Q2 2020 USA Truck Inc Earnings Call
Welcome to the USA truck second quarter 2020 earnings conference call.
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After todays presentation there'll be an opportunity to ask question.
Please note this event is being recorded.
I would now like to turn the conference over to Mike Stevens. Please go ahead.
Thank you Sarah and good morning, welcome to U.S. 18 capacity solutions second quarter earnings Conference call. Joining us. This morning from the company, our James read President and CEO exacting Senior Vice President CFO.
Thank you for joining us today.
Her to help you better understand U.S.A.T. capacity solutions and that's a result, some forward looking statements could be made during the call and we all know forward looking statements by their very nature are subject to uncertainties risks.
For a more complete discussion of factors that could affect company's future results. Please refer to forward looking statements section of the company's earnings press release and the company's most recent that's used to.
In order to provide more meaningful comparisons certain information discussed on the conference call, including non-GAAP financial measures as outlined in describing the tables in our earnings personally I'll now turn the time or does that.
Thank you might want to thank everyone for joining us on the call today and we appreciate your interest in support of USA truck. We hope you all had an opportunity to review our earnings release from last night.
As we stayed in the second quarter.
Second quarter was unlike any quarter, we have experienced as a management team the corona virus pandemic pressured our non essential customers, which make up approximately 20% of our at the trucking customer base.
Having many to stop shipping altogether or significantly reduced shipments this caused us to move trucks into the spot market, which has been at a four year low.
The move caused a decrease in utilization rate and base revenue per tractor per week and logistics, we were able to increase load count, 16% year over year, and 23% sequentially to help offset the rate pressure in the marketplace.
If you'll please turn with me to slide number three well do a brief review of our financial results.
Consolidated operating revenues came in at 123.7 million for the quarter, which represents a 7.7, 0.4% decrease year over year.
Thanks revenue was down 2.8%, which excludes fuel.
Consolidated adjusted operating ratio for the quarter with 98.6%.
Up from 98% in the prior year, primarily driven by weaker freight weaker freight environment due to the Coburn 19, pandemic, which affected both of our operating segments, our adjusted loss per diluted share with success.
Turning to slide number four.
Trucking operating revenue before intersegment eliminations decreased 7.8 million or 8.8, 0.1% to 88 point Sixmillion based revenue excluding fuel was down 3.5% to 80.5 compared to 83 point Fourmillion for the second quarter of 29 team.
Our trucking segment generated adjusted operating income of 1.7 million, an increase of 47% year over year.
As a result, our trucking segment second quarter 2020, adjusted operating ratio was 97.8% an improvement of 80 point year over year, and 370 basis points sequentially.
Trucking base revenue per loaded mile decreased from $2.14 to $2 into that.
Or 5.7% and utilization decreased 76 miles per truck per week or 4.9% from the second quarter of 2019, largely due to network interruption caused by non essential customers freight volumes.
These rate and utilization outcomes negatively affected based revenue for available tracker per week, which decreased $347 or 10.4% year over year for the second quarter.
Our deadhead percentage for the second quarter 2020 improved by 10 basis points from the first quarter. Our average available on seated tractor count percentage was 5.8% 60 basis point increase from the second quarter of 2019, the average available tractor count for the first quarter of 2020 was 2063.
Which is a 7.7% increase when compared to the second quarter of 29 team.
This truck count growth was due to additions of owner operators.
Turning to slide number six will review the results of our U.S.A.T. logistic segment.
Revenue before intersegment eliminations decreased 28 million from the second quarter of 29 theme for 2.1%.
38.7 million.
Our logistic segment generated 172000, adjusted operating loss and had a 100.5% operating ratio.
Gross margin dollars decreased 1.8 million to 4.7 million.
Gross margin percentage for the first quarter of 2020 was 12.2% versus 16.5 per cent for the comparable quarter of 2019.
Load count increased to 33400 loads during the second quarter of 2020 from the 27200 loads in the first quarter, an increase of 22.8% an increased by 15.9% or approximately 4500 load year over year.
The primary drivers of these results were a decrease in revenue per load of approximately 15.6% and only an 11% decrease in purchase transportation cost per loan when compared to the robust brokerage market experienced in the second quarter of 2019.
This market environment drove our margin per load.
The $141 per load from $227 per load year over year.
If you'll turn with me to slide number seven will highlight some key balance sheet liquidity measures as of June Thirtyth 2020, total debt and lease liabilities were 189.5 million and stockholders equity was 75.5 million.
Net debt was 189.4 million and our net debt to adjusted EBITDAR for the trailing 12 months ended was 4.1 times down from 4.2 times as of Q1.
This represents a net debt decreased.
6.8 million from Q1, 2020, and a 10 basis point improvement in our leverage ratio.
The company had approximately 38 million available to borrow under its credit facility as of June 32020.
The continued impact and uncertainty caused by the coven 19 pandemic on our customers employees and communities has caused us to continue to focus on minimizing cash outflows. We continue to expect minimal capex in the near term. However during July we did enter into an agreement to lease 189, new tractors and dispose of certain high cost.
Tractors during the back half a 2020.
We expect this agreement to allow us the opportunity to reduce our average tractor age and improve our maintenance and fuel costs, while controlling our cash outflows near term.
One other item of note is our 2022nd quarter tax rate.
