US Xpress Enterprises Inc (USX) 2021 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the U.S. Xpress Third Quarter 2021 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the call over to Matt Garvie, Vice President, Investor Relations. Please go ahead, sir.

Thank you, operator, and good afternoon, everyone. Welcome to the U.S. Xpress Third Quarter 2021 Earnings Call. Eric Fuller, U.S. Xpress' President and CEO, will lead our call today; followed by Eric Peterson, our CFO, who will discuss our financial.

Additionally, Joel Gard, President of Xpress Technologies; Cameron Ramsdell, President of Variant, are here to answer your questions.

Our discussions today include forecasts and other information that are considered forward-looking statements. While these statements reflect our current outlook, they are subject to a number of risks and uncertainties that could cause actual results to differ materially.

These risk factors are described in U.S. Xpress' most recent 10-K filed with the SEC and in the Form 10-Q for the quarter ended September 30, 2021, which is expected to be filed with the SEC in the next several days. We undertake no duty or obligation to update our forward-looking statements.

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. As a reminder, a replay of this call will be available on the Investors section of our website. We have also posted an updated supplemental presentation to accompany today's discussion which is available on our website at investor.usxpress.com. We will be referencing portions of this supplement as a part of today's call. And with that, I would like to turn the call over to Eric Fuller.

Thank you, Matt, and good afternoon, everyone. This afternoon, I'll review our third quarter results and provide an update on our digital transformation. On today's call, there are 5 main themes that I want to discuss. First and foremost, we sequentially grew our overall truck count in the quarter, which is a key inflection point as growth in Variant outpaced attrition in the remainder of our OTR fleet.

The Variant fleet exited the quarter with 1,283 tractors. Our Brokerage segment grew revenue 62% year-over-year, demonstrating its ability to provide expanded capacity solutions for our customers. We made tremendous progress repricing our dedicated portfolio in Q3 and expect the full quarter of higher rates in Q4 to provide improved margins. We remain committed to investing in variant and Xpress Technologies to position our company for long-term profitable growth as we focus on doubling revenue over the next 4 years.

Turning to Variant. We continue to grow the tractor fleet in Variant during the third quarter, exiting Q3 with 1,283 tractors, which represents approximately 11% growth sequentially, and we remain on track to exit 2021 with 1,500 or more tractors in the Variant fleet which would represent approximately 120% growth year-over-year.

Tractor growth in our variant fleet outpaced attrition in the remainder of our OTR fleet, and I'm pleased to report that our overall truck count grew sequentially, which was what we expected coming out of the second quarter.

As a reminder, we launched Variant just under 2 years ago with 5 trucks, and have grown the business to an annual revenue run rate of approximately $250 million exiting Q3. We believe this is a remarkable accomplishment given the macro environment that we have been navigating over those 2 years.

Since the end of the third quarter, we have added close to 100 additional tractors to Variant. Importantly, we have added to our tractor count while maintaining our safety stats, which is a key part of the incremental operating margin improvement in variant compared to our legacy OTR fleet. We now expect to return to sequential total tractor growth as variance growth has outpaced the contraction in the remainder of our OTR fleet.

Turning to Dedicated. Last quarter, we discussed addressing price-to-value mismatches within our dedicated portfolio of business. And I am pleased to say that the vast majority of those mismatches have been addressed which led to an increase in overall rates across the portfolio of 3% in the third quarter.

Our rate exiting Q3 was up closer to 7% sequentially, and we expect to see that rate improvement benefit our operating income beginning in the fourth quarter. These price increases were necessary to pay our professional drivers competitive wages to provide the service levels that our customers have come to expect from us.

Looking ahead for this business. We expect the truck count to hold steady during the fourth quarter of 2021 with modest truck growth in future years as we believe our growth opportunities lie in Variant from a truckload perspective. We expect the operating margin in the business to improve steadily long term as we improve both the professional driver experience as well as our cost discipline and Dedicated.

Turning to our brokerage segment. Xpress Technologies grew revenue 62% year-over-year to approximately $91 million. More importantly, gross margin was up 450 basis points compared to the third quarter of 2020. In addition, the percentage of loads processed on our digital platform increased to 83% in the quarter.

We're in the early innings of our transformation within our Brokerage segment. to establish a scalable and differentiated digital freight marketplace. We believe doing so not only creates a more resolute operational foundation for our entire business, but enables innovation into adjacent business model as deeper engagement with an expanded network of shippers and carriers is realized.

In pursuit of these growth initiatives, we will continue to prioritize responsible revenue and loan growth as we work to demonstrate our value proposition to our carrier and shipper partners. As we continue to build out our network density to help ensure broader operational resilience for U.S. Xpress and our partners. We continue to target growing this business at a roughly breakeven OR in the near term.

With that, I would like to turn the call to Eric Peterson to discuss our financial results in more detail.

