HDT: Last week you reported your first quarterly financial results since you went public. We reported on the numbers in a story, but give us a quick overview of your first quarterly results reported this time around as a public company, how you feel about it.
Fuller: The big part of our story is we’re going through a big transformation, almost what I’d call a turnaround, that started in in 2015, so this last quarter was just continuing in that transformation to what we say is kind of closing the gap with our peer group on operating ratios. Historically there was a 700 basis point worse performance than our peers. So we’ve been working on closing that gap, and this last quarter was just a continuing of our strategy that has continued to drive overall better operating margins for the organization.
[U.S. Xpress’s second quarter 2018 operating ratio of 95.5% was a 380-basis-point improvement compared to second quarter 2017, and its adjusted operating ratio, a non-GAAP measure, of 93.4%, was a 510-basis-point improvement compared to second quarter 2017.]
HDT: This is not the first time U.S. Xpress has been a public company. Your father and his co-founder Pat Quinn, who started U.S. Xpress in 1986, took the company public for the first time in 1994, but then bought up the stock to take it private again in 2007. Why go public again?
Fuller: If you look back when we were public prior to 2007 and took it back private, we did that through a leveraged buyout, and it required a lot of debt. And we’ve had a lot of debt ever since then. Being highly levered in a cyclical industry is a kind of scary proposition. We decided to take some debt off our balance sheet, and we felt the timing was right for us as a company and where we were in our transformation, but also how the market was valuing and looking at trucking companies, we thought now was the time. I think we came in right under the radar, if you look at the volatility of trucking stocks getting our deal done, it’s been quite a ride.
HDT: What do you think is driving that volatility?
Fuller: I think a big part of the story is a concern that this cycle is at its peak, because it is a very cyclical industry that typically is very sensitive to additional capacity, additional supply if you will, coming into the market. I know there’s a lot of energy around all the truck orders, we’ve had record truck orders, and that’s created a lot of concerns that maybe there’s extra capacity coming into to the market and that we’re on the backside of the cycle. That’s not our opinion; we see a very robust, strong market and we don’t see anything that’s going to change that.
HDT: And yet, as you just pointed out, it IS a cyclical market. How do you prepare for the downside?
Fuller: So partially it’s up to our dedicated division. We are now up to about almost nearly 40% of our revenue coming through dedicated. That is one area that is very consistent, very reliable. You don’t have a lot of ups and downs as much as in over the road. The other thing is how we manage our brokerage division, and we manage it to optimize our fixed costs, our assets. Outsourcing [freight] to a third party [in a stronger market] allows us to have flexibility in a weaker market and allows us to take freight and run out of our own assets rather than being exposed to the down market.
HDT: I read that the dedicated division did have a less robust performance last quarter than over the road.
Fuller: We had a couple things. We had some startups in that quarter that created some issues, but really the bigger piece was the fact that we had some customers that changed a little bit of their shipping patterns, how the accounts actually ran versus how we had modeled them... We were forced to make some adjustments in pricing to compensate for the lack of capacity the accounts were getting. We put in the release that as of July 28 we had a pretty significant [rate] increase in that business that will allow us to better align with the revenue and margins.
HDT: What are some of the pros and cons of being a public company versus privately held?
Fuller: I think the biggest thing about being public is having a little better access to capital. When we were private, especially the debt market really had a hard time with trucking, I think partially because you don’t see a lot of people in the debt market that are large truckers, so you don’t have a lot of comps out there, so we had a hard time finding the financing we needed. Funds are easier in the equity market, whether we offer more stock or are able to get decent debt financing.
I think the other thing is it gives employees visibility into how the company is performing. It’s one thing to be out there as a private company telling people how you’re doing, but it’s another when they can see it… they can see how the performance of the company is affecting things, and that creates a little more buy-in from the employee base. When we released earnings the employee base are calling into the conference call, they’re trying to understand how things are going on, they’re celebrating. It’s a little harder to do in a private company; it’s possible, but that’s a little tougher.
HDT: In the quarterly earnings release you said you had the company’ best Adjusted Operating Ratio since 1998. But it sounds like you’re still not satisfied.