For the second quarter of 2020, our effective tax rate was 211.4% as compared to 99.5% the second quarter of 19.
Our tax rate was primarily affected by close to breakeven operating loss for the quarter, coupled with permanent difference.
Permanent differences.
The most significant of which is the effect of the partially nondeductible per diem pay structure for our drivers.
And our pre tax income approaches breakeven the fixed portion of tax expense related to the permanent differences begin to skew tax expense by making it less variable when compared to pretax income.
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 to everyone as we have in quarters past, we will offer indepth update today on dynamics and segment performance in the quarter, an update on our progress in our self help transformational initiatives and how we see things going forward.
Before we begin let me give a brief update on October 19 response in what we're doing to be a better corporate citizen given our heightened sensitivity awareness in concern about issues of the quality in the world.
Our cobot 19 response has gone well as we outlined last quarter, we have well established contingency planning criteria and governance policies born from our experience in the 500. Your flood of 2019 that allowed us to continue to run our business seamlessly recently, we made a significant change in our protocols, we began taking temperatures of essential employees as they enter the work.
Place and review CDC provided questions to evaluate fitness for work. We continue to have the vast majority of our nonworking work for our non driving workforce working from home and the technology and business cadence tool. We haven't place have allowed us to do so effectively.
Sadly, we have experienced some illness and one driver and one non driver hasn't have lost their lives in the pandemic.
It's in prayers are with them and all of our affected by this pandemic around the world.
As Zach outlined in his comments from a business perspective about 80% of our customer freight is from what we call essential and cause I essential customers, we've been able to survive through the Calvin crisis, and believe we're well positioned to thrive as we gain even more momentum with those customers have made adjustments to our network to reflect the short term.
Possibly permanent loss of non essential business and as our business cadence strengthened through this cycle.
I want to take this opportunity to thank truckers everywhere for their continued perseverance and diligence and keeping Americas freight moving and supply chains open. These men and women have all the same concerns in worries as the rest of us and yet they get up every day and do what only they can do our heroes drive trucks and we're proud of them.
We've also remain committed to being a more thoughtful more aware and more engage.
Community and creating a quality in the workplace as we have reached out to trusted advisors and mentors thought leaders in this space and have worked with our board. We have engaged in a concerted way, we're working with our internal diversity count for the heightened awareness internally, we will continue to recruit diverse candidates in our new College graduate program as we always have we are folks.
Moving on developing diverse talent into leadership roles, we began recruiting at more diverse universities, including HBC use and we're working with the board to emphasize diversity in leadership. We're also partnering within our community should provide pro bono access to technology and business advice from our team. We believe the best way to advancing quality is through our.
Actions and we are and will be active in making a difference.
So first I'd like to talk about the dynamics in the quarter and segment performance given the uncertainty in the world. We had expected the second quarter to be more or less level with the first in terms of financial performance, we were able to improve on that performance through a lot of grit commitment to our self help plan and execution on key initiatives broadly.
Well to keep volumes steady in the business throughout the quarter, our customers and segment diversification efforts first began two years ago have provided some installation through the uncertainty of the economy and beginnings of a separate cyclical upside.
We are far from certainty about what the evolution of the virus will be how that will affect the economy and how the upcoming elections will manifest in our business. However, as we noted last quarter, our deep understanding of our customer makeup and their relative strength in this environment has given us confidence that we are well positioned to execute and take advantage of it.
Turning cycle.
We still expect to continue our strong track record of generating positive EBITDA through the cycle and are moving forward decisively.
When we last met we had come off a strong April and we're beginning to experience a softer may and we shared that at the time. It was a sign of things to come well volumes remain relatively balance through the quarter industrywide capacity availability drove may spot prices to near historic lows. When this happened customers with hold some of their committed freight take it.
The spot market and then asset carriers with committed freight fights preserve as much committed freight at committed prices as possible I intentionally word committed there a lot to make a point.
The alternative when this freight is not tendered his to play in the spot market at lower rates not a good situation for profit and yet that's what we had to do in the quarter. We had one six week period in April and May where our asset business relied on nearly 20% spot freight and an unfavorable right rate environment, just to keep our trucks moving and producing variable contribution.
Ian.
On the logistics side. This same environment can result in margin expansion in as much as committed customer freight can now be met at a lower spot purchased transportation price, except the customers longingly observe market dynamics and lament the perceived loss cost saving so they to go to the spot market, which we also experienced in the quarter as spot rates have rebounded nine.
Sleep logistics customers now on to lean into their committed bid award freight at the exact time, we'd rather be in the spot market, it's fluid and dynamic and we're getting much better at balancing through the cycles.
I'd like now to talk about the trucking CES segment, we want to make two points abundantly clear to anyone who's listening or reading. This commentary point number one our trucking segment is making substantial progress and number two we have made significant investments in our own self-help prescription throughout the cycle and we expect the those investing.
Well, yet yield performance gains going forward.
USA truck trucking segment improved sequential adjusted our performance Zacks said by 370 basis points.
Sequentially and year over year improved adjusted or 80 basis points at a time fraught with economic uncertainty. We achieved that result, despite the uncertainty we saw revenue per tractor down mostly attributed to rate changes year over year, we had challenges and driver retention recruitment related to the broader economic environment, we saw tractor productivity slip.
