U.S. Xpress (NYSE: USX) spent about $40 million more on purchased transportation in the second quarter of 2021 than it did in the corresponding quarter of 2020, an increased cost that went right to the truckload carrier’s bottom line.
By several standards, the company had a strong quarter. Its revenue excluding fuel rose to $473.5 million from $393.9 million last year. According to SeekingAlpha, the revenue for U.S. Xpress came in $9.2 million over projections.
But the cost of putting people behind the wheel, whether it was the company’s drivers or independent owner-operators, climbed significantly, offsetting the revenue gain.
The cost of salaries, wages and benefits at U.S. Xpress climbed to $144.5 million from $140 million in 2020’s second quarter. But the jump to $157.5 million from $117.4 million in purchased transportation was the cost item that jumped out in an overall increase in costs to $466.1 million from $406.2 million. The closely watched insurance and premiums line item on costs dropped to $18.9 million from $21.2 million.
The end result was a drop in operating income to $8.9 million from $16.2 million in last year’s second quarter. Sequentially, the second quarter was better than the first. In the first quarter of this year, operating income was just under $8 million.
Net income of 8 cents per share was 5 cents less than projected, according to SeekingAlpha. It was also 10 cents per share worse than the second quarter of last year. But it was better than the 5 cents per share recorded in the first quarter.
Given the decline in operating income, the truckload operating ratio widened to 97.7% from 94.6% a year ago. However, sequentially, that was better than the first quarter, when the truckload segment posted an OR of 98.2%.
Overall, the consolidated operating ratio at U.S. Xpress widened to 98.1% from 96.1%. It was helped to some degree from widening further by the improvement in the brokerage division to 99.8% from 109%. U.S. Xpress management has made improvements in its brokerage group a key part of its management plan for the future, and revenue at the group soared to $96.5 million from $46 million a year ago.
On the company’s conference call, CEO Eric Fuller said the percentage of transactions in the brokerage division that were completed digitally rose to approximately 75% from less than 25% a year earlier. Operating income in the group was just $200,000, but that is significantly improved from an operating loss of $4.2 million in 2020’s second quarter.
The higher costs for personnel ran into the fact that U.S. Xpress is running fewer tractors. This is part of the company’s plan; it is switching more of its over-the-road miles to its Variant division, a truckload carrier within a truckload company. Average tractors at the company declined to 5,849 from 6,564. And Fuller has said repeatedly that it is becoming more selective in what freight to chase.
That helped contribute to a decline in average revenue miles per tractor per week, dropping 12.2% to 1,684 miles from 1,918. But virtually all other benchmarks of how those trucks did were positive. OTR revenue per tractor per week was up 7.8%, to $3,837. Average revenue per mile in the OTR division climbed 22.8% to $2,278 from $1,855.
In the dedicated division, lesser gains compared to the second quarter of 2020 also were recorded. The average revenue per tractor per week rose 5.19% to $4,336 while the average revenue per mile was up 4.13% to $2,448.
The consolidated figures on those categories were also up. Average revenue per tractor per week rose to $4,053, up 6.85%, while average revenue per mile climbed 14.77%, to $2,354.
Those improvements in the benchmarks can be seen as signaling a strong performance at Variant. While the number of tractors at the company overall declined, trucks at Variant grew about 25% to 1,105 tractors, according to U.S. Xpress. Variant figures are not being broken out — they are in the overall OTR figures — but the company said in its earnings statement that Variant revenue grew to 15.5% of truckload revenues compared to 4.7% a year ago. Sequentially, Variant’s share of truckload revenues was up from 11.8% in the first quarter.
In the statement, Fuller said the current scale of Variant puts it on target for an annualized revenue run rate of more than $200 million. He added that the target of 1,500 Variant tractors by the end of the year was on target, and that if reached, the run rate at the end of the year for Variant would be $300 million, about 25% of truckload revenues.
In earlier earnings calls, Fuller has talked about the “inflection point,” at which Variant’s share of the company’s operations is of a size that it starts to drive the overall performance. That term came up again in the earnings call for the second quarter.
The decline in the size of the fleet during the second quarter, and the periods before that, has likely hit its nadir, Fuller said in the statement. The CEO said total fleet size should begin growing this quarter, “with Variant becoming an increasing percentage of the fleet.”
Fuller, on the earnings call, expressed continued enthusiasm for the Variant initiative. He said U.S. Xpress continues to believe the plan for Variant will result in an improvement in OR of 1,200 bps. Key metrics at Variant are outperforming the legacy over-the-road business, Fuller said, and each tractor added to Variant from here on in “will positively impact our profitability going forward.”
More specifically, during the earnings call with analysts, Fuller said he expects the growth in Variant in the second half will “outpace the attrition of the outdated fleet.” The result of that, he added, is that fixed costs per mile are expected to decrease and there will be sequential margin improvements.
Combining that with an initiative to increase dedicated contract rates or exit dedicated customers if the higher rates can’t be realized, Fuller said he expects U.S. Xpress’ truckload’s OR to be in the low 90s by the end of the year. That would be a significant improvement from the 97.7% of the just-completed second quarter.
But as the impact on costs from wages shows, U.S. Xpress remains a company whose fate is particularly tied to the vagaries of driver costs and purchased transportation, something it has said repeatedly is a feature that it hopes to free itself from through the growth of Variant, with its higher driver retention rates. For now, though, the company said in its statement that “the market for professional drivers remains challenging, which is helping to keep supply tight.”
That can impact costs but also revenue. “These conditions are expected to continue to support a strong spot market and contract renewal environment through the remainder of 2021,” the statement said.
On the earnings call with analysts, Fuller was asked why the legacy OTR operations can’t perform well in a strong freight market even as the Variant shift goes on. The CEO said the company’s legacy operations might take advantage of opportunities that it finds, but “what we don’t want to do is throw good money after bad, and spending a lot of time propping up a division that ultimately we’ll be exiting over the next couple of quarters.”
Disclosure: FreightWaves founder and CEO Craig Fuller retains ownership of U.S. Xpress shares through his family trust.