Edited Transcript of USX earnings conference call or presentation 30-Apr-20 12:30pm GMT

Chattanooga May 7, 2020 (Thomson StreetEvents) — Edited Transcript of US Xpress Enterprises Inc earnings…

Chattanooga May 7, 2020 (Thomson StreetEvents) — Edited Transcript of US Xpress Enterprises Inc earnings conference call or presentation Thursday, April 30, 2020 at 12:30:00pm GMT

U.S. Xpress Enterprises, Inc. – SVP of Corporate Finance & IR

* Eric A. Peterson

U.S. Xpress Enterprises, Inc. – CFO & Treasurer

U.S. Xpress Enterprises, Inc. – President, CEO & Director

* Scott H. Group

Good morning, ladies and gentlemen, and welcome to the U.S. Xpress First 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.

Thank you, operator, and good morning, everyone. We appreciate your participation in our first 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 May 7, 2020. We’ve also posted a supplemental presentation to accompany today’s discussion on our website at investor.usxpress.com.

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, and supplemented by our April 7, 2020, Form 8-K. 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.

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

Thank you, Brian, and good morning. Given the evolving freight and financial markets and the worldwide impact of COVID-19, we will be covering a lot of ground on the call. The 4 main themes we hope you take away are, first, we’ve been very proactive in protecting the health and safety of our employees. Second, freight volumes have remained relatively steady year-over-year during the first quarter and during the most recent week of April. Third, at the peak of the COVID-19 crisis customers representing 96% of the Company’s pre-crisis revenues remained operational and incremental volumes from those customers more than made up for the nonoperational customers. Finally, the Company is managing the business to prudently control expenses and to protect liquidity.

On today’s call I will review the steps that we have taken to protect our employees and customers as COVID-19 has quickly spread across the country, as well as the actions that we are taking to ensure that we have the liquidity and resources necessary to manage an extended downturn. I will then briefly review our first quarter results before turning the call to Eric Peterson, who will discuss our financials in more detail. I’ll conclude with a comment on our market outlook and then open the call to your questions.

I would like to start by thanking our employees for their hard work and dedication during such a challenging time. They’ve adapted quickly to our new normal and kept our company operating seamlessly and our customers’ products moving across the country. To ensure we could maintain the safety and health of our employees and business as COVID-19 pandemic began to sweep across the globe, we created a task force to analyze and develop our business contingency plans in the beginning of March. As the pandemic intensified, our task force moved quickly to enable our office employees to work remotely and we transitioned more than 95% of our corporate office staff to a work-from-home environment by the middle of March.

Given this new work environment, we have instituted policies to facilitate effective communication to ensure we maintain our productivity. For our nondriving employees, our managers are required to have multiple daily contacts via video with their direct reports. We have developed KPIs, facilitated by our digital capabilities, to measure the Company’s operational effectiveness. We believe that the increased communication across the Company is driving an improvement in areas such as customer and driver satisfaction and many of the learnings will continue to be used as we return to the office in the future.

To ensure our employees have access to the necessary medical services, we have also implemented new processes and support staff so that our people have access to the resources that they need. Additionally, we are providing regular cleaning and disinfecting of our facilities and maintaining an adequate supply of safety equipment, including masks and gloves for our drivers who are on the front lines. Our employees are playing an essential role in the country’s fight against COVID-19, as they work to keep critical supplies moving and store shelves stocked.

To further ensure the safety of our drivers and staff, we have instituted mandatory temperature checks for drivers prior to entering Company facilities. For new drivers we have leveraged our new driver training program, as well as creating a virtual orientation program that allows drivers to complete work remotely. This is an attractive innovation for drivers and has contributed positively to our recruiting efforts.

A critical factor that has enabled our organization to quickly adapt to this new environment has been our investment in technology over the last several years, as we have digitized and automated many processes, which is enabling our employees to successfully work remotely. We believe these investments have enabled our entire workforce to maintain their efficiency and, in some cases, drive improved outlook and customer satisfaction. This is a direct result of our ongoing digital initiatives, including the frictionless order, and represents opportunity for further efficiency gains.

Our investments in technology, combined with the active support of our team, has enabled us to handle a sharp increase in demand from our grocery, consumer products and home improvement customers during the early days of the shelter-in-place orders while transitioning capacity from other customers where volumes declined. As most of our employees worked remotely, we continued to accept, plan and deliver over 30,000 loads per week during March and April.

We are fortunate to have a strong and diversified customer base, with our top 25 customers representing approximately 71% of our 2019 revenues. At the peak of the COVID-19 crisis, customers representing 96% of the Company’s pre-crisis revenues remained operational. And, as stated earlier, incremental volumes from those customers more than made up for the nonoperational customers. U.S. Xpress has a strong customer mix of grocery, e-commerce, consumer products, discount retail and home improvement, with little exposure to automotive, manufacturing and restaurants.