Due in large part to coveted related network disruption and slightly higher empty miles. These rural areas that we're working to improve despite those headwinds we made meaningful progress as evidenced by the results the 97.8% adjusted or in trucking is the best we've had since the end of the last cycle back in Q1 of 19 and yet with.
Great and utilize utilization depressed versus that comparable how are we doing it.
Recall as we've discussed previously that we expect the das some short term challenges in our transition to regionalize operation. The network effect. The Calvin 19 added to those challenges as all of us in the industry had non essential customers. So absolutely critical components, our respective networks stop shipping freight, but we made many preparations in in advance that were necessary.
To improve our results. Despite the headwinds we had the foresight to reduced head count in the fourth quarter of 2019 in the first quarter of this year that provides us much needed cost relief, reducing head count nearly 10% was a hard call to make but the right one.
We had the courage to close our van Buren, Arkansas maintenance facility. It is co located with our headquarters and is where our company was founded clothing that facility required robust analysis dependence on data driven decision, making and the courage to follow the math and the interest of all stakeholders. Our team had the wisdom to grow and expand our asset light owner operator program.
As a means and weights enable revenue stability as we implemented our regional model. This allowed us to grow our paid miles even as network dislocation from cobot affected productivity on company assets and we had the insight to make investments in capital people and processes to improve our safety performance to a level that provides us a financial advantage.
Due to our top tier safety performance, we made a decision a couple of years ago to add in cab recorders that faced outward and inward beyond a significant financial investment that one decision probably hurts, our retention and turnover stats, but the results are tough to argue are collisions per million mile and audio t. collisions.
Familiar mile are down approximately 40% over the last four years and the financial benefit of those decisions are beginning to accrue to the results and while all of those decisions and the execution of those key initiatives have been important to our trucking business improvement improving they are just beginning we'd like to remind everyone of the investments we have already made thus far in making this the.
Company that will deliver competitive result in market environments of all shapes and sizes, even as the market cycle has been against the industry over the last couple of years, we've taken this opportunity to improve the underlying execution engine that makes up USA truck, we have not been resting in a down market. We have been anxiously engaged in improving the costs.
Four of the business. Some other things that we've done regionalization, we've made the transition to a regionalized fleet. Then the result of those decisions are expected to be better driver retention improved utilization and productivity lower maintenance cost and even better safety results. We've also invested in regional maintenance facilities, we announced last quarter that we would have all.
All four of our new regional centers open for business and we have accomplished that just this month, we secured and have begun staffing up our walk to add to Texas terminal. We now have eight regional maintenance facilities, where we know we have the best chance to cost effectively maintain inspect and manage our fleet. We made the purchase of Davis transfer this significant invest.
And expanding our southeast regional footprint has paid dividends in the form of increased present exposure to clause I dedicated business with long term trusted partners and financial results that meet our expectations for David and our aspiration for the rest of USA truck. This business has been a steady low ninetys, though our business even through the trough of the cycle and we are now.
Leaning into the Davids leadership team to teach the rest the USA truck to do Likewise Davis is our best evidenced in what is possible in a truly regionalized model, which is why are we are moving to the regionalized model as quickly as possible. We've made technology investments, we made a big investment last year and transitioning to the latest and most modern Tms available for our bid.
We are now stripping out rtms, an unnecessary intermediate application layers that were implemented here over 10 years ago, and we expect doing so to increased throughput by decreasing transaction times and that will be completed this quarter.
We've also talked in the past about our dedicated expansion our dedicated truck count has grown 26% year over year and is up nearly 40% since the beginning of 2019, if we count Davis and our dedicated and cause I dedicated trucks, we're approaching one third of our trucking business in this space.
As each of these businesses continue to perform well we feel compelled to pursue this as a key strategic vector.
Finally, a significant investment that Zach mentioned earlier was consummated just last week when we closed the deal with a major truck OEM to replace an incremental 189 tractors in our fleet. This year, we work a construct to replace these tractors without incurring additional capex, while minimally impacting liquidity and our debt ratio and.
Reducing our maintenance and fuel cost on the fleet. This deal is exciting to us and is expected to be completed by mid Q4, but will have positive impact on this year's performance, especially from a maintenance and fuel cost standpoint, we expect this investment will reduce our average age of fleet by four months at the by the ended the year, bringing us below 30 month average age of our fleet.
Let's now shift to talking about our logistics segment. It is no secret that the logistics segment has been a challenge last several quarters and this has not been a unique experience to USA T. logistics, it's been industrywide, we believe the increasing transparency in the marketplace and freer flow of information to market participant has changed the environment and.
The windows for harvesting gains when spot rates dropped in may customers fled to the spot market and in June and July as spot market pricing is flip to the high end those same customers try to enforce bid commitments that day themselves were all too willing to abandoned in may it's tricky.
As we said last quarter, our goal and logistics remains to create an environment where margin and volume are adequately cover our fixed cost in the short term, while providing the basis for profitable growth in the future. The formula in logistics is quite simple revenue per load times gross margin percentage times load count or volume.
Equals profits or losses as a case, maybe we think it's important to address these inputs to help investors and the street understanding exactly what the moving pieces, our and our assessment of each.
First revenue per load.
The second quarter 2020 revenue per load and our logistics business was the lowest it's been in over a decade candidly, we went back and looked as far back as we have records. We can't find the time that the revenue per load was lower than in Q2 2020.
