Q3 2019 Earnings Call
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Thank you Melissa good morning, and welcome to USA Truck's third quarter earnings Conference call. Joining us. This morning from the company, our James read President and CEO , and Jason <unk> Executive Vice President CFO .
We thank you for joining us today in order to help you better understand USA truck and its results. Some forward looking statements could be made during the call as we all know forward looking statements by their very nature are subject to uncertainties and risks for a more complete discussion of factors that could affect the company's future results. Please refer to the forward looking.
Eight months section of the company's earnings press release, and the company's most recent FTC public filings in order to provide more meaningful comparisons certain information discussed in the conference call includes non-GAAP financial measures as outlined and described in the tables in our earnings press release, I'll now turn the call over to Jason.
Great. Thank you Chad.
We want to thank everyone for joining us on the call today and we appreciate your interest in support of our company.
We hope you all had an opportunity to review our earnings release for last night.
As we stated in our release the third quarter of 2019 marked a continuation of the challenging freight environment, we've experienced so far in 2019.
The freight market has been soft, allowing shippers the opportunity and motivation to move a larger portion of their freight in the spot market a reduced prices. This continues to weigh on our operational metrics.
If you please turn with me to slide number three for review our financial results.
Consolidated operating revenues came in at 130.9 million for the quarter, which represents a 1.3% decrease year over year consolidated adjusted operating ratio for the quarter was 99.7%, which represents degradation of approximately 470 basis points year over year and was due primarily to the weaker free.
Environment and its effect in both of our operating segments.
Turning to slide number four.
Trucking revenue before intersegment eliminations increased 6.8 million or 7.8% to 93.6 million for the third quarter of 2019.
The majority of this increase was associated with the acquisition of Davis transfer completed in October of 2018.
This represents a 2.5 million dollar decrease year over year I'm, sorry, our trucking segment generated point 1 million of adjusted operating income in the third quarter of 2019, which represent the two and half million decrease year over year.
Our trucking adjusted operating ratio for the quarter was 99.9%.
Which was a decline of 340 basis points year over year.
Base revenue per available tractor per week decreased $273 or 8% year over year in the third quarter.
Base revenue per loaded mile decreased 14 cents or 6.3% year over year for the third quarter.
This was primarily due to increased participation in the spot market as mentioned earlier, our spot market participation in the third quarter of 2019 was approximately 15% up from approximately 4% for the comparable period in 2018.
Loaded miles per available tractor per week decreased 28 miles or 1.8% year over year, well deadhead percentage for the third quarter of 2019 improved 30 basis points year over year.
Our average available on seated tractor count was flat year over year at 6.5%.
The average available tractor count for the third quarter of 2019 was 1991, which is a 21.3% increase when compared to the third quarter of 2018, which had an average of 1641 again due in large part to the acquisition of Davis transfer.
A real bright spot in our trucking segment is the combined performance of our dedicated lines of business, including our qualified dedicated David Davis business.
Which together comprised of approximately 30% of our total fleet. This part of the trucking business traditionally perform performs at a higher level than our core truckload operations generally in the high Eightys to low ninetys from an adjusted operating ratio perspective, depending on the quarter.
And provides a platform and focus for future expansion.
Turning to slide number five we will review the results of our USA few logistic segment.
Revenue before intersegment eliminations was 39.4 million for the third quarter of 2019, a decrease of 9.7 million or 19.8% year over year.
This was driven by lower revenue per load as a result of deterioration in the spot market when compared to the third quarter of 2018.
Revenue per load decreased 25.7% or $442 per load year over year.
Adjusted operating income was point 2 million, a decrease of 3 million year over year.
Adjusted operating ratio was 99.3 in the third quarter of 2019.
Compared to 92.9% for the comparable 2018 period.
Gross margin dollars decreased 42.2% or 3.5 million year over year to 4.8 million for the third quarter of 2019 gross margin percentage for the third quarter of 2019 decreased to 12.2% from 17% when compared to the same quarter in 2018.
Load count increased 8% or approximately 2300 loads year over year.
If you'll turn with me to slide number six we will highlight some key balance sheet and liquidity measures as of September Thirtyth 2018, total debt and lease liabilities were 188.9 million total debt net of cash was 188.7 million and total stockholders' equity was 82.5 million.
Net debt to adjusted EBITDAR for the trailing 12 month ended September Thirtyth 2019 was 3.1 times. The company had approximately 54.7 million available to borrow under its credit facility as a quarter end.
It is worth noting that even in a difficult operating environment over the past two quarters, we were able to reduce our overall debt this past quarter, while continuing to invest in refreshing, our truck and trailer assets as well as standing up new terminal facilities.
Now I'll turn the call over to James for discussion on the business and go forward strategies.
Thanks, Jason.
As we stated in our release the third quarter marked a continuation of the challenging freight environment that we've experienced so far this year.
As I look at our internal leading indicators of seasonality EA turndowns and seasonal surge thus far in the fourth quarter, we see a bit of a mixed bag.
He began to see an increasing number of VDI turndowns, indicating some strength returning to our demand side, but our surge revenue is down considerably year over year, indicating minimal need urgent capacity compared to our own experience over the last two years amongst our customers.
We see more transactional customers, taking advantage of low spot and ultra low margin platforms to drive their own shipping spend down but the health of the bid season with more strategic partners remains quite strong we have bid over 1.8 million loads. Thus far in the bid process and we're still pricing some of our largest bid even as we speak we.
Optimistic that this will allow us to continue to build out a strong network and improved pricing dynamics through our own network design, even in the face of a tough environment.
Before I move on.
Hi.
Pricing in lanes that we already have with existing customers is trending mostly flat to even a bit down going into 2020 and that would be my best view of the market at large that said, we actually expect our consolidated trucking rate per loaded mile to be up a little bit in 2020 by low single digits through continued development of our networks.
Strategy and I'll talk a little bit about that later.
We are in the midst of an environment that is quite challenging, especially when compared to last year. As we noted last quarter, we compounded the environmental difficulty when we failed to bid to win on enough rate in the 2019 bid process late in 2018, we don't plan to let that happen again.
Despite the headwinds and that misstep, we continue to take steps steps forward in our self help story.
I'll turn ahead with us to slide eight.
I want to be abundantly clear about our perspective, we are in no way pleased with our performance in absolute terms, a 99.7 or arc excuse me a 99.7 consolidated adjusted or will never be okay with us. However, despite our disappointment with that result, it is instructive to come.