Despite relatively steady freight volumes to date, there’s increasing rate pressure from certain customers, as well as competition from nontraditional truckload and LPL carriers that are entering our markets due to drops in their core verticals. In the near term, we expect rate pressure to continue. In the medium to longer term we expect capacity to exit the truckload industry and the supply/demand balance to shift as capacity recedes and the economic restart gains momentum.

While the country looks to be bending the curve on the pandemic, the outlook for the economy remains uncertain. To effectively manage our business and liquidity given this uncertainty, we have considered a variety of economic scenarios, including those that would entail a significant multi-quarter degradation of business conditions and volumes across our customer base. Based on this analysis, we are closely managing our expenses, capital expenditures and liquidity to assure that we can comfortably operate even if deeper and longer periods of economic decline come to pass. As Eric will touch on further, we have proactively closed on a new 5-year, $250 million credit facility in January, which will provide us increased flexibility combined with lower borrowing costs. Overall, we ended the first quarter with almost $100 million in total liquidity and remain very confident in our ability to weather a prolonged downturn.

Now I would like to spend a few minutes reviewing our first quarter results. Our Over-the-Road segment experienced a 10% year over year decline in spot rates, given the persistent oversupply of tractors relative to market demand. And our contract rates also modestly declined due to mix. This supply/demand imbalance pressured our Over-the-Road average revenue per tractor per week down by 4.2% as compared to the 2019 first quarter, while our average revenue miles per tractor per week increased by 1.6%.

The Truckload freight environment was lackluster through 2019. However, we were starting to see early signs of a broad market recovery prior to the U.S. outbreak of COVID-19.

Turning to our Dedicated division, average revenue per tractor per week, excluding fuel surcharges, increased $107 per tractor per week, or 2.7%, as compared to the year ago quarter. The average revenue per tractor per week achieved in the first quarter of 2020 of over $4,000 remained in record territory for the fourth quarter in a row. The increase was primarily the result of a 1.7% increase in the division’s revenue per mile and higher miles per tractor. At the peak of the pandemic only 40 tractors of our more than 2,700 tractors in the division were at locations that ceased operations, and we quickly redeployed those assets to other operational accounts. We have continued to see consistent results in our Dedicated division as the fluctuations in volumes in the general freight market and in specific industries have not yet negatively impacted our major dedicated accounts which are concentrated in the discount retail and grocery market sectors.

Brokerage segment revenue increased to $50.5 million in the first quarter of 2020, as compared to $46.2 million in the first quarter of 2019, primarily driven by increased loads and partially offset by a decrease in revenue per load. We incurred an operating loss of $4.9 million as compared to operating income of $2.8 million in the year ago quarter. We continue to work on improving margins in this segment.

I would now like to 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 morning.

Operating revenue for the 2020 first quarter was $432.6 million, an increase of $17.2 million as compared to the year ago quarter. The increase was primarily attributable to increased volumes in our Truckload division and an increase of $4.3 million in Brokerage revenue. We posted an operating loss of $3.7 million in the first quarter of 2020, which compares to operating income of $12.6 million in the 2019 first quarter. Our operating ratio for the first quarter of 2020 was 100.8% as compared to 97.0% in the prior year quarter.

This reduction in earnings is primarily the result of our 5.7% reduction in our rate per mile in our Over-the-Road fleet and a reduction of Brokerage gross margin from 17.5% to 3.7%. Lower net fuel costs for the quarter were offset by increases in our general and other operating expenses, primarily related to higher driver turnover. This segregation was partially offset by progress made in our Dedicated fleet, which saw per-unit revenue productivity increase 2.7% to $4,068 in average revenue per tractor per week.

Net loss for the first quarter of 2020 was $9.2 million, which compares to net income of $4.7 million in the prior year quarter. Excluding a $2.0 million impairment charge for an equity-method investment, our adjusted net loss for the first quarter was $7.2 million, or $0.15 per diluted common share.

Turning to our balance sheet, we announced in January that we have refinanced our senior credit facility into a new $250 million facility. The new facility has improved pricing and provides us with greater flexibility. As a reminder, the new facility has a single covenant, which is a fixed-charge coverage, which is tested only if available borrowings fall below a threshold amount which is less than the greater of $20 million, or 10% of the facility. At quarter end, we had $438.5 million of net debt and had $96.3 million of cash and availability under our revolving credit facility.

As Eric discussed, we are managing the company to be prepared for a prolonged downturn and are aggressively managing our capital expenditures, expenses and financings to protect liquidity and flexibility. As a result, we have 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.