The reason for the extremely low market driven revenue per load is twofold, one capacity the excess capacity that contributed to a challenging 2019 also bled into 2020 contract pricing and to fuel cost fuel as a significant aspect of nearly all brokered freight and is down 30% sequentially and 44% year over year when revenue per load.
It is down margin dollars go down a percentage of a smaller number is a smaller number.
Second gross margin percentage.
As we disclosed our margin percentage in the quarter dropped to 12.2% margins get squeezed when there is a market mismatch between pricing, which is still too low and capacity availability, which is also too low said differently carriers are charging higher rates, while customers continue to dig in on low pricing.
This is all coming to ahead soon as rates are beginning to rise a spot pricing pushing expectation fire and if capacity comes back into the marketplace does driving supply higher and costs lower we do believe that capacity stayed on the sidelines with government incentives and that when the artificial Billy effect, a subsidy goes away that some modicum of balance will return to the marketplace.
And that finally leads us to load counter volume as our third variable. This is the area. We most controlling the equation a thorough review of our numbers will lead the observant reader to some amazing insights first you, let's say two logistics revenue per employee is up 33% year over year. Despite the low revenue and low margin market that we just did.
Scribe second USA T. logistics loads per employee is up 51% year over year again, despite the environment. This efficiency drives transactional cost down and improves our ability to compete in the marketplace.
And third our volume production in the quarter, where the three highest months of volume production in our history and add those together in the team just delivered the highest load count volume quarter in the history of the company in a tough environment why does any of that matter well I'm, an old manufacturing finance analysts by trade and we always look to result in terms of rate versus volume effect and.
We do that same analysis here all else being equal if our volumes remained strong if margin percentage remains low, but the average rate and revenue per load rise on a rising spot market and inevitably higher fuel costs. It bodes well for our well tune revenue engine. For example, if revenue per load rose even to 2019 relative.
Really depressed levels it would still be an additional $200 per load more than the market bears today at those levels. The logistics business swings nearly another million dollars net margin per quarter not to mention any upside in margin percentages that usually occur in the cycle, let's just recap that logistics based revenue actually grew in the quarter.
While margins in revenue per load were down while improving revenue in load per employee efficiency improved 33%, 51%, respectively, and we forgot to mention they did all this while lowering head count 28, and a 5% year over year, just as we did last quarter, we improved execution and lowered cost significantly both year over year end sequentially in a tough margin environment and we.
I believe that fiscal and operational fitness will bode well for that business in an improving cycle.
I'd linac I'd like to now shift gears to talking about our transformational self help initiatives. So thats the update so far on the dynamics for the quarter.
We've been consistent and dressing our self help initiatives in past quarters, and I'll try to be more brief today, but it's fair to say that we're more enthused about our prospects for change now than at any time in the last three and half years as we said last quarter and earlier in this call. We've managed the age of our fleet. We completed the acquisition of Davis, we closed down high cost facilities, we manage head count.
On aggressively Weve regionalize, the business, we've lowered maintenance cost and we've expanded our dedicated business and we've lowered the cost per transaction logistics.
The first initiative that we talked about and this is on slide eight I believe.
He is increasing utilization on the existing fleet as we reported utilization was minor set back in the quarter, but as our regionalization and governance. A standard work is taking hold we're already seeing utilization per available tractor and revenue per tractor performance through July that's above and beyond our Q2 performance already it's early but promising.
Second thing as we said, we increase our team presence and utilization, it's a slow burn as it requires intense coordination with our network design and it's been a challenge to get people to want to team and a coveted environment, but we've seen some big moves into revenue per tractor in this space and we're continuing to be encouraged on that vector next as network optimization.
I'm really not giving as much time to this as we should but in the face of co bid we refined our network model optimizing both truck level performance and network yield and deployed both of those in the last six weeks, we did a hard pivot.
Given the changes in the non essential freight we believe that this is contributing to our improve utilization and segment dynamics already in the third quarter again, It's just July encode remains a concern in the source of uncertainty, but we are optimistic about the trend.
We've already talked in detail about drilling the dedicated business and driving logistics load count so I'm going to skip over those two and go to the final initiative, which is driver retention, it's gotten a lot harder of late.
We've been much more disciplined execution the regional strategy and that has some fallout when you have higher expectations people don't like that they leave.
Weve recently gone to some more real time and virtual Onboarding options. We've instituted some regular feedback loops using anonymous text based serving surveying methods and we expect the full deployment of regionalization to improve our results on this vector as well. So we are excited.
Now pivoting to the outlook.
Yes, I think we would say the outlook is fuzzy while we shared much about market dynamics in our pricing prior commentary on this call I think the way our chief commercial officer described the market is fitting in fact Bronto winding road for the first time and its foggy rates are up so far in July about 5% sequentially volumes are very steady and quite strong.
80, I rejection the sign of market held our over 1000, a day for us while in 2019 through Q1 and 20, we hovered around a couple of doesn't today compared to normal July our 80, I rejections are up 80%.
Productivity is improving over our reported results from the prior quarter non essential shippers are still M&A and while we maintain our commercial relationships with them, we're planning for life with their freight at currently depressed levels.
We're bullish over the long term and cautious in the near term if july's trends continue and this is the turn of the cycle. Then it will be very good for all truckers. We just have the recent experienced a 2019, which was much worse than any of the prognosticators predicted and 20.8, which none of the prognosticators could have predicted.