Pair our relative performance versus our public peers.
When we make that comparison as you can see in this graph on page eight it is clear the team has begun to fundamentally and structurally improve our operations.
Since taking over in early 2017, our team has improved truckings adjusted operating ratio 560 basis points when compared to the average adjusted operating ratio of our public peers. The 2016 USA truck trucking segment, adjusted or was 1370 basis points higher than the peer group and now.
Not quite a full three years later it is 810 basis points above the peer group average and that comparison includes some consistently high performing outliers and the analysis.
This management team arrived our primary mission has been to close the gap with our competitors and with this quarter's results that's over 40% of the gap closed and it's still early we have a long way to go and a lot of opportunities ahead.
This improvement has occurred through the ups and downs or the current cycle. The outcome is only a third time in the last 31 quarter's USA truck's truck in adjusted our was not the highest in the peer group. This demonstrates that our long term plan, we laid out at our Investor day in May as not only progressing it is happening despite the broader environment.
We will continue our methodical approach to make the changes necessary for the company to perform at a consistently high and competitive level.
Now I'd like to talk about some of the initiatives that we have underway that we addressed in our release, we've instituted GAAP closing measured in the second third quarters in response to the challenges arising from the freight environment. These measures are named are aimed at stabilizing our operational and financial performance for the remainder of 2019 and to set the stage for further improvements in 2020.
Okay.
Some of these measures include eliminating 5% to 10% of our fixed costs across all departments. We have this year, thus far implemented approximately $5.6 million an annualized cost savings in 2019 with additional areas under review cost.
Stewardship is a primary part of our job. The second one is to increase the actualization of bid awards, we've implemented bid award tracking to more closely monitor customer commitment that the lane level. This has enabled us to identify customer specific opportunities and impact our freight realization.
Third we've expanded our terminal footprint to enhance alignment with our improving network. The goal of this terminal expansion is to drive further reductions in outside repair cost throughout our network. In addition to offering more accessible amenities to our drivers. We recently entered into a lease agreement to open a terminal and Carlisle, Pennsylvania that will.
Provide tractor and trailer repairs as well as provide driver amenities. We've also been maintenance facilities and South holiday, Illinois in Atlanta, Georgia, and are making improvements to driver amenities and several other terminals across the network and finally, we've added salesforce in the USA to logistics to increase volume, we added 11 personnel to logistics salesforce to broaden their sale.
Both pipeline and extend our customer reach at a time when freight volumes are critical.
This team continues to press forward in this environment to make sure we create our own positive outcomes, rather than sitting idly by and letting the tough market determine our fate. We believe it taking these actions constitute investments and the right places to allow us to further close the gap with our peers in 2020 and beyond.
Let's move back to slide seven you'll recognize the 2019 company objectives as we've talked about them in each of our prior calls this year as we reach the final quarter the year I intend to focus a little less on these objectives and instead gives you some more insight about our emerging view of 2020 as well.
These and these objectives include improving our safety. We are so proud of our professional drivers and they're continuing near best in class safety performance in the truckload space.
An improvement investment this year has been in our transition to a fully LD capable system, which has more than 90% capable or excuse me complete and well ahead is scheduled for completion before the fmcs a deadline, we have focused on becoming a service organization service to our customers remains our highest priority this quarter, we rolled out our.
Focus to our organization, which will guide us in the future service to our driver service to our customers and service to each other watch for more on this in coming months.
We've invested in our technological capability. This year, we completed a Tms implementation and the telematics implemented implementation as I said is nearly complete and add to that the notable accomplishment of integrating AI enabled load and capacity matching and predictive analytics in real time track and trace and our logistics business and we've made some real progress.
Competing commercially the most important element to our competitive position is in our expanding customer base and our approach to bid activities. We've added over 100, new customers. This year in an effort to diversify deepen and broaden our customer base.
We also have become much more efficient and price in creating a specialized logistics pricing function and being much more assertive in winning freight we have come to view the pricing exercise a bit like a prisoner's dilemma and to minimize the impact to our organization have gotten very committed to winning freight.
Via price war, but winning the right freight in the right locations with the right characteristics that should almost always be one and now we're winning it and finally investing in our people. We just can't say enough about this our people our highest priority we've invested mightily in teaching our people to lead our developing comprehensive onboarding and training expense.
And we'll continue to find ways to make USA truck a great places to work.
I really want to spend some time on the outlook as we said earlier closing the performance gap with the competition, it's been a high priority for us and this quarter, we made even more progress toward that goal, we think accomplishing that kind of doing what we said we would do.
Lends credibility to our thesis that the USA truck's self-help story is working to improve results and that our opportunity to improve via self-help remains in place more now now than ever.
And we see the opportunity to close the entire gap well within our reach we believe this is truly a unique story and transportation, we still have massive room to improve asset utilization ample opportunity to reduce maintenance and operating cost and and drive to improve our services should materially improve our profitability and customer experience.
What does that all mean for 2020, well, it's still going to be a tough in absolute terms seasonality is neutral to soft demand is not showing signs of breaking out but it also seems to not be dropping off significantly either rate pressure on incumbent lanes looks to be flat, even a little bit down as I said earlier and insurance costs have risen can.
Favorably as of our October Onest insurance renewal, it's a brutally tough insurance market right now.
On the other side are positive side of equation IMO 2020 should have fuel implications, which ultimately will play in our favor. The ERP implementation should have some minor influence on reduced availability of capacity, which helps us and the fmcs a drug and alcohol clearing house in January 2020 should have similar effects. Unfortunately, we don't.
Have a crystal ball, but based on where we sit right now taking into consideration the various puts and takes I just outlined we currently anticipate the fourth quarter of 2019 to be relatively similar to the second third quarters from an earnings for perspective with the first half of 2020 looking relatively similar to the second half of 2019 how.
However, just as we outlined the offensive play calling we deployed this year, we will fight for our company in 2020 as well we have several elements of our strategic plan shared at the May 2019, Investor day that move into play.
In earnest in the next 12 months. The first one is network improvements. The last two years had been the stage setting for a revamp network design in that time Weve, mostly manage the freight we already had into more profitable configurations and in doing so we've eliminated over 750 lanes from our network, we've reduced our lanes with one low.
