Earnings Transcript for USX - Q4 Fiscal Year 2020

Operator: Good afternoon, ladies and gentlemen, and welcome to the U.S. Xpress Fourth Quarter 2020 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for question and instructions will follow at that time. 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. Mr. Baubach, please go ahead, sir.

Brian Baubach: Thank you, operator, and good afternoon, everyone. We appreciate your participation in our Fourth Quarter 2020 Earnings Call. With me here today are Eric Fuller, President and Chief Executive Officer; and Eric Peterson, Chief Financial Officer. Additionally, Jim Ramsdell, President of Variant, is here to answer questions. As a reminder, a replay of this call will be available on the Investors section of our website through February 4, 2021. We have also posted an updated and more detailed supplemental presentation to accompany today's discussion on our website at investor.usxpress.com. We will be referencing portions of this supplement as part of today's call. Before we begin, let me remind everyone that this call may contain certain statements that constitute forward-looking statements within the meanings 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, as supplemented by our first quarter 2020 Form 10-Q filed on May 6, 2020. 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.

Eric Fuller: Thank you, Brian, and good afternoon. On today's call, I'll review our fourth quarter results and provide an update on our digital initiatives designed to grow revenues and position the Company for the future. Eric Peterson will review our financial results in more detail, and I will then conclude with a review of our market outlook. The five main themes that we hope you take away are

Eric Peterson: Thank you, Eric, and good afternoon. Operating revenue for the 2020 fourth quarter was $455.6 million, an increase of $6 million as compared to the year ago quarter. The increase was primarily attributable to increased revenues in the Company's brokerage division of $22.2 million, an increase of $1.2 million in truckload revenue, partially offset by decreased fuel surcharge revenues of $17.5 million. Excluding the impact of fuel surcharges, fourth quarter revenue increased $23.4 to $428.7 million, an increase of 5.8% as compared to the prior year quarter. We posted operating income of $15.1 million in the fourth quarter of 2020, which compares favorably to operating income of $1.4 million in the 2019 fourth quarter. Our operating ratio for the fourth quarter of 2020 was 96.7% as compared to 99.7% in the prior year quarter. The primary drivers of our improved earnings were higher rate per mile and lower claims expense. Revenue per tractor per week improved 11.9% in our Over-the-Road division and 1.2% in our dedicated division, while we continue to execute on our digital initiatives and fixed and variable cost control efforts. Additionally, I'm happy to report that our truckload operating ratio improved 290 basis points to 96.2% from 99.1% in the prior year quarter. While we have delivered operating ratio improvement on a year-over-year basis, we have been investing back into the business in order to drive our digital initiatives designed to improve our profitability while positioning the Company for growth. This investment is suppressing the underlying margin improvement that is taking place. Importantly, we are managing the business for long-term value creation and are confident that these investments will translate into stronger margins and growth as we move through 2021. As an example, as we build the platform, process and technology for Variant, we are investing in smart technology and people. These expenses equated to approximately $0.28 per mile for the 700 tractors in Variant during the fourth quarter. If we are able to scale the tractors in this division to 2,000, we believe these costs will reduce to approximately $0.09 per mile and further improve overall truckload profitability. Additionally, throughout 2021, we believe we will be able to remove meaningful costs from our organization as we continue to allocate capital to Variant and it cannibalizes the legacy over-the-road business over time. As this division continues to become a higher percentage of total truckload revenues, we expect our truckload margins to expand and consolidated operating income to increase. Net income for the fourth quarter of 2020 was $7.6 million, which compares favorably to the $9.6 million loss that we reported in the prior year quarter. Earnings per diluted share were $0.15. Turning to our balance sheet. We had $353.5 million of net debt and $175.3 million of liquidity, defined as cash and cash equivalents plus availability under our revolving credit facility. I'm very pleased with the progress that we have made as our leverage continued to decline to 2.4x net debt to trailing 12-month EBITDA for the fourth quarter of 2020 compared to 4.15x at the end of the 2020 first quarter. We believe our leverage will continue to improve over the next several quarters. Turning to net capital expenditures, they totaled $111.6 million in 2020, including a previously disclosed $20 million transaction that carried over from the fourth quarter of 2019. In the fourth quarter, net capital expenditures were $16.3 million. With that, I'd like to turn the call back to Eric Fuller for concluding remarks.