So much depends on the country's continuing practical and economic response to the pandemic.
Broadly in longer term, we think it's prudent to address how and if all the heavy lifting we've applied to the business has had any effect whatsoever.
We were asked not long ago by market Observer, if we are better position entering this phase of the transportation cycle than we were before the answer is an unequivocal, yes, it's easily demonstrated through a simple rate analysis recall the demonstration we made earlier rate versus volume that example was logistics example, while the same applies in the trucking business. So let's do.
The math.
Take the second quarter 2019 rate per loaded mile added as a point of comparison it was $2.14 a mile.
If the trucking segment had the same rate in the second quarter of 20 that was experienced in the second quarter 2019 in the adjusted EBITDAR for the trucking segment would have been in the low ninetys this quarter when compared with the second quarter 2019, the trucking segment that quarter.
Our adjusted OIBDAR was actually 98.6 that approximate difference of 500 Bips is a clear indicator of where we are and where we are as very close to be able to being able to demonstrate that all the investments the move to regionalization the technology the terminal and everything else. We discussed here today has been more than worth it.
We believe we are on the verge of industry competitive, though ours just as has been our thesis all along it's very exciting we hope the overview of the quarter the update on our self help transformation and the perspective on the outlook in the market has been helpful. The market is better than the last nearly two years and strengthening both from a price in demand standpoint, we believe we have made the.
Right investments in people capital processes, and technology to be well positioned to leverage the same improving out the USA truck can be a market competitive service provider and an investment with appropriate returns so with that Sarah let's open it up to the audience for questions. Thank you.
Thank you we will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
We are using a speakerphone please pick up your handset before passing the key.
Sure Joe Your question. Please press Star then.
At this time, we'll pause momentarily to assemble roster.
My first question comes from Jack Jack Atkins with Steve. Please go ahead.
Hey, guys. Good morning, and thanks for taking my question.
Sure. Thanks, good to hear from you Jack.
I guess, James Let me go back to your comments around the rate environment in July.
Encouraging.
Your comment that rates are up 5% sequentially I'm, assuming that's a loaded miles comment and is that versus the.
Average rate in the second quarter, Yes, and I guess, just kind of broadly now that there's some increased rate momentum.
Yes.
In favor of asset carriers here over the last couple of months.
Is there an opportunity maybe.
Reprice some of the freight that.
Maybe some lower yielding freight did you had to take over the course of the last year, just just just given sort of where the freight Morgan Ben.
And how should we thinking about the impact that could have.
More broadly.
Yes, great question.
Before I answer that I don't mean to.
The two complimentary, but thank you for your piece last night. It was clear that you really read the details in your observation on the tax rate was was right on point and understanding our sequential improvement. So thank you for that with respect to rate environment July is up 5% versus the Q2 average assets.
That's exactly right. The way you said that in terms of repricing I kind of casually touched on our network efforts.
We really undertook an intense review of our network because.
We had to make a real time pivot based on the loss of.
Many of these non essential shippers, we have no idea when or if they'll come back I mean, we talk to them and they're hopeful, but but we'll see and in doing that.
Absolutely did what you said and we've identified some opportunities and so just in really practical terms, what we're doing on a weekly basis is going back to the bottom 10% of are yielding freight and we're raising prices. We're doing it relatively across the board we have some strategic customer relationships where.
So what we really care about its kind of the profitability on the round in through and out of that market, but yes, we are absolutely undertaking that right now.
And it's something that we do as part of our regular cadence and then in terms of impact on the quarter I mean, I didn't say this in my comments, but I'll say it now and this question.
We've been very conservative in our own internal estimates and we obviously, we don't share our internal estimates we just feel like we got so burned in 19 and sell burned in the first part of 20 that were Red has it been hesitant to do anything risky that said.
If the market continues like July I.
You can kind of do your own Matthew take the bottom, 10% and assume that they're going to be up to average I mean, obviously, you don't know the distribution of our pricing.
That will be helpful and I'd, just encourage you to run that through and as you know as you and Mike talked about your model.
Probably give you a little bit of feedback, but I'd, probably most comfortable as pausing there I hope that answers your question.
It does James Thank you for that and I guess for my follow up question I wanted to go back to.
Your comment on.
On the driver market and you mentioned turn a little bit of a challenge as you're sort of make any structural changes to the business, but I guess more broadly what are you seeing in terms of the availability to go out and then find drivers.
What are you expecting from driver wage.
Perspective in the second half of year as the driver market and gray market tightens.
And how should we think about how that impacts your fleet growth over the balance.
Sorry.
No no it's really good.
So you know a couple of things.
In terms of driver wage.
We do have a little bit of wage increase built into our internal plan, but.
That all as market related so we we we've said this publicly before I'll say it again are we study the competitive pay surveys.
Monthly our goal is to be in the bottom.
The bottom of the top third payers. So we have very competitive pay and we will be subject to market trends like everybody else on that vector, but we're not planning any big move thankfully, we have some awesome customers, who understand that dynamic and we would work with customers to defray and offset that and they've always been very good about that.
Kind of the question behind your question is we've intentionally and I touched on this in my comments intentionally increased our dependence on owner operators it say.
Good.
A asset light play that has a relatively fixed margin on it but as the spot market improve those guys are more and more of a flight risk and so we're doing things like implementing.