Thank you, Eric, and good afternoon, everyone. In the third quarter, we generated operating revenue of $491.1 million, an increase of 13.8% from the third quarter of 2020. Excluding the impact of fuel surcharge, revenue was $451.8 million in the quarter, an increase of 11.9% year-over-year, driven by increases in both truckload and brokerage revenue.

In our Over-the-Road division, Variance Optimizer is now prioritizing for yield, which is a combination of rate and utilization. This prioritization helped drive average revenue per tractor per week, up 2.4% through an 18.3% increase in rate per mile, netted against the 13.3% reduction in utilization.

I'm really pleased to highlight the progress made in our Dedicated division in increasing rates across the portfolio, which resulted in a 7.4% increase in rate year-over-year. This helped to increase average revenue per tractor per week to $4,340, an increase of 6.7% year-over-year.

Dedicated rates exiting the quarter was up approximately 7% compared to our second quarter rate and it's important to keep in mind that the rate increases were back-end loaded in the quarter, whereas we had a full 13 weeks of increased cost as we were already paying our professional drivers competitive wages ahead of receiving the rate increases from our customers. We expect these rate increases to have a more noticeable impact on our truckload operating margin beginning in the fourth quarter.

Turning to operating ratio. Adjusted operating ratio deteriorated in the quarter to 98.5% compared to 96.1% in the prior year quarter. Adjusted truckload operating ratio deteriorated to 97.8% compared to 94.1% in the third quarter of 2020.

The deterioration in our operating ratio in the third quarter is primarily the result of our conscious decision to build the foundation of a company that can double its revenue over the next 4 years and support a fleet much larger than our current fleet size. As a result, during the transition period of building out this infrastructure ahead of the truck count growth, our fixed cost will temporarily be too high relative to our current volumes. As we continue to grow our variant fleet into the size of our infrastructure, we believe that our fixed costs will decline as a percentage of revenue and ultimately show the operating leverage in our model.

Turning to guidance. To help with modeling, I wanted to highlight a couple of changes in our assumptions for Q4 and the full year as well as reiterate a few other points. In terms of total truck count in the fourth quarter, we expect modest sequential growth in overall truck count as the growth in variant has now surpassed the reduction in our remaining over-the-road fleet. We expect utilization to be flat sequentially as Variant continues to optimize for yield rather than utilization alone. We expect truckload rates to be up 2% to 4% sequentially and modestly exceed anticipated cost inflation in the fourth quarter. We continue to expect a full year effective tax rate of 26% to 28% before any discrete items.

We continue to expect net capital expenditures of $130 million to $150 million for the full year, and we now expect interest expense to be approximately $15 million. As a reminder, we have an equity investment in an autonomous trucking company, which we mark to market on a quarterly basis, and this can be volatile at times. We will continue to adjust this unrealized gain or loss out of our adjusted results because it's not indicative of our operating performance.

With that, I would like to turn it back to Eric Fuller for final comments.

Thanks, Eric. Before we open the call to Q&A, I want to take a couple of minutes to discuss our outlook over the next few years. how we are measuring success and how we think you should evaluate our progress as we execute against our long-term goal of doubling revenue over the next 4 years.

First and foremost, while we are extremely excited about the course that we have charted for the company over the next several years and our progress towards it, we believe the trucking industry is moving closer to disruption and consolidation.

We believe it is only a matter of time before the venture capital that has been flowing into adjacent industries such as freight brokerage, alternative fuels and driverless technologies make its way into traditional asset-based trucking. Someone will solve the scalability issues that have been inherent in our industry since its inception, and we believe our focus on building a digitally in naval fleet, which is recruited planned dispatched and managed using artificial intelligence and digital platforms is how to do it.

Therefore, our focus remains on investing in Variant and Xpress Technologies. Metrics wise, the most important metric to follow and gauge our success is Variant truck count. As long as Variant continues to grow, we will continue to allocate our capital towards that business. Keep in mind, that each tractor added to the fleet adds approximately $25,000 of annual incremental operating income compared to the legacy fleet.

Next, we continue to add truck count to our Variant fleet while keeping our safety stats in line with their long-term expectations. Preventable accidents per million miles is a leading indicator. So fewer actions today will benefit us more in future quarters as claims have a long tail. Turnover is extremely important to our ability to scale our business and improve profitability.

We remain confident in our long-term expectations for turnover in variant, but expect that quarter-to-quarter, it may swing particularly as the market for professional drivers remains extremely competitive. As we prepare for more growth in 2022, Variant is focused on maintaining its driver experience, which is critical to achieving our longer-term turnover expectations.

Finally, on the metrics, pay attention to revenue per truck per week in Variant. We are rate takers, given the fragmentation in our industry. The Variant optimizer is uniquely able to solve for how best to monetize the available freight in our network, given the various constraints, including locations of trucks, trailers, drivers, holiday schedules, et cetera.