Eric Fuller: Thank you, Eric. Looking to the year ahead, our baseline assumptions for the market included general sequential economic recovery, supported by increasing inventory restocking, continued tight trucking capacity, and relatively benign cost inflation outside of driver related and insurance premium expenses. These conditions, combined with the continued shortage of drivers are expected to be supportive of the market and rates. As a result, we expect contract rates to increase on average by 10% to 15%, with the driver shortage, likely extending the cycle as we believe there will be up to 200,000 fewer drivers as compared to 2019. While the market should provide an accommodating backdrop for our industry, we are deemphasizing the cycle. In fact, we are transitioning our business model from a cycle dependent model to a model that we believe will hold a growth opportunity at an improved margin regardless of the market backdrop or the position in the cycle. As we execute on our technology-enabled platforms, we expect to begin to look more like a growth company than a cyclical company. The trucking market is $800 billion market in which no company has meaningful share. Recently, our large and highly fragmented sector has gained the attention of venture capital hoping to disrupt and grab market share and what's essentially a wide open opportunity. We believe this poses a significant risk to all incumbent companies given that rates are commoditized, margins are low and existing operating models have been unable to scale. These market dynamics create a real opportunity for a company that can solve these issues and aggressively scale their business and eventually push the incumbents out of the market. Clayton Christensen wrote about industry disruption in his book, the innovators to Lima. The scenario that plays out over-and-over is that new entrants enter a market at the lower, less attractive end. Instead of meeting the disruptors head on, the incumbents moved to the more attractive part of the market and essentially see the low end to the new entrants. The new entrants use this, as a base from which to build out their capabilities and eventually move upstream, replacing the incumbents in not only the low end of the market, but the high end of the market as well. You could see this playing out today within the truckload market. The OTR market can be highly competitive, volatile and exhibit low margins. As a result, many of the larger incumbents are walking away from this market and moving into other areas with less competition and better profitability. This is leading the OTR market, the smaller, less successful incumbents as well as new entrants. While we believe there are boundless opportunities within dedicated and brokerage, we also believe there are incredible opportunities within OTR, particularly for a company that can produce an operating model that has a lower operating cost and proves to have significant scalability. When we started working on our hypothesis around what would eventually become our Variant fleet? Our focus was on building a lower cost model that could scale. While we are still being cautious and disciplined with Variant's growth, everything that we are seeing at this point leads us to believe that we have succeeded. We believe that we have line of sight to an operating model that should operate more profitably than a legacy model at ultimate maturity. On top of that, we have confidence that Variant's model, combined with the digital platform we are developing in our brokerage segment could significantly scale creating a long runway for growth. We believe we can double our consolidated revenues over the next four years. In summary, these are exciting times at U.S. Xpress for our people, for our customers, and we believe, for our investors, as we embark on what we expect to be the most wide open growth period for our company in the past 20 years. We have the advantages of a strong capital base, strong customer relationships and the relative stability of our dedicated division on which to build. We have the confidence gained from Variants launch in a clear advantage over our legacy OTR model. And we have the leadership, and the technology and team acquired earlier this year to propel our digital brokerage initiatives. Business came about because of service and cost advantages over competitors following deregulation in 1980. He the gold rush days in the 1980s and 1990s established most of the market leaders in our industry, including U.S. Express. And we believe over the next 10 years, the industry will experience similar transformative changes. Through our investments in technology and our mindset that the old truckload model is broken, we see ourselves poised to lead this next area of growth. As a reminder, Cameron Ramsdell, President of Variant, is on the call, and we'll be able to add color to questions on Variant's as needed. Thank you again for you time today. Operator, please open the call for questions.

Operator: [Operator Instructions] Our first question today is coming from Ravi Shanker from Morgan Stanley. Your line is now live.

Ravi Shanker: A couple of shorter questions and one bigger picture one. Maybe if you can start with fourth quarter and dedicated, I mean, one of the beauty is a dedicated business is that it's very stable, long-term contracts, long term pricing. You don't usually have driver issues and dedicated business. Can you talk about if there's any way your dedicated business might be different than what we traditionally understand dedicated to be that you're having these issues right now and kind of how they can be solved?

Eric Fuller: Yes. Probably, I think the issue really this year was really unique. If you look at the driver situation, I don't think we've ever seen a driver situation deteriorate as fast as we did this year. We went from a situation where it was fairly easy to find drivers' turnover was relatively low. And then within a matter of weeks, we had really flipped to probably one of the tightest driver situations that we've experienced in a long time. I think that situation kind of created a situation in which we had to go and add some extra costs, whether it be through paying drivers more whether it be through spending more on recruiting or going and sourcing third-party capacity in order to meet our contractual obligations, and we were unable to get that back from the customer in a short period of time. Typically, when these things happen, it's progressive, and we're able to have conversations with the customer over a period of weeks and even months, to get compensated for those increased costs, and that didn't happen this specific quarter. We also had one specific customer that created some headwinds through that process as well.

Ravi Shanker: Okay. Got it. On Variant, in this incredibly tight driver market, is Variant having an easier time finding drivers in the rest of the OTR business? And if yes, why not accelerate the rollout? And also, have you considered breaking Variant out in the separate segment?