Fuel programs have been implementing service discount programs with them purchasing discounts at them recruiting guys have multiple trucks in their fleets. Instead of just one truck to kind of increase the stickiness of the business. We've said this I think before but if not we'll sit now.
We've got a program where they can.
We pay differentiated pay for people to have safety features like forward collision mitigation in those trucks and we have differentiated pay for guys that.
Voluntarily sign up for and cabinet quarter solution. So we're doing some innovative things to mitigate and offset that risk.
Okay, Great Great and then one last question.
And I'll turn it over.
On slide you guys had a really good.
They are you actually two good quarters it up in a row overall insurance expense perspective.
I know that underlying premium costs are going up going up across the industry.
Could you maybe help us think about how we should be thinking about that line in the back half of the year, maybe more broadly I know you guys. It really had a lot of traction on some of the.
Safety equipment installations that much I'm sure, that's helping but just how should we be thinking on that line moving forward.
Yes, so I mean, you're right on with what you said so we've added.
Over the last three years, we've invested heavily in collision mitigation.
And calibre quarters both.
External so we can see what's happening outside the truck as well as internal so we can frac coaching.
Through our to our driving workforce.
But overall I mean, we believe that those investments are starting to pay off and you're starting to see that and reflected in our insurance line. So when you look at our collisions are collisions are down as James made stated in his comments questions are down substantially over the last four years.
Our frequency is about flat, but our severity us significantly down as it's been for the last couple of years. So we're starting to see those reflected in both our actuarial studies as well as our reserves that are collisions. So.
Yes, and Jack just as you think about.
That with this new truck well with the truck orders that we already had for this year, which were only 65 initially we get to 100% of our fleet with full forward collision mitigation. So we think Thats story only gets better and then we've got this 189 trucks that were bringing in in the back half of this year that are going to replace some existing trucks that already have.
Collision mitigation on them for the most partly a few of those trucks going out that don't.
But the technology improves the interaction the user interface to the seamlessness of it the kind of the subtlety in supplements of it improves over time. So we really think this is something going forward and we've talked about this as well publicly in the class, but I just want to reiterate it leaves an external.
Actuary to review our lost triangles, our loss pick in our loss runs on a on a monthly quarterly based so they look at it twice a year and so we're really confident that not only our investments, resulting in fewer collisions familiar miles and fewer DRTV collision, but we're confident in the financial.
Structure those the cost of the collisions that we are having are lower and lower and lower our management of the claims is world class. We are qualified self insured we've got essentially insurance company that within our business.
Virtually the staff that reports the Zack so we.
And I'd say I was little skeptical early on you know when I first came into the business. It was a lot of money to invest in a business that really wasn't doing well, it's proven to be a huge strategic advantage. So hope that answers. Your question. Okay. Great. Thanks again for the time.
Thanks Jay.
Okay, and if you'd like to ask a question. Please press Star then one.
Next question comes from Jeff Kauffman with loop capital markets. Please go ahead. Thank you very much well congratulations everyone.
Fantastic quarter in an uncertain environment.
Just some follow up.
Questions to what was just ask.
You mentioned that your insurance or your collisions were down and it's a function of some of the investment you've made and safety equipment, but it was a pretty steep drop sequentially.
From where we were a quarter ago, and almost a 2 million drop and quarterly insurance cost an 8% more.
Sales driven was it more of an anomaly in the quarter, where even if you do have collision avoidance and better safety systems. It was still an unusually low insurance quarter and how should we think about.
Forward modeling, a kind of 4 million in the quarter versus kind of a more normal $6 million to $7 million run rate.
Yes, I'll, let Zack take the second part of that question I'll hit the first part.
You're right. So we look at our actuarial evaluation of our reserves on a regular basis and there was a portion of that call. It probably.
Probably around half a million that was a onetime adjustment and there was a portion of that that is just part of the run rate for the quarter and we recognize that all at once that second half you should absolutely expect in your future modeling of that expense line item and as we go through the ended the year.
And relook at our loss triangles, we expect that we're going to have an impact on those positively as well so from a run rate perspective, I I'd say.
The annualized run rate comes down about 2 million.
So back yet yes so.
Go ahead, Jeff.
Yes.
Yes, I would just tack onto our James said I mean, when we do our actuarial studies.
Semi annually.
When you take a look at that and when you couple that with the investments that we've made.
We did receive like James said, a little bit of a onetime true up on our actuarial models, but overall the drop.
And our loss pick in our projections related to those models you can kind of model in a couple million on an annualized run rate.
Alright, thank you.
Just a couple of a detailed follow ups.
Again following up on what was just asked revenue per loaded mile up 5% sequentially, that's comparing to the down 6.7 in the quarters. So so you would say while the trend is good we're still not up on a year on year basis. So far in July you would the thought is maybe we get there, but but as of now.
Now we're closer to breakeven as I've got a fair way to think about yes, that's right I mean, we'll just talking really round numbers here so far.
In the quarter was right around two bucks and it's up 5% you can assume we're kind of in that 210 range and last year. We exited at 214 in Q2 of 19, so euro observations exactly right.
Okay, and with a 189 trucks that you're bringing in.
I know you said these are mostly replacements, but how should we think about fleet size.
We're looking toward the end of the year.
So our fleet overall by the end of year is going to be down about 100 trucks.
So.
We're cycling out kind of more trucks and we're bringing in.
