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Edited Transcript of USX.N earnings conference call or presentation 28-Jul-20 9:00pm GMT

Q2 2020 US Xpress Enterprises Inc Earnings Call

Chattanooga Aug 20, 2020 (Thomson StreetEvents) -- Edited Transcript of US Xpress Enterprises Inc earnings conference call or presentation Tuesday, July 28, 2020 at 9:00:00pm 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

* 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

JPMorgan Chase & Co, Research Division - Senior Equity Analyst

* Jack Lawrence Atkins

Stephens Inc., Research Division - MD & Analyst

* Kenneth Scott Hoexter

BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials

* 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 afternoon, ladies and gentlemen, and welcome to the U.S. Xpress Second Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the call over to Mr. Brian Baubach, Senior Vice President, Corporate Finance. Please go ahead, sir.

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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 afternoon, everyone. We appreciate your participation in our second quarter 2020 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 August 6, 2020. We have also posted an updated and more detailed supplemental presentation to accompany today's discussion on our website at investor.usxpress.com. We will be referencing portions of this supplement as part of today's call.

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 2019 10-K filed on March 4, 2020, as supplemented by our first quarter 2020 Form 10-Q filed on May 6, 2020. We do not undertake 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 afternoon. On today's call, I'll review our second quarter results and the success that we are achieving as a result of our technology and cost management initiatives. Eric Peterson will review our financial results in more detail, and I will then conclude with a review of our market outlook.

The 4 main themes that we hope you take away are: first, we continue to make meaningful progress implementing our frictionless order initiative. And we are seeing the pace of business accelerate across the company. Second, we formally launched a new digital fleet within our Over the Road division and scaled it to an average of approximately 400 tractors in the second quarter. I will spend more time later in the call further discussing this new optimized fleet developed in Xpress Ventures. Third, we delivered strong margin expansion despite rate pressure in our OTR division that exceeded the benefit from lower fuel prices. And we expect continued margin expansion as we continue to ramp our digital fleet and drive costs out of the organization. Fourth, our dedicated operations continued to deliver strong performance as we continued our trend of average revenue per tractor per week in excess of $4,000 for the fifth consecutive quarter.

To start, I'm very pleased with our second quarter results as we are beginning to see the tangible financial benefits of our strategic initiatives focused on utilizing technology to improve our processes, accelerate the velocity of our business, improve our customers and driver satisfaction and lower costs. We achieved approximately 500 basis points of margin expansion in the second quarter as compared to the 2020 first quarter as we delivered an adjusted operating ratio of 95.9%. This improvement exceeded normal seasonal improvement and was achieved despite rate pressure in our Over the Road division. As there continues to be excess tractor capacity relative to freight demand in the market, for the majority of the quarter due in part to COVID 19. The digitization of U.S. Xpress, including our frictionless order initiative and our digital fleet contributed meaningfully to this success.

As we have spoken about on prior earnings calls, a key focus of our team has been our efforts to digitize our systems and business with the goal of delivering the frictionless order. To aid in this process, we hired a new Chief Information Officer, Bob Pischke in early 2019. With Bob's experience and expertise leading digitization efforts at multibillion-dollar companies. We have been hard at work integrating our legacy systems and utilizing existing data that is tracked 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. Thus far, we removed over 6.5 million annualized manual touch points with the goal of fully automating them and optimizing them over time. This is beginning to significantly reduce the level of work required by our drivers, allowing them to spend more time moving freight. It is also making our office employees' jobs more efficient by removing routine work.

As discussed in the earnings supplement, beginning on Slide 4, our most recently launched digital initiative was the ramp-up of our digital fleet, which is a fleet that is largely recruited, planned dispatched and managed using artificial intelligence and digital platforms. Our digital fleet is a completely new paradigm for operating trucks in an over-the-road environment that is provided to the driver through a proprietary app-based driver experience. We developed the concept as a hypothesis in 2018, based in part on the business models of the digital freight brokerages. As venture capital back, digital brokers began to enter the market utilizing cutting-edge technology and a new operating model. We believe there is an opportunity to take this approach and apply it to our asset-based business in order to drive improved profitability and growth. In early 2019, we launched Xpress Ventures and hired new leadership, including Cameron Ramsdell, formerly the CTO of one of the largest third-party logistics providers to explore and further develop this concept. Cameron assembled team that began building the databases, applications and processes to form the foundation for our digital fleet in 2019.