Eric Fuller: Yes. So I'll answer that, and then I'll throw it over to Cameron to answer about the driver piece. The reason we're not going and switching all of our tractors over today is because we -- this is a brand-new model. It's brand new technology. It really is completely unique than anything out there. And so we are being very disciplined about that growth. And what I don't want to do is go through 2,000 trucks over this model and then somehow it breaks, meaning we dilute our metrics at some point, and we don't know where it broke. So by being very deliberate, it's going to be slow, and it will take us a little while to get to that final cannibalization of that entire fleet. But by doing it this way, it will make sure that it's sustainable and that will be able to recognize if we encounter any kind of issues in the growth strategy, we'll recognize it in real-time and be able to fix it as opposed to having to go back and kind of do an analysis after the fact. And Cameron, do you want to hit on the driver piece?

Cameron Ramsdell: Sure. Everyone, this is Cameron, Ravi. Thanks for the question. I think you were asking if we're finding it easier to recruit drivers into Variant than the OTR model. The short answer is generally yes, progressively more so over time, right? We launched an entirely new brand, and I think at first, underestimated how big of a lift and how much time it would really take to gain traction and educate a market on a unique value proposition. But we've seen sequential growth week-over-week even through the holiday weeks, which was -- which is traditionally a time when recruiting really slows down. So, we're really gaining a lot of momentum.

Ravi Shanker: Great. And will you consider reporting Variant as a separate segment, so we can see some of the differences in the numbers?

Eric Fuller: Yes. So, go ahead, Eric. I was going to say right now in our earnings supplement, we're putting some of the separate stats related to turnover utilization and accidents per million miles on the Variant fleet as Variant continues to be larger and a more meaningful part, then we'll consider breaking that out as a separate operating segment, and as a reminder, just 9% of revenues for the fourth quarter. So much more cannibalization to come, where ultimately, we'll be displaying these stats separate.

Operator: Next question today is coming from Jack Atkins from Stephens. Your line is now live.

Jack Atkins: So, I guess, Eric Peterson, when you think about the $0.28 per mile on the 700 Variant trucks, in the fourth quarter, I guess, that's overhead. Is there a way to kind of quantify that in terms of dollars? I guess I'm just trying to figure out how many trucks do you need in the Variant fleet before that fleet is accretive to earnings, like how close are we to that tipping point?

Eric Peterson: Yes. I would say, Jack, thanks for the question. I think as far as being accretive to earnings that we're already there with $700 million. Because as we said, discrete is performing 1,200 basis points better just looking at the combined stats to better utilization, lower turnover and fewer accidents per million miles. So I'd say we're already better than we were by replacing the student program and having those other drivers in our over-the-road fleet. As far as nominal dollars, to answer your question, that $0.28 represents for the fourth quarter, about $4.5 million of expense. And when we get -- taking that to 2,000 tractors and that investment, that expense will increase, but not nearly at the rate as our revenue will increase, that drops to $0.09 per mile. So you're talking about a $0.20 reduction out of the cost infrastructure over a unit at a rate of $2 a mile, that's 1,000 basis points alone. So, we believe that we will achieve 2,000 tractors and then ultimately surpass that. We don't see a limit to scale at this time and that cost will continue to reduce on a per mile basis.

Jack Atkins: Okay. Got it. Got it. That definitely helps. And then I guess when we think about the dedicated piece of the business, just to follow-up on Ravi's question for a moment. Eric Fuller, if I remember your prepared comments correctly, it sounds like you're expecting to take a couple of quarters to get the rate where you need it to make up for the cost headwinds there to seek those trucks. Why is it going to take so long? And are there things that need to change with those dedicated contracts in the future to kind of put some rate adjusters on there for situations like we're finding ourselves in right now.

Eric Fuller: No, I wouldn't necessarily say, it's really taken two quarters. I think that we'll -- the problem is some of the rate improvement that we need, will come in a little bit later in this quarter, right? So they'll come in maybe at the end of January, early February, some of it gets layered in a little bit at a time. And so, I think we'll fully be -- have all the rates that we need by the beginning of the second quarter. But from a result standpoint, it will be a progression from where we were Q4 through Q1 into Q2, if that makes sense.

Jack Atkins: Okay. Okay. Got you, Eric. And so, I guess just kind of putting it all together with the additional progress at Variant over the course of the first quarter, to get to 900 trucks, the rate actions are dedicated. Typically, I understand there's some -- obviously, some headwinds from a seasonal perspective going from the fourth to the first quarter. How should we think about that seasonal progression this year given all the different moving pieces that we're talking about on the call right now?

