Q1 2020 Earnings Call

[music].

Good morning, and welcome to the USA truck first quarter 2020 earnings Conference call. All participants will be no listen only mode should the need assistance. Please ignore conference specialist by pressing the snarky followed by zero.

After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one or your telephone keypad.

To withdraw your question. Please press star to please note. This event is being recorded I would now like they turn the conference over to Mike Stevens Senior Vice President Finance tragic strategy Investor Relations. Please go ahead.

Thank you Danielle good morning, and welcome to U.S. safety U.S. safety capacity solutions first quarter earnings conference call. Joining us. This morning from the company, our James read the President and CEO, Anzac King Senior Vice President and CFO.

We thank you for joining us today in order to help you better understand USA T. capacity solutions and its result, 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 the of factors that could affect the company's future results. Please refer to the forward looking statements section of the company's earnings press release, and the company's most recent FCC public filings.

In order to provide more meaningful comparisons certain information discussed on the conference call could include could include non-GAAP financial measures as outlined and describing the tables in our earnings press release I'll now turn the time over to Zack great. Thank you, Mike we want to thank everyone for joining us on the call today and we appreciate your interest and support.

Our trucking segment, and we saw increases year over year and sequentially in both loaded miles per available truck and available truck count.

However, the freight environment, we experienced in 2019 had some carryover effect on the first quarter of 2020, especially in our base revenue per loaded mile.

As mentioned last quarter, the freight market has been soft, allowing shippers the opportunity to move a large portion of their great at reduced prices, we remain committed to improving our cost structure. Our trucking based revenue per available truck, our logistic load count and logistics margin dollars regardless of market conditions.

If you'll please turn with me to slide number three we'll do a brief review of our financial results consolidated operating revenues came in at a 126.8 million for the quarter, which represents a 5.4% decrease year over year consolidated adjusted operating ratio for the quarter was 101.7% primarily driven by the weaker freight environment mentioned previously.

Okay and.

And affected both of our operating segments.

Our adjusted loss per diluted share was 26 cents.

Turning to slide number four trucking operating revenue before intersegment eliminations decreased $900000 or 1% to 94 million, our trucking segment generated a $1.3 million adjusted operating loss and 101.5% adjusted operating ratio.

The primary driver of these results was a 15.9 sent reduction in base revenue per loaded mile when compared to the first quarter of 2019.

At this rate reduction also negatively affected based revenue per available tractor per week, which decreased $152 or 4.5% year over year for the first quarter.

The offset to the rate reduction was an improvement and utilization of 72 miles per truck per week or 4.9% when compared to the fourth quarter of 2019.

The aforementioned base rate per loaded mile reduction was the result of increased year over year pressure, which began in the second quarter of 2019 and has consented throughout.

Continued throughout the last 12 months.

Loaded miles per available tractor per week decreased 42 miles or 2.8% year over year, and our deadhead percentage for the first quarter of 2020 improved 100 basis points from the fourth quarter.

Our average available unseated tractor count percentage was 5.2% a 260 basis point improvement from the first quarter 2019.

The average available tractor count for the first quarter of 2020 was 1974, which is a 3% increase when compared to the first quarter 2019, as a result of our continued focus on improving our driver experience here at USA truck.

Turning to slide number six we will review the results of our USA T. logistic segment revenue before intersegment eliminations decreased 5.6 million or 13.6% to 35.8 million.

Our logistics segment generated a 600000 dollar adjusted operating loss and had a 109 or 101.9% adjusted operating ratio.

Gross margin dollars decreased 3.7 million or 48.4% to $4 million.

Gross margin percentage for the first quarter of 2020 was 11.1% versus 18.5% for the comparable quarter in 2019.

Load count increased to 27200 loads during the first quarter from the 25800 loads in the fourth quarter of 2019, an increase of 5.4%, but decreased 1.5% or approximately 400 load year over year.

The primary drivers of these results were a decrease in revenue per load of approximately 12.3% and only a 4% decrease in purchase transportation purchased transportation cost per load when compared to the robust brokerage market experienced in the first quarter 2019.

This market.

Environment drove our margin per load down to $146 per load from 278 per load year over year.

If you turn with me to slide number seven we will highlight some key balance sheet liquidity measures as of March 31 2020.

Total debt and lease liabilities were 196.3 million and total stockholders' equity was 76.1 million net debt for the net debt was 196.2 million and our net debt to adjusted EBITDAR for the 12 trailing 12 months ended was 4.2 times.

The company had approximately 37.9 million available to borrow under its credit facility as of March 31, 2020, and as noted in an 8-K filed on April Twentyth, we reduced the lender commitment under our collateralized credit facility from 225 million to $170 million, but retain the option to access our credit facility supporting feature of.

Up to 75 million if needed.

This commitment reduction was primarily driven by an effort to reduce costs throughout the business and is expected to save approximately a $125000 annually and credit facility fees.

In addition to the availability provided by our credit facility. We also have other sources of liquidity, we could access if needed such as acceleration of our accounts receivable through a variety of quick pay programs and loans against our non collateralized assets.

With the recent impact of the krona buyers pandemic on our customers employees and communities, which Dave will discuss in more detail later.

Has caused us to focus on minimizing cash outflows given the unknowns in the marketplace, we continue to be diligent and controlling both our cost and capex by only investing in high our ROI projects and initiatives as a result, we expect minimal capex in the near term.