This is a combinatorial problem that generates potential solution sets which are orders of magnitude, too many for humans to count, let alone calculate, which is why we are using algorithms to plan our loads instead of people.

Looking ahead to 2022, we are focused on continuing to position the company for long-term success by increasing the truck count and Variant and continuing to grow revenue and load count in Xpress Technologies. We believe we have reached the tipping point where Variant growth will outpace the contraction of the legacy OTR fleet and will result in sequential net total fleet growth over the coming quarters.

And finally, as the last few weeks have shown, Variant continues to grow, which we believe will ultimately be the driver of improved financial results.

With that, operator, we are ready to take questions.

(Operator Instructions) Our first question is from Ken Hoexter from Bank of America.

Can you maybe just -- can you talk a little bit about your move to -- you noted at raising driver pay at the beginning of the period, but yet you waited until later on to start countering with rate increases. We saw other carriers obviously a bit more aggressive to do that faster and especially in this environment to provide that capacity. So what are you doing -- again, are you raising pay again? Should we expect another overhang given this environment or just the new rates just catching up now?

No. And there was a little bit of a catch-up effect, Ken. I mean, look, we can -- we always go back and look at our previous quarters and how we performed, and that was an area where we admittedly did not get the rate that we needed in order to properly compensate our drivers. And so that was an area where we did end up giving some driver increases prior to getting some rate increases, and we didn't get those rate increases as timely as we would like. But we now feel like we are at a point from a rate perspective, that we are comfortable. And while there are some small increases that go in effect, we should be maintaining that rate from here on out and shouldn't see additional cost increases in relation to that those rate improvements.

So -- I'm sorry, so you said that there are still more small rate -- driver pay increases or rate increases on the...

I mean some marginal pay, and there's always -- I mean, there's pay increases that happen, in this environment, it's happening in real time. But to say that there won't be any -- I don't think there'll be really any significant cost increases in that area. And what we have in rate is sufficient, and we will be able to maintain both the rate and the margins going forward into the next quarter.

So into the next quarter, if you're now -- if these are back-end weighted, should we be seeing mid-90s OR? I mean, where do you go from 98? It seems like you've valued around here through this year so far in a great rate environment, what does it take to now move out of that upward 90s?

I mean I think from a dedicated perspective, we're very comfortable where we are from a rate perspective. I mean we're there. It took us probably 2 quarters longer than we would like. So not necessarily thrilled that it took us longer, but we're there, and we feel like we have the rates for the current environment in place. There's always going to be a little tweak in. There's a few accounts here and there that may get tweaked, but for the most part, from a dedicated perspective, we're comfortable with where the rates are.

Okay. I'm sorry. And did you want to hit on the OR thoughts? Is this enough to get you moving out of that upper 90s? Or is this just kind of incremental?

I think it's going to improve. You look at Dedicated, it makes up, what, about 40% of our revenues or so in the rest of the organization. It is about growth. So we're continuing to focus on growth within our variant truck count. And that's the key to our operating ratio improvement, and that's the key to our earnings. And we still believe that we're on the right track.

We believe in the story and our strategy. We think it's the right strategy. We prove it out almost on a daily basis in our modeling, and we know that we're as long as that continues to grow. And we continue to add their variant truck count fleet, then we're going to be exactly where we want to be in the future. And it's -- and we feel really good about the next couple of years.

One more, if I may. Just on brokerage. I just want to understand how you don't post a gain in this quarter. I understand you were talking about still looking for growth. Yet we've seen other companies earning missed a massive growth, surprisingly, post larger gains than they had ever anticipated, just given the strength of the rate environment, the spot market. Maybe you could just walk us through your thoughts on that.

Yes, Ken, I'm going to let Joel Gard answer that one.

Joel here. Thanks for the question. I mean to be as straightforward as possible. I think the biggest significant thing here is that we continue to be in the investment phase. We see similar improvement in our freight mix and gross margin performance at the contract level on both sides of the business. But continue to proactively invest for the future, and that's sort of reflected in the numbers for the quarter. So eyes are on the future, certainly a great environment right now that we also took advantage of. But doing still with an eye towards where we're going over the long run.

Our next question is from Ravi Shanker from Morgan Stanley.

This is Christyne McGarvey on for Ravi. Maybe I can follow up on the OR question or ask it in a slightly different way. The Variant truck count, clearly on track for 1,500, that's only a couple hundred away now at this point, but the margin kind of flow-through has been a little bit elusive. So it might be helpful to kind of parse out the dedicated impact that you guys have kind of discussed this quarter versus the fixed cost as a percentage dynamic that's happening there. And maybe how should we think about the target kind of beyond that 1,500? And how you guys are thinking about the inflection beyond that?