With the foundation and early versions of the technology in place, we launched a proof-of-concept fleet with a small number of trucks in the fourth quarter of 2019, where we rolled out the technology and implemented the model. The test was very successful, and we expanded the pilot to approximately 100 trucks over the course of the first quarter of 2020.

Given the results of the first quarter pilot, we decided to move to a full production model scaling the operation to approximately 400 tractors in the second quarter. The improved results continued during the second quarter as we experienced an approximate 20% improvement in utilization per truck. A dramatic decrease in driver turnover of approximately 70%. Improved safety, a higher level of on-time service and a significant reduction in fixed costs. The results in our digital business contributed to the dramatic improvement in our second quarter profitability. We are now confident that we can further scale this platform while maintaining these positive results. While we continue to further enhance the capabilities of this new technology. Phase 1 of our plan is to convert an additional 500 trucks, bringing the total to approximately 900 over-the-road solo trucks operating in the digital fleet. We are specifically targeting this segment of trucks within our Over the Road division with the lowest return over the next few quarters.

Phase 2 of our plan will be to potentially convert an additional 1,200 trucks from our Over the Road division over the next couple of years. We have built the model to be scalable, but the conversions will not be linear as we need to find qualified experience drivers and source the appropriate freight to fit this model.

In fact, most of the drivers will need to be sourced externally to meet this fleet's requirements. While the number of tractor conversions will not be linear and will take time, we see the opportunity for further margin improvement on each underperforming Over the Road tractor we convert regardless of the market backdrop. The key benefit of our digital platform is a significant reduction in driver turnover. As the drivers see their utilization and pay increase as a result of more miles, so does the job satisfaction. We also have processes in place to monitor their satisfaction levels to ensure that we are proactively solving their problems. As an example, we put out a sentiment survey each data to our digital fleet drivers, which allows us to identify those drivers that may be struggling and proactively solve their challenges.

As our driver turnover continues to improve, we see significant opportunities to further reduce expenses. One area that we've already taken action in is our OTR student training program, which we decided to exit in January of this year. Our OTR student program had structural issues across many parts of the program and has been an area of focus. In part, as a result of our improved driver retention in our digital fleet, we terminated the program for student drivers in our Over the Road fleet, which should result in annualized savings of approximately $16 million. Our second quarter results reflect approximately $2 million in savings for the quarter, and we expect approximately $4 million of savings on a quarterly basis, beginning in the third quarter. Driver recruitment and training has been a significant expense given our historically high turnover. As we scale our digital fleet, we expect our turnover to continue to improve and expenses to decline further. We are also experiencing improved safety results, which should have a positive impact on our insurance costs over time. As we continue to become more efficient, we will also review further opportunities for expense reduction across the company.

Turning to our second quarter results. Our Over the Road segment experienced a year-over-year decline in spot rates, given the persistent oversupply of tractors relative to market demand, and our contract rates declined approximately 5%. This supply-demand imbalance pressured our over-the-road average revenue per tractor per week, down by 1.8% as compared to the 2019 second quarter. While the rate backdrop was a headwind to our results, the benefits of our digital platform contributed to the 3.5% increase in average revenue miles per tractor per week.

Turning to our Dedicated division. Average revenue per tractor per week, excluding fuel surcharges, increased $104 per tractor per week or 2.6% as compared to the year ago quarter. The average revenue per tractor we achieved in the second quarter of 2020 of over $4,000 remained in record territory for the fifth consecutive quarter. The increase was primarily the result of higher miles per tractor with average revenue per mile relatively flat. We have continued to see consistent results in our Dedicated division as the fluctuation in volumes in the general freight market and in specific industries related to COVID-19 have not negatively impacted the volumes of our major dedicated accounts, which are concentrated in the discount retail and grocery market sectors.

Brokerage segment revenue increased to $46 million in the second quarter of 2020 as compared to $39.5 million in the second quarter of 2019, primarily driven by increased loads, and partially offset by a decrease in revenue per load. We incurred an operating loss of $4.2 million as compared to operating income of $1.3 million in the year ago quarter. Improving brokerage margins is a priority for our team, and we have initiatives in place that we are working on. That said, our brokerage segment provided us of freight selectivity and the opportunity to optimize freight volumes while playing an important role in finding the freight that fits our digital fleets' requirements.

Before I turn the call to Eric Peterson. I would like to take a few minutes to discuss our operations and our employees in light of the COVID-19 pandemic. Our management team continues to have an unwavering focus on our employees' health and safety for both driving and non-driving team members. To ensure their safety, over 95% of our corporate office staff continue to work from home, and I couldn't be more pleased with how dedicated and effective they have been.