We continue to generate positive quarterly EBITDA and with reductions in Capex in the near term. We expect this to allow us the opportunity to slightly delever, our balance sheet through 2020.

We expect net debt to adjusted EBITDAR to peak in the second quarter and fall below four times by the end of the year.

As I noted previously we ended the quarter with 37.9 million and availability. This is down from the 55.1 million at the end of 2019 due in large part to abide annual appraisal that reduced our collateral base as a result of deterioration of the used equipment market.

We also purchased replacement tractors and trailers in the first quarter that were deferred from 2019.

Based on current projections and Capex reductions, we expect availability to be more than sufficient for the remainder of 2020 with that I'll now turn the call over to James for a discussion of the business and current initiatives.

Great. Thanks, Zack and good morning, everyone. Our results are not at the levels, we expect from our team, but were notably better than we had discussed in our fourth quarter 2019 earnings call.

We had expected the first quarter this year to look a lot like the fourth quarter last year as 2019 freight trends were consistent rate pressure continued to carryover in January and February seasonality was in line with normal demand cycles.

Then the impact of the code 19 pandemic came in to clear focus and our business implications Likewise became clearer.

While there was no way to fully anticipate the arc of the viruses impact our team was able to respond capably and decisively. This is a direct result of the experience. We had in the 500 year flood just last year and through our enterprise risk assessment and emergency response planning that we perform annually.

We never would've guessed in 2019 that our flood response are required overnight relocation of assets remote workers arrangements and emergency communication protocols would have such immediate and relevant application.

Our highest priority. During this trying time has been the health and safety of our team customers and communities and communicating with those constituencies was our first order of business. We have consistently followed the centers for disease control and prevention and the World Health organization Health recommendations, while following local state and federal guidelines, where we operate.

We took immediate action moving to remote work for most employees, we eliminated all travel we disallowed outside visitors enhance deep cleaning guidelines and increased cleaning frequency of facilities. We developed policies related to employee quarantines and made some amazing sourcing efforts to get masks hand, sanitizers and gloves to drivers that are for.

Facilities, we even commission local church groups to manufacture masks, we had to get creative to protect our team. Additionally, we send debt we send daily co with 19 updates to our drivers and driver support teams.

We host weekly driver calls to answer questions and concerns and the exact team meets three times weekly to assess unanticipated coated rate related issues. These efforts have now shifted to assessing our return to work planning.

The efforts of our amazing and devoted coworkers, who provide our country with vital products and services has been inspiring during this time in history, I, especially want to recognize and thank our drivers and their families for their efforts. They have been amazing as have all our employees. We have had only a small number of drivers who have chosen not to drive.

As a result of pandemic concerns and we have followed the recommended quarantine protocols in those cases, where exposure was suspected.

So in light of world events.

We think it's important to offer some in depth updates on a few things first our customer dynamics the monthly optics within the quarter and segment performance second our ongoing transfer more transformational initiatives and finally, how we see things going forward.

With respect to customer dynamics and monthly optics.

During February before the virus was thought to be a global concern we had conversations with all of our largest customers regarding their supply chain and preparedness for potential interruptions, then as the scope of the pandemic broadened one of the first things we did in February as part of our contingency plan exercise was bifurcate our customer base into essential.

Kwanza essential and non essential categories to help us understand short and long term financial exposure is related to become a 19 pandemic.

Two years ago, when our Chief commercial officer came onboard we did a market scan to understand our customer universe and determine at that point that we needed diversification into the dollar stores and broader diversification into discount retailers. We have executed on that strategy and frankly as provided a welcome source of safety instability through this crisis.

So as we performed this analysis of essential non essential customer types, we determined that just over 80% of our customer volume fits into the essential in Kuala essential categories, given the strength in complex none of our customer base, we gained confidence in that analysis that even in our downside case and despite a potential.

Our long duration, we can expect to continue our strong track record of generating positive EBITDA through the cycle.

That understanding has allowed us to move forward more decisively.

So let's move now to the monthly optics within the quarter.

I will step back for a moment and this feels like ancient history now, but January and February look seasonally normal.

But as we moved into March we had about two weeks of pandemic driven spike in demand in the essential and clause essential customer category as I mentioned earlier that surge has since subsided, our non essential category customer volume dropped 50% from the first week in March to levels, where they are today.

All that demand is important to us and we are working with customers to ramp up as soon as possible and makes up only about 10% of our overall normal customer freight volumes.

So with that burst of demand March ended up being the best month of results. We've seen since last March a full 450 basis points better than our 12 month rolling average of consolidated or so pretty good month.

Looking at the segment performance within the quarter. It was generally encouraging the trucking segment continued progress towards our self help improvement plan on a few different vectors on a cost front and in a continuing effort to manage our cost lower we closed our van Buren, Arkansas maintenance facility in the quarter, which we expect to have near and longer term posit.

Of cost impacts to our business the facility sits outside our newly Densified operating network and couldn't be cost justified as we move to our regional operation. So we made the decision to shutter. It. We also noted in our Q4 2019 earnings call that we had cut head count in that quarter by about 8% and decision that proved serendipitous input.

Paradise to be lean entering into the first quarter, our head count overall right now is down about 10% year over year.

Next saying that the initiative I'd like to discuss as regionalization, we've made great progress in the quarter toward our plan to regionalize the business and now have each of our regional operations leaders in place we have three out of our four operating centers up and running and we expect to have the forthcoming online in the third quarter, we expect that operating regionally will allow us better.