We grew our fleet this year I'm kind of spread nobody asked that question, but that was 100% through owner operators. So as you look at the overall fleet by the end of the or the truck count to be down about 100 trucks, okay, but now that was a simplistic question because the fleet was up 8% in the quarter.
Okay, Great just two other details and im done.
You mentioned, a little bit about labor expense in the things you were doing for drivers, but your labor costs was up 12% on miles that were only up about 8% to 9% you talked about a pay increase being thought about but kind of what what drove that increase in labor costs above mileage and.
Kind of what's going to stick around and what was kind of more expense that you ran into in the quarter trying to manage the environment.
Yes, so whenever we look at our that total salaries wages employee benefits line I mean, there's a lot of items included in that line, but we've had little bit of increased and benefit costs. We've had some.
Incentive accruals that may not have been there last year. So there's some other factors that aren't specifically related to drivers that are causing that to trend up just slightly this year.
Kevin final question.
James Your truck division relative to the other truckers that are reported look terrific. This quarter. The did logistics division less so and I think you address some of the positive things going on any or logistics business.
And I. Thank you for that detail, but at the end of the day from 10000 feet.
The margins in the logistics business are not with the rest of the industry is.
Is that a function a mix is that a function of not charging customers properly is that a function of how the business being managed how do we fix that.
Well, it's a little bit of or a variety of those things. So sometimes it's apples and oranges right. So we we do a robust quarterly competitive review of our competitors and we Peel out what we can and what we can discern from their queues.
From their releases to understand their business and some of the pure plays aren't really pure plays they have threepl and for PL businesses, which are higher margin, which we don't do.
They have warehousing businesses, which we also don't do we predominantly play in the truck load.
Brokerage space and when you look at competitors, who play in that same space, we actually compare quite well.
Of our competitors I mean, there's one close by here that lost $13 million in the quarter, but we're never going to do that I mean, I should probably shouldn't they never knocking on wood here, but thats not our model I mean, our model is to produce high volume throughput.
Basically.
At breakeven levels right now in the environment, because you've got some hi, hi, purchase transportation costs and relatively low customer freight.
Contract pricing, which hurts us so I I respectfully would kind of disagree on a truckload brokerage level that we're not competitive because I think we're actually better than a lot of guys. A pure play theres. Another notable competitor, who we know extremely well that we believe is fulfilling their brokers business through an independent contractor model.
Which has more of an assured.
Profit component to that because they work on a percentage of PC model and we are growing that business significantly within our brokerage business. So I think a great observation I would just say, it's a little nuanced, but I don't think were mis priced we have we have relatively strong assurances given our knowledge of the industry in the market that we have good.
Competitive pricing.
And as I tried to articulate with example in my prepared comments you know look fuel can only got one direction at this point that's important to the right and as I said the base rate per load is the lowest ever been in the history of the company and that's a market diner.
Too so all else being equal that business gets back to profitability pretty quick when the market goes back to some form of normalcy, even if thats a low margin normalcy.
Okay. Thank you very much and congratulations thanks, Jeff.
Right.
Okay.
Our next question comes from Jason Seidl with Cowen. Please go ahead.
Thanks, operator, a James sorry, I'm jumping also another call here, but wanted to your sense of sort of demand trends in where we are how comparable they are to some other prior years I just got off the call. We're one of your US truckload competitors said that.
They're now over book for the first time since almost 2018, so I'd love to hear your thoughts on.
Yes, we're over book every day.
Right now and you probably didn't hear my prepared comments days and we'll go over those with you later, but.
Yes, we have over a thousand FDI rejects a day on average right now and so it's really a situation where we're sorting through our commitments worth sorting through our strategic relationships and frankly, we're sorting through the highest realized profitability opportunities and prioritizing so it's fundamentally shifted for sure.
What we don't know is how the economy is going to respond to I hate to say that the elections.
And how the broader what's going to happen to covert I saw some data just this morning. It looks like deaths are dropping again like maybe we'd peak for a second time. So we're really cautious and we're optimistic in that caution, but we're cautious about that so yes, whoever said that is right where oversold everyday right now and its a.
Much better situation that said pricing still not back where it needs to be it's just it's not even close and so we're repricing the bottom 10% on a weekly basis with expectations to push pricing, even higher as capacity comes back and the.
Into a constraint environment.
And you have a fairly large percentage or business that repricing in the back half of this year correct.
Yeah, we balance we said this the last few years that kind of shifts around but on average. It's about 50 50 50 in the front half 50 in the back half. So as an example, we just implemented the second week of July.
Our our bid with our largest customer and you can guess who that is we actually disclosed in our in our in our K, but.
So yes, we have about half of our yes, we have about half of our business that reprices in the back half and half in the first half.
Okay Thats.
Excellent color any any difficulty.
Getting drivers right now because we are hearing that too.
People that sort of.
June was sort of the turning point, where driver availability became a little bit tougher and what are your thoughts on sort of the driver pay outlook for the remainder of the year.
No that's exactly right. It has gotten tougher we actually made our own situation a little bit tougher because in a we have been doing.
Virtual orientation through Davis transfer for about six months, it's gone really really well and so we said hey, july's typically stop the we're going to do that for USA truck.
Well guess what July hasnt been soft so we've been scrambling.