This is Eric Peterson to answer your question. One point we wanted to make is that, one, we're focused on the longer term. We're investing right now. We're working on our landing pad, which means that our quarterly earnings, not as focused on the next 90 days as we are is where we're headed. However, with that said, as far as the impact of these dedicated price increases. If you look at it on a sequential basis from the second to third quarter, we're up a couple percent, but we're up actually close to 7% on our rate increases where we're entering the fourth quarter compared to where we were in the second quarter. And so we think that we'll have -- some of that will help us a number greater than 0, better than a 98% OR, all things constant.

If you're looking at the contribution from Variant as we go into the fourth quarter, and in the third quarter, we only grew our variant truck count by approximately 120 tractors, and we had grown by 470 in the first 2 quarters. So we didn't really get a lot of benefit in the third quarter from variant growth. Now with that said, just like our dedicated price increases that were back end weighted at the end of the third quarter, so was our growth in Variant. And we've already grown at approximately 100 trucks since the end of the quarter.

So that's something we're seeing during a transformation where I wish it was in a straight line, left to right at the same slope, but it's going to accelerate, then it's going to slow down then accelerate. And I would say the last 5 weeks, that Variant truck count growth has started to accelerate. And as it becomes a higher percentage of our revenue, you're going to see it have a more meaningful impact on our overall earnings. Variant still less than 20% of our overall earnings. We're extremely excited about it.

And as it becomes a more meaningful percentage of our truckload revenues, we're going to see the earnings improve on a sequential basis. We feel like we've been through that hard point where the tear down of our legacy over-the-road fleet is now -- it's losing the rates compared to the growth of Variant. So we're growing more trucks on a quarterly basis and Variant than what we're carrying down in the legacy fleet. And we haven't shown sequential truck count in our over-the-road fleet since the second quarter of 2020. And so we think this is the inflection point quarter and we're excited about the good times to come, not just in the next couple of quarters, but over the next 2 years.

Got it. That's very helpful to kind of think through. If I could ask a follow-up. As you think about heading into next year, interesting comment in the deck, I think you noted you expect spot rates to actually exceed contract through next year. Just to be curious on what's giving you confidence there? And any early read on what we can expect for contract rates in '22?

Yes. I mean we expect this environment to continue. We don't really see the environment changing all that much from where we're at today. If you look at macro conditions, we think demand will stay strong well into at least -- the first half of '22, I'd really say the second half of '22 too, but there's always a little bit of concern about some supply chain issues and whether we end up in a situation where COVID just goes away altogether, do we end up where people over index a little bit more on experiences and things like that.

But for the most part, we really don't see demand slowing down. And even when the consumer slows down, there is a significant restocking situation that has to happen on an inventory level that probably leads to increased demand for another 6 to 9 months. So we don't really see demand really slowing down. On the supply side, it's -- and it is about equipment to an extent, and that is creating further headwinds with trucks and trailers. But really, it's all about drivers. And we have a serious driver issue within the industry. We don't have enough drivers. We can't find enough people that want to do the job. We're continuing to that struggle across the entire industry.

And I don't see any catalyst that would significantly change that. So I think until we were to get to what I truly believe would be more of a global recession. I don't see anything that's going to significantly change that driver situation. And so that leads us to believe that this market is going to stay strong. So in regards to rates, spot rates are going to stay robust, probably a healthy premium, maybe not as big a premium as what we saw last year on a percentage basis, but still a fairly healthy premium relative to contract rates for the majority, if not the entire year next year.

On the contract side, we anticipate being in that high single digits. So in that 5% to 10% range on contract. We still think there's been some pretty significant cost creep, both from a driver pay equipment, other things that have occurred this year. And so we think that it's really necessary and also given the market conditions that we see a 5% to 10% rate increase on contracts for 2022.

Scott? Scott, I don't know what happened to our operator, are you there? If so, I think you can ask a question. Operator?

(technical difficulty)

I apologize. I think we've lost our operator for a second. So please hold. This has never happened before. But -- and I don't know if there's anybody there that -- Scott Group, you were in the queue for the next question, if you're there, then we can go ahead and move forward. But I don't know if the system allows you to talk or not.

All right. Hold with this real quick because this is -- we're trying to figure out -- it looks like we've lost our operator. And those in the queue are not able to answer questions at this time, we're still kind of holding -- kind of holding on.

Well, I guess, I'm trying to think of other questions that -- or other items that we can talk about. I think one thing that I would like to mention is the -- our plan around Variant is on track. We still like -- we said in the supplement -- or in the prepared remarks that we still believe we're going to be over 1,500 trucks by the end of the year. We are on pace for that.

While we did have a little bit of a slowdown in related to a few items. So there were some macro conditions -- obviously, this driver situation has gotten progressively worse. And so that did create a little bit of a slowdown in our growth. Since the end of the quarter, we have added nearly 100 drivers to Variant. And so if you look at over 3 weeks' time frame, we've added nearly 100 trucks.