Our revenue efficiency in yield lower driver turnover improved engagement scores and lower over the road maintenance costs.

Next is our dedicated in our Davis businesses, we believe our performance in the Davis transfer acquisition and our dedicated operations give great credence to our strategy.

The dedicated business, we're growing our dedicated presence are happy to report that we've grown dedicated trucks over 21% year over year and expect to add more through the year in March and for the last 12 months. Our dedicated business has performed at industry comparable results for similar dedicated operations and thus the focus on growing it further.

The Davis businesses have been everything we expected the ability to produce great results, even in a protracted tough market was a bit unexpected towards the positive Davis is our best evidenced of what is possible in a truly regionalized model, which is why we are skating there as quickly as possible. We characterize this business has caused by debt.

Dictated given its strong and consistent roster of recurring and repeat business Davis has consistently maintained a low ninetys LR over the last 12 months, despite the challenging environment and was even better in March.

From a driver retention standpoint, I'd like to discuss the trucking segment driver retention late last year, we identified a specific tenure cohort of drivers that returning over at a high rate we analyze the factors affecting this group and maidenform changes that positively affected the cohort retention by 50% our operational retention has improved.

By 18% sequentially and 12% year over year, driven predominantly by the improvement in that one driver cohort.

Now I'd like to turn our focus in the quarter to the logistics segment logistics continued to wrestle with lower margin percentages throughout the quarter just as we have seen since the second quarter of 2019, the dynamic in the quarter was that January and March looks similar for different reasons and February showed improving fundamentals.

January was mostly continuation in the prior year February had improved volume and improving margins and then the pandemic pushed brokerage type business back into a trough in a tough cycle of lower margins.

Our goal in logistics is to create an environment, where margin and volume are adequate to cover our fixed costs in the short term, while providing the basis for profitable growth in the future. In fact, we accomplished notable growth as March volumes were the highest volumes we produce since August 2019, and one of the highest ever actually second highest ever.

But margins were still lower than we had hoped.

As we've said in past calls we are not on a loss leader path to grow volumes at all costs. We just don't think Thats. A response, that's responsible right for us in our business and not us as we are squarely focused on growing volumes in gross margin dollars and what appears to be a lower than historical margin environment and because of that we have to lower our transactional costs.

We made investments over the last two years in a new Tms system in logistics has partnered with outside technology firms and refined our processes to drive efficiency into the business into driver to drive transactional costs lower as a result of those investments we were able to increase revenue per employee in the quarter by 16% year.

Every year and 23% sequentially in a decreasing revenue per load environment. Similarly load count per employee was up 31% year over year and 19% sequentially. This is remarkable and I commend our logistics team for this result, we improved execution and lowered cost signal.

We currently both year over year and sequentially in a tough margin environment, and we believe that fiscal and operational fitness will bode well for that business and an improving cycle more to come on that when I talk about second quarter trends.

So thats the update on the dynamics within the quarter I will now move to our ongoing transformational initiatives and how we see things going forward, including some brief insight into April in the second quarter.

As Eric mentioned, despite a tough business environment in the first quarter, we continued to see our operational initiatives take hold as loaded miles per available truck increased by about 5% empty miles were down and we had a low unseated truck count sseven lower today.

Most on this call are aware of our transformational efforts here, we have often called it a self help story because we believe there are many things we have done and many we can yet do with or without market Tailwinds to continue improving this companys financial results. We have manage the age of our fleet. We've completed the acquisition of Davis.

Closed down high cost facilities manage head count aggressively regionalize the business, we've lowered maintenance costs, we've expanded our dedicated business and we've lowered the cost per transaction and logistics. We believe this company is well positioned to leverage these improvements in whatever market we faced.

While the trajectory of a recovery is unknowable, we expect consumers have to return to the market at some point capacity will come out of the market and economy.

Wide productive capacity of all sorts will inevitably come online. These factors are all positive for USA truck.

We are focused in 2020 on ways to increase utilization improved revenue per available tractor and drive profitable logistics load count growth. The initiatives. We outlined last quarter are moving ahead irrespective of the market challenges.

We are increasing the first initiative is increasing utilization on existing fleet as we reported utilization was up 72 miles sequentially, a 5% improvement and we are intent on raising that further the second is increasing our team presence in utilization our team operation of the focus as a means to increase utilization and we'd have we've had some success, but that will.

What we had hoped.

We made the decision in the pandemic two intentionally slow the pairing of teams out of an abundance of caution for their own health, but we're making progress on this initiative next is network optimization and network remains a focus but volume follow us related to the pandemic cause us to backfill network shortfalls with brokered freight.

This hurts the network balance we're currently performing a network rationalization to find our highest profit centers and paring back to maximize yield.

We built the network, which didnt exist previously and now we're determining how to how to harvest it.

Growing the dedicated business. We are ahead of schedule on this critical initiative tractor count is up as I reported 21% year over year. The next is driver retention. We're doing what we said we would do turnover is in line with industry levels and improving daily.

And finally, driving logistics load count this really should say driving logistics profitable load count, but this is the title that we used in last quarters as slides and so for consistency, we're going to keep it but logistics load count was the highest in March that we've achieved since August and is little premature, but April volume was even higher higher than.

Anytime in the last six years.