Our operations continue to run smoothly, and in some cases, we have seen productivity improve. As part of our commitment to our employees, we have also spent much time thinking about what is happening across the country as it relates to race, justice and equity. As a management team, we believe it is important to stand up for what is right and just as we need to make more progress towards the quality and social justice. To achieve this goal, we are forming a diversity and inclusion council made up of employees with all levels of U.S. Xpress. The council will make recommendations to the strategy team about how we might incorporate diversity in the company-wide decisions, like ensuring we have a diverse applicant pool, a supportive environment for everyone and policies that are continuously reviewed from a diversity and inclusion perspective. This council is a significant and meaningful first step for our organization, and we believe it's the right way for us to begin to contribute resources and create impact. We are confident this will live up to that responsibility.

Let me now 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 [4]

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Thank you, Eric, and good afternoon. Operating revenue for the 2020 second quarter was $422.5 million, an increase of $8.6 million as compared to the year ago quarter. The increase was primarily attributable to increased revenues in the company's truckload division of $16.2 million, an increase of $6.6 million in brokerage revenue and partially offset by decreased fuel surcharge revenues of $14.2 million. Excluding the impact of fuel surcharges, second quarter revenue increased $22.8 million to $394 million, an increase of 6.1% as compared to the prior year quarter. We posted operating income of $16.3 million in the second quarter of 2020, which compares favorably to operating income of $8.8 million in the 2019 second quarter. Our operating ratio for the second quarter of 2020 was 96.1% as compared to 97.9% in the prior year quarter. This improvement in earnings was the result of our 3.5% improvement in utilization, in our Over the Road division, the 2.6% increase in average revenue per tractor per week in our Dedicated division, a reduction in our -- both our fixed and variable costs and partially offset by a lower rate per mile and an operating loss in our Brokerage segment.

Slide #8 of our supplemental materials contains a representative bridge of our 470 basis point operating ratio improvement from the first quarter. I'm happy to report that our truckload adjusted operating ratio improved 350 basis points to 94.1% from 97.6% in the prior year quarter. This significant improvement was achieved despite a 3.2% reduction in our revenue per mile and is primarily due to improved utility related to our new digital fleet. Continued strengthening of our dedicated division our ongoing aggressive actions on reducing costs and certain temporary industry tailwinds in the second quarter, such as lower than average fuel costs.

With respect to reducing costs, some of our larger ongoing initiatives that contributed to cost reductions in the quarter and that are designed to continue lowering our costs in future quarters are as follows: first, we expect to continue to harvest the savings of recent changes to our student training program that Eric spoke about earlier. Second, as a result of improving operational efficiency in late 2019, we determined that we could reduce our trailer fleet by up to 1,800 trailers with no impact on revenues. Through June, over 1,100 trailers have been removed from our truckload operations with no impact on revenues, and we are working to remove the remaining additional trailers over the next few quarters. Third, as our cost-conscious culture evolves in our procurement department, which we began in 2018, continues to mature, we expect continual incremental cost savings each quarter over the next year. For scale and magnitude, this department is on budget to achieve over $5 million in annual run rate savings for the full 2020 calendar year with over $4 million run rate achieved through the second quarter.

Finally, we will focus on capital allocation as we continue to allocate tractors away from certain underperforming portions of our over-the-road fleet and move them to more profitable areas, such as dedicated in our newly formed digital fleet. We expect the combination of these initiatives to reduce our cost as a percentage of revenue and to support continued margin expansion over time. We believe we have additional runway to continue reducing both fixed and variable costs over the next several quarters, which will allow for continued progress on earnings as a temporary tailwind, such as lower fuel prices experienced in the second quarter subsided.

Net income for the second quarter of 2020 was $9.5 million, which compares to net income of $2.7 million in the prior year quarter. Adjusted net income attributable to controlling interest for the second quarter of 2020 was $9.5 million compared to $2.9 million in the 2019 quarter. Earnings per diluted share were $0.18 for the second quarter of 2020.

Turning to our balance sheet. We had $381.6 million of net debt and $140.4 million of liquidity defined as cash and cash equivalents plus availability under our revolving credit facility. I am very pleased with the progress that we have made as we improved our liquidity by approximately $45 million, while our leverage declined by almost a full turn to 3.3x net debt to trailing 12-month EBITDA, both as compared to the end of the 2020 first quarter. We are taking a conservative approach with respect to our liquidity, leverage and capital expenditures until we have greater certainty concerning the pace and extent of the economic recovery.

