broken up between whether it's a live load, live unload versus a pre-load and those live load freight have become incredibly competitive. You're seeing the digital brokers and even traditional brokers getting incredibly aggressive on pricing, and we are feeling a little bit of that in our market as well.

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Operator [17]

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Our next question comes from the line of Ravi Shanker with Morgan Stanley.

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Ravi Shanker, Morgan Stanley, Research Division - Executive Director [18]

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So just to kind of maybe, unfortunately continue with the theme of the question so far, if we kind of like take a step back and look at the market right now, I think based on your comments as well, it does look like things are maybe improving slightly sequentially, stabilizing even, obviously not off to the races or anything, but certainly moving in the right direction.

And yet you guys are pointing to the kind of high-end of the sequential deterioration in OR for 1Q, which would put you, I think, well over 100 OR. What is the path to getting back to a low-90s OR? I mean, what do you need? I mean, obviously, if there's a 2018 like scenario where now rates are up like 30%, sure. But short of an outlier scenario like that, I mean, how do you get this OR back to where it should be?

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William Eric Fuller, U.S. Xpress Enterprises, Inc. - President, CEO & Director [19]

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Sure. Yes. I mean, obviously, it's two things. It's revenue and costs, right? So we are incredibly focused around costs with all the things that we're doing around safety and trying to reduce our overall exposure from an insurance perspective, but there's a lot of other factors that go into it as well.

And I kind of touched on it a little bit, but reducing our overall exposure to students will reduce our overall cost as well and make it a little bit less costly to bring drivers in. So there's things that we're doing in our business that we can try to shave some costs out here and there that may not have an effect on day 1, but if we look back a quarter or 2 back, we'll see that the decisions we made started to have a material effect on our cost infrastructure.

As we look at revenue, we are working towards trying to do things that will drive better utilization. We are seeing some, as Eric would call, green shoots around that, where we're seeing a little bit of life, being able to -- in certain markets, being able to take advantage of opportunities and better utilize the drivers' available time.

For example -- I'll give you one good example. As we started to aggressively push out parking opportunities to our drivers, allowing our drivers to better utilize their clock and their hours and not shut down early and by providing better defined parking opportunities for our drivers, it's given our drivers as much as 30 to 45 minutes of additional driving time every single day.

And so it's things like that that over time, as we get more of that into our fleet, will drive utilization. And those things are going to drive our -- kind of our outperformance as we go forward. Obviously, we need the market, obviously, to respond as well. Part of the problem today is just that the rate situation is just as bad from a spot perspective as we've seen it in a long, long time, and we need a little bit of life there to kind of get us back to a position where we feel a little more comfortable with the rates.

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Ravi Shanker, Morgan Stanley, Research Division - Executive Director [20]

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Got it. So based on those initiatives, I mean, if the market -- if we were just to have a normal market from here for the next 10 years, like a low to mid-single-digit rate inflation market, I mean, how long do you think it takes to get to a low 90s OR?

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William Eric Fuller, U.S. Xpress Enterprises, Inc. - President, CEO & Director [21]

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Yes. I mean, I think it's hard to guess, but I think we feel like we could -- I mean, in a normal stable market without the volatility, it wouldn't take us very long at all. Our initiatives are starting to show some improvement. We need a little bit of market to come back, to give us a little bit of more confidence in that, but I don't think it would be very long. I mean, anywhere from 4 to 8 or 10 quarters at best. So we feel pretty good about where we are as long as the market is cooperating.

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Ravi Shanker, Morgan Stanley, Research Division - Executive Director [22]

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Got it. Just one more for me. The hair follicle test conversion, can you share some of the results of that? I mean, what kind of failure rates you saw in your existing driver base? And if we were to get the HHS approval for hair follicle at some point this year, do you think you see something similar for the rest of the industry?

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William Eric Fuller, U.S. Xpress Enterprises, Inc. - President, CEO & Director [23]

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Yes. I mean, unfortunately, the HHS piece that's out there today will just allow those of us that are doing hair follicle to only do hair follicle, won't obviously mandate hair follicle across the board, which I actually think is necessary, and we're big proponents of, but I don't see that happening anytime in the near future.

On the hair follicle side, though, we are seeing failure rates as high as 10 drivers a week failing hair follicle that are passing urinalysis. So it goes back to what we said multiple times is there's active drug users out on the road that aren't getting caught by urinalysis, that are getting caught by hair follicle testing.