To provide context, we spent $67.1 million in net CapEx during the first quarter, leaving only an approximate $35 million to $55 million net CapEx for the balance of the year. This full year guidance represents a decrease from the $140 million to $150 million which we had outlined on our fourth quarter call and is subject to further downward adjustment should economic conditions deteriorate. The reduction from our prior estimate relates primarily to the deferral of small quantity of planned tractor replacements combined with the reduction in the planned number of new trailer deliveries for the balance of the year. For the balance of 2020 we expect to finance 100% of our new equipment purchases with financed leases or secured equipment notes with no use of cash or revolver liquidity.

We are also reviewing a broad range of programs designed to reduce nonessential expenses and contain costs. As a reminder, approximately 2/3 of our cost structure is variable, such as fuel, driver pay and claims, and 1/3 is fixed, such as facility expenses and nondriving compensation. A dramatic decrease in load volume would not be welcome, but it also would be cushioned by lower variable expense. Rate changes have a dollar-for-dollar impact. We are diligently working on both fixed cost and variable cost per mile through this period. Overall, we remain confident in our ability to weather even a severe and prolonged economic downturn as a result of the pandemic.

Lastly, interest expense for the first quarter was $5.4 million and we expect interest expense to be approximately $20 million for the full year 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.

While the Truckload freight environment has been lackluster for several quarters, we were seeing the early signs of broad market improvement prior to the outbreak of COVID-19. As the pandemic spread across the U.S. through March, freight volumes and spot market pricing began to ramp up as consumer stockpiling and inventory restocking drove increased demand. Through April we have started to see spot market pricing begin to subside as consumer buying patterns have started to normalize. While demand is difficult to forecast in the current environment, we remain well positioned, as practically all of our customers are open.

Additionally, our investments in technology and our goal of delivering the frictionless order, combined with improvements in our driving-training facilities have had the added benefit of positioning U.S. Xpress to quickly adapt to this new work environment and succeed. Our productivity and efficiency are increasing and we are developing best practices to further improve our operations once the economy begins to normalize.

Additionally, we are working with our customers to further digitize their operations in order to minimize our drivers’ interactions with customers’ employees. In this respect, the pandemic is accelerating the movement toward automating the processes around moving freight, which will help to improve the velocity of our operations over time.

Lastly, I remain confident in our liquidity and believe we will be well positioned to take advantage of opportunities as we exit this unprecedented event.

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) The first question is from Ravi Shanker of Morgan Stanley.

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

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So your commentary talking about a stable April is a little bit different from many of your peers who saw the data kind of drop off pretty sharply in March and April to date. Can you maybe isolate some reasons why what you’re seeing may be different? And also, if things have been relatively stable so far, is it possible that 1Q could be the earnings bottom for you guys for the year?

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

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I think the distinction is really our customer base. If you look at our customer base, as we mentioned previously, 96% of our customers stayed open. I would say that’s probably stronger than most and it’s really because we have almost no exposure to those areas or verticals that were shut down during March and into April. So if you think about a lot of manufacturing, automotive, anything to do with restaurants, clothing retail, we have really small percentage of capacity in those areas and really focused around grocery, home improvements, discount retail. And those areas that, if anything, actually increased during this period as opposed to being shut down or even slowing. So that really helped us weather through this event quite well. And I think as we look out, I think it’s going to help us, because I think those areas, even though I think that there is a little bit of a pullback because I think we saw a spike in demand probably for a few weeks in a lot of those areas. And while I think things are normalizing, those areas, those customers, are going to continue to stay fairly strong and robust relative to those that are just slowly going to be coming back online. So we feel like we can weather the storm probably better than most in that regard.

So I think as you look out into the future, I think the big question is just there’s just so much uncertainty. So I’d really be hesitant to say one way or another whether there would — how earnings in the second quarter would be relative to the first. But I would say where we sit today we feel pretty comfortable with our position and our customer base.

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

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Understood. And just to follow up, can you describe the driver environment for you right now, kind of what the supply of drivers is like for you, what your turnover is like? Because that used to be an issue in the past. Is that better now? And also, any views on wage inflation over the next 12 months?

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

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So in regards to turnover, we have seen turnover greatly improve, but I believe it really is kind of a false positive. So this environment has made it less likely for drivers to want to switch. Obviously, if you think about a driver going to another carrier, they have to go and sit on a bus for a few hours, if not half a day. And then they go sit into an orientation facility for a couple days. And so the risk of exposure to other people and potentially getting infected is probably greater than if they were to stay with their current carrier. So I think what you’re seeing, not just in U.S. Xpress but in all carriers, I think the drivers are kind of hunkering down and staying where they’re at. And so that is a net benefit from a turnover standpoint.