So we're on a run rate right now of adding 30 net trucks and Variant over the last, say, 3 to 4 weeks. We think that absent holidays, we can continue something in that range, hopefully. And so that should give us a pretty -- hopefully, over 1,500 -- we believe over 1,500 trucks by the end of the year and also put us on a trajectory going into Q1 where we think we will continue the growth in Variant well really for the entire balance of the year in 2022. So our strategy is in line. We still think we're on the right path and that things are moving forward the way we have anticipated and hoped.

We also -- there's been questions I know about Xpress Technologies and our Brokerage division. And as Joel mentioned, we're on pace there as well. We are in an investment phase. We're continuing to invest in our business, invest in our growth, and we're focused on that 3-year build, and we're moving in the right direction.

I got a couple of questions -- go ahead.

This is Robert. We do apologize for the technical difficulties. Our next question is coming from Scott Group from Wolfe Research.

Guys, can you hear me now?

Yes. We got you, Scott. Sorry about that.

So the -- I know you talked a few times about just sequential margin improvement. Can you just help maybe just put some expectations around it? Is it 100 basis points more or less -- I'm just not sure how to think about it.

Yes. I mean if you're looking at the Dedicated with those rate increases, heading up, there's a 40%, all things constant, that could give us 100 to 200 basis points improvement from those rate increases alone. And then I think in your model, it's a volume play with those varying tractors, it's going to come down to that ending count and where that runs.

And Scott, I hear you, it's just -- it's tough for me to give guidance on these 90-day scorecards when -- as the management team, we're really focused on this landing pad of what we're doing to scale. Right now, our fixed cost as a percentage of revenue, as you know, they're probably 700-plus basis points too high. It's because we have this foundation that we can really grow on.

So on a sequential basis, with this transformation, we'll have quarters that are perceived on people looking at this 90-day scorecard more disappointing than others, but our scorecard that we're focused on is growing the variant truck count. Keeping the safety stats and keeping the driver experience that we'll have relatively low turnover significantly lower turnover than the industry average. And that's our focus and the numbers in the longer term are going to more than take care of themselves.

Okay. Are we still seeing that big delta between utilization on Variant versus legacy trucks? Just because the mix is obviously going more and more to Variant, but the utilization is not -- it's still going down.

Yes. We're really measuring the revenue per truck per week. And so we're continuing to see that delta as it relates to revenue per truck per week as we optimize for margin. And so we feel we're still moving in the right direction in regards to our older legacy fleet and our Variant truck fleet, like I said, in regards to the revenue per truck. So that's the item that we're really watching. Obviously, utilization is a component of that, but also being able to optimize the right freight that's priced in the right manner is going to give us the best result. And that's where we're optimizing today for.

Okay. The other trucking revenue was up a lot from last year's second quarter. Any color on what's going on in there?

That's a -- yes, we don't break out the individual components of that revenue. But -- Scott. So yes, it's just miscellaneous revenues that are increasing, not necessarily related to direct truckload operations.

Is that a -- does this new run rate continue? I'm just -- I'm not even sure what's within this segment. So...

Yes, that run rate will continue. And as an overall percentage those revenues are not in our truckload stats, our revenue per tractor per week. It's more miscellaneous revenue, what's in that bucket is lease revenue from our independent contractor program and those types of revenues. But yes, I think you can expect that run rate to continue.

Okay. And then last thing, the -- just on the driver side. So it sounds like you've seen things pick up a little bit in the last few weeks. Do you think that there is some improvement in driver market. And then I'll just marry with your thoughts on any kind of vaccine mandate, and how you may or may not respond to that.

Yes. Yes. So on the first part of the question, I don't think the market's gotten better. I mean we talk to a lot of peers, especially private peers and benchmark with a lot of people, and I'm hearing that the environment has not gotten better. Now I believe we have done some things in our individual business that is improving the driver hiring situation and also improving some of our attrition issues.

So we've put together some plans and some processes in place that we think are helping us, and that's the reason we're seeing growth. But I don't think that this is somehow a market condition where things are loosened up because we're not hearing that from others.

In regards to the vaccine mandate, we are waiting on the OSHA ruling. I keep hearing that it's imminent at some point over the next week or so. We are anticipating that not being something we want to see. We would love to see truck drivers have a carve-out. I know that Canada had a vaccine mandate. And I believe truck drivers were carved out, but I do not get the feeling that drivers are going to be carved out of this mandate.

So we're waiting and anticipating if the mandate goes out the way we suspect, Yes, we're concerned. I think there's a fair amount of drivers that are kind of by nature -- by the nature of kind of their personality and the reason they migrate to this industry in a way is they don't necessarily want to be told what to do, and this is one of those items. And so I think you're going to see pretty significant pushback from the driver population.