As we discussed on our first quarter call, we reduced our planned net capital expenditures for 2020 to be in a range of $100 million to $120 million, which includes a previously discussed $20 million transaction, that carried over from the fourth quarter of 2019. Through the second quarter of 2020, net capital expenditures were $65 million, including the $20 million carryout. As a result of our current capital plan, the average age of our company tractor fleet is expected to approximate 22 months as we exit the year.

Lastly, interest expense for the second quarter was $4.9 million, and we expect interest expense to approximately $20 million for the full year of 2020.

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. To conclude, we are very optimistic about the future of U.S. Xpress. We believe our digital initiatives, cost management programs and other internal improvement efforts afford us the opportunity to improve our operating efficiency in ways that will add to or mitigate the impact of the freight environment. For the third quarter, we expect to report a modest sequential improvement in our margins despite expected headwinds in the form of higher fuel prices, continued pressure on our brokerage margins and rising health care calls. Whether we achieve improvement and the magnitude will depend on our own performance as well as a number of factors outside our control, such as regional responses to the pandemic, government economic stimulus programs and consumer spending. Regardless of the economic backdrop, we expect to do better than just the external forces would indicate.

In terms of the freight market, demand improved through the quarter, and that has continued into July. Allowing for a correction in soft spot market conditions that pressure spot rates more than 30% below contract in April. After the lows of April, spot rates increased sequentially through the end of the quarter. This trend has continued into July to where spot rates now slightly exceed contract rate and the number of loads that we are currently turning down are consistent with 2018 levels. The higher spot market should benefit us in our uncommitted OTR capacity but could restrain our progress on margin expansion in our brokerage division. The largest positives from rates are expected to come from sustained spot market strength that leads to contract repricing over the next several quarters.

Although we are optimistic about the market conditions as we move through the balance of 2020 and into 2021, due in part to our customers' demonstrated resiliency through the pandemic, we expect periods of volatility, and we'll continue to manage the company conservatively with a real focus on expense discipline and liquidity given the dramatic rise in new COVID-19 cases across much of the country. While the economic outlook is somewhat uncertain, we remain very positive, given the many opportunities that we have in front of us to improve our profitability, including a further development of the frictionless order. Conversions of underperforming tractors into our digital fleet and the benefit of further streamlining our operations.

Overall, I remain very excited for the future of U.S. Xpress. We expect our internal initiatives around digitization and cost management, combined with our continued strength in dedicated and an improving rate outlook have us well positioned to continue improving our margins through 2021.

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 Ravi Shanker with Morgan Stanley.

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Ravi Shanker, Morgan Stanley, Research Division - Executive Director [2]

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Gentlemen, very interesting on the digital fleet. Can you give us a little more color here, specifically do you think this is a tool that works better in a weak market compared to a tight one, namely, do you expect to get the same level of incremental benefits in terms of utilization if the market really tightens up in the back half of the year? Also, what does it look like in terms of tech spend? Is that something that needs to go up over time? And does this expand your whole fleet over time as well?

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

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Yes. Thanks, Ravi. Yes, I think the big focus on the digital fleet and really, our belief is that it's really agnostic to market conditions, that the way that we've designed this fleet is really to be highly optimized to drive efficiency and drive better utilization, and we believe we can achieve that regardless of the market conditions. So I think that either in a weak market or even in an exceptionally strong market, we can out index our legacy fleet to the same tune that we've been doing, and that's our long-term intention. Obviously, we think this is -- we built this to be scalable. Our intention is to scale it as we've laid out in the materials. Long term, we think we can go to about 2,100 tractors within probably the next couple of years, we can have about 2,100 tractors converted into this model. I think at that point, obviously, we would look at whether there's additional growth or those type of things that we can look at. But I think that there's a lot of opportunity here over the next couple of quarters and maybe even into the next couple of years as it relates to conversions from our underperforming areas into this digital fleet.

As it relates to technology spend, obviously, we already have quite a bit of technology spend that's already been recognized. I would say there's probably some small additional spend that we will have to take on. But for the most part, the spend, the run rate is already in our numbers. And so I don't expect a significant ramp-up from where we are today. We have a team that's operating in Atlanta, and that team's really just right across the interstate from Georgia Tech. We put that team together a couple of quarters ago. And so that's been in our numbers for quite a while now. And so we feel comfortable that we don't have to make significant other investments on top of.