So we know we're doing the right thing. We know we've got to continue doing the right thing to take the people that are drug users off the interstates. And we really believe that this is something that really should be mandated across the entire industry.

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Operator [24]

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Our next question comes from the line of Brian Ossenbeck with JP Morgan.

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Brian Patrick Ossenbeck, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [25]

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Just wanted to see -- you gave some commentary on interest expense tax rate. Just wanted to see -- hear your comments on assumptions for benign cost inflation. Obviously, we're hearing, as you've elaborated on, insurance expense going up. It seems like you're constructing the driver base a little bit based on the testing and the going to fewer students. So just maybe you can walk through some of the bigger line items in terms of what you expect and how that might progress throughout the year?

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Eric A. Peterson, U.S. Xpress Enterprises, Inc. - CFO, Treasurer & Secretary [26]

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Brian, this is Eric Peterson, good to hear from you. Yes, if I just go line-by-line down the financials and we look at the biggers, I would say that there's probably not a lot of pressure right now on the driver wage line to go in and put in significant increases in the year. Obviously, that can change if the market changes, but usually, that will be more than made up for on the rate side.

When we look at our equipment costs for bringing on the new tractors in the fleet, we plan on bringing the average age down to about 19 months from 21 as we exit the year. We're not seeing significant inflation on the cost of equipment on a year-over-year basis.

Then you have these general and other and these overhead type line items. We don't have any big numbers and -- or we don't have any large line items in there, where we're seeing significant cost inflation. I would say the one line item on the financials we're on the most bullish is going to be the insurance and claims expense line item.

I think that's one that as it gets traction, it's going to get traction in a way where on that line item, despite inflation on excess premiums, despite inflation in the litigation environment in the courtrooms, I still think we have an opportunity to lower that cost on a per mile basis and a percentage of our revenue. So the comment was really just general to say there's not any line item on our financial statements, where we feel like there could be rapid inflation from a cost perspective.

I think if you look back over the years, you'll look at these cost inflation line items, and they stay relatively constant. And then the rates kind of lag. At one year, you'll get significant increases in rates, and then they'll go down, but usually over a period of time, they have a pretty similar trajectory over 4 years.

But what we're seeing right now, obviously, on a year-over-year basis, we saw our -- the rate inflation and what's happening in the rate market is going a little backwards. And obviously, the costs continue to go up, albeit at a slow slope.

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Brian Patrick Ossenbeck, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [27]

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Eric, on that point on insurance, is that a like-for-like basis because I know there's been some choppiness from the claims and other events recently. Is that included in what you're seeing, are you seeing on a like-for-like basis, excluding some of these bigger items, you [see some improvement]?

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Eric A. Peterson, U.S. Xpress Enterprises, Inc. - CFO, Treasurer & Secretary [28]

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Yes, that's fair. I think the nature of our industry in the self-insurance, we're always going to have -- on a quarter-over-quarter basis, we're going to have some volatility when you have the unfortunate events. However, I think, in general, and looking at the trend with the things we're doing, we should see that start to come down. And so while there still might be some choppiness, we believe our net results can be lower insurance expense.

I had that one claim hit this quarter and that was from a $10 million policy year that we had to unfavorably settle out. If you look at our insurance expense in the policy place that we have in place today, it's now limited to $3 million. So had that claim happened subsequent to '18, I wouldn't have had some of that choppiness that I experienced this quarter.

We have -- if you look at our balance sheet, we have $105 million in accruals on our balance sheet for these insurance claims and that's something that gets managed over time. And so now that we have a couple of years with this new risk strategy that we're executing with the $3 million exposure, I believe we'll see less volatility as we go forward.

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Brian Patrick Ossenbeck, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [29]

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Okay, got it. One follow-up for Eric Peterson -- I'm sorry, for -- on the fleet size. It feels to me like maybe, obviously, the market has been volatile, and you've got some of these things like the Mexico fleet where you've repositioned it and you're managing Dedicated as well. But it seems to me like maybe last quarter, there's expectations that you needed to have a little bit more leverage to spot and now you're paring it -- paring it back down.

So is that just a virtue of kind of the balance and the mix that you're trying to manage? Or is this more of a strategic direction that you're calling out here? Maybe you can just put some clarity around that, that would be helpful.