Eric Peterson: Yes. So if you look at, obviously, rate there's -- the spot environment in Q4 to Q1, there's always a little bit of reduction from a rate perspective, right? But this year, I think you're going to have rate improvement layered in both on the OTR side and the dedicated side, but I think more significant on the contract side, but probably more significant to us is the dedicated things, where I do think that we will be better on -- from Q4 to Q1 within our dedicated operation. Secondly, we will be growing. We plan to grow to about 900 trucks in Variant by the end of this quarter. And today, we are just a little bit below 800. So, we are tracking towards that $900 million, we're actually a little bit ahead of it. So we feel very confident that we can get there. And as Eric said, today, we're already recognizing 1,200 basis points improvement and on a truck by truck basis between Variant and our OTR. So that will be another conversion of 200 some-odd trucks that are operating at that level. So I think it's likely that we could kind of buck the normal trend of seeing that big drop off from Q4 to Q1. I think there are some headwinds in that, especially that spot rate. But I think some of the self-help things that we're doing specifically around dedicated and in the Variant conversion, will at least keep us kind of on probably a similar level to the previous quarter.

Operator: Our next question today is coming from Ken Hoexter from Bank of America. Your line is now live.

Ken Hoexter: Good afternoon, Eric and Brian. Eric, just to clarify real quick on that 1,200 basis points. Is that for Variant? Is that utilization? Or is that an operating ratio number that you're throwing out there?

Eric Peterson: That's an operating ratio number and the components, one of which the largest is utilization. It's 21% better utilization on a two-third variable, one-third fixed. That $700 million of your $1,200 you have another 200 basis points in insurance and claims expense, it will be lower just because of the dramatic decrease of preventable accident per million miles. And then the third component is driver turnover. Seeing driver turnover in that 50% range compared to that legacy group, which has been above 150% equates to easily 300 basis points of cost.

Ken Hoexter: Thank you for that clarification. So Eric, fuller, I just want to understand, you mentioned a lot of focusing on growth in your prepared remarks. And I guess I'm a little confused by that given -- if you're talking about an operating ratio in the mid- to upper 90s, why would you not say there is no growth, and we're just focusing on getting the cost and the ratio into the 80s, right? I mean, wouldn't that be more meaningful than growing the fleet at this low single digit margin?

Eric Fuller: No. I think we're not growing at a low single digit margin. I think if you look at it, if you take what we said that we're at 1,200 basis points improvement within the Variant model that we think there's at least another 1,000 basis points improvement to come in the Variant model as we get to maturity, that there's no reason for us to slow down that growth. I mean, so at that point, we're running 2,000 or better basis points improvement over the legacy model. So you're no longer in the mid-90s, you're doing much better than that. And at that point, we would continue to accelerate that growth. So we have we have line of sight to an OR sub-90. And we believe that we are moving in that direction. And really, what we need to continue to do is convert this fleet and completely cannibalize the legacy fleet as it exists today because it is broken. And we can spend a lot of time trying to fix it, and its small incremental fixes, and we'll spend the next year or two fixing it. When a reality we believe that disruption is happening within the industry. We think its early days, but we think there is a real likelihood that in 10 to 15 years, the environment within the truckload industry is dramatically different than what it is today. We think that there could even be as little. There'll be some small initiatives and stuff. But for the most part, we think that the market could even be carved up by as little as 20 companies. And we think that people that are going to sit here and try to operate in a legacy model will likely not survive that. And so that's why we're making this drastic change. And we believe in the direction, and we believe that it will improve our earnings.

Ken Hoexter: So just to clarify, when you say growth, you mean growth switching over to Variant outgrowth in the total fleet? Or do you mean growth overall?

Eric Fuller: It would be growth in the total -- I mean as we surpass, so there will be a conversion period. So this year, is what I would call more of a cannibalization year where we're going to cannibalize the legacy model from a numbers perspective into Variant. Once we get to that point, we're not going to stop. We're going to hit the accelerator. At that point, as Eric said, we'll be sitting close to 2,000 trucks. We're going to have that fixed cost of the tech infrastructure going from $0.29 to $0.09. And we're going to be off to the races. And at that point, as long as the model continues to scale, which we believe it will, we have no reason to slow that down.

Ken Hoexter: And just to clarify on that statement, though, this is just for the OTR, it doesn't migrate to the dedicated.

Eric Fuller: Well, we're still looking to grow dedicated. But I think what this is going to do as we grow Variant that's actually going to give us opportunity in dedicated as well. Because the plus with this growth in Variant is in the past, we have played a little bit defensive with some of our dedicated accounts because we were concerned about losing overall truck count. We believe we can continue to grow Variant, and we'll fill any kind of reduction that we might have to absorb within the dedicated accounts if we get a little aggressive from a rate perspective, but we need to. So there are some accounts that have underperformed. And in the past, we probably allowed that underperformance because we were worried about our infrastructure and covering that fixed cost. Now, this is going to give us the ability to fix those as well. So I think it's a net positive for the entire --for the entire company. But when we talk about doubling -- we're talking about just doubling their AR fleet. We're talking about doubling revenues for the entire company within four years.