So, from a driver perspective I think the other dynamic that you have, and you see this in most downturns, is you have a flight to quality. So you’ve got smaller carriers that are going to be the most impacted from a utilization standpoint. And they are probably being squeezed more than most. And so drivers will look to go somewhere where they can get a stable paycheck, where they know there’s more consistency in lanes and consistency with customers. And so I think you’re seeing that.

And so we’re seeing turnover come down and we’re seeing the ability to find qualified, experienced drivers right now improving. And so what that’s allowing us to do is to improve our core driver mix. And so we are increasing our hiring standards so that we can hire a better quality of driver. We’re looking at some of the drivers within our population to see if there’s some that we can purge from the system and find — and really upgrade our quality of driver at this point.

So, yes, I don’t think this is something that’s going to last for quarters and quarters. It’s probably something that this situation could be a quarter or 2, but it’s going to give us an opportunity, we believe, to upgrade our driver population.

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Operator [6]

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The next question is from Jack Atkins of Stephens.

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

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So I guess, Eric Fuller, if you could just start off and maybe kind of talk about how you see fleet count progressing as we move into the second quarter and into the second half of the year, between both OTR and Dedicated. Could you maybe give us some color on how you plan on those 2 fleets shaping up here?

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

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So we again — so we had talked about this for a while, was trying to prioritize growth in Dedicated and we will continue to do that. We do have some new dedicated accounts that will be coming on over the next 60, 90 days and so we’ll continue to see some growth there. And if you look at the customer mix that we have within Dedicated, I mean, very, very heavy grocery and discount retail. I think we mentioned that we only had 40 trucks shut down at any point during this pandemic. And so we really have a healthy, robust, dedicated group and lots of opportunity to increase truck count, not only with new accounts but also within our existing. And so that’s probably where you’re going to see the bulk of the growth from.

Obviously, where we believe the uncertainty is going to lie through this process is going to be within that Over-the-Road division. So the more that we can insulate and isolate ourselves from that, the better. So I would say kind of flat for the most part, to maybe slightly down in Over-the-Road, but trying to see some incremental growth in Dedicated.

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

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Okay. And just kind of following up on that within the Dedicated business, what are you seeing in terms of customers’ willingness to sort of move forward with new agreements? Or are there any sort of delays happening there, pushback, in terms of getting stuff across the finish line? And what are you seeing from a rate perspective with the Dedicated? Could you maybe comment on that for a moment?

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

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Yes. I think in regards to the bids, I think it depends on where they were in the process. So if it’s something where they’re kind of middle of the way through the bid process, then people are pausing a little bit. Obviously this is an uncertain situation and so I think everybody is wanting to see how this is going to play out. So if it was early or midway through the bid cycle, you saw kind of a little bit of “let’s wait and see, maybe we’ll extend the period for a period of time to kind of see how this plays out.” Those that were further along are going ahead and awarding business.

And so I — we haven’t seen anybody pull Dedicated bids or anything like that at this point. So I think that the interest still seems fairly robust and strong through this period. And I think maybe there will be a little bit of slowdown in the velocity as people try to figure out what — how this thing plays out. But I still think Dedicated is going to be an area that’s going to have a lot of demand going forward.

From a rate perspective I think we just could see mostly consistency in the rates. We’re not seeing a lot of pressure either in existing business or new business for any kind of significant decreases in rates or anything relative to that. So I would say mostly Dedicated is in mostly on a go-forward basis at least for the next few quarters is probably more in a flat environment.

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

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Okay. Got you. And then last question and I’ll turn it over. But within Brokerage, pretty significant compression in net revenue margins there sequentially. Could you talk about what you’re seeing in April in terms of Brokerage net revenue margins? Are you getting some relief there now that the market’s loosened up? And how are you thinking about taking steps to substantially improve profitability within that segment, which is really the reason you guys are reporting a loss this morning?

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

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Right. We really started to see degradation in that Brokerage margin starting in Q4. And, again, as I previously had mentioned, we had gotten aggressive with Dedicated specific bids in, say, Q2, Q3 last year as the market weakened. And the reason being was twofold. One, we felt there was an opportunity for us to grow our brokerage. But we also really wanted to have increased selectivity for our assets, so bringing more opportunity in the door. And that kind of started to negatively impact us in Q4 as we saw some of those buy prices from a capacity standpoint start to creep up and we started to get squeezed.

We saw — we continued to see the same phenomena in the first quarter. We did start to back out of some of those commitments and some of that freight that we had originally sold. However, I would say right now having some of that freight — we didn’t back out of all of it, because having some of that freight now is actually advantageous. As the market starts to slow a little bit we can take some of that freight back into our Over-the-Road division and keep our trucks running. And that freight is still better than going out to the spot market in this current environment.

Now, as we look out to margins over the next couple of quarters from a brokerage perspective, we believe we will see sequential improvement over the next couple of quarters. And we believe that within the next, say, 2 to 4 quarters we can be back in double-digit gross margin territory and start to be moving towards positive net margins.

