Chattanooga, Tennessee-based truckload and full-service freight transportation provider U.S. Xpress recently announced that it plans to formally divest its U.S.-Mexico cross-border investment. The company said that this move is part of ongoing capital allocation and profit improvement efforts.
And it explained that this initiative is expected to reduce current and planned invested capital by roughly $40 million, and also improve its consolidated operating margin, and provide customers with continued access to cross-border service through what it described as a variable cost alternative.
“As part of our ongoing initiatives to improve profitability and enhance shareholder returns, we evaluated our aggregate investment in our U.S.-Mexico operations, including investments south of the border, in Laredo, Texas, and in U.S. assets and personnel required to service this business,” said Eric Fuller, U.S. Xpress president and CEO, in a statement. “We concluded that these operations required a comparatively high level of fixed investment per unit of revenue and created lane inefficiency in the U.S., because serving freight to and from the border did not maximize revenue per mile or meet our other network planning priorities.
Fuller added that in 2018, the combined Mexico and allocated U.S. operations failed to keep pace with improvements in the company's U.S. OTR (over-the-road) and Dedicated truckload operations. And the company’s to exit this operation was identified as a relatively high return, simple execution initiative.
“This strategic decision reflects the latest step in the Company’s transformation as we methodically evaluate our capital allocation, improve our operational execution, and target industry-leading profitability," explained Fuller.
The U.S. Xpress cross-border business unit is comprised of 95% equity ownership in Xpress Internacional S.A. de C.V., which includes fixed United States-based investments, including: a trucking terminal in Laredo, Texas; roughly 700 incremental dry van trailers; and tractor capacity allocated toward serving freight to and from the U.S.-Mexico border. U.S. Xpress said this cross-border business generated around $50 million in revenue, but insignificant operating income, in 2018, including the allocated costs of its U.S. investments and personnel.
In November 2012, U.S. Xpress purchased a 90% interest in Nuevo Laredo, Mexico-based Xpress Internacional, who provides border crossings and truckload transportation of U.S. Xpress trailer equipment throughout Mexico. U.S. Xpress and Xpress Internacional had been involved in a joint venture, which was established in 2007, thorough the time of that purchase.
U.S. Xpress said at that time that its partnership with Xpress Internacional has grown to become a lead provider for gateway to and from north and central Mexico and the U.S., with more than 200 daily border crossings through Laredo.
A company executive told LM in November 2012 that U.S. Xpress’s partnership with Xpress Internacional was the culmination of a partnership of everything it has been working towards by putting a long-term business plan in place to take on controlling interest of that business.
What’s more, the executive said the collaboration has been very positive for U.S. Xpress and its customers going back to 2007, having filled a solid need its customers had and on the way to becoming about a $120 million business unit for U.S Xpress at that time. And when totaling both the U.S. and Mexico revenues U.S. Xpress generated at the time of that announcement, the executive said it was about two-thirds U.S. and about one-third Mexico and is a service that had been well-received by its customers.
In its announcement this month, U.S. Xpress said it made the decision to exit its fixed cost investment in the cross-border business and also sold off its Mexican entity to the existing managers. And it also noted that the operational transition should be finalized next quarter, with the various facets of the exit expected to take place in the coming months, including:
- the sale of the company's 95% equity ownership of Xpress Internacional S.A de C.V., for an estimated $4.5 million in cash and an additional $8.5 million in cash to be received over 8.5 years. The equity sale has been completed;
- the closing and sale of the company's trucking terminal in Laredo, Texas, and disposition of approximately 700 dry van trailers allocated toward the Mexico business as these trailers complete the transition phase. The terminal is valued at an estimated $7.0 million, and the trailers had been slated for replacement over the next two years at an estimated cost of $20.0 million. This operational transition is anticipated to be completed during 2019; and the
- repositioning approximately 300 domestic tractors from loads to and from the border to more profitable loads through network optimization over a transition period, while continuing to offer customers ongoing access to cross-border service on a variable cost basis through relationships with its former partners, anticipated to be completed in the first half of 2019
Stifel analyst Dave Ross wrote in a research note that U.S. Xpress’s decision to exit its U.S.-Mexico cross-border trucking business was driven by an objective to improve margins and avoid throwing more money into the low-return operation,” and also “provides the company with additional U.S. network density, improved focus on its core U.S. operation and higher cash flows.”