Fuller: Obviously the dedicated isn’t there yet, that needs to be addressed, and we are working on that. We’ve also still got a decent gap between ourselves and our peers. We’ve closed it substantially, but we still have a little ways to go. And a lot of that is continuing to execute our plan focusing on operations and front line execution. There’s really no silver bullet. It’s about consistency in operations and in the employee base… if you continue to drive that expectation for the front line then we’ll see results. We’re focused around having everyone be consistent in their jobs. Consistency helps you address driver frustration and improve driver satisfaction and lower driver turnover. That drives bottom line improvement. Minimizing driver frustration, increasing pay, and driving better utilization of our equipment is going to drive better operations and better profit margins for the company.
HDT: We read a lot about the driver shortage these days, not only in trucking publications but also in the mainstream and business media. How do you see the situation and what are you doing to address it?
Fuller: I don’t see it getting any better. We’re getting below 4% unemployment, while manufacturing and construction are continuing to add jobs, and we compete against those industries for drivers. I don’t see anything that’s going to change in the near term. As a carrier it’s about trying to position yourself, to present a better overall package, a combination of pay, of lifestyle, of consistent home time, quality equipment, and benefits, and what type of opportunities you are providing. I think everyone kind of gets caught up in pay, and pay is absolutely a component of it, but there are a lot of other things we can do as a carrier.
As an industry, it’s about trying to bring new people into the industry, and that’s not easy. Pay is lagging behind those competitive industries, and also our lifestyle with the driver being out on the road for one, two, three weeks at a time, is harder than those employees who may be able to be home every night. Until we can provide [drivers] a more consistent lifestyle and better work/life balance, I think we’re going to struggle as an industry.
HDT: Can you offer some examples of how you’re addressing it as a carrier?
Fuller: Some of it is internal initiatives around communication – making sure we’re communicating things going on in the company, and adding a mechanism for drivers to communicate with each other. We recently launched an intranet for our drivers so they can understand how the company’s doing, but also providing a little more social environment for the drivers online… you see a big movement toward social interaction today, and being out on a truck makes it even more tough.
Also, we’re looking at what kind of benefits can we provide the driver that’s going to go a long way toward making the job work for them. Looking at in general what type of benefits, whether it’s education, health… the things we can do that help set us apart from the pack that drivers will see are advantageous and something that they want to have.
HDT: You mentioned earlier the recent record truck orders; is U.S. Xpress buying more trucks, and if so, is that for expansion or replacement?
Fuller: We have a normal replacement cycle and we’re sticking to it. We typically replace 1,600 to 1,800 trucks every year, and we try to keep that cycle as normal as possible to smooth things out. We’d like to see some growth, but again, it’s all predicated on being able to bring drivers into the fold. I’m not a big believer in, ‘Let’s buy capacity and then find drivers.’ Finding trucks isn’t that difficult. It’s finding drivers that’s the problem.
HDT: How do you see e-commerce affecting your business?
Fuller: It’s changing a little bit in just shipping patterns and how different customers schedule their business, how they manage their freight. But at the end of the day it’s not a drastic change for us. For us it’s not anything that’s going to be a major shift. It’s more about understanding how those customers who are trying to put a focus on e-commerce are operating and their expectations and matching that with how we can operate.
HDT: U.S. Xpress has long been known as an early adopter of technology. Do you see that changing any under your new management and corporate culture you’ve been putting in place these last few years?
Fuller: We’ll still be an early adopter where it makes sense. I don’t want to be somebody who’s on the bleeding edge of things. There’s a lot of technology out there; there’s some will be adopted on a large scale and there’s a lot that won’t. It’s important you don’t go chasing things down a rabbit hole that aren’t going to give you a payback. I think we’re maybe going to be a little more disciplined than our reputation, but in the long run we’re someone who wants to be at the forefront of adopting new technology.
HDT: What are your biggest challenges right now? Opportunities?
Fuller: I think there’s a lot of opportunity. I think the market, we’re in a strong up cycle and have been for quite a while, and I think from an opportunity standpoint there’s a big opportunity on separating yourself from the rest of the pack as a quality carrier that has high service expectations that can provide a lot of value for your costumer base. That’s something we’ve done for a long time, but it’s something we’ll stay focused on as we drive better execution in our operation.