So now as we move to April in our outlook, we've continued to monitor customer customer shipping behavior closely throughout April and overall, our customer freight realization percentages are slightly higher than in 2019. Despite recent slowdowns in demand across all customers. After the initial pandemic driven high demand that subsided the last.

We can March as noted earlier, our non essential freight customer volume decreased about 50% and businesses like clothing retailers manufacturing appliances and others.

It is tough to imagine at freight gets worse from here and so we're quite optimistic that is non essential customers return and they are starting to this should be good for us are essential customers are beginning to ramp backup their own traditional freight patterns with increased volumes in retail and home improvement events starting up in the next few days and inbound retail starting up mid month.

We remain very close contact with customers, who have been deeply affected era and are doing all we can to be there first call when freight begins moving again for them.

April trucking results were steady as essential customer freight continued to move it's fairly consistent volumes, but a challenge and this has continued into may is that the keep load count up and trucks moving with adequate utilization, we've had to move more spot market freight than we would normally as traditional customers return to more normalized patterns. We.

We'll diligent replaced diligently replace spot market freight with contract freight, which should result in better trucking segment results later in the year.

Logistics has been a resurgence to what I would call normal all the groundwork laid in late 2019 in the volume momentum gained through the first quarter of this year has paid off we now have a high output volume engine and so far in the second quarter, we have seen margins in that business returned to the low teens percent range logistics had a robust April.

And is off to a similar start in May we are hopeful that this will continue excuse me, but broader market moves will tell the final tail on the quarter. We are optimistic about the trend all end April's performance was positive from a consolidated operating income standpoint, and the back to back profitable March and April is the first time we've accomplished.

That since August September of last year last quarter, we said the market. Notwithstanding 2020 is a year in our plan as it always has been that several elements of our strategic plan gain traction that's still true.

There are things out of our control spot rates fell to four year lows. This week excess capacity is rampant in the marketplace and some aspects of customer freight have come to a complete stop but there are many things within our control. We're moving ahead and making progress on every initiative that we have outlined this team has proactively lowered our head count by 10%.

Shuttered underperforming locations manage the average age of the fleet launched our company real regionalization and opened regional facilities that fit our network expanded our profitable dedicated business and added a profitable Davis business within the trucking segment and logistics is producing all time highs in load count and employee productivity at all time low.

As in transactional costs, we hope the detail. We provided here is helpful and contextualize thing the dynamics within the quarter, our ongoing transformational initiatives and how we see things going forward. So with that Danielle we'll turn it over to you to open it up for questions.

We will now begin the question and answer session.

Question You May Press Star then one on your telephone keypad.

If you using a speakerphone please pick up your handset before passing the Keith.

Now let Joe Your question. Please press Star then Q.

Time applies momentarily to assemble the roster.

My first question comes from JP will vital Kelly. Please go ahead.

Thank you operator that drill team good morning, I hope, everyone is doing well and being safe out there.

James just to clarify something you said did you say that in April you guys had positive operating margins overall, our income over all or was that just for logistics overall and in logistics. So we had as we were really worried about.

In April coming in to the pandemic.

It was uncertain for everybody and our April month ended being mostly positive because of logistics frankly.

Okay perfect.

How should we think about sort of that's spot looks business, which levels.

Ultimately local or contract business.

But as I look at how states a couple of Banco pools.

Excluding legal strong core growth. So that's good that's.

Thats going to lead a lot.

In volatile networks, we will have level also post close.

As with somebody will supplement that was more of a.

2021 of them.

Response to that you'd like before contracts in spot because of how we're going to become involved puzzles.

I wish I knew the answer that it's a really great question.

So let me kind of split into two sections, and then I'll throw it over to Zac and see if he has anything you'd like to add to that so.

In the quarter hour.

Brokerage freight outside spot freight was about 10% of our volume as we moved into April and May that's gone up and it's more like 15% and just to be completely honest. We've had a couple of weeks that got as high as 20%.

Yes, so it it is a challenge and end with spot rates being what they are.

It is it is a risk that we worry about to be to be Frank now that said, we're still running well above our variable contribution. So we're still creating cash in every scenario that weve planned through and so we're not concerned about that but we are actively trying to work with customers that.

Havent been shipping to be the first ones. They call as I said to start shipping again to be their freight provider or their carrier of choice.

And we're seeing some things we have some.

Nationwide retailers I won't name them, who are starting up big retail pushes this weekend and we are no front and center on those pushes we've got our largest customer, which we disclosed in our K.

It has informed us to expect as at their inbound port business will be picking up in the next week or so so there are really good and positive signs and it just as you pointed out as those things come on its a no brainer to replace the brokerage volume with contracted customer freight.

To your broader question of is this a 2021 or I really hope, it's a 2020 thing.

But we just don't know I mean, it will we don't know and buy we I mean that collectively.

We don't know we believe that consumers are going to come back I certainly.

I don't want to challenge the God's but.

They can't consume less than they did in April right. That's got to be a positive shippers have got to be shipping more freight going forward.

But we just don't know how <unk>.

Co bid related consumer revised behaviors, we will manifest themselves in shipping patterns going forward. So.

Great question extremely difficult to answer either best answer we can give you is we're going to keep pushing forward on our initiatives because we believe at the end of the day EPS is the best indicator success in this space and everything we're doing is moving towards a better EPS small I don't know Zach do you have a different daughter, no I completely agree and just to Echo as James said I think.