So we see improvement. We know that we’ve made some pretty substantial changes within our management group, within our Brokerage division. We made some process changes and some structural changes and we believe that that’s going to continue to drive some improvement in our margins over the next couple of quarters.

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Operator [13]

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The next question is from Scott Group of Wolfe Research.

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

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Can you just give us an update in Over-the-Road, what you’re seeing April from a utilization and rate-per-mile perspective?

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William Eric Fuller, U.S. Xpress Enterprises, Inc. – President, CEO & Director [15]

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Yes. On the utilization we’re staying consistent. And I would say in April our utilization has been consistent, if not on the high end of an average week for the year. So, again, our customer mix has really helped us through this process and that’s something we’re really proud of.

Now, on the rate side, specifically the spot rate, which is where you’re getting an incredible amount of pressure, I would say that we’re seeing spot rates lower than we saw through really any of 2019. And so there’s obviously some concern there about where spot rates are going. We believe that they will probably stay fairly low for the foreseeable future.

And so the real positive is that customer mix should allow us to minimize our exposure hopefully to the spot market. And with us moving more capacity over into Dedicated and trying to get more concentration with those customers that we’ve had longstanding relationships with, we can help to minimize that exposure further. Because we don’t see an uptick in the spot rate market for at least another quarter or two.

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

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And where are you now in terms of spot exposure?

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

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I think roughly probably total revenue in that 12% — 11%,12%. As week to week we normally like to manage it close to 10%. It spiked up in ’19 as high as 14% to 15%, but where we’re at today is probably closer to 11.5% to 12%.

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

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And that’s just with Over-the-Road or that’s of total Truck?

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

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That’s of total revenue.

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Scott H. Group, Wolfe Research, LLC – MD & Senior Transportation Analyst [20]

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Okay. So that, so we should — based on that, rate per mile will certainly be lower sequentially 1Q to 2Q.

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William Eric Fuller, U.S. Xpress Enterprises, Inc. – President, CEO & Director [21]

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Yes. I think we’re seeing a little bit of pressure there on the rate side.

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Scott H. Group, Wolfe Research, LLC – MD & Senior Transportation Analyst [22]

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But utilization is not seeing pressure, which is good. Okay. And then . . .

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

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Right.

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Scott H. Group, Wolfe Research, LLC – MD & Senior Transportation Analyst [24]

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. . . why don’t you just make sure I’m understanding what’s going on with the CapEx stuff? So the $67 million in the first quarter, that was net cash CapEx. So you’re saying the remaining $35 million to $55 million of net will all be for leases. Is that right, Eric?

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Eric A. Peterson, U.S. Xpress Enterprises, Inc. – CFO & Treasurer [25]

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Yes. Leases or funded debt. So the point there is when you’re looking at our overall liquidity is that CapEx for the remainder of the year will not impact our liquidity at all.

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Scott H. Group, Wolfe Research, LLC – MD & Senior Transportation Analyst [26]

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Okay. And do you have — of that $35 million to $55 million that’s left, do you have a breakdown of what’s gross versus net, just because the proceeds will all be cash and that will help liquidity?

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Eric A. Peterson, U.S. Xpress Enterprises, Inc. – CFO & Treasurer [27]

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I don’t have that broken down right now.

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Scott H. Group, Wolfe Research, LLC – MD & Senior Transportation Analyst [28]

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Okay. And then, do you know if you’re doing it instead of with cash but with leases, what’s the OR impact of doing it this way?

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Eric A. Peterson, U.S. Xpress Enterprises, Inc. – CFO & Treasurer [29]

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I would say with the number of factors we’re looking at for the balance of the year, I’d say it would be minimal. I think when you’re looking at our — essentially what you’re doing is — if you saw I put interest expense would be down to $20 million for the year. And previously I believe I was at $22 million. So essentially what you’re doing is you’re putting that interest expense above the line and vehicle rent. So call that $2 million over the year. Compared to where we were, I’d say it’s going to have a minimal impact on our operating ratio for the year.

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Operator [30]

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The next question is from Brian Ossenbeck of JPMorgan.

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Brian Patrick Ossenbeck, JP Morgan Chase & Co, Research Division – Senior Equity Analyst [31]

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Eric Peterson, can you go back and maybe elaborate on some of the cost reduction initiatives? It sounds like you have quite a few going on right now before, and probably even more so now. Maybe you can give us some broad strokes as to what are in — what’s on the board and potentially what could be structural? Sounds like there’s some of those that have already been implemented in Brokerage, but you can lay those out and perhaps quantify, any of that would be helpful.