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Ravi Shanker, Morgan Stanley, Research Division - Executive Director [4]

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Got it. And just a follow-up. You've been pretty open through the quarter of 2019, kind of pointing out that the way you calculate your spot rate is probably different than the rest of your peers and maybe the rest of the industry. And your spot rates were running at all-time lows through most of 2019. It would be helpful to know kind of how much you've seen that bounce off the bottom and kind of how far are we kind of getting back up to maybe a normalized rate or even a peak rate? How much further do we have from here do you think?

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

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Yes. So if you look at how we define spot, we define spot as any freight that we don't have an agreed rate to. And so it could be one of our long-term contract customers. And if we don't have an agreed rate to, we've got to give a onetime rate or even a project rate, then we call that spot, where others may call just broker freight spot. We have a broader definition for it. If you look at the opportunities that are out there today, I mean, the spot freight opportunities are vast. I mean, we're turning down a lot of freight, there's a lot of opportunities in the market. Our biggest thing right now is trying to manage the balance between our commitments and trying to take advantage of what we think is a premium market that will probably stay this way for quite a while.

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Operator [6]

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

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [7]

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So I guess, Eric, just to go back to the digital fleet for a moment, just so we can understand a little bit more about what all that exactly means. So could you kind of walk us through the mechanics of a conversion from a company -- please the company metal into a digital truck and sort of are you going out and trying to match up an owner-operator with a certain piece of freight? Just kind of walk through the mechanics of how that conversion works exactly?

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William Eric Fuller, U.S. Xpress Enterprises, Inc. - President, CEO & Director [8]

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Yes. I mean, so if you look at how we've built the model, we wanted to build something from the ground up that was completely, in our minds, a completely different business model than the legacy business model. And so when we brought Cameron in, we had this business model idea. But essentially, what we really told him, that's what we wanted to do was to use new technology, cutting-edge technology. I love the technology that was being brought from venture capital from a lot of the digital brokers and leverage that technology, which we actually thought was a better fit, more for asset-based truck, even brokerage. And so we said, take those type of -- that type of technology and rebuild the truckload asset-based business model with everything that we've learned over the last 30 years and all the things that we've done right, and others have done right, and others have done wrong and take all of that and kind of redesign the business model. And we believe that's what we did.

And so we've really highly optimized, highly automated a lot of the functionality within the day-to-day, both on the office side and even the driver side. And the focus is around prioritizing the driver, making their lives easier, making the job easier and trying to drive utilization and pay it to the driver, ultimately. If you look at the model, it's not your traditional fleet manager, where they have 50 trucks, it is a -- it really operates in a very different manner. And so we believe that the manner that we've developed is built for true optimization. And I actually think that we can get better results than we've been getting as the model matures and as we continue to go on. Right now, it's all company drivers.

So we've got all company drivers that I had mentioned previously that part of the problem is we've got to go outside our fleet now to find drivers for this model and partially because we do have higher expectations around experience around less accidents. And we also want somebody that is kind of a little bit more comfortable operating in automated or digital environment. Not all drivers are going to be a fit for this model. It does require a little bit more of self-start or someone that's that really is comfortable working with different types of technology. And so that's the type of driver that we're really trying to focus on.

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [9]

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Okay. Okay. That makes sense. And I guess just one quick follow-up on that, though. I mean, as you kind of go outside of the company driver pool here going forward, does that free up your company driver, your company truck to then pursue what other maybe more lucrative freight opportunities in this improving backdrop. Is that kind of the idea?

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William Eric Fuller, U.S. Xpress Enterprises, Inc. - President, CEO & Director [10]

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Well, potentially. I mean, I think those lucrative opportunities can also be taken advantage of by this digital fleet. So we've built it so that it's nimble and it doesn't have to -- it's not like a dedicated type model where there's certain freight that is consistent. The model is built so that it is flexible regardless of the environment. So when the market is strong and there's a lot of opportunities from a spot perspective then that this fleet can also take advantage of those opportunities.

So yes, I think -- but I think if you look at the conversions, as I mentioned, the drivers probably won't convert, but a lot of that equipment probably will. So over time, as we bring in a digital drive fleet -- a driver for the digital fleet, then we'll probably unseat one from one of our less profitable areas to move that equipment over. So over time, you'll see a migration from that bucket of 2,100 trucks that have been underperforming in this digital fleet over time.