[music].

We we want to begin a spot to aware whenever they do come back on online ours is the first call. They received so.

That's what we're aiming for yes ill has us that makes sense.

Jason I just want to add one of the thing which is I was really intentionally specific in my comments.

Over 80 per se, it's just over 80% of our customer base fit in that essential and closet essential closet essential kind of it's a little comedic to me when we first of the analysis, we weren't sure that beer and beverage.

And home improvement were considered essential but it turns out that they are and so we've got over 80% of our freight that just it's moving at pretty much pre coated levels.

I'll ask thats, good to hear room to be clear dealers essential might household.

Right.

I think everybody is crystal ball is a little bit cloudy with covidien, probably crop in the side as well.

So I don't fresher and Sir.

20 to 21.

All the so both I'll just jump into your world.

Regional centres.

So we are all going to open before the end the year can you give us a little more granularity on the cadence in terms of by quarter. What you expect and also as the sports betting is that next year it opens up before.

Now the fourth we'll be in the third quarter and we won't get two particular about the facility and.

Because it's still being locked down, but we feel really confident about getting that done. So we have four regional facilities.

Where we have operations center. So we have one is in Dallas, Texas and Thats, one we hope to open in the third quarter I'd like said, we're very confident about that got Atlanta, Georgia, where we have two facilities within about three or four miles of each other we've got to kind of the central Pennsylvania, Carlisle, Pennsylvania area and then the fourth Central operating center is actually.

Not at a terminal it's here in van Buren.

To be clear all of those teams are up and running even the Dallas team, we stood up the Dallas operations team got a great leader down there he's got a wonderful team of experienced people.

A couple that have come over from USA truck and relocated down there to be with that leader in a couple from the outside from some brand name carriers that you would all know that he used to work with sale that team is operating as a regionalize operation. They still have a terminal yet, but they we expect that they will frankly in July that that's what we're targeting.

Okay sounds will listen not all of the types lunchtime I'll turn it over somebody else, but of all be safe out there.

Thanks, Jason you too.

The next question comes from Jack Atkins Stephens. Please go ahead.

Hey, guys. Good morning exact congratulations on her new role.

Yes, Thank you Jack.

So I guess.

We just kind of go back to April for a moment, because I think the comment that you more profitable on EBIT basis is very encouraging, especially considering.

The mix shifts to more spot here over the course the last several weeks so James I guess is that.

Big time proof point in your mind that all the effort that you guys are putting out over the course the last couple of years to reposition the company is really beginning to pay fruit and as you can maybe get that spot mix back down to me that to me seems super encouraging about profitability as we move out of this coated prices I just would love to get.

Your thoughts on that because I think thats.

He said stands out to me.

Yes, no. Thanks, Jack and thanks for the opportunity to address that we mentioned, we've got a really strong Davis business. They just I mean, they're just predictable they do a great job and have great performance month in a month out.

It was a challenging month for truckload for sure, but they continue to operate in profitable space month in a month out we've got a dedicated business that's growing thats still coming online it's yet to.

Really berets fruit, yet because we have been starting up these businesses the real superstar in April from from my way of thinking was our logistics business.

We've got this really strong engine, that's producing a ton of volume at really efficient transactional costs and the margin environment slips and we've got these low teens margins and it's it's kind of back to the old the model that we had in and if I can go a little off script from your question.

[music].

Last year broke my head a little bit I struggle with.

In an unknown in a tough asset market most of us expect to be able to be bolstered by our logistics business and I think youve. If you scan to the entire landscape you say that wasn't true last year logistics was down pretty much for everybody asset businesses were down for everybody in that that was a real concern and we had concerns we haven't addressed them a little bit in the last quarterly call of.

Well, we are trying to make sure that there aren't any fundamental or structural changes there that we don't understand and what seems to have happened in 2020 at least in in April in the first part of May is we've got the strong engine a logistics business. That's got a respectable margin and its thrown off some some earnings sellers Zach if anything I Miss their knowledge.

You cover that I mean, it's logistics last year like Jim said was a little bit of a head scratcher just in terms with all the tech brokerages that came online in their impact on the marketplace and then how those have reacted through the first quarter and early second quarter of 2020. So.

Hopefully those margins continue for awhile.

Okay. That's that's all great to hear.

I guess kind of pivoting for a moment can you help us think about how.

Your fleet should be trending as we move into the second quarter and for the balance of the year would you expect fleet.

Count to come down some say flat.

How should we be thinking about that and then also.

Tractor ages kind of creeping up I mean for obvious reasons. I know you guys are doing everything you can to to preserve liquidity, but.

How should we thinking about where were the.

Average age of your tractor fleet will sort of wind up at the end of this year.

Yes. Good question. So let me address the last part of that first and then go back to the other part so.

Tractor age by the ended the year 3.2 is kind of where we think it's going to be so kind of not in a bad spot at all our target kind of all along has always been in that two and a half to three we think is an ideal operating parameter.

And even at 3.2 years, it's still considerably younger fleet than we had 2017 in the first part 18. So we feel really good about our fleet dynamics as in terms of of the age of sleep.

Going forward.

If you had lost my train of thought what's the first part of your question well.

Okay Triple compound question I remember.

Well I guess you have a first part which is asking about fleet count and how you're expecting that to trend. Yes, yes. So we've got wasn't number Mike is that a 160.