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Eric A. Peterson, U.S. Xpress Enterprises, Inc. – CFO & Treasurer [32]

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Yes. Not going to through and quantify them, but I think just things that we’re doing in general, as far as our office staff and new hires working remote, unless it’s — to the extent we have turnover we’re not backfilling those positions unless they’re 100% near critical. Obviously monitoring overtime, expenses. It’s amazing, having everybody working from the home environment your productivity has actually been pretty strong if not higher. And so we’ve been able to get the same amount of work done without incurring those overtime hours.

And yet you look at our procurement group and if you remember we said we just started this group really, an IPO, and now we’re getting some maturation with that group and really starting to make some progress and being able to harvest some of that investment. You’re going through all of our expenses with all of our vendors with former RFPs, and not just RFPs, important, but the service-level agreements we’re putting in place with our vendors and working with is making for much more efficient relationships.

A big one, a big expense, I think we’ve made tremendous progress with our overall capital management. And that’s managing our tractors as far as our unseats. Right now we probably have the lowest number of unseated tractors in our fleet that we’ve had in a long, long time.

And as far as trailers, we’ve really focused on this. We’ve had our trailer tracking on our fleet for a while, but recently we’ve done a much better job of integrating that into our operational workflow, where we’re actually able to run the fleet with 1,500 to 2,000 fewer trailers than we were before and still maintain the same revenues. And so that’s really helping us from a CapEx perspective going forward, because as some of those trailers are reaching end of life on their cycle we’re not having to go out and replace them with new trailers and we’re maintaining our revenue.

So those are some examples. There’s more. We essentially have all of our Vice Presidents across the organization — I’m getting calls on a daily basis almost from one of them say, “Hey, look, I think I can eliminate this cost. And here’s the dollar amount.” So we’re keeping score. We have a scoreboard of all of these savings. A lot of them are small dollars, but they’re adding up to decent figures.

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Brian Patrick Ossenbeck, JP Morgan Chase & Co, Research Division – Senior Equity Analyst [33]

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And just on the same topic, the level of technology investment. You have highlighted some of the benefits here a couple times today. Is that still continuing at the same pace as before? Are you finding new opportunities to reallocate into certain projects? I believe you hired a CIO not too long ago, so perhaps you can offer some thoughts on that, too.

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William Eric Fuller, U.S. Xpress Enterprises, Inc. – President, CEO & Director [34]

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Yes. So we hired a new — it’s probably been about 18 months now. And I think that when we talked about bringing him on, we were really talking about digitizing our operations and our systems. And that’s really led to this frictionless order initiative. And we are seeing some incredible results of that. I would say that being able to shift our entire workforce of over 1,000 people to work from home in under 2 weeks is really a testament to what we were able to accomplish with the frictionless order, because being able to rely on the level of automation and optimization that we had led us to be able to do a lot of those things and to shift that work. I think if we were — had the pandemic occurred 18 months ago we would not have been able to make this shift. So I think our investment in technology has really helped to facilitate our ability to work through this situation.

And we’re continuing to invest in that. We truly believe that we’ve gotten about 50 — 45% to 50% of those so-called touchpoints out that we think that we can remove from the system. Most of those touchpoints relate to driver friction and frustration. So we really believe that if we continue to focus on that we can take a lot of that friction out of the system. That friction is going to allow us to drive our driver — improve our driver retention. It’s also going to lead to better utilization. And we’re already seeing some of the early wins of that. So we think as we focus on driving the other 50% out we’ll start to see improved results due to that.

So we think technology is something that we are committed to and, if anything, we’re more committed to it today than we were 6 weeks ago, because we now see the benefit of all of the investment we made over the last 18 months and how it’s benefiting the organization.

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Brian Patrick Ossenbeck, JP Morgan Chase & Co, Research Division – Senior Equity Analyst [35]

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I have one more quick one on the supply side. You had something in the slides about you continue to expect long-term trends will take out capacity, but some other actions will perhaps slow the speed of the contractions. You covered that a little bit with some of the competition spilling over into the Over-the-Road. But maybe you can elaborate on that comment to the slide specific to the government and other sort of actions there.

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

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Yes. I mean, I think that if you look at the stimulus bill and the PPP that was put in place specific to companies under 500 employees, I think there are going to be some examples and there are some examples of companies that were probably very close to moving towards bankruptcy or having to at least reduce their fleet significantly in order to survive. Because 2019 obviously was a really tough period for a lot of smaller companies, the less well capitalized companies.

And you saw a good bit of bankruptcies but I think there were quite a few other companies that were really on the edge of bankruptcy as we moved into the situation. And in some cases the pandemic’s actually going to give companies a lifeline. There will be some companies that are going to get funding through the stimulus bill that will actually allow them to continue operations, where otherwise they may have gone out of business over the next couple of months. So I do think there is a propping up of capacity that will be occurring at a certain level.