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

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Okay. I got you. Got you. And then one last question, I'll turn it over. But Eric, you mentioned that you expect to see margin improvement within the business because of these initiatives through the end of FY '21. Is that a quarter-over-quarter sequential comment that you expect to see improvement as you move through the year? Or is that more of a -- more of a comment on '21 versus '20? Just trying to understand the context there.

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

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Yes. I mean, I think we can have sequential improvement for the next few quarters. I think, obviously, as you get into Q4 to Q1, that switchover is always tricky. So I wouldn't make that comment relative to that quarter. But if you look at, as long as we continue to execute our strategy, which we believe we will, and we continue to grow the trucks in the digital fleet. We continue to manage costs appropriately like we have been over the last couple of quarters, then we think we can kind of get to some sort of sequential improvement obviously, taking into account some sort of seasonality. We talked about being around 400 trucks in our digital fleet in the second quarter. We're now today sitting at 475 trucks in the digital fleet. And as we go out over the next quarter, do we really expect that to grow and our long -- and our plan, as mentioned before, was to get to at least 900 trucks total within that fleet by the end of Q1 '21 -- 2021.

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Operator [13]

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Next question is from the line of Scott Group with Wolfe Research.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [14]

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So Eric, you talked about your thought that the strength in the spot market would be sustainable. And I'm just curious what gives you that confidence in the sustainability? And then is this more regional? Or would you call it broad-based tightness at this point?

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Eric A. Peterson, U.S. Xpress Enterprises, Inc. - CFO & Treasurer [15]

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Yes. It's definitely broad-based. It's really widespread. Now I will caution you -- I mean, I have confidence, but obviously, this COVID situation can obviously change that relatively quickly. And so that's one situation that has us nervous. But absent anything major from a shutdown perspective, we feel very confident that the next -- probably 4 to 6 quarters, we'll see a really robust market and maybe even longer than that. I think one of the big dynamics we're seeing is on the supply side. You look at this year alone, there's been 100,000 less CDLs issued this year than the comparable time last year. And it's because there were a number of schools that were shut down. You've had this -- obviously, this unemployment benefit that's come in.

And so you have a lot less drivers coming into the market. You also have a number of drivers that have been excluded through the drug and alcohol database as well. And so we think it's likely that by the end of this year, it could be anywhere from 150,000 to 200,000 drivers could come out of the market, and within this calendar year. And I think that's pretty significant. And I think the big significant piece is those schools that are typically feeding drivers there it's going to be a long time before they're able to get up to full capacity. Most of the schools are operating at about 50% capacity today. And even with social distancing and things as they start to get more students, they're still going to have a hard time getting back up to full speed. And so I think you're going to have a lag for quite a while, and that supply isn't going to come back into the market, we believe, as quick as maybe it has in previous cycles.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [16]

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Okay. And then I'm guessing there's not a whole lot going on right now in terms of contract pricing negotiations, but if there is, would love to hear what's going on. But I guess I'm wondering, how you're thinking about 2021, bid season starting up in a few months. What do you think is a realistic outcome for 2021 pricing at this point? I know it's...

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William Eric Fuller, U.S. Xpress Enterprises, Inc. - President, CEO & Director [17]

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I mean, yes, I don't know that I'm ready necessarily to stick my neck out on 2021. And like I said, there's still a little bit of uncertainty around some other factors. But I think we definitely feel positive at where we stand today in relation to 2021. As we start to move into where spot as a premium obviously to contract, that's a positive environment when we go into a bid season. So as long as we maintain that, which we believe we will, absent something macro, then I think we feel pretty good about bid season this next year.

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Scott H. Group, Wolfe Research, LLC - MD & Senior Transportation Analyst [18]

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Okay. And then just last one for me. So utilization in the over-the-road was up nicely year-over-year. Do you have a sense on the monthly trends there in utilization? And then what you're seeing so far in July?

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

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For the most of the quarter was up. So it wasn't like it was a single spike. It was -- a lot of it was related to the conversion that we made of tractors into this digital fleet. And so that's been probably -- that was probably the biggest impact. And like I said, it was mostly flattish through April, May, June, probably more May, June. And then July, roughly a little bit of the same.

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Eric A. Peterson, U.S. Xpress Enterprises, Inc. - CFO & Treasurer [20]

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That's right.

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Operator [21]

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Our next question is coming from the line of Brian Ossenbeck with JPMorgan.