Mode, and one move by 42% and we've improved lane density, which as a measure of freight per lane per week, a staggering 51% that we've improved that 2020 of the year, we embark on our power Lane and market have driven five year network strategy in full force this model unlocks yield productivity and velocity and why.
Ways, we've never seen at USA truck and we've already made significant progress in the network design for next year in the bids we completed year to date were 60% of the way complete and setting this up the fourth quarter is a critical bid season to put the final pieces in place.
It's also worth noting that the pricing and bid tack, we've pursued should allow us to return to our intended strategy strategy of minimizing spot freight we have been pressed into being too dependent on brokered spot freight on our assets in 2019 and expect that to return to more normal trends in 2020 with this strategy.
The second important measure to outline for 2020 is our logistics and trucking pricing to win as discuss each of the last two quarters, we have significantly increased our intensity enterprise engagement and focus on pricing and both our logistics and trucking businesses. We anticipate that these changes will result in more flexibility and.
Opportunity in both businesses in 2020 and beyond this is still a huge market with plenty of profitable freight to be had we learn from the mistakes of the 2018 bid season and are on a more mature more season and more capable team as a result.
Next is our regional maintenance facility adjacent alluded to this and I did too earlier, we we have done exactly what we said we would do and we opened or at least three new facilities in the last 12 months in New Hall in Atlanta, and now Carlisle, Pennsylvania, which we just signed a lease on the cost benefits of these strategic location have yet to be realized.
Especially in the latter two locations the constant cultural benefits that arise from servicing our equipment in house seeing our drivers face to face on a more regular basis and coordinating with regional customers from a regional presence are hard to quantify here, but this emulates the model run by our most capable and successful competitors and is the one we will pursue as.
Well.
Next is expanding our customer customer Brett we have built out an expanded truckload salesforce and logistics center and internal sales team both of which we believe to be among the best in the business. We've already added over 100 additional customers in 2019, and we'll continue to add customers to the fold. This base provides the pool to expand our logistics business.
Deepen the opportunities in truckload. The fifth is regionalization, we talked about this last quarter, we will begin staffing our regional facilities with regional operations staff to bolster the existing centralized structure overtime, we expect to get closer to our customers and drivers through regionalization again. It is the model followed by the best for the best in our business.
This effort has begun in earnest what the recruitment of our regional staff and we expect to have at least one of our regional operators in place and functioning by January 1st and have several other regional operations up and running no later than mid year, and finally, drawing our dedicated service offering we run an excellent dedicated operation within our trucking segment that operates.
Very profitably and more importantly offers best in class service experience to our customers as Jason mentioned it makes up about 30% of our business and operates at an o. are consistent with what other dedicated operators achieve it is a very profitable aspect of our trucking segment that we intend to grow the pipeline for this business is as strong as it has ever been.
After two years of focused efforts to grow it and we expect 2020 to be an important year in adding more trucks to true dedicated operations that run well and run very profitably.
We said in our Investor day.
And that 2019 would be the year that we converged on industry level results.
We're getting much closer overall that goal with this latest result, and we're not done we believe the actions outlined above ultimately lead us to higher base revenue per tractor improve trucking or higher utilization lower out around and consistent cost control. So much of this will have to be considered relative to the market, though because its.
Just not clear what will happen in the market in terms of capacity and therefore price pressure. One thing. We are clear about is that we expect to improve our relative performance no matter what the market does just as we have done thus far since our team arrived in 2017.
No one in our company is pleased with the result this quarter. We are more capable than this financial result indicates and strive everyday to improve on that outcome. We have however closed a considerable amount of our GAAP of competitors, thus, indicating that we have become more competitive even in a tough environment and we are proud of that weve.
Well the actions we have deployed coupled with the 2020 path forward that I've outlined here today should combine to close even more of the performance gap as we move forward and more importantly, these same actions. We believe are the right steps that can lead us to the sustained profitability that we expect and that our stakeholders deserve so that alyssa.
I'll turn it back over to you for questions.
Thank you we will now begin the question and answer session.
Good question you May Press Star then one on your Touchtone phone if you use any speakerphone. Please pick up your handset before pressing keys to withdraw your question. Please press Star then too.
This time, we will pause momentarily to assemble our roster.
Okay.
The first question today comes from Jason Seidl with Cowen. Please go ahead.
Thank you operator, James Jason Good morning, Gentleman, Hey, Jason.
I want to talk a little bit James about the power Lane 2020 initiatives and design that you talked about.
Can you tell us on this bid season is this just trying to win those particular lanes that you want to beef up in in 2020 can you tell us how this is going to impact your model from a financial side going forward.
Yeah, So I'll talk kind of tactically and strategically about how we're addressing it and then I'll invite Jason to kind of weigh in on the financials. I mean, we're going to be a little hesitant to give you predictive numbers about the impact, but I can give you some directional.
So this isn't necessarily anything new what we've done and I tried to make the point my prepared comments.
What we basically done the last couple of years and we've talked about this a lot publicly as we've taken I use the metaphor of a pickup sticks game, we had pickup sticks that relying all over the table and we've just organize the existing freight into better more profitable configurations and in so doing like I said, we got rid of over 750 Lane. So we're doing that on fewer.
More efficient more profitable lanes and Thats contributed to our success now we're in its it's settled but critically important we're pivoting away from just reorganizing the freight that we've already got to being really thoughtful and strategic about the freight we want to go play offense and get and so with that said.
I threw out a data point that I think is pretty interesting in my comments.
As we go through the bid process of all the bids that come across from all our various customers, we're able to stitch together a network of what I'll call desirable market hubs and for competitive reasons I don't want to say the exact number of hubs in that exact number lanes, but we've got.
Well it more than a handful of hubs that constitute the desired origin and destination. The OTI pairs for the network a lot of those we already have in house, we're using the bid strategy. The bid process. This year, we've been doing it for the last six months to go drive volume into those hubs. So that we can proactively.
Match profitable loops, and we look at it on the the O R in out and what we call on the turn so what the next the next possible load is for that lane and that helps us identify these powerline, we've already got three power lanes, where we run a considerable percentage of our business, though it proved out the model in 2009.
18, so it's not a when we've been experimentally on it and then we're going to expand that considerably in 2020 through the bid process and so that said.
I've said this time and time and time again, you know, it's an $800 billion market uneven if we assume that it's down a little bit it's still a massive market. There's plenty of freight. This is all about picking the right freight with the right characteristics with the right directionality that kind of.