Now, most of our industry is made up of carriers with 1, 2 and 3 trucks and most likely those companies aren’t going to be able to take advantage of that stimulus bill. And so I still think you’re going to have capacity come out. But, yes, that was the point of that comment, is that we do think that there are some capacity that will be propped up through the government action over the next couple months.

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Operator [37]

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The next question is from David Ross of Stifel.

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Matthew Jarrod Milask, Stifel, Nicolaus & Company, Incorporated, Research Division – Associate [38]

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This is Matt Milask on for Dave Ross. Can you just provide us with any updated guidance on gains/loss on sales and D&A for the remainder of the year and perhaps if 1Q is a fair run rate for the insurance and claims line going forward?

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Eric A. Peterson, U.S. Xpress Enterprises, Inc. – CFO & Treasurer [39]

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Yes. I would say as far as our depreciation, inclusive of the gain/loss, that you could see that probably consistent with where we were in the first quarter to maybe dropping a nominal amount, not significant. If the leases increase through the balance of the year you could see our depreciation drop consistent with that. But I think that if you look at our overall equipment cost, it’s more of a geography area, you know, depreciation and interest down a little, vehicle rent up a little is how I would look at that in the aggregate. I do not anticipate our losses accelerating through the year. I don’t believe that they’re going to accelerate throughout the year relative to where we were in the first quarter.

I think that when you look at our — moving onto the insurance line item, when you look at that expense and you look back historically over the years, to the extent we are self-insured up to $3 million, that’s why you have some variability in that from a quarterly basis. If we stayed at that level and you go back the last 2 years for the rest of the year, that would be something that we have never experienced before. Usually our high quarters are in that range where we are today. It’s in that $25 million to $26 million range. But then I think if you look back we also have quarters we’re in that $20 million range.

So when I look at the progress we’ve made from a safety perspective and the overall incidents, I would say the inventory and our insurance accruals on our balance sheet of over $100 million that’s rolling in is better than the inventory rolling out. And so I would anticipate sequential improvement in our claims expense through the year. But, like I said before, all it takes is 1 or 2 bad incidents and I could be right back to that $25 million range set.

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Operator [40]

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The next question is from Ken Hoexter of BofA.

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Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division – MD and Co-Head of the Industrials [41]

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Eric and Eric, maybe Eric Fuller, can you talk about the digitization that you’ve gone through? Why do you still see 100 operating-ratio-plus versus some of your peer carriers that are clearly in a different market? Is it really just rate? Is it more exposure to spot market? Is it still your expenses that you’ve talked about since the IPO? Are they just still too high? What has really been the difference here versus what we see at some of the peers?

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William Eric Fuller, U.S. Xpress Enterprises, Inc. – President, CEO & Director [42]

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Sure. I mean, I think we’ve gone through a significant transformation. And you look at those that you’re comparing us to, they’ve been operating at those levels for an extended period of time. And we are in a process of moving from — the way we look at it, from one group, one kind of operating tier, to another. And that’s a different situation than those that have been operating at that tier for an extended period of time. So the biggest thing for us is these things don’t happen overnight. And it’s a lot of consistency that we just have to continue to drive results and stay consistent with our plan.

And we believe that the plan that we have around our digitization is the right plan. We are seeing costs come out. It doesn’t happen overnight and it’s something that does take a number of quarters, if not in some cases a number of years, for costs of the level that we had engrained maybe as long as 15, 20 years. That cost has to come out and we have to put other things in place to replace that cost. And so it’s the digitization. It’s the automation. It’s the optimization. It’s different things around — just doing things differently.

And for us, again, one of the biggest things we’ve talked about is that turnover has been our biggest issue for a long, long time as a company. And that’s something that we have put a lot of focus on. The needle has moved a lot slower than we would have liked, but, again, it is moving. And we believe that all of the initiatives and the investments that we have made, we’re going to continue to drive better results in our turnover numbers. And that’s really where we get probably the biggest impact and probably where when we benchmark with our peers that operate at a much better level, that’s where we see the biggest gap, is if we can get to their level of turnover, you really start to see the models really start to converge from a margin perspective.

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Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division – MD and Co-Head of the Industrials [43]

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So just to sum that up, Eric, then you really see it as more of a cost issue than anything on your exposure to spot rates and maybe more rate pressure. So, did I get that right?

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William Eric Fuller, U.S. Xpress Enterprises, Inc. – President, CEO & Director [44]

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Oh, yes. I think we’ve always said that. I think it’s a cost problem more than anything.

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Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division – MD and Co-Head of the Industrials [45]

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So then I . . .