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Brian Patrick Ossenbeck, JPMorgan Chase & Co, Research Division - Senior Equity Analyst [22]

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A couple more on the on the digital fleet. I see the initial results on Slide 5 of the presentation. Is there are you able to parse that out for the stronger rate in freight environment, maybe how are those trending as the fleet gets bigger and you get better lessons learned here into July. So I just wanted to see how precise you're able to kind of parse out, at least initially here, the digital fleet, which looks like it was actually launched in a pretty volatile time as well. So a lot of moving parts. Just wanted to hear how you're able to parse out what's this new progress versus something might take a little bit longer to prove out.

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

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Yes. So those initial results. We're seeing the same type of results that we've seen throughout this whole model. So if you see the 20% or greater utilization versus our legacy OTR model, an improvement of over 70% driver turnover rate, 5x more trucks for operational employ. All of those things are continuing to track, better safety, better service. And so the thing that we've been the most excited about, we launched the pilot in late 2019, and we saw these results with 25 trucks and the 50 trucks. And as we've ramped, we have not hit an inflection point where we're starting to see those results start to go negative. We're continuing to see that same level of positive results. And so far, we're really excited about the opportunities. And like I said, it was really intentionally built to be scalable. So our belief is that it is scalable, and we can achieve these type of results as we scale. And that is our intention as we go to that full 900 trucks by the end of Q1 2021. And then obviously, as we ramp to even large numbers over the next couple of years.

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Brian Patrick Ossenbeck, JPMorgan Chase & Co, Research Division - Senior Equity Analyst [24]

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Got it. So on that point, the ultimate size, at least as it stands now at the 2,100. Is that where the digital and the higher-performing tractors sort of crossover? Or is that -- is there any constrained on the type of freight? Or what the shippers need to do to get plugged into the system? If anything, if maybe you can put some context around the 2,100, obviously, vis-a-vis how you get there and what are the factors building that up?

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William Eric Fuller, U.S. Xpress Enterprises, Inc. - President, CEO & Director [25]

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Yes. So the 2,100 is our underperforming tractors. And to be fair, those tractors in most cycles have been what's dragging our results down. And those tractors have lost money for a period of time. So our initial is to convert those tractors into a much more profitable model. Obviously, at that point, once we get 2,100 trucks or so in this model or we move some of those tractors over into dedicated where they're more profitable as well. But only moving into this digital fleet. But as we move all of our tractors, and they're all making a return that is acceptable, then obviously, at that point, we will evaluate, do we look for net growth? Or do we then move additional trucks from less profitable areas into more profitable areas. And that's a decision that we'll make down the road. But we're not ready to make that decision today. And probably, that does probably depend a little bit about what we're dealing with in the market at that given time. But we think that we want to really try to focus on these 2,100 because they are the ones that have been dragging our earnings down. And as we get them out of our fleet and into more profitable areas, then you're going to see our results obviously align with that.

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Brian Patrick Ossenbeck, JPMorgan Chase & Co, Research Division - Senior Equity Analyst [26]

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Okay. Last quick one then. You mentioned drivers being sort of bottleneck, at least for the time being. Is there anything that shippers or the freight profile that could be a limitation? Or maybe even opportunity if Howard, is it to get a new shipper on board with digital fleet or if there's even anything that they would really realize if that change is happening?

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William Eric Fuller, U.S. Xpress Enterprises, Inc. - President, CEO & Director [27]

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Yes. So this is really -- so you hit on it. I mean, this really is a driver facing initiative. And so for the most part, at least as it exists today, there's not a lot of visibility to this from our customer base. And now there is a little bit of characteristics of freight that may work better. But like I said, the model really is optimized, built to optimize whatever we have in our system. And so it doesn't necessarily have to have a specific kind of freight. But obviously, as we go through bid cycles, we can improve efficiency of the fleet by bringing in more favorable freight that will drive the optimization even further. And so I think that as we go through repricing and bid cycles, that's where we're going to have even greater opportunity as we bring freight in. I do think it could potentially be a limiting factor, not 400 trucks or 500 trucks, but as we start getting into that 1,000, 2,000 range, we'll want to make sure that we're bringing freight in that really fit with the optimization -- the network optimization model we're trying to build.

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Operator [28]

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Our next question coming from the line of Ken Hoexter with Bank of America.

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Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [29]

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Congrats on the new program and the early benefits. Eric, if we could just dig into that, the freight selectivity a little bit and the program itself, is this simply what a driver is seeing some sort of technology, iPhone, whatever to -- that's directly telling them to select what freight there and route they're going to? Is this pre-selecting the freight for them? So they're not making any choices of where to go. And is that moving away from the driver manager concept, so you mentioned getting rid of some employees because that -- so I just want to understand, is the system picking the routes, the driver now finds again, automatically where to go, what's changing literally for the driver?