Trucks coming out.

Yes, so we've got a 165 trucks that are coming out of the fleet this year and our internal plan and I didn't really mentioned this on the call, but im glad for the opportunity to address it we've been growing owner operators pretty rapidly as you can imagine the tough spot environment and the tough economics with.

Insurance costs and re licensing which goes on at this time of year in small trucking companies, we've had a pretty substantial influx of owner operator tracked so our plan internally, which we never disclose the financial elements that but it's always been to replace those 165 trucks.

With additional owner operators, we think that gives us some flexibility in our fleet. We think that gives us frankly better return on invested capital dynamics and we're pretty excited about how thats going it's going really well that said I want to be careful how addresses we don't ever want our owner operator friends to feel margin.

Realized in any way, we treat them like part of our fleet, we give them access to our freight we treat them as equal citizens, but as far as investment decision scale. If the market got worse from here, we have some real alternatives to assess if we want to compress the fleet with 165 trucks coming out actually gets a lot easier because those are decisions you can make in days not much.

Yeah.

Okay got you and then last one for me and I'll turn it over but with.

With the fleet kind of coming down from here.

And the used equipment market really being a mass right now how should we be thinking about gains or losses on sale.

For 2020 users.

Good maybe some parameters think about that.

Yes.

Jack I.

I mean, like we mentioned in prior quarters and overall market I mean, the used equipment market right now is tough.

We think that were depreciating, our tractors down through a to a level of which we should be able to exit.

From them, but like like you said with every.

With the change in.

Kind of the dynamic in the market you don't know what impact thats going to have on the equipment market. So we continue to constantly evaluate that.

But I wish I knew what what we could sell truck for and three or four months, but right. Now we just don't know that at this point, so well and we've made we impaired some assets previously and I don't remember Zach if we put in the in the queue at because if we determined it was material or not but we did have some.

In the quarter.

Depreciation that that was a result have taken a lower retained.

Salvage value on the truck right, yes, we did have to accelerate several tractors to get those down to a.

Market level.

Yes, so if the crazy time, Jack I know you look at those those numbers.

And we stay on top of it I mean, it's clearly a topic that we watch closely.

Gotcha, maybe one last quick question here, but.

Could you update us on sort of where you are.

Within the bid season process and are you seeing customers trying to push.

Push out those decisions somewhat.

And how should we be thinking about sort of that.

Your your book of business at year on the contract side and is rolling over in your expectations. There this year.

Yes, fair and good questions. So.

This shift we talked about over the last two years I went from kind of a 50 50.

A shift in.

In 18 kind of first half second half bid cycle to 40 60, we're in the back half a 19, there were low contract rates and people were trying or low spot rates and people are trying to take advantage that they delayed.

We've seen this really weird dynamic right now it's almost split.

Towards like 60, 41st half of the year back half of the year, but to your point of like do you see people pushing it off you do but not in the way you would expect so we have beds that typically or a two or three round multi bid bid and I just was talking our pricing team earlier this week.

Just first our extending the bids into additional rounds, which they traditionally don't do to try to take advantage of the lower spot market and so there are customers and I'd say non strategic customers. They are trying to push for lower and lower rates and we have some other kind of more traditional more on that 80% of our customer.

Base.

Customers that are sticking to their process because they've had the experience of the market highs and lows in there a little bit more disciplined, but you're you're right to point out that it's a bit of a weird environment and the bid cycle.

Cracks me up when people ask even internally when people say well bid season. This bid season that Theres no bid season bid season shifts to follow a spot market trends.

In terms of timing.

Okay got it thats helpful. Thanks for the time guys. Thanks Jack.

The next question comes from Jeff Kauffman as loop capital markets. Please go ahead.

Hey, how are you doing guys.

Hey, good morning.

First of all thank you for that color on April and May that was very helpful.

A detailed question then some bigger picture questions. So where are we right now on projections for gross and net Capex and I think you were talking a little bit about fleet values and you recently took an adjustment how should I be thinking about depreciation at this point for the year.

So we think.

Depreciation for the most parts to remain at a level that we've seen in in Q1.

We don't anticipate having to take additional depreciation assuming the market stays where it's at today, which is pretty crummy right.

If it was you know to shift downward we would have to probably accelerate a little bit, but overall I would say, it's consistent with Q1.

Yeah, and then on the question of gross net Capex mean.

We have really add Mike talk on this call, but he's the expert on that so where are we I mean, we kind of laid out the expectation that we wouldn't have any capex, but actually think were a net positive on capex you want to Andrea we should have some net positive capex. We've we've shut down all the large projects or push them off which which will help us not hurt us on a on equipment standpoint. So.

We will will be in a good spot there. So what that means Jeff is we're not buying any more trucks for the rest of the year and we've got proceeds. So net net we're actually going to be it will be a kind of a credit to the cash flow.

All right and you mentioned 165 trucks coming out later this year, so we're probably going to generate some more proceeds as year goes on.

How much of a.

So you mentioned the fleet age up to 3.2 so.

As we think about 2021 2022 kind of the out years, how should we think about capital spending.

So we have kind of.

I want to say danced around it but we've been intentionally vague in the past about that if you look at our business and you look at our size of fleet.

And we think about a normal cycle a normal business cycle for us is around call. It round numbers 40 million net capex.

And so even as we look at this year, we expect to produce enough EBITDA to cover that and.