Combining collude to give us the best opportunity for profitability and what I will tell you is we have done the math on the fee erratic.
Oh, our potential of this configuration in the power lanes themselves.
Have a potential executed with our operating parameters that we assumed to be kind of mid eighties LR business. Just on those power lines now I don't want anyone to get confused the say USA truck's guiding the mid Eightys LR, that's not what we're doing because to get trucks out of their domiciled into the power lanes takes some inefficient moves.
It takes some empty miles you got to chase some freight, but we see this as a really big opportunity for us to leverage going forward, what we've been experiments going on over the last year. So that's what I'd say that Jason is there anything you want to add to that the only thing I would add is.
What we're talking about is almost like a qualified dedicated type set up and if you think about Davis, we've talked about Davis a lot.
They operate in the high Eightys low ninetys before we bought them and they've been relatively consistent even in the downturn.
The slid a little bit, but not much and what we're talking about setting up is something very similar to that where we got burned and we've been very open about this and this was our strategic misstep was that we didn't anticipate through the bid season last year that the market would turn as quick as it did and so we not only went after.
The lanes that we wanted to fulfill this strategy, but we did so while trying to command pretty good rates and Thats, where we stumbled if we hadn't been as aggressive on the rates, we might have been able to.
Fill out this this network strategy. This year not was the plan all along and then when we started getting into the year and seeing a lot of the realization on the contract freight not being there. That's when we realized that we've made a mistake and so we're now ensuring that we don't make that mistake again as we now go through these more reach.
Bid cycles as James alluded to a lot of our freight is underway right now.
But thats. The goal is too is we we kind of took a step back but the strategy hasn't changed.
No I completely get being exposed to much to the spot market you guys get caught.
Ultimately.
We look out somewhere between three and five years, what percentage of your business in the trucking business is going to come from the power.
So you expect beyond three yes, I'll just tell you our goal for the end of Nextshares have 60% to 80% of our business in the Powerlines.
60% to 80%.
Perfect.
Let me switch focus for a minute and.
And talk about your logistics business.
The things, we're seeing on those especially the brokerage side is just massive spending more on technology.
Just wondering.
What do you guys see out there what are your plans on the technology spend and do you think smaller brokerage players such as yourself are going to be able to keep up with us to compete with some of the larger players somewhere over the next five to 10 years.
Yeah. So it's a great question.
And it's got into that kind of a bit to unpack there because there are multiple competitive elements to it. So the first one is these these big brokers are these well funded kind of what I'll call ultra low cost platform. They are making massive investments and it would be easy to resent that it might even be easy to.
Blamed customers, which you should never do.
Because it's a highly commoditized business.
It is making an impact in the way people think about it and so rather than being victims about it.
Our goal is to transform ourselves a bit in the process and get better and smarter and more effective and how we do that so.
I kind of re characterize us as a small brokerage I mean, we've got a $150 million to $200 million brokers. There's lots of guys are a lot smaller than us.
So we think we've got enough scale and size to be relevant, but maybe to your point not enough scale and size to be bleeding edge investors that can afford to put literally tens of millions or even hundreds of millions in some cases into new platforms and so the smart strategy to us is to leverage co travelers or other technology.
Companies that have.
Technology that we can use.
That help us kind of compete with the Big boys and so some of the things I said in my prepared comments was that weve.
Deployed.
We've got an AI partner on the logistics side that helps us automatically match capacity solutions with available demand. So there's no humans in the middle its.
It's it's frictionless and I call. It I'll give you the PG version this stuff through a goose model, where the freight comes in automatically it gets tendered automatically it gets capacity match automatically and never to the human intervene and we're doing that through strategic partnership, which we havent named publicly yet, but we may do that soon and then the other side of it is we use per.
Addictive analytics in that space to significantly improve our throughput and again reasoning outside third party, who has made significant investments in technology and so that's kind of the long winded answer I think the short answer is we're not big enough to put lots of dollars to the middle of the table and so we're going to leverage our outside partners to help us do that and we think we're doing it.
Pretty well.
The margin environments tough there's people that are selling freight at a loss, we know that they say that customers now like to how long that last we don't know, but what we'll do now is invest in the capabilities. So that when the market turns and it will it always does well being a good spot to leverage it I think we all know that selling freight at a losses on a long term strategy.
Just really quickly and this is somewhat related to this but how should we think about capex in 2020, and then sizes the truck fleet 22.
Yes. So are we we have one of the things we inherited when we got here was a need to invest in the fleet and I talked about that in our prepared remarks that even though the market's been soft we've continued to invest because we believe.
That is important for us to stay on top of that from a maintenance expense perspective and from a driver satisfaction perspective.
Having said that we are you talking to a CFO in a former CFO within in James I mean were finance guys and so we run the numbers, we do the ROI and the residual values of these trucks is plays a big factor in that ROI and so we're going to pay close attention to that this year and in the.
Market in which weighs going and make sure that were not you know excessively investing.
Another thing were doing is we're we're looking really closely we think there could be some opportunity to add some independent contractors. This year and we think it could be a good year for us to to be able to make it attractive for them to come run for us, whereas we might be able to offer them something that other people wouldn't be able to.
For because it will be accretive to us, but dilutive to them and so we think theres an opportunity for us to maybe.
Swap out still maintain our fleet relatively consistent but swap it out by bringing on owner operators and letting go above company trucks, therefore, avoiding unnecessary capital deployment in an environment, where that our away my ROI might not pencil.
Having said all that our current plan is to replace we've got roughly 300 to 350 trucks that are coming off next year and our plan is to replace them. We don't expect to shrink our fleet, but we do want to try to grow.
Our owner operators by roughly 100 or 150, if we could come in so that'll help on that capital deployment. If we're only having to go down by a couple of hundred trucks as opposed to 350.
So on unpacking that Jason Directionally for Capex is are we going to expect something a little bit flat, maybe slightly up next year.
Honestly I think it might be flat to down next year in terms of our capital.
Capex.
Much appreciate the time as always gentlemen.
Thanks, our pleasure.
The next question comes from David Ross of Stifel.
Good morning.
Good morning debt.
So you talked about being 90% of the way through the ASV RTL de conversion what have you seen there would have you learned.
Any cost.
Productivity issues.