Ken Hoexter: If I can just squeeze one more in -- sorry, but absolutely dedicated contract rates, I just want to understand your answer to Jack and Ravi, but the dedicated rates declined. I'm a little -- down 1%. Maybe you can just -- I mean, up sequentially, I guess, on a sense per revenue mile basis. But is that a mix of business? What would cause that to go down, I mean, if contracts are structured, why wouldn't you at least haven't built in? And I don't know, Eric, if you want to throw in something on the scale of driver pay because you mentioned the impact of drivers in there as well?

Eric Fuller: It's completely a mix issue. So if you look at the accounts in which we have a higher rate per mile, those are what I would call the more difficult accounts to staff. And so that is where we saw a reduction in our driver count. And that -- so when you look at the mix perspective, we had less of the higher-paying revenue and because we had less drivers and that's the reason that, that mix played out like that, it's strictly a mix. We didn't see reductions or anything from a rate perspective. It was strictly a mix issue.

Ken Hoexter: I'm set, but if you want to just throw in a thought on the driver page just because Eric mentioned the driver pay was it -- is there a level you want to throw in a percentage rate increase or anything?

Eric Fuller: No. Well, so one of the things on the driver pay for dedicated is because the situation deteriorated so fast, we've already given, in a lot of cases, the pay increase in a lot of those dedicated accounts. So, we're in the process now being recouped for that from a customer perspective. So there may be some small incremental increases that need to happen on the dedicated side. But at this point, I feel pretty confident that we shouldn't see too much increase in the cost from a driver perspective going into this quarter.

Operator: Next question today is coming from Scott Group from Wolfe Research. Your line is now live.

Scott Group: So if I look over the last two quarters, as you've really started this transition to Variant, the over-the-road fleet is down 12%. What's going on there?

Eric Fuller: Yes. So, we made a decision in Q2 to stop investing in what we determined was a broken fleet that we were no longer -- we came to the conclusion that we weren't going to fix it. And that if we continue investing in this fleet that at some point, we're going to have to kind of -- we're going to have to fix that because we're going to keep investing its own good money after bad. So we made a decision in Q2, which has negatively impacted our truck count, and we recognize that. And we still believe to this day that it was the right decision. And we are now -- we've kind of I would say plateaued on that truck count reduction, and now we're going to be building back and building back in the fleet, which we want to see growth in.

Scott Group: So do you think in the first quarter, the fleet is similar size to what it is right now?

Eric Fuller: I mean, yes. I would say, Scott, mostly, I mean, I think that we probably don't see net growth in the fleet probably until the following quarter. But I feel pretty confident that we'll start to see a little bit of net growth and maybe get back to similar numbers from last year at some point in the back half of this year.

Scott Group: Okay. I just want to understand Variant a little bit more. Is freight moving at spot rates? Is this at contract rates? Are these new trucks, brand-new trucks? Or are these some of the older trucks that you're just rebranding? Just a little bit more color. Cameron?

Cameron Ramsdell: Sure. This is Cameron. Thanks for the question. So, it's a mix. We don't over index on spot or contract rates. We are -- we've built this entire model from scratch with the intent to scale. So we knew it needed to be resilient, irrespective of rate type. So the focus on the fleet is -- certainly has an emphasis on it, but it doesn't over-index on either one necessarily. As for new or old trucks, we have -- the fleet is its own unique fleet with its own unique brand. So we are in the process of cycling through some of the older equipment and bringing in new Variant trucks.

Scott Group: How much of the margin differential is just that these are new trucks versus older trucks? Is that a factor, do you think?

Eric Peterson: No, it has no bearing on it whatsoever.

Scott Group: Okay. Okay. And then any -- I know you answered about first quarter trucking margins, but any thoughts on what's a realistic target for the full year trucking margins?

Eric Fuller: No, but I do think that you're going to see some progressive improvement through the year as long as we continue to be able to grow our Variant fleet count to the tune of roughly, what, 200 trucks per quarter or so then we feel really confident that sequentially, we're going to improve our earnings through the year because as we said, we're already getting a significantly better return on those trucks. And then as we grow, we're going to be spreading more of that fixed cost over additional units. So that delta will actually grow.

Scott Group: So if we look in 2018, you did a 93.5% meta fuel, can it be as good as that or better than that?