Well, we don't need at this year, so weird can as Zach said in his prepared comments concerning that to pay down debt and expand our look available liquidity through the year.

So as we look I mean honestly I, Jeff we do have a five year plan.

And I don't want to sound to nearsighted, but we're really focused on what happens on the other side of this pandemic. So if you were to look out and think about what your assumptions are and Mike will get with you to look at your model and have a discussion.

I would assume kind of a net 40 AG capex schedule indefinitely, but subject to market vagaries.

Okay, well you mentioned five year plan, let me just switch gears for a second.

So when we talked about longer term targets before the world changed.

The thought was trucking logistics split of basically 65 35.

With the longer term target of 1 billion in revenue.

Using technology to drive data route miles.

You thought that you were priced about 20, 25% below the market in terms of revenue per truck. So that was kind of the big opportunity there.

Have any of those changed as a result of kind of how the world's changing your customer base is changing.

We don't think so just from a timing standpoint, so we've been here really as a management team has kind of it seems like a long time, but I was doing the math and I've been CEO for three years.

And the first year, you know, we had 17 going into 18, and and we really got one year of of.

You know reflection of our efforts and you saw that an 18 and we got had certainly a lot of market Tailwinds there.

And I just feel like it is a baseball game, we're in the third and I said this before we're in the third or early fourth inning I still I think theres a rain delay I think Mike Myers said that the other day, we're in the third or fourth inning, and there's a rain delay, but everything that we.

That we laid out there I think we owe you an update our view is we want to kind of get through the other side of this code virus work with our board to understand what the timing of our ambitions look like and then while we normally wouldn't do at Investor day.

Every year I think theres, one in the future and we'll work with our board to figure that out because we owe it to you and investors in the marketplace to give that update but the short answer is it's a third early fourth inning. We're in a rain delay, but all of those ambitions remained the same and Blair and his team are still working on driving utilization to competitive levels and without naming names deal look at our yield.

Visitation in the quarter, we'd be a couple of our public competitors out there. So we're getting better and we expect more.

You beat on utilization at I think that was really really encouraging but the the I guess revenue for trucks different way to look at and I always look at revenue per loaded mile and that was below the peers.

Thats right you said, it's a function of your mix the spot and how you guys were using brokers to fill in.

Thank you for the baseball analogy made my morning, and good luck, but there's more to come in my closing comments that don't hang on.

The next question comes from David Raso Stifel. Please go ahead.

Yes, good morning, gentlemen.

Morning.

Okay.

Two.

I guess, we just talked about the fleet for second first roughly 2000 trucks.

What's the breakdown mean, our owner operators included in that fleet count that you give in the operating stats.

Yes there.

And with the rough breakdown now of owner operator versus company power.

Give me a second on got it written down here on our fleet consisting.

So.

I think we've disclosed this in the past right now so our current our owner operator count is at the end of the quarter was 458 of the company trucks.

Okay, So about 1500, or so company trucks, yes, yes exactly.

And Dave this is that still about 250.

Yeah round numbers yeah.

And what would what would dedicated be in terms of.

Yes, so we don't disclose Dave has been dedicated separately as they're part of the trucking segment, but I think we have said in the past that it's kind of in that three to 400 trucks range kind on the higher end of that now given that we've added so many trucks.

And.

And teams probably pretty small like less than 100 trucks I would think Oh, yes, yes, and we havent given a public number on that we want to get closer to the 100 numbers. So we have.

I am not to mix your question with somebody else's, but as you think about you know our revenue per truck measure, which we think is absolutely. The most critical measure in our business one of the reasons, we want to add teams as we think we can get utilization up which.

Runs into revenue per tractor and we think about.

The regionalized model that Davis so.

Capably demonstrates to us Thats why were trying to as quickly as possible.

And move to the regional models for that we can up our revenue per tractor per week commensurate with what they see and same thing on the dedicated it's just it's a workforce.

And.

You talked a little bit about.

Lowering maintenance costs.

I heard correctly.

How do you do that with an aging fleet.

Yes, the best way, we do that is by reducing our over the road expenses. So those that have followed us for a while I used to explain our network as a game of pickup sticks. When I first got here and that this pickup six were laid out all over the table with no discernible pattern or structure to it one of the first things. We did was we re.

We organized our pickup sticks into identified network and now we've worked to bolster that through the bid process to get more and more and more density in the network. We didn't say this time, but last quarter. We said that our density was up 60% since 2017 as measured by loads per lane per week and as you do that Dave.

And you start to discern really visibly patterns about where your spend as and so we reopened our Chicago facility I think last year.

We got the Atlanta facility, we now have the Carlyle facility, we close the facility here because out of our network. We're opening this facility in Dallas, We got a facility West Memphis, We've got a facility in Vandalia, our Dayton, Ohio, and those are hot spots in our network, where we were incurring the most over the road cost so the way that we read.

Due to maintenance cost in an environment, where basically the truck age is going to stay flat.

Is by taking over the road repairs off the road and put them in house and it's a significant cost savings.

Why was the operation and maintenance expense up over 20% year over year in the quarter.

So.

I believe that's a great question so.

Yeah.

That line item is not just maintenance expense I believe it has operational head count.

We're going to half too.

Dig into that number were not give us a socket.

And we'll come back to you on that day, because it should be really easy for us to answer and I'm, sorry, I don't have it off the top of ahead.