Yes, that's really interesting so I'll give you a little look behind the curtain actually had our finance team. When we first saw these results I think sometimes a CEO first reaction is to be a little bit in denial and of course, we're managing it every day and trying to get better and better results everyday and so one of the questions asked our finance team.
I'd like to look at productivity and profitability by truck by Alby are the versus LD to see if because we had the benefit if you call. It that during the quarter of having both devices simultaneously deployed in the fleet as we're transitioning and there's virtually no impact to profitability.
Okay and productivity of the trucks was nearly identical between both LD and LDR D. So that's that's a good thing now that said we looked at this conversion as an opportunity not only to be compliant but to be better and so we went out and did a full RFP in over a year ago looked at a lot of technology solutions and.
Rather than deploy.
Kind of one of the well say one of the two traditional in trucks solutions.
We did a combined solution that has a software company that we have lot of confidence and experience with designing the interface with our drivers and then and outside partner with a more of a type solution and allows us a lot of flexibility. So we now have a tablet in the truck.
It allows drivers to do everything they need to do from that tablet.
Has the same a software deployed on it that they have on their driver app that they have on their personal cell phones, and so we actually expect to really important benefits from that one is a small cost efficiency that probably won't really show up too much in the financials, but it's real and that is the ability to save some money by using our app to 100% scanner document.
Station, whereas they've been using a third party provider.
And then the second one is real time mapping software one of the really cool benefits of this program as it has optimized mapping software that takes into consideration whether time of day in traffic patterns much as many of our kind of crowdsourced apps that some of us use on our fall and use it to help our drivers even more efficient. So it's not just the compliance move we.
I actually think it's a competitive advantage and we're super excited about it.
And were cost of the conversion material means that something is going to be a tailwind next year not having that.
Well I have to say.
In reading some recent releases I was giving my controller hard time, like Hey, should we be calling this out and adjusting it out of our.
[laughter], so I know, we're going there but.
But yes, I would tell you that.
There is absolutely been cost to it.
But but I don't know that it's anywhere near the magnitude of what some it sounds like some others may have incurred and we didnt have any impairments on the previous assets because they had been fully depreciated and utilized so other than a little bit of downtime as were swapping out the the machines, which.
It is real right I mean, you've got downtime you've got driver Dissatisfactions is your swapping out the technology.
But other than that we haven't actually quantified it and broken it out but.
More and more people start doing that we'll we'll be happy to do that.
Yes.
And the Tms implementation sounds like that's behind you there James is that hurt.
Near term and it's going to help long term or is it been a benefit from day one.
Yes, Dave I appreciate the question.
It's an insightful question look it hurt this year. It was it was harder than we expected we made some missteps.
The the software provider was clear about the capability the system, but I think we were a little bit namely.
Hopeful about what it can do I will say this it won't hurt us in the future.
I don't think or significantly in a better or worse position I, just think it's kind of neutral.
That said, we have totally change the way we operate.
A from a day to day standpoint, and we'll continue to tweak yeah and my point in saying that is and I think the reason jason's kind of weighing in there's the ITC department is reporting to him and rather we had been focusing a lot on long term IC horizon issues and instead of pivoted to day to day issues.
And so we've literally got four or five if people downstairs everyday troubleshooting improving the experience, we're really focused on improving our driver in our driver manager experienced through this so the net net of all that is I'd say, it's neutral it's not a headwind or tailwind. If we had hope that it would be super helpful. It's that's clearly not the case.
Excellent. Thank you.
Thank you David.
Our next question comes from Jack Atkins Stephens.
Hey, guys. Good morning, Thank you for taking my questions.
Jack So youre James I guess to go back to your your prepared comments around your relative performance and I definitely appreciate the improve relative performance this cycle versus last cycle, but when I look at things on absolute basis.
In Threeq you 16, you guys had 100 100 Omar.
Thank you 19, you have.
99, seven or so I guess.
Why haven't we see more of an improvement on absolute basis, let's put aside the relative performance for a moment just given all the actions you've taken over the last couple of years.
Yeah, I think Thats, a fair question, Jack I mean.
Some of it is environmental right. We've made a lot of changes that are hard to.
To refute or dispute we have a reduced the age of our fleet. We have added over the road repair facilities, we've reduced the cost.
To repair.
Our assets I mean, like we talked about it in last quarter's release, we made significant improvement in our cost per mile on maintenance costs. We've upgraded our people we've upgraded our equipment. We've upgraded our software there are lot of transformational things that had to happen around here structural that we think are materially different now just looking at reserve.
Pulse.
The big thing this year.
Flipped in adjacent actually was a lot clear than I was on the call about it is.
All of US have been at this for a long time some longer than others. This cycle admittedly flipped faster than any of us since seen I mean, you. You'll remember one economists said that 18 was an a plus the 19 would be in a while this sure doesn't feel like M&A to me and they flipped a lot faster than anyone in head expected and inside.
So doing we got more exposed to the spot market because we just didnt have enough freight in the top of our funnel I, we're never going to make that mistake again and as a result, we did some math on this.
Yes, I'm going to say the number I mean, if we had just maintained our mix of contracts freight.
Reverses.
Brokered freight so if we had been 10% better like we were last year at the current rates. We have this year. It would have resulted in a $3.9 million higher profitable number in the quarter and so thats. The old if somebody were canyon that'd be Christmas all year long ray, but but if we had done a better job in our bid process, we would have been.
Nearly $4 million more profitable this quarter.
Then we were at that time in 16, and so we think thats meaningful we think we know what the issue is and it's I don't want to say, it's easy to fix but it's easy to fix.
Okay got you know that met all makes that all makes a lot of sentence I guess kind of thank you forward to 2020 van and James Your to your comment around 60, 80% of the business 2020 is going to be in those power lanes.
How does that feather in.
Think about next year.
Sure, it's not going to be that way.
First quarter.
So was that an average for the year.
What portion of your business today.
Yeah. Good good question, so today, it's less than 30% and those power lines.
But approaching that number the 60 to 80 is a goal by the ended the year urea I loved your phrasing. It's the same I would use it will feather in relatively proportionally through the year.
You know 40 plus percent of our bid activity goes into effect in the first quarter of next year and so it's a little bit weighted towards the front, but yes, we expect the results of that to be.
To be meaningful and to be by the end of the are now Jason sitting next to me and I'd invite him to opine on this a little bit the cost headwinds guys. They're real if if if if you're not thinking about or if we're not confronting the brutal facts about the insurance environment for example.