Eric Fuller: I'm not really going to guesstimate where we may land, but I feel very confident if we meet our goals that we've said internally that I think we'll all be happy with where we end up for the year.

Scott Group: Okay. And just last thing real quick. Eric Peterson. You have a net CapEx number for the year?

Eric Peterson: Yes, that's included in our supplement with all of our assumptions for next year, and that number is $130 million to $150 million.

Scott Group: And that's the cash. That's the net cash.

Eric Fuller: Net CapEx, that's correct. And that also includes our investment into our technology platforms as well.

Scott Group: Okay. Thank you, guys. Appreciate it.

Eric Fuller: Thank you.

Operator: Our next question is coming from Brian Ossenbeck from JP Morgan. Your line is now live.

Brian Ossenbeck: So just maybe picking up on the assumptions in the appendix, truckload rate per mile, expecting mid single-digit increase. That seems, I guess, I don't want to interpret that because you're looking at 10% to 15% increase on contracts, spot is still going to be pretty strong. And I think in 2018, you did like 12% ex-fuel. So what am I missing there? Because that seems a lot lower than I thought?

Eric Fuller: We don't anticipate dedicated being to the tune of 10% to 15%. So with the dedicated piece in aggregate, then that's kind of where you end up.

Brian Ossenbeck: Okay. Even with the -- and I was looking at the 12%, I think was on a consolidated basis with dedicated in '18, which was up like 8% or so shouldn't you be able to get better rate if you've got the catch-up in some of the cost inflation in 2021?

Eric Fuller: On the spot side, though, you've really got two quarters where you've got a big difference. And then you've got two quarters where you had really high spot rates, where it's -- the year-over-year comparison is not going to be as extreme. We're '18, for the most part, the spot rates were -- you had a really strong spot rate environment on a comparison basis through that entire year.

Brian Ossenbeck: Okay. Got it. And then the truck count, modest growth, it sounds like you're going to start off a little bit slower and then build through the year and maybe hit flat in the back half of the year. So I guess, is the delta, I think that was mostly on commentary, but is the delta on dedicated?

Eric Fuller: Yes. I mean I think dedicated, we'd like to see a little bit of growth, but that's probably going to be small and where it makes sense. Obviously, we're going to grow in dedicated opportunistically, but the OTR fleet, the conversion over into Variant is where we're going to see that improvement and that growth.

Brian Ossenbeck: All right, and then just one last one on Variant. Maybe you can talk about the turnover in the fleet, what type of folks you're getting in that stay and how many are leaving and why? And then just the investment needed to build out the automated recruiting Variant, it sounds like that's just getting live right now. So how far are you on that? And what do you think that will end up costing to fully develop?

Eric Fuller: Right. Yes, I'll let Cameron answer those. Cameron?

Cameron Ramsdell: So the turnover on the Variant fleet, we look at turn over a couple of different ways. The most important way that we look at it is from a voluntary basis, standpoint, right? So what we're intensely focused on is bringing down the total number of voluntary drivers that voluntarily leave the Company. So in total, those numbers we published in the supplement it's right about 50% right now. But on a voluntary basis, it's just important to note that included in that 50% number are the drivers that we are managing out drivers that deliver late for shippers or don't have a great on time or safety record, we are terminating. So that's baked into that number. Also bake into that number is anybody that may have actually had an accident. So we are intensely focused on reducing the voluntary attrition levels. We don't publish that number at this time, but it is meaningfully lower than the total number. And everything that we're doing from a technological standpoint is really either directly or indirectly aimed at enhancing the driver satisfaction, thereby reducing that number. As far as the total investment, the right answer is it depends. We take kind of a much more agile approach to development. So right now, what's in scope for that platform? Couple of million bucks, maybe at the most, but what's interesting about the model itself it is predicated upon the belief that the best recruiter for a new Variant driver is a happy existing driver. We have many of those, as indicated by the voluntary number. So what we try to do is provide a brand-new revenue stream to them, while simultaneously creating a community for them, so it makes a big company feel much smaller. And what's unique about that is it is actually scalable and comes at a lower cost. So what you're seeing is actually a displacement of cost from the traditional models into this new model.

Brian Ossenbeck: Okay, great. And then maybe just one more quick one, margin profile, which is 60% automated in the quarter. How do you think of that scaling, I guess, into the numbers when it comes to reducing headcount and getting better productivity, probably a combination of both?

Eric Fuller: Yes. That's really going to fuel our growth. So as we grow this year, which we anticipate some pretty significant revenue growth within the brokerage segment. We will be able to leverage that digital platform to grow without being as capital-intensive as we would have been in a traditional sense. So, we're still going to be adding people, but we'll be adding people probably at a slower level than we would have because we are able to leverage that digital platform. So not only is it going to fuel growth, but over time, it's going to lead to a better return from an OR perspective because we're not going to need as many people on a dollar by dollar basis that we would in the traditional.