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

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Yes. Not -- so from a driver perspective, as it relates to the freight, it's not much different in the past. It was selected by a load planner who was making that match. Today, the system is optimizing those matches. So from that perspective, it's not much different for the driver. But the difference in the models that the optimization by using the technology, we can get much better matches that are going to drive efficiency, drive utilization, drive velocity for the drivers. So we're seeing better satisfaction from that standpoint because drivers are making more money. They're staying busier. Those type of things. We're really not looking -- I mean, I think that a reduction in head count is something that can occur through this model, but that's not really where our big focus is -- our big focus is around being able to leverage the technology to drive better results. And we think that by having a highly automated and optimized model that's where we can get better results, not necessarily just from taking people out of the model.

And so I think there will be some opportunities for those employees to move into other areas where there may be some other opportunities. But really, this model is really based around trying to automate and optimize most of the functionality. So it's not just a dispatch function or a load planning function. But it's all the way through. There's heavy automation and optimization in the recruiting functionality and through all of the different other functionalities of this model.

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Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [31]

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And is this more optimizing the freight route? Again, you mentioned the shipper hasn't changed yet. So it's not eliminating bids that you've already had or choosing different lanes. It's optimizing existing freight that you already had. So it's not going through a bid season that's going to change the margins or scale of what you can achieve?

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William Eric Fuller, U.S. Xpress Enterprises, Inc. - President, CEO & Director [32]

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Right. I would agree. Exactly. It's dealing with the freight that we already had, that we were already committed to and just -- better optimizing and speeding the velocity of that existing freight. I think as we go through bid seasons, that's where you're going to see this model get even better from an optimization standpoint because we'll be able to align what we're bidding on with actually with the network that this model is building.

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Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [33]

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And you mentioned kind of running at the 94% range now. I guess is there thoughts as the other, Eric, in terms of incremental margins or thought on potential as you roll this out, where this could target? I know you had a lot of other plans with casualty expense and other things that you've been working on. But is there something from this program that you can talk to in terms of incremental margin capability?

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Eric A. Peterson, U.S. Xpress Enterprises, Inc. - CFO & Treasurer [34]

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Yes. I'd say right now, looking at a fleet of 400 tractors, and they're getting 20% better utilization and 70% better turnover compared to the tractors that were in there. We've talked before that, that turnover really has cost on every single line item on our financial statement. So as that turnover drops, we'll see costs come down. And safety is a big one. We mentioned that the safety results we're seeing from this fleet are significantly better. So as far as tailwinds as the fleet grows, which we said is not going to be linear, but as it grows, I think incrementally, you'll see both fixed and variable costs come down as we have these professional drivers in there. You'll have lower insurance costs. You don't need as much equipment because you have lower turnover, so you need fewer unseated tractors in wip, so to speak. And I think on a cost basis, it will go on and on.

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Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [35]

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Sorry, just one last one more to go. What's the time frame to getting a driver turned over? I mean, is it -- why can't this be done, I guess, at a faster rate? Or what's the delay that has to happen as you convert?

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William Eric Fuller, U.S. Xpress Enterprises, Inc. - President, CEO & Director [36]

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Yes. I mean it's attracting drivers into the model that fit the requirement. So obviously, as we're trying to go out into the market and explain the drivers that this is new and this is digital, and this improves their potential to utilization and those type of things, that's a little bit of a sell. I mean, obviously, being in business, any company being in business for 35 years, you have some residual reputation out there, and you're going out into out into the driving population, and they have some preconceived notions about what U.S. Xpress can and can't do from a utilization standpoint and everything through that whole model. And so we're having to sell something that's a little different. So we'll do it, and we're getting some success there, but it's just not going to be 1 of those things that you can just do overnight. It's going to be a process as we kind of build to it.

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Operator [37]

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At this time, we've reached the end of our question-and-answer session. And I will now turn the call back to Eric Fuller for closing remarks.

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William Eric Fuller, U.S. Xpress Enterprises, Inc. - President, CEO & Director [38]

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Okay. Well, we appreciate everybody on the call today and looking forward to telling more of the story as things develop. And looking forward to telling you next quarter where we're at. And what type of success we're continuing to see. So thank you.

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Operator [39]

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This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.