Then then we're live in a pipe dream I mean, it there is some real cost headwinds that may absent a price recovery may end up in it look in a lot at least in the first half a lot like the second half a 19, yeah agreed and so and it's not just insurance on insurance is brutal and and we need to make sure that everyone's aware.
Thats started this month October 1st was when our renewal went into effect and.
Literally I, just because I know, we're going to get the question as I just want to put it out there we literally will experience between 750000 in a million dollars of incremental premiums.
Third quarter, starting this quarter, so right off the bat, we've got that cost headwind and that is going to be something that the entire industry fields and so I want to make sure. That's clear. So that's something we're going to be battling and then and then there's also the driver environment is still tough I mean, we've got.
All time lows in unemployment and it's tough to get drivers out there and it will be interesting to see some of the different things that James talked about with the drug clearing house in some of the other thing.
These whether whether or not that compounds that situation and so that's something that we're keeping our eyes on and we just want to be realists about how we plan that out in project that and so we don't want to be overly optimistic about how these network redesigns and some of the things that James alluded to how they'll transfer.
Late to the bottom line because there are cost pressures as well, yeah, and I'll just add a little bit to that though as you know we're kind of setting the table for that.
For next year, but it's also net net good for US right that that's a little bit of a calculus that will have an impact on capacity that should flow through to price at some point at some we just don't know exactly when that is and if we did we'd all be billionaires right, we'd be doing something else. So yes. So in the interim candidly I mean that math that James shared with you. We we will.
Run in the numbers I mean.
Just replacing and going back from 15% spot exposure on our brokerage exposure on our on our truckload freight and taking that down to our last year. We were a 4% historically were in that 4% to 5% range.
You know.
We're looking at.
Close to 70 to 80 cents per mile differential on that freight amidst a gigantic differential and so well just being more aggressive on winning contract freight in the right places.
It is going to really flow through it from a financial perspective, and help offset some of these cost headwinds.
Okay. Okay that metal is super helpful. Because I think as you sort of play the play this out through the fourth quarter.
Jason to your comment about insurance premiums being higher sequentially.
I tried to interpret James's comments from his prepared remarks around what the fourth quarter look like and it sounds like it's probably going to look pretty similar to the third if I'm hearing that correctly given.
Maybe a little better seasonality offset by these higher costs on the insurance side, but as we get into next year.
C.
Spot exposure go down.
That's that's how we should perhaps see better than normal seasonality sequentially as we kind of going to the first half of next year I am I interpreting that correctly.
Yes, you are getting a lot of head nodes in the room right here, So you're right on point.
I.
I would hesitate to say that we expect fourth quarter look just like third quarter I think James's comments were somewhere between second and third so again a lot of people like overreact to.
39 cents loss keep in mind. The dollar amounts that were talking about when we only got 8.3 8.4 million shares outstanding So you're talking about a million dollars here right. So it literally swings pretty wildly just because of our small amount of shares outstanding but when you look at the dollars.
You know what we didn't Q3 in Q4, it's somewhere in that range, but again ARPU as James said, our Crystal ball is as cloudy as anyone else's. We we don't have the same level of confidence uncertainty that I think some of our peers have expressed on their calls about declaring the bottom and things like that.
We just want to be we want to be realistic and be we'd rather be conservative than overcome middle right now.
If I could ask one more question and I'll hand it over.
James just just sort of looking at the other satellite going playing Devil's advocate.
And then thinking about sort of what what could go wrong.
Yes.
Shift more your business into these power lines I mean.
Is there some potential execution risk around this going into next year or do you feel like the learnings from this year.
Really puts you on a good footing as you sort of look to execute on the strategy I just wanted to make sure given the market's going to still be fairly choppy in the first half of next year that you know.
Yeah.
I just wanted to want to make sure. We're thank you for both sides of the coin if you will.
Yes, no. It's a fair consideration I would characterize executional risk is kind of.
Internal execution risk and external execution risk on the external side. This will look to our customers to our drivers to the people that are.
Operating the business every day no different than it looks today the the biggest risk and this is the internal risk of not bidding properly guys. There is that on a freight out there.
It's about bidding properly and bidding strategically and winning the bids in the right place at the right time with the right freight configurations and write directionality and so the biggest risk.
Exposed itself last year, and we think we learned from that and so I would characterize this risk is pretty low we've got the I wish that we can invite everyone on the call into our.
Strategy meetings, we are more coordinated moral line have more operational input and more clarity about how we move forward than we've ever had and so while there's always risk I would characterize in your question that the primary risk is an internal bid strategy risk and we think we successfully mitigated that by the learning to last year.
Okay, James Jason Chad, Thanks, very much for the time really appreciate it.
<unk>.
The next question comes from Jeff Coffin affluent capital markets.
Hey, guys good good morning.
Yeah.
I I want to pursue down the ifs and buts, James laid out a little bit earlier.
You know does the things you can control and the things you can't control, which you can control is how many structure in your fleet and what your staffing and had counted and expenditures are what you can't control is how many of these page you're going to win at at what price and it sounds like the strategy here is we're running craze.
For free because we had too many trucks in the market shifted so more of those trucks are carrying spot.
Strategy is going to be to go out there lower price and bid the right Lane. So we have more of this business lock then and we're not subject to spot can't we accomplish that just as easy by having say, 5% fewer trucks you know what if.
You go out and you make the bids at lower rates and you don't get doing.
What do we do that.
Yeah. So there's there's kind of a sequencing event here and I appreciate the question Jeff So.
The first one is and I I would kind of wax a little philosophical on you I I say this in our building all the time you learn this like maybe the second day of operations class in business School. If you have a factory with excess capacity should be willing to run into that variable cost and let fronted variable cost five cause it's fun to make a little bit of money right, but.
You're right at some point that becomes running freight for free but if you look at what we did in terms of paying down debt and creating cash in the quarter, we're not running freight for free we're still making variable margins and that's the right thing to do in this space.
<unk> said very articulate Lee earlier, we will continue to do the are a lie on those investments and when they stopped making sense, we will reduce the fleet if need be we hope it doesn't get there, but that's a consideration that we look at every single day now with respect to what we can control and can't control you know we have employees on these calls to and.