Operator: Our next question is coming from Nick Farwell from Arbor Group. Your line is now live.

Nick Farwell: Eric and Eric, I just have a couple of clarification. Did I hear correctly that you felt that this lag in pricing or price adjustment in dedicated might be no more than one to two quarters? Typically, it takes longer than that, especially is my recollection, especially if it starts in the beginning for whatever series of reasons earlier in the year, and you have a number of contracts that may come up in the spring or the early summer?

Eric Fuller: No. Most of these issues were where we incurred new or additional cost that we typically, in a normal cycle would go back and get re-computation from the customer. And what normally would happen is this would happen progressively, and we would see it, and we would go and have dialogue over a period of time with the customers. And say we need to give it drive a wage increase, and they would kind of agree with us. And so in that scenario, you would see the rate follows suit, usually kind of in conjunction. However, this happens so quickly that we were forced to go and kind of chase the rate. And in that same scenario, we were not able to recoup the cost as quickly. But now we have gone out of cycle and in most cases, we have those increases, either in place or going in place.

Nick Farwell: Oh, I got it. Okay. So, one might say you were far more proactive than prior cycles to be -- there's a growth statement. Recognizing the squeeze that was taking place in such a short period of time?

Eric Fuller: It happened quicker than I think than normally where you would have a little bit more time. This would just happen so quick, and I think that's and it happened on a large scale. So I think it's why it impacted us so much, but I think it also is going to be easier and quicker to fix.

Nick Farwell: Just conceptually, how do you see yourselves benefiting the dedicated side of the business, from what you've learned digitizing over the road? I'm being a little gross in my statements, but I think you understand the concept.

Eric Fuller: Yes, I do. And I would say that today, that is not on the road map, however, I would say that within 1.5 years, 2 years, as we get the Variant model to what we would call maturity, not only from a size perspective, but from a technology platform perspective, we will look to see where else we can apply this level of technology and business model and dedicated would be an obvious place to look, so not on our road map today, but definitely in the back of our minds as a possible place to take approach like this down the road.

Nick Farwell: And taking that same thought process and characterizing it as a suitable for over the road. To what degree is this, a way of sort of working or anticipating, I guess, is a better word, ultimately, the implementation of EV trucking?

Eric Fuller: Yes. I think it actually aligns quite well with all of the different types of technology that are going to be coming down the pipe, whether it be new types of fuel from a tractor perspective or even autonomous trucks. We think that by leveraging technology, leveraging an optimization system that is really not dependent on people. We could build the most defined network possible to take advantage of new technology from an equipment standpoint that we expect to come out over the next 5 to 10 years.

Nick Farwell: So, we're really looking out prep to be fair about this prior mid- to late '20 s before you really see the autonomous truck on certain lanes on an ongoing commercial basis. Is that sort of your hunch?

Eric Fuller: Yes. I would say that you might see a couple here and there by 2025 or before, but not on a large scale, but I think between 2025 and 2030, I think it's likely that you'll start to see a lot more autonomous vehicles on the road. And we think that the system that we're building within Variant really translates well to that environment. I don't envision it like just taking over and replacing drivers, it's more on a specific kind of area niche basis. But there's going to be certain applications that are going to really align very well with an autonomous unit.

Nick Farwell: Yes. And then the last question, I just want to make sure I understood yours and Eric Peterson's general comments about '21 that the OR will improve in some measure because of this Variant grows, you cover the incremental fixed cost.

Eric Fuller: Yes.

Nick Farwell: And then dedicated pricing and the improvement that you've characterized earlier in this conference call, but you didn't mention or maybe I missed it. The swing in brokerage, I mean, that alone, given what the fourth quarter manifested would be could be a rather substantial swing going into this particular year compared to a difficult first two, three quarters last year, right?

Eric Fuller: Yes, I would agree. However, we are continuing to -- much like we have done previously with Variant with the technology platform. We are investing in that area. We are anticipating some pretty aggressive revenue growth, not only this year but in subsequent years, and we are building out the platform in order to facilitate that. And so while we don't believe we will slip down back into the, I think that the next year '20 will be an area where we are going to have some additional costs coming into that model that, that may make that model. From a revenue growth standpoint, we anticipate some pretty aggressive growth. But from an improvement in OR, we don't anticipate that being a big part of 2021 within that brokerage division.

Nick Farwell: So basically, it's an investment year.

Eric Fuller: Yes, it is, but its 1.5 years. It is in that area, but I think the harvest year, if you will, and the Variant model is 2021.