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Eric A. Peterson, U.S. Xpress Enterprises, Inc. – CFO & Treasurer [46]

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And really, Ken, I think I’d like to add you can really isolate it to our Over-the-Road fleet. I mean, if you look at our Dedicated division, which is 40% of our tractors, and we benchmark that group as far as revenue productivity on a per-tractor basis, you can see we’re very comparable. I think where you see the sharp divide, as Eric was mentioning, is you start looking at our driver turnover, it’s significantly higher. And if you look at our utility revenue productivity on that Over-the-Road fleet and compare us to others you’ll see a gap there.

And so as we continue to utilize that equipment better and get the turnover better, that’s when you’ll see that gap start closing.

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Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division – MD and Co-Head of the Industrials [47]

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Let me then focus on the driver turnover for a quick second, because you mentioned the higher costs. I’m kind of surprised, given the scale of unemployment than where we are now, the kind of loosening environment that we’re seeing in the trucking market because of the ability of getting drivers. Are you not then seeing that loosen up a bit? And then, if the driver issue is there, what is it? Is it a worse platform on the U.S. Xpress model in terms of not getting the same utilization of miles? Is it pay? What is the crux of your issue then?

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William Eric Fuller, U.S. Xpress Enterprises, Inc. – President, CEO & Director [48]

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Yes, Ken, the comment about turnover is a pre-COVID comment, really about our model over a long period of time. The last 6 weeks we have seen our turnover percentage at better than probably — we could probably go back 10-plus years and we probably haven’t had a period of 4 to 6 weeks where we’ve seen our turnover where it is right now. So I think that — but I don’t think that that is a long-term fix. I do think that’s situational. I think it’s market driven, because prior to the COVID situation we were still having a good bit of issues around turnover. So we’re not being naive to think all of a sudden that it’s fixed. We do think it’s situational.

I think if you look, again, what we’re seeing in the market over the last 6 weeks is a real positive from a driver perspective. That loosening also is allowing us, as I said earlier, to upgrade our drivers. So orientation and hiring is becoming more plentiful. We’re finding it a little bit easier to find drivers. As I said, we see drivers move to kind of a flattened quality and so they start to go to the big carriers where they can get consistency. And so we are being able to hire at probably a higher pace than what we were previously. And that’s allowing us to upgrade.

So in the near term we have low turnover and we have better recruiting which is allowing us, again, to improve our quality of driver. But we’re taking advantage of it while we can, because we do think it is purely a situation that is being caused by the pandemic and the economic impact and not necessarily something that we’ve done internally. And we recognize that.

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Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division – MD and Co-Head of the Industrials [49]

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I appreciate that. I thought the answer was a bit off before, about getting on the bus and going to driver orientation. I’ve heard most of the carriers going to online situations anyway.

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William Eric Fuller, U.S. Xpress Enterprises, Inc. – President, CEO & Director [50]

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Right.

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Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division – MD and Co-Head of the Industrials [51]

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But let me just put — I guess the ultimate question here then is given, Eric Peterson, your view of adding more tractors and operating leases — why? Why bother? If your revenue per tractor is declining, especially in Over-the-Road, why are you not shrinking that fleet? And if you’re having trouble with driver — keeping the drivers and with costs, why not really shrink that fleet significantly and focus on increasing profitability of that existing fleet in this kind of a market?

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Eric A. Peterson, U.S. Xpress Enterprises, Inc. – CFO & Treasurer [52]

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Yes. I think when you’re looking at the replacement, that’s not growing the fleet. What that’s essentially doing is just taking equipment out that we would consider that it’s at its end of life, as far as maintaining our equipment and that average age in that 1.5-to-2-year range is what we’re really doing there. We’re not going out and growing the fleet into the pandemic, so to speak.

And as far as shrinking the fleet, if we look at our per-tractor contribution, what the numbers and what the math says is you’re better keeping those volumes up even though you might have a little decline in rate over a period of time. But, once again, we’re looking at this over a longer period of time. We think the spot market is a temporary phenom. We think — we were seeing market recovery prior to the pandemic and we think that as we come out on the back side that supply still will be exiting the market. Capacity will be lower and the cycle is going to flip.

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Operator [53]

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This concludes the question-and-answer session. I would now like to turn the conference back over to Eric Fuller for any closing remarks.

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William Eric Fuller, U.S. Xpress Enterprises, Inc. – President, CEO & Director [54]

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Okay. Really appreciate everybody dialing into the call today. We look forward to doing this again in a few months. We really believe we’re kind of in a unique period of time, given the situation with the pandemic. And so obviously things are probably a little more confusing than normal. But I think at U.S. Xpress we are doing everything we can to plan for every contingency. I mean, we have modeled out everywhere from a U, a V, a W and an L shaped recovery and we are well prepared to react, regardless of what the overall macroenvironment is. And so, we think we’re in a good position to take advantage of the future and we’re excited to see where things go from here.

Anyway, thank you.

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Operator [55]

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This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.