So I always I picked my words carefully so as not to overly inspire or overly d. flight them, but they know I mean, we're really blunt and upfront about this we look at our cost structure every day, which includes people and we continue to consider not only do we have the right side asleep, but we do we have the right number of resources in the building and around the company.
And so that's hard but that's the burden of leadership and and we are looking at that and we always look at that and then finally in terms of beds and at what price I'm. So glad that you said that because.
I think some times people in you didn't I think imply this by a question, but I I'll take the opportunity I think sometimes people think that by pursuing freight more aggressively in a bid process that you were implying that we're starting a price war, we are not chasing the lowest price freight I, let me say.
Again, we are not chasing the lowest price right. That's not what our plan is our plan is to identify the network, which we have done identify the right freight characteristics, which we've done and bid to win freight.
In those in that network and I, often say to customers. We are a network first company and as we do that we don't set the price the market's sets the price and so that's oh and extremely long winded way of saying I I like how to characterize that we do have internal stuff that we can control and and Jason said, it and I'll reinforce that were we.
Siderar costs and the airline our best since every day and we do have outside things that we don't have as much control on the market sets the price and we think the strategy as we've outlined addresses that as perfectly as we know how to do it would do you add anything yeah, that's well so [noise].
No. Thank you for that answer switching gears briefly Jason I I think you said you, we're probably going to hold back <unk> about 350 ish on the truck side, because that's replacement where are you on the desired.
On the truck and can you talk a little bit about where you stand on the trailer plead the trailer Catholics plans.
Yeah. So just to clarify the 350 is the number of trucks between 303 50 that are coming off of this year, but like I said, we think we have an opportunity to do a little bit of a land grab a with owner operators. This year, because we can make it financially attractive for them to run for us, whereas in had still have it be a creative dust.
Whereas our peers may not be able to to do the same.
And that's just because of where we are and so are <unk> expectation is it up the let's call. It 325 that are that we're going to be getting rid of that we we replace those with 100 250 on rock later, so therefore, our Capitol deployment is not on 300 trucks, but on closer to 175 or 200 trucks.
So that's that's the truck side and on the truck average age they're just real quick were below two and a half years. So we're exactly where we want to be where we said that we were getting to all along so now switching gears to the trailer side I think we've been pretty clear at least I know you and I have talked in the past about <unk> in the past the.
Former management teams head head had done done some large purchases of trailers that created some bubbles in the in the life cycle. So we're working through kind of managing that and balancing that out but as it stands today are average age of trailers is six years. So again, that's right about where we would want it to be.
So we we do currently have in the plan to bring on some incremental some additional trailers next year.
But but it's unclear right now exactly when that will be we also we we have a new operator operations team downstairs, it's really digging into asset utilization and we found some pockets, where we weren't utilizing our trailers as efficiently as we should've been and so they're going after that aggressive.
<unk> to make sure that we're not allowing customers and take advantage of us where we're not being able to build the tension and things like that so we may be able to not have to buy as many trailers as as we previously thought but as it stands right now our expectation is to to buy a few trailers next year as well. So you know when it's all said and done we expect the net of all those things to be a reduction.
One year over year in in <unk>, and I'll, just say being where we desire to beat on average age within the fleet actually gives us some flexibility to be really open about what that means next year yup.
Okay, Jason Thank you for the clarity James Thank you as well good luck.
Thanks, Yeah.
The next question comes on that day Hanes as stage asset management.
Thanks, everyone had a couple of questions first thanks for the the analysis on on Slide eight My My question is if you take the 810 basis points of remaining gap to the competition.
<unk> and I don't expect qualification, but if you had a sort of.
Where you think that biggest deltas are and opportunities you know kinda from maybe you know take us to smallest you know what are the two or three or four.
Main areas.
That you can close can you even close the hall 810 or are there scale advantages at some guys have so maybe you can only close 600 of the 800 or so a little flavor on that as my first question.
Yeah. So that analysis is against our public peer group and so while there are two kind of notable outliers in there. It includes everybody and we see no reason that we can't get there even in the explanation. We gave earlier, there's really two major things that we can do the first one is that we can improve the utilize.
<unk> on our tractors I mean, if you look at it either by miles or revenue Protractive per week that is our biggest opportunity in the business and we close a considerable amount of that gap simply by being competitive in terms of putting miles on trucks.
The second thing and we've discussed it a lot here, but it's improving or mix on our free we improve our mixed on our freight and our utilization we were talking about this actually as a team last night, we actually more than close the gap of the competition. We we end up out actually outperforming the peers. If we just get to average on utilization and we change our mix back.
Yeah, not all the peers not the best in class.
The average yeah and <unk> you know so so on that point when he talks about the network what he's referring to there you're going to have a lot less out a route dead head idle time things like that and turnover driver turnover, because they're not getting the miles that they like which leads to higher costs on your recruiting so so as simple as it is say utilization it actually in.
This is a variety of different line items within the piano that help you get to that place a being more competitive.
Got it <unk>. That's very helpful. Second question was in terms of the new terminals is there sort of and expect that are Oh I see that you you get from those were payback periods, So and and you just feel on on.
On the financial manager those yeah, absolutely I mean again, you're talking to to finance guys right. So we don't do anything if if it doesn't pencil and so we we have done detailed analysis on outside spend in the markets where where.
It might be cost advantageous for us to to do it on her own as you know over the road repairs or you know the labor rates are much higher than than what you would pay if you do it yourself and so we've done the analysis on how many we've done a in those markets with our new network and what we projected the reduction to be and there is absolutely a and R.Y. on those.
We we we typically don't disclose that but I would tell you that the expectation is that like for example, we just you know <unk> least the property up in Carlisle, we didn't buy anything or build anything so it's a little bit of a different analysis, but we do expect that to to pencil in terms of of the <unk> up there yeah, and so varies me a little humble.
I'm really proud of the team on this one <unk>. This is one of those where you ask somebody to go look at something and they impressed you with the breath and capability. They bring in the table. So chasing his team did this incredibly cool kind of heat map analysis of all of our over the road span and proposed hypothetical locations that would most reduce our costs.
We pick those locations, which we've now secured and then <unk> you know we did the analysis before securing them and you know he's being a little cryptic, but more than cleared our hurdle are hurdle right. So you can just as capabilities. We can't go figure out what are weighted average cost of capitalism and tell you. They at least clear that hurdle right and then.
[noise] God, Okay. Thank you and my last one is.
Going over to logistics the revenue per load was down 25.8%.