Eric Peterson: Okay. Yes. Nick, I think to your point, we don't anticipate having a 106 operating ratio in our brokerage division in 2021. So, there will be that year-over-year improvement.

Nick Farwell: Right. And I say that -- but what you're saying is basically, it's breakeven maybe you make a little money. It's not going from negative 6% to positive 5%. Just --

Eric Fuller: I would agree with that.

Nick Farwell: Yes. Yes. Okay. And then the last question I have, when you say cap spending, I assume you meant net cap spending $130 million to $150 million so I just missed that?

Eric Peterson: Yes, that's correct. That's net capital expenditures of 130 to 150.

Nick Farwell: And what portion of that would be, if you could characterize the investment in technology as opposed to fixed equipment, if you will, roughly?

Eric Fuller: Yes, I would say during 2020, $13 million of our net CapEx number were around the technology platform that we built, and we could expect another comparable to a little higher during 2021.

Operator: Thank you. We reach end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

Eric Fuller: Great, I think one thing that we did not cover on this call that I think is really important is to really define a little bit quickly, how this model that we're building within Variant is different than what maybe others are applying from a technology standpoint. So Cameron, briefly, could you describe what we are doing and how it's different than other models that may be out there?

Cameron Ramsdell: Sure. So there are a few, I'd say, three or four critical differences. The first is that we built this entirely from scratch. It's an entirely different tailor built operating model that's digitally native. So if you think about applying technology solutions in an existing business, you inherently design around the existing constraints. And those constraints get built upon and built upon over time. And you end up usually over-indexing on them and getting a sub-optimal product as a result. Also when you apply technology to an existing business, especially a people heavy business, the change management effort is profound and can derail the initiative entirely. And we fundamentally did not do that. We built this again in a completely greenfield environment in a completely unconstrained environment with all the benefit of the knowledge of those pitfalls, which I think has really yielded a remarkably different product for the problems we're trying to solve. So that's one. That's just the starting place for Variant, the genesis of Variant is different from anything else out there that at least I've seen. The second is that the mission is fundamentally different. We built this with the intent to scale it from day one, and we built this with the intent of creating the most seamless and superior driver experience in the marketplace. Most other large providers that are leveraging technology try to drive incremental change. And what our mission has been since day one is a step change from anything else that's out there. So it's a much broader mission. The third is that the team of people that are executing the strategy are fundamentally different. So for example, I'm not in Chattanooga. I'm 100 miles South down I75, I'm in Atlanta, across the street from Georgia Tech. We're in a little part of the city here, called the Tech Square. It's got -- it's home to a number of innovation centers from Fortune 500 companies and a bunch of start-ups. So it's a great place to incubate something like this. And we have an incredible team of technologists ideating and building these systems that we've discussed on this call. We've created, I'd say, a culture of innovation here comprised of very bright people from very diverse backgrounds in product. Data science, software engineering, data engineering, analytics and more, all co-located with the operating group. So there are very tight feedback loop. So when a driver called in, there's an issue or something with our optimization system goes wrong, is immediately identified, if not proactively identified. And there is someone sitting right there that is able to communicate with one another, albeit in this age in a digital world with COVID. But the feedback loop is very tight. So you have this kind of co-located operations with the technical operating group. And the final piece is that the fundamental operating model is different. This is not just an app. Of course, there's an app. It's not some bolt-on optimization software. I think anyone can do that. And I think some do leverage it some types of optimization softwares and some capacity. But it's more about how we've built and integrated a holistic operating model that's particularly special. So for example, every trucking company I know of, and in my last life, I dealt with a lot of them, they have load planners. We do not. We have algorithms. And these algorithms automatically orchestrate the movement of the assets dynamically regardless of demand asymmetry or disruption, so traffic, weather, whatever happens instantaneously processed and propagated through the fleet. The most trucking companies have fleet managers and dispatchers, we do not. We have a driver concierge and an omni-channel engagement model for those drivers. So these specialists are armed with technology designed to predict disruptions and ideally automatically resolve those problems before human interaction is necessary, but this is trucking, things happen, and sometimes you do need to intervene. So what we try to do is triage those as quickly as possible with our algorithms, understand the problem and direct them to the specialist that is empowered to handle whatever problem comes up. So everything that we build within Variant is either for rapid proof-of-concept to make our drivers better, improve our operating metrics, like utility, attrition, accidents or to scale at an unprecedented rate.

Eric Fuller: All right, Cameron, thank you. I just want to thank everybody for being on the call today. Again, 2021 is a big year for us. I mean, we've been investing in this and building this for the a few years. We really think this is the year we really harvest all of that investment, and it really starts to show in the numbers. Start to show in the growth. As we've stated multiple times, we plan on seeing revenue growth double within the next four years, and we believe we built a platform to do that. Thank you.

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