And we're at the point of trying to figure out, okay, so if we have to test on a weekly basis, what are we going to do? What's the process? What kind of how are we going to set that up. And at this point, I would tell you, Scott, I don't know the answer, but we're working on it. But it's something we're definitely nervous about, I guess, it's probably a fair way to put it. I think that we will be able to come up with a way in order to deal with it and handle it, but it could have a pretty large impact on the driver population as we go forward.

And then maybe just last thing real quick. How are you -- what are you hearing, if anything, about hours of service given supply chain? And what the government is trying to do right now?

Yes, there's been a little bit of talk about some relaxation of hours of service or even relaxation of driver requirements for people coming into the industry. And I know that -- I believe the Secretary of Transportation has made a couple of comments in that regard. I'm not aware of anything substantive at this point that's either been set or decided. So at this point, it's been just dialogue from the Secretary, and that's really all we've heard. And I don't believe even ATA really has anything at this point of note. And I think everybody is waiting to see if there is something that does either get announced or go into effect.

Our next question today is coming from Jack Atkins from Stephens.

So I guess my first question is about revenue per truck per week in the OTR segment. When I look at sort of the 2-year stack there, I think it's up 2% third quarter versus 3Q '19, just to kind of take the volatility of the last year out. We've seen other folks report sort of a 2-year stack growth rate in terms of revenue per truck per week in the teens, mid-teens.

Can you walk us through maybe some of the puts and takes why you guys aren't maybe seeing that type of improvement there on a 2-year stack basis? Is it having to do with the transition? Or just trying to understand why we're not seeing a little more rate benefit there. I understand the utilization of miles per truck are a headwind.

Yes, Jack, this is Eric Peterson. A fair question. I think if you look at the overall transformation of our over the road division today versus where it was 2 years ago, I think we need to remember that we're no longer feeding that division with student drivers.

When you're feeding that division with student drivers, you get the organic creation of a team's truck, it's going to run more miles on a weekly basis. So what it's doing for utility, if it's making those comps look like the -- like there's not as much improvement of what's going on in the industry, and you're exactly right.

But part of the answer is that we have significantly fewer teams, and we don't have students in the truck where you have a super solo or team asset generating more miles on a weekly basis.

Number two is, it's intentional and by design as it relates to our Variant fleet. If you look at our Variant fleet in the optimizer what it's doing now is it's not saying, "Hey, go get the most miles you can't on this truck this week. It's saying, hey, how can we create the best yield. And that's a combination of both the miles and the rate. And so I think when doing some of those comparisons, you'll probably see that as far as our rate per mile, where this shows up quantitative instead of my qualitative answer. You'll see that our rate per mile is probably outperforming on 2-year increases on what they've done over 24 months and to offset spend the utility.

But keep in mind, too, we've had our net truck count ceded component has come down over the last year, and we are in the process of building and growing that back -- And so that's having an effect on that number as well.

Okay. Got it. Got it. And I guess maybe a follow-up question for Joel on the brokerage side of the house. I mean you talked about investing for growth there, keeping the business at sort of a 100 OR breakeven level as you're doing that.

What do you mean exactly when you say invest for growth? I mean, is that more volume? Is that taking -- I'm just trying to understand exactly what that means because I'm a little bit -- I would have expected, I guess, an invest for growth phase with a breakeven OR, we'd have faster volume growth than we saw in the quarter. Can you kind of walk us through what you mean by that? And how that's going to look over the next, call it, couple of years as you scale that business?

Sure. Yes. A couple of things, Jack. I think that the biggest thing to start with is just sort of acknowledging some of the historical context that the brokerage business has been maturing from. In a historical sense, it hasn't always been a leading competency for the business. And so the underlying operating model had a -- we had some work to do with it in order to kind of really get it fit for scale, right?

So some of the investment to date has been in things like a transition in the portfolio, refactoring things like freight mix, really kind of bringing some level of health to the underlying fundamentals of the operating model so that we had a better foundation to grow into. As we think about proactive investment on a go-forward basis, and this is really what's been layered in over the last 3 or 4 quarters. A lot of that is in technology and the enhancement or growth of the dedicated technology team building proprietary products for our shippers, carriers and employees as well as enhancements to our headcount and within our sales and operations group to be able to stay in front of the growth that we anticipate in the years to come.

So those are really kind of the high notes, right? So we've been going through a level of transformation improvement and just sort of setting up the underlying operating at for scale. And then as that foundation started to take root over the last year, 1.5 years, we've been sort of proactive in getting out in front of doing the things from an investment perspective that we believe will yield additional volume in future quarters. So that volume comp is really a function of concentrating some unhealthy business over the course of the last few quarters. And we're now in a place where the foundation is ready to be winning into.

Okay. Okay. That's great to hear. And I guess as you think about the next couple of years and scaling that business, we've seen some other truckload carriers with brokerage, subsidiaries really sort of scale their power only or drop and hook operations over the last 18 months. How are you thinking about that opportunity for your brokerage operation over the next couple of years?