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William Eric Fuller, U.S. Xpress Enterprises, Inc. - President, CEO & Director [30]

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Yes, we weren't actually trying to increase our exposure to spot last quarter. I mean, we did see some truck count growth. We felt that was opportunistic growth that at the end of the day, with our model, having more revenue spread over our fixed cost because we didn't have to increase fixed costs in order to grow the truck count, was the right answer for us in that situation.

But at the end of the day, it's always been our intention to get our spot to a 10% of revenue consistent regardless of cycle. And that is, at this point, has not been any change in our strategy. So that is -- that will continue to be our strategy. And we just think that's a prudent way to manage because of the cyclical nature of our business.

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Operator [31]

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Our next question is a follow-up from Scott Group with Wolfe Research.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [32]

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So just a couple of quick things. Can you give us some guidance on gains, loss on sale and depreciation for the year?

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Eric A. Peterson, U.S. Xpress Enterprises, Inc. - CFO, Treasurer & Secretary [33]

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Yes. I think if you want to look on a sequential basis, excluding lease conversions. If you look at our year-to-date loss, we had an approximate $2.2 million loss in the third quarter. We had a $1.8 million gain in the fourth quarter. So with those normalized, and yes, that brought our depreciation expense down from that $26 million to $19 million. I think you can split the difference, and that's going to be a decent run rate, excluding losses on a go-forward basis.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [34]

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So give-or-take, $23 million a quarter?

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Eric A. Peterson, U.S. Xpress Enterprises, Inc. - CFO, Treasurer & Secretary [35]

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Yes, that 20 -- $23 million to $24 million. And then that's not -- that's excluding losses, that's our depreciation. So with the losses, we'll see what the market does relative to our equipment. But if you look back historically, our losses have been fairly inconsistent or insignificant rather.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [36]

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And given used truck, you feel like that's a good assumption -- immaterial losses right now?

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Eric A. Peterson, U.S. Xpress Enterprises, Inc. - CFO, Treasurer & Secretary [37]

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Right. I mean, there could be $1 million, $2 million of losses a quarter. As we -- then we'll see this market start to recover, and then that could flip the other way. But right now, I would expect nominal losses on top of that depreciation.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [38]

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Okay. And then Eric Fuller, you said a couple of numbers and I -- maybe I want to just get some perspective on it. So you said we're at 140 turndowns a day. What -- where does that number peak? I just want to put that in perspective. And then you said 10 failures a week on the hair follicle testing, how many drug tests do you do a week?

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William Eric Fuller, U.S. Xpress Enterprises, Inc. - President, CEO & Director [39]

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Yes. So on the drug test side, we're probably drug testing about 200 drivers a week or give-or-take. So what's that, 5% failure. But now that's 5% failure that's not failing urinalysis. We do have a few that will fail urinalysis as well. So the total failure percentage is a little bit higher.

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Eric A. Peterson, U.S. Xpress Enterprises, Inc. - CFO, Treasurer & Secretary [40]

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The turndowns?

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William Eric Fuller, U.S. Xpress Enterprises, Inc. - President, CEO & Director [41]

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Oh yes, the turndowns. So yes, it can peak, I mean, if you look at 2018, we had days where we were over 1,000 turndowns in a single day. So it can definitely peak much higher than where we're at.

But for us, it was really the -- comparing ourselves to last year where we were hardly turning down anything and seeing a little bit of turndown. Now like I said, it's very regional based, where there's markets -- there's different regions where we're coming in slightly overbooked. And since those opportunities do not pay a premium, then we're turning those down because we can't handle those opportunities in an overbooked market.

So the problem is what that doesn't really give you is that the fact that even though there are some markets that are overbooked, there are some markets that are grossly underbooked, and that's the reason that from a rate perspective, we don't feel that the rates on an overall aggregate basis are moving much at this point.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [42]

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Okay. And then just last thing real quick. You said spot is still well below contract. What -- how far below percentage-wise are we?

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William Eric Fuller, U.S. Xpress Enterprises, Inc. - President, CEO & Director [43]

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I don't have that in front of me, but it's -- as bad as it's been it has -- spot is not showing any life on our end at this point from a rate perspective.

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Operator [44]

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We have reached the end of our question-and-answer session. I'd like to turn the call back over to Mr. Fuller for any closing remarks.

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William Eric Fuller, U.S. Xpress Enterprises, Inc. - President, CEO & Director [45]

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All right. Great. Well we appreciate everybody being on the call today, and we look forward to talking to you in a few months. Thank you.

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Operator [46]

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Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.