No worries an issue I mean, if when you got to CFO rate.

[music].

Slide eight.

You talked about the 2020 strategic objectives and targets and you look down that that list specifically on the performance target side.

What.

One of those items do you think is a slam dunk most easy to hit in which one do you think is the biggest reach right now.

We it's kind of a cultural thing we have a little bit of an aversion to slam dunk, but that's because of a prior later that used to say things were slam dunks and then the never work.

I I think that honestly.

Boosting utilization increasing teams improving the network growing dedicated drive retention those are all things I'm very confident about the one I'm probably most concerned about is improving gross margin and logistics because a lot of that is market driven and I don't feel that I have all the control in the world over that so that would be the one I'd.

Sam most concerned about but as I've noted in my prepared comments the load count engine that we've created in that in that group has been just remarkable I think probably best in class. So I hope that kind of addresses your question.

Just taken into logistics real quick before I wrap up.

What's the mix currently of.

What I call spot business versus contract business, there and we'll is one of the reasons or weaker margins last quarter. Because you are just.

Using it to fill your own trucks and not actually going after revenue per load or try to make margin.

So you kind of confused me there with the question. So are you talking specifically about logistics and what's the logistics contract spots, but yes, you are not not be fully you already talked about the flat in the spot exposure there, but specifically how much is the I'm going to buy a truck at X and solid for yes, yes about 60.

That contract so that business has consistently about 60% contract, 40% spot always has been and that was consistent in the quarter as well.

And so as margin dynamics recover you start to see a pretty rapid flip in there in there and their performance.

Excellent.

Great questions and Dave.

We're going to try to answer your question before the calls over but if not we'll follow up with you shortly after.

Sounds good appreciate it.

Thank you.

As a reminder, if you have a question please press star one.

Your next question comes from Barry Haimes Sage asset management. Please go ahead.

Thanks, everyone on gledhill, everyone is safe and doing well.

Couple of questions, maybe one first one.

Chains is there.

More contract business from new customers that you've won but hasn't started yet and we'll start up either this month or next month.

Because presumably even in freight doesnt get better we all think it will but.

Even in the current environment, you would have some some help on that.

And then for trucks and in the spot markets less first question.

Yes, very great to hear your voice to I hope you're doing well.

Allscripts, though.

Good good good to hear so a couple of things on that yes, you're right. There is more business coming online and we are very active in our bid process consistently adding new business. All the time and we do have new business coming on we have some pretty big business coming on this weekend.

One with a national home improvement a retailer and another one with the big.

Parcel carrier. So we've got some really exciting stuff going on there and then we have some bids that have come in on some of our big retail customers and that that retail volumes really starting to pick up let me rewind to what we said back in February we had a launch of freight coming online in February and March that we just never got to re.

Recognize the full effect of that onboarding of that freight because of the virus timing and we have done a bunch of analysis in house to go back and look at all the bid activity. We did last year look at the expected realization on that bid activity fast forward that into the number of loads per week that that should deliver.

And then try to make a determination of how much of that freight is being affected by a code virus and how much of it isn't and I actually personally look everyday with our chief commercial officer, and our operators at day over day volume day over a four week moving average day over 13 week moving average of every.

Customer by essential non essential and closet essential categories to understand those dynamics. So im sorry, it's such a crazy little bit befuddled answer, but yes, new freights coming on.

And Theres a whole bunch of freight that we've been awarded that we still havent recognized from the first quarter because of the impacts of the virus and we expect that to be kind of a positive double whammy whenever freight returns.

Got it okay, great great answer appreciate that.

And then.

Second.

Just to be clear could we go ofer.

If there any covenant or other restrictions relative to the depth that we just need to know that in terms of metrics thinking.

No. So we have one covenant in our debt facility Thats.

Our debt facilities disclosed in our 10-K, but on an exhibit but do not there and look at it but we have one covenant, it's a screen covenant once we dropped below.

10%, so right now were above 20% and with the recent change from 225 to 170 million that actually brought that 20% down. So we're in compliance of all covenants, we don't anticipate any issues there.

Great appreciate that thanks, so much good luck guys.

This concludes our question and answer session I would like to turn the conference back over to James rates for closing remarks.

Great. Thanks, Danielle we want all our constituents to understand that we're forging ahead in improving our financial performance that our balance sheet is strong and that we have plenty of liquidity, we put a lot of time effort and resources into transitioning this company to a regionalized carrier with cost and operational discipline is well positioned when the cycle turns I have been.

In a book called minute work by George will the talented sportswriter and it has me thinking in baseball terms I'm missing baseball lot right now by the way I'm sure. Many of you are too he attributes to Mike So should the idea that the harder you work the more lucky have we believe that here and we believe that all the great work. We've done has manifested improvement that will become even clearer as.

Market emerges from the was a 2019 2020. We also believes that there are our immutable natural laws of the universe.

The gravity is an undeniable principal great pitching always beats, great hitting and truckload pricing and demand is cyclical. The last couple of years have been cyclically abnormal yet we are focused on the things we can control, making progress on the commitments, we have made and improving the business for that day when the inevitable cyclical turn comps we don't know how.

2020 will play out yet nobody does but we are better position today than we have ever been in a long time and as a result of all the work in in results that we have outlined here today. So thank you for your time. Thank you for joining us today, and we look forward senior in the future. Thank you.

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