Yes. Well, truthfully, I think it's the nexus to being able to drive additional selectivity for Variant. So it's absolutely on our radar. I think one of the things that we don't often give ourselves credit for enough externally is to the extent that the power-only business that our Brokerage segment is supporting today. It's not the overwhelming majority, but depending on where we are seasonally, it can make up anywhere between 15% and 30% of our daily volume.

So there's a competency there that we're actively seeking to enhance. We've hired some talent from outside of our company, but from within the industry to help scale a power-only product in a formal sense and build upon some of the tribal knowledge we have already. But absolutely a huge part of our road map on a go-forward basis.

Okay. That's helpful. And then, I guess, last question, and I'll turn it over. But just back to Eric, your comments on the vaccine mandate. Obviously, a lot of unknowns about that and sort of the ramifications that could have on the broader truckload market, I mean how do you think it would affect U.S. Xpress' business specifically, I mean, in terms of your drivers, your driver pool. Would you expect some attrition there? Any sort of color you can add? I know it's hard to speak for the broader industry. But how do you think it would impact U.S. Xpress in particular?

Well, I think there is some concerns from a number of people that I've talked to that the industry could lose 5% to maybe as much as 8% to 10% of the driver population that may choose to go elsewhere, meaning leave the industry because there's not enough small carriers with excess capacity that can absorb those that may leave the larger carriers.

If that were to occur, and there were some steadfast drivers that would not get vaccinated. And there is not a sufficient testing structure that could accommodate them or they may not even want to get tested. And so a fallout of 5% to 10% in our driver pool would affect everybody. I think that is an area that would be very difficult operate in. It's something that, at this point, we're prepared to do. And we're working on ways to try to mitigate some of that driver attrition that could occur, but it is an area of concern, and I think it could be fairly catastrophic. If we were to lose even 5% of the drivers that we have within the industry today at the levels that we're already at, I don't know how we absorb that.

Next question today is coming from Brian Ossenbeck from JPMorgan.

Maybe just one more on the vaccine mandate to wrap it up, hopefully. Given we just said about the potential catastrophic impact potentially in the industry, I guess I'm surprised why weather isn't a bigger push or traction to get some sort of exemption.

You mentioned the one in Canada. I think the truckers were exempt from the mass mandate that came out earlier. So are you have -- but you've seen Peterson pretty, excuse me, pretty confident that there isn't something that works to hope for. So maybe you can just elaborate on that, please.

Yes. No, I've been very involved in conversations with ATA and with others trust me. There is a lot going on behind the scenes to say that there isn't a push to try to get drivers carved out is not the case. I mean ATA is very involved. There are many others that are very involved in trying to get some sort of a carve-out or concessions for drivers.

Unfortunately, that at this point is just not feeling all that likely. And so now we're having to figure out how to deal with it, right? So it's -- we could be surprised if things could come back tomorrow and it could have drivers carved out, and we would all be fine. But we're at the point where we're just not real confident of that with everything that we're hearing back channel. And -- but there's no lack of trying to make that happen.

And with supply chain being top of mind, both from an economic standpoint and a political standpoint, it does give me a little bit of hope that it could occur. But I would say my confidence is fairly low, given just some of the back channel conversations and other things that I'm hearing. So we're preparing for a mandate that could, if go into effect, could have some pretty seismic results on the driver population. And we're getting ahead of it and starting to have conversations and figuring out how to deal with it.

Yes. So I was wondering if the supply chain top of mind with all the push there that this would kind of go against a different goal of the administration. Obviously, there's about a lot going on, but the industry has been pushing, I'm just surprised you haven't had as much traction or felt like you've had much traction.

Yes.

Okay. Just a quick follow-up on Variant in general. Maybe you can just talk about acquisition costs of the drivers in this environment, maybe some of the turnover. And if you can elaborate just what happened in the last quarter because it did look like you're making some pretty good progress quarter-over-quarter and things slowed down and it reaccelerated. So if you can elaborate on that.

Yes, Brian, I'll have Cameron answer that, if that's all right?

This is Cameron. Thanks for the question. You're absolutely right to point out that we definitely saw a small uptick in turnover quarter-over-quarter. As we talked about during the earlier remarks, we have grown Variant really as a start-up in Atlanta from -- essentially in the last 2 years from $0 in revenue to trying to exit the year at about $300 million on a forward-looking revenue run rate.

So as you can imagine, when you add near 1,400 drivers to the fleet in a short period of time, we absolutely experienced some growing pains that eroded the driver experience.

What I'm really happy to report is that our leadership team identified a lot of these problems worked tirelessly throughout Q2 and Q3 to resolve them. And I think that's what you're seeing is our accelerated growth in October, where we've added essentially almost the same number of drivers as we had in the entire quarter. So I feel like a lot of those are behind us. We are watching it very, very closely. But we feel very confident in the continued growth of the driver base now.

