Chattanooga-based truckload (TL) carrier U.S. Xpress (NYSE: USX) provided some color on the company and the freight environment in a fireside chat at the Bank of America Merrill Lynch (BAML) 2019 Transportation and Industrials Conference.
President and Chief Executive Officer Eric Fuller provided an overview of the current market, which he described as weaker than the normal seasonality typically seen in April and May. He noted that there was a little life in May, but not the normal seasonal uptick in freight demand that the market usually sees. He said that cool temperatures in many pockets of the country and a fair amount of capacity overhang from 2018's record shipments were largely to blame.
When asked about achieving operating ratio (OR) goals, Fuller said that the goal of achieving low-90s ORs is still on the table. He said some of this is dependent on the economy, but that he feels the 93 percent OR target announced on the first quarter 2019 earnings call is still achievable in 2019. Fuller said that the company would not make the full-year call on OR until August. Other than the environment, USX has some cost levers that can help it achieve the goal. Fuller believes that the ability to lower its insurance costs will be a large driver in achieving this target. Fuller said that hair follicle testing of new drivers (over 50 percent of USX's new drivers are tested) and its new training center in Georgia will help improve driver safety and increase retention.
When asked why USX has been slower to see OR improvement than some of its peers, Fuller pointed to the fact that most of the company's peers converted to forward-looking event recorders three to four years ago. USX is in the midst of converting to these devices now, but Fuller believes that the driver safety improvements from the devices take 18 to 24 months to bleed into operating results.
Fuller was asked if the company has been chasing freight by moving trucks from dedicated to its over-the-road division, and vice-versa, to gain better returns when one market is outperforming the other and if this has impacted the business. Fuller said that longer-term, USX prioritizes the dedicated offering where the company is seeing double-digit margins. However, he said that dedicated opportunities have slowed compared to last year when many shippers increased the amount of freight they were moving to a dedicated contract to guarantee capacity as truck availability declined and spot rates soared. He said that if there is ample opportunity to go after strength in the over-the-road market, USX will, but said the longer-term bias is for dedicated to account for 50 percent of overall revenue (approximately one-third of USX's revenue in 2018).
Fuller said that revenue per truck per week, a metric for utilization, is typically lower on dedicated contracts and made reference to the fact that much of USX's dedicated business is with the dollar stores, where utilization is a little lower. Further, he said that overall utilization is still light of where the company wants it to be as USX tries to lower its spot market exposure, which is 10 percent of the overall business and 20 percent of over-the-road revenue. The company has an extra hurdle in this attempt as it continues to place roughly 300 to 350 trucks that were put back into the domestic market when it divested its Mexico division in early 2019.
When asked about pricing and the spot market, Fuller said that he believes that the spot market bottomed out in March and that he has seen a little life in May. He said that contractual rate negotiations are producing mid-single digit rate increases, but noted that negotiations aren't as strong as what was experienced at the beginning of the year, particularly in January. The company still expects to see mid-single digit contractual rate increases in 2019, but noted that spot rates are still lower than contract rates.
Fuller went on to explain that brokers became more aggressive with rates in 2016 and 2017, which increased the gap between broker and contractual rates. He said shippers chased the lower rate and increased their overall exposure to the broker which created some pressure on asset-based carrier pricing. He made reference to some brokers continuing to use rate as a means of taking market share, but said he hasn't seen his customers pursue the brokerage strategy because many shippers were left paying considerably higher rates to the brokers last year when the market tightened and spot rates jumped.
Fuller was asked if there were any changes in the original goal (provided during the initial public offering roadshow) of load planning improvement wherein driver hours are maximized and empty miles are minimized. Fuller said that USX is continuing to drive greater automation into the process. There are 15 gates in each order. USX wants to lower the amount of human involvement (friction) in the order process which is expected to reduce errors, capture data and improve future decision-making. Fuller believes that 70 percent of these gates can be automated, lowering office employee or driver involvement.
On leased versus owned equipment, USX's Chief Financial Officer Eric Peterson said that the company wants to increase its ownership of tractors. In the past, USX has had one of the highest leased percentages of equipment. The company wants to cycle out of tractors at 475,000 miles before warranties expire and maintenance expenses dramatically increase (at 500,000 miles). Additionally, Peterson said that fuel efficiency is better on the newer equipment and overall safety improves. Peterson said that leasing is simply pre-paying for miles that may not be used by the time the lease expires, which is less than ideal for dedicated contracts that can have lower utilization rates. One-third of USX's tractors are still leased. USX wants to see that number in the 10 to 15 percent range and plans to spend $170 to $190 million on net capital expenditures in 2019.
When asked about the low valuation on the stock, Fuller pointed to debt leverage and the fact that investors are seeing a softer freight environment and haven't seen USX manage through a downturn yet. He thinks investors are opting to look at the companies with a track record of managing through a tough market instead.
When asked about struggling with lower than desired utilization and turning in equipment in favor of paying down debt and buying back stock, Fuller explained that it wouldn't work. He said that it is relatively easy to do in the dedicated business, because they can close out unprofitable accounts. In over-the-road service, the equipment is very connected to the network. Even though they may be running equipment in a less than favorable lane, that lane is connected to better paying lanes. If they were to begin to dismantle the network it would mean losing good freight to remove bad.
USX Stock Price Chart – SONAR
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