What was the change in your cost of buying capacity within logistics in the corridor.
Not enough.
[laughter] not enough I mean, it's interesting you know the if you look at spot.
The spot right year over year, it's down about 30%. So it's not exactly a one for one decline that would imply this is totally spot market driven but even though we have great customer relationships and a lot of this is contract driven that businesses exposed to a lot to the spot market <unk> I will tell you about it it's a great question until.
A week ago, the traditional letting out that you would expect to see and the capacity costs just didn't happen. It's been it's been on an an unnatural phenomenon that frankly I haven't heard anybody explaining in good terms, it's been tough to understand but just in Alaska kind of 10 days, the market's freed up and and capacity.
Providers seemed to be acting in a way that's more rational inconsistent with history. The way My logistics leader told it to me. This week is they they finally realized Oh, my gosh to get freight my rate needs to be right and so I think we're starting to see that log jam ease, but it it's been brutal and it's been weird.
[noise] right. Thanks like ask good luck.
<unk>.
The next question comes from Mike.
New in capital.
Hey, guys am I.
A couple of Crooklyn's four yeah, Yeah. Your clue, yeah. When you when you state that yes, it's a million yeah with their share account, it's a million dollars here.
You're talking very little dollars right to go to.
Below 100, or when you look at the cost side.
There has to be additional costs that are.
Identifiable that you can go after.
<unk> Yeah, it's been running like this for you know 15 20 years, there has to be additional costs out there. They go how do you go about finding and and are there those that you're looking at so that this will lead the way this question.
As the next cycle approaches that were a leaner company and.
Mid cycle or is 200 basis 0.3, 250 over the last cycle in our peak earnings are 234 hundred basis points higher than last year.
Yeah How'd you How'd you go look at that and then if you can comment on I'm sure you've run models, where your expectations are for that <unk> for that.
<unk> earnings next mid cycle and peak cycle.
Yeah, So Jason is going to hit the costs real quick here and and hopefully talk about our costs countless.
I'll just tell Ya, we <unk>, what I I don't want people to lose sight of I mean, great companies invest in downturns, because you don't lose sight of what strategically important when there are clouds around you and investing in our trucks will lead to lower costs investing in our repair facilities will lead to lower costs and now turnover.
Jason has a lot say about other yeah. So I'm glad you ask the question, Mike I was hoping I get the chance to talk about this yeah I'm really proud of of our entire organization candidly. This is something that we kicked off almost a year ago and we actually identified 91 areas. This was a cross functional effort in initiative. There were 91 areas that we had.
Identified as as opportunities for cost take out we've already kicked off 74 of those so when James talk I think it was in the release from it was in his comment about about having cold out 5.6 million a fish <unk> costs annualized fixed cost reductions, that's that's real and I wish the market was better.
Because then you would see it more right, but right now it it's just helping us stay afloat candidly, but the the the target opportunity did they were going after was a 52 million dollar spend area and we we estimated somewhere between five and a half an 8 million of opportunity and.
We realized by 0.6, which means they're still several million dollars of opportunity left to be had and of those <unk>. You know 91 total areas. We've kicked off 74, but that doesn't mean, we've seen 74, all the way to the finish line.
You know I could I could for you to tears with all the details behind each one of these different things, but suffice to say there's no area in the company that is not being looked at right. Now. So so your point is is right on and it's exactly what we're doing.
And and it's our job to focus on bringing an incremental revenue in <unk> being better utilization and and all these things, but at the same time.
When you've had a company that's been around for 30 years inherently there's been just bad behaviors that have worked their way into the business or or bad contracts or or or or legacy systems are things that you've just continued to do that nobody's really bothered to just say hey, why are we doing this do we need this can we cut this out can we renegotiate this and that's what this this call.
Counsel that we've got is doing it's it's like a set of cross functional team. They they have multiple sub teams that meat on on multiple times, a month and we get together as entire council. Once a month to review progress not something that's been going on for probably about nine months now and will continue for the foreseeable future and.
On the second part of your question I want to answer it really carefully but also really care clearly so when you ask about next cycle and where would we be midcycle. It it's kind of a two part or you know one we said in our prepared comments that we see within our grasp the ability to further to totally close to 810.
Basic point gap between us and and the peer group.
We do through all of the things that we've outlined here, but let's just pretend that we only get that number to 500 basis points in the next two years I'm not setting an expectation is purely hypothetical and the reason I'm doing that is because the numbers start to frighten me in a good way if the mid cycle of the peer group is around and <unk>.
<unk>, which it is and we're 500 basis points from that you hang up essentially a 30 million dollar operating income on a 600 million dollar top line revenue business you get to $30 million of operating income I might have said that already you convert you tax effect that and run that to E.P.S., It's a scary number.
So even as a we improve over time.
And our results improve over time, you'll start to see I I don't think the word is too strong massive improvements in E.P.S. at the mid cycle and I'm not even going to talk about what happens at the top of the cycle. We're in a really good spot we've closes the gap considerably we know how to close the rest of the gap.
And if we get some help from the market, which we've always said that are improvements not market dependent we're gonna keep improving despite the market, but if the market goes back to a normal midcycle. This companies in a really good position.
Excellent in Alaska.
No one really tabs on it the balance sheet looks like there are no worries.
Whatsoever. There there are no real covenants on this and we have we just extended it for five years and it looks like you know we're not burning much cash at all if any of you actually pay down some debt disorder and she w. The same as we look forward that.
Pretty neutral on the borrowing base.
Yeah, great points, Mike in your spot on we did pay down dead, even in a tough quarter. We have 50, roughly $55 million of availability. There are no spring covenants that would be restrictive or or or you know.
Hurt us in any way shape or form and and our intent like I said like we've had a couple of times you got a couple of finance guys here.
We're going to make sure that we're not deploying excess capital beyond what our company's able to generate I. That's our job to you is shareholders and so we're gonna make sure that we continue to manage that appropriately.
Excellent, Okay, and I would highlight stock you know we're right around tangible book here if management the board if there's ever a time to go in there and buy stock I would assume that a at this point in the cycle Now's the time.
You have to make decisions as do all individuals about what's a good investment for them, but we wouldn't disagree with what you said so okay. Thanks. Thanks, Thanks right.
I see no further questions. This can contact question and answer session that conference has now also concluded. Thank you for attending today's presentation. You may now disconnect Airlines.