Okay. Any comments on acquisition costs as you find the right channels to get these folks and to retain them?

Sure. So we have 2 primary channels that we recruit drivers from and they have very different acquisition costs. One is entirely variablized. And I think it's very unique to the model to Variant. We call it the Variant ambassador model. So again, that's a very valid model where we have evangelized many of our drivers to go out and recruit new drivers. That comes at a far lower acquisition cost. And we've hired -- we launched that program a little over a year ago. This week, we just hired our 300th drivers through it. So we're seeing some tremendous acceleration. It took us about 9 months to figure out how to get the first 100 drivers in through that program. And we've hired our 300th now, and we did that in about 2.5 months. So we're seeing some acceleration there. Again, it's a variablized cost model, and it's far less than the traditional kind of programmatic media spend that U.S. Xpress in the broader industry is really rely on to bringing the lion's share of their drivers.

Okay. And then last quick question. If you can stick with Variant, if you can just tell us how you're benchmarking and managing that through some of these growing pains I saw commentary into the slide deck. I think it's improved 100 basis points OT quarter-over-quarter. We've seen the impact of the optimizer. But how do you benchmark and compare that and tweak those as you continue to scale the fleet? What are you measuring internally that we don't see externally?

Yes. As far as -- that's really tracking that optimizer. There's all of those levers, and it's something where we're going to get smarter and smarter on it. as we continue forward. We were able to increase our overall rate on the various tractors in the third quarter compared to the second by right over 3%. And that cost us about 7% utilization. But when you look at the net result with 2/3 variable and 1/3 fixed cost, you take that 7% loss in utility, and you lose 1/3 of that to earnings to offset that rate increase. The combination of those 2 was 100 basis points better result in what I would say is a comparable market. And so I think that's more of -- I always talk about macro issues and mirror issues. And to me, that's more of a mere accomplishment, something that we did on our own in a consistent macro environment.

Our next question is coming from Felix Boeschen from Raymond James.

I just have a big picture one. It's the only one, but I really want to better understand how we should think about some of these tech investments around Variant going forward?

It seems like last quarter, we might have been close to an inflection point, meaning Variant outgrowing its fixed cost base. Do you still think that is the case? And just how should we think about these tech investments heading maybe into 2022 as you continue to refine the model there?

Yes. I think from an inflection point, we're there. It's just we've got to continue that growth, right? And Q3 was a little bit of a difficult growth environment for us for a number of reasons, mostly macro. And like I said, I think we've solved that and figured it out, but it created some issues.

And the problem was we kind of stalled that truck count out to an extent right on top of that inflection point. And so we didn't get necessarily the benefit that we had hoped for had we grown a few more hundred trucks.

We are now growing. And we feel like as we continue to grow, we will further outdistance ourselves from that inflection point, which we still think occurred in Q3. And so we will continue, as we grow, continue to move away and start to see the results start to fall to the bottom line.

In regards to further investment, I mean, I think for one way to look at it is the run rate that we have will continue. This is a model where we think that we will forever always be building technology. It's not one of those type of deals where you have an IT team, build a system and then go do something else.

So we're always iterating and always trying to build out continual technology within this operating model, and so that's going to continue. I don't think that you're going to see that run rate necessarily go up all that much. There might be some small incremental increases. But for the most part, we're at a healthy run rate where we feel comfortable with the investment that's in place and that investment will continue. But again, that inflection point versus that investment occurred in Q3 and we're going to be at a point as we move forward that the growth will benefit the bottom line as we move forward.

Okay. That's helpful. So it doesn't sound like much change on the cost side. It's all about spreading that tractor count additions above that fixed cost base now.

Yes. That's where we're at. I mean, like I said, there's always going to be -- there could be some small incremental increases as Cameron starts to look at -- maybe I've got to add a developer here and there. But nothing that's going to really move the needle on a dramatic basis. Our cost is, what our cost is at this point, and now we just got to outrun it from a growth perspective.

We reached at the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

All right. Well, thank you, Hey, really apologize for those technical issues, not exactly sure what happened. But I appreciate everybody sticking through that. That was a little bizarre, but we got through it.

So anyway, I look forward to talking more about this next quarter. Again, just to recap as far as we're concerned, we're on pace. We're happy -- maybe not happy necessarily with the results maybe from an earnings perspective, but we're happy with where we are in our strategy around our growth and Variant.

We're happy around our strategy around our growth in Xpress Technologies, our Brokerage division. And we're also happy about where our rates are now in our Dedicated division. A little painful of a process, maybe getting us to the point where we are today, but we feel very comfortable where we are and feel very confident about the next couple of quarters as we move forward. So I appreciate everybody listening to the call, and we'll do it again in 90 days. Thanks so much.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.