To get our trucks backfill and we finally turned the corner. This last week, but we had a couple of weeks, where it was a real struggle with respect to driver pay I'll just reiterate what I said a little bit earlier, you know our goal is to remain in the bottom of the top third.
Of competitive pay packages and will remain true to that we have some pay increases built into our internal model, but I mean, it's safer to just follow the industry, we're not going to be an industry outlier on that front. So as other people start to talk about and see an experienced that and it's reflected in their pay packages will follow suit, but I don't see anything.
The big right now and just more broadly I mean, this a little anecdotal but.
The subsidy to not work I think is really hurting driver recruitment right now at the macro environment.
Gotcha. So you would assume that the top third probably does have to take or pay if you look at it as a whole.
I think pay if you look historically the industry as a function of price. So if if customers are willing to move price to where it needs to be and it's still I mean, it's probably 15 to 20 cents away from where it needs to be.
Then we'll do it it takes to secure the workforce.
Okay sounds good listen I appreciate the time.
Thanks, Jason.
Again, if you'd like to ask a question. Please press Star then one our next question comes from Mike with Newland Capital. Please go ahead.
Hey, guys, how you doing.
Hey, Mike Good are you.
Well I guess I'm just trying to go through some of that that quick math you did so we're close to where we were on a per mile basis rate wise to 20 Twoq 2019.
But you stated that we'd have approximately 500 basis points of improvement and I guess, that's through all these initiatives that we've been going through.
Yes, that's right.
So thanks, Brian and I guess.
Yes good.
No Im just looking at so if I remember correctly last two Q2 thousand 19, we were breakeven made a couple of charges so slightly profitable.
So if we dropped knocked that off by 500 basis points and pull that forward.
We're putting up significant profits quarter to quarter as long as rates stay where they are or is there something else that I'm missing in there. There are those permanent takeouts that we should see going forward. Yes. They are I mean, we believe we've made a structural impacts in the business and it's just really easy math, if you substitute to 14 for two or one in the quarter.
Are you get through the number that we would have had in so.
We use that example, as a specific.
Point to articulate gosh, the business is different than it was we've taken out 60 heads we've taken out significant cost we've improved the throughput of the business.
We've done a lot of all those things that we outlined going to regionalization, we really Mike. We think we're in a really good spot and honestly I wish I had what I have now a year ago.
And Thats kind of the point I was trying to make you're exactly right. We think these are fundamental their structural it's only been saying all along and it's finally kind of coming home to roost, we feel pretty good about it.
Okay. So I had those suzanne so.
If I am looking back right now so we had a 98 seven.
You too.
2019.
Or 90 95.
Is it wrong to think that rates get back to 214 that we're at a 93 five.
Got wrong.
Okay. So that I just put it out there that's roughly 45 50 cents of earnings if we get there.
Yeah, and borrow and that rate per mile were not far away from it it's not far away and we've got the challenges right on a consolidated basically you're talking about trucking right now we've still got the challenges of logistics I mean that that market has been a mess for four quarters.
We're work our way through that but if that goes back to kind of a normalized market I kind of think as logistics as a perfect hedge against trucking and vice versa. It hasn't been that for the last year and half.
Yes. So that you look at you look at the changed and logistics I mean and the.
Third or second quarter of 19, they were a 96 eight adjusted operating ratio so.
We have significant.
Movement to take there to give that back to where we work Q2 19 got it's a 500 basis points is in truck.
Yes.
Alright, Okay, great question right. Thanks, Thanks, guys.
Right.
Having no further questions. This concludes our question and answer session I would like to turn the conference back over to James rate for any closing remarks.
Great. Thanks, a lot Sarah So I was asked this week if I would have a baseball story on the call apparently our call participants like that.
So I love baseball for lotteries and that requires diligence skill. Unlike almost any other sport constant repetitive practice and the most basic skills and the ability to fail a lot in order to win.
And what other sport can a person who failed almost 70% of the time be worthy of hall of Fame status. The parallels between life work in baseball are pretty profound yes, there isn't a light baseball's because even small guys can have a lot of success a couple of our current and former board members are huge Astros fans and in honor of them I'd like you to think about Jose LTV.
I will today as the shortest man and major League baseball he lifted at five six I'm, telling you I sit next to him and I think five fixes stretch.
I will today was originally turned away from an open trout in Venezuela because of his size. The scouts actually thought that he had lied about his age but Easter as proven everyone wrong. He is one the American League MVP in 2017 that same year. He won the associated press mail athlete as a year or you want to gold glove ones for the best fielder enforced.
Silver Slugger awards for the best hitter his position and most importantly, he led the Astrazeneca victory in the 2017 World series.
Can you share against that Guy.
Well USA truck is the smallest carrier in the public marketplace, we're still large compared to almost anyone outside the public's, but I think it's fair to say that we represent the little guys.
And then a commoditized market, which inherently provides a level playing field with the right skillset and tools, even a little guys can be on top of the world. So a lot like baseball and we look forward to the continued trajectory that we are on their great things to come at USA truck and I would be remiss. If I didn't think everyone of our co workers drivers and driver support alike for all the incredible work.
They have done to affect this transformation to get the company on stronger footing and allow us to thrive together through this worldwide pandemic. They are truly the best of the best and I want to I want to each of the USA carriers out there to know that I am proud of all they have done and all they will yet accomplish we're looking forward to great things ahead some of them. Thank you.
Thanks Sara.
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