Q3 2020 USA Truck Inc Earnings Call

Good morning, and welcome to the USA Truck's third quarter 2012 earnings.

Earnings Conference call, all participants will be in a phenomenal should you need assistance. Please take all crossing specialist.

Starchy called <unk>.

After todays presentation, there will be an opportunity to ask questions.

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Please note this event is being recorded.

I would now like to turn the conference over to Mike Stevens.

In your price cuts yet find out strategy and Investor Relations. Please go ahead.

[music].

Thank you Greg Good morning, and welcome to you at the peak capacity solutions third quarter earnings conference call joining.

Joining us this morning for the coming from the company are James Reed, President CEO, and docking senior Vice President and CFO we.

Thank you for joining us today in order to help you better understand your safety capacity solutions and its results.

Forward looking statements could be made during the call.

As we all know forward looking statements by their very nature are subject to uncertainties and risks.

For a more complete discussion of factors that could affect the company's future results. Please refer to the forward looking statement section.

Company the earnings press release.

Companys most recent FCC public filings.

Order to provide more meaningful comparisons certain information discussed on the conference call could include non-GAAP financial measures as outlined and described in the tables in our earnings press release.

I'll now turn the time over to Jack.

Thank you, Mike we want to thank everyone for joining us on the call today and appreciate your interest in and support of USA truck. We hope you all had an opportunity to review our earnings release from last night as we stated in the release the third quarter was the telo to freight market.

First half of the quarter was much like the second quarter, where the market place downward pressure on price and volume and required us to transition more trucks. So depressed spot market. However around the middle of August we experienced a tightening of capacity, which abruptly strengthening customer demand. We believe this shift was the result of approximately 1.3 million people in the trucking industry.

Still want employed when compared to the 500000, receiving unemployment benefits that this time last year. This was the core according to the Bureau of Labor statistics, when coupled with limited supply of new driving professionals entering the workforce student COVID-19 concerns and truck driving school closures it created capacity constraint.

These constraints positively impacted both of our segments I think.

Leasing our base revenue per loaded mile and trucking and our revenue per load and U.S. 80 logistics that made it more difficult to recruit qualified driving professionals and increased cost one securing third party capacity.

Please turn with me to slide number three well do a brief review of our financial results.

Consolidated quarterly operating revenues came in at 141.8 million, which represents an 8.3% increase year over year. Thanks.

Thanks revenue was up 14.5% excluding fuel consolidated adjusted operating ratio for the quarter was 96.4% down from 99.7% in the prior year, primarily driven by improvements in our base revenue per mile in our trucking segment and increases in revenue per load in our U.S.A.T. logistic segment, while controlling our costs.

Cost structure our.

Our adjusted earnings per diluted share was 29 cents.

Turning to slide four truck.

Trucking operating revenue before intersegment eliminations increased 3.8 million or 4.1% to 97.4 million base revenues, excluding fuel were up 10.1% to 89.5 million compared to 81.3 million for the third quarter of 2019.

Our trucking segment generated 3.8 million in adjusted operating income and a 95.8% adjusted operating ratio, which is the third the best third quarter trucking adjusted operating ratio in over a decade.

The primary driver of these results with a 19% increase in base revenue per loaded mile when compared to the third quarter of 2019.

Utilization also increased 14 miles per truck or approximately 1% from the third quarter of 2019 related to our continued regionalization strategy.

These rate and utilization outcomes positively affected base revenue per available tractor per week, which increased $318 or 10.1% year over year.

Our deadhead percentage for the third quarter of 2020 improved by 70 basis points from the second quarter.

The average available tractor count for the third quarter of 2020 was 1969, which is a 1.1% decrease.

Parents of the third quarter of 2019. This truck count decrease is the result of continuing to moderate our fleet to improve asset utilization and profitability.

Turning to slide six.

We will review the results of our U.S.A.T. logistics segment revenue before intersegment eliminations increased 12.7 million from third quarter of 2019 or 32.2% to 52.1 million.

Our logistics segment generated 1 million in adjusted operating income and Haddon and had a 98.98% adjusted operating ratio.

Gross margin dollars increased 1.1 million to 5.9 million in the quarter gross margin percentage for the third quarter of 2020 was 11.3% versus 12.2% for the comparable quarter in 2019.

Low count decreased to 32100 boats during the third quarter.

From the 33400 loads in the second quarter EPS.

<unk> decreased 3.7%, but increased by 4% or approximately 1200 loads year over year.

This market environment drove our margin per load up to $183 per load from $156 per load year over year.

If you'll turn with me to slide number seven well highlight some key balance sheet liquidity measures as of September Thirtyth 2020, total debt and lease liabilities were 182 million and stockholders equity was 78.2 million net.

Net debt was 180.8 million and our net debt to adjusted EBITDA for the trailing 12 months was three and a half times down from the 4.1 times in the second quarter.

This decrease is the result of a net debt decreased to 8.6 million.

In the second quarter of 2020, and a 5.4 million dollar improvement in our trailing 12 month EBITDAR.

The company had approximately 47.6 million available to borrow under its credit facility as of September Thirtyth 2020 as.

As discussed in prior quarters, we continue to expect minimal capex through the end of 2020. However, as discussed on our last call. During July we did enter into an agreement to release, the 189, new tractors and dispose of certain high cost tractors. During the back half of 2020 to date, we have received approximately half of the total tractor order and expense.

The remainder of those trackers to be delivered throughout the remainder of the fourth quarter.

With that I'll now turn the call over to James Great.

Great. Thanks, Zack and good morning to everyone I Hope as you review the release that you see what we see a wonderful back half of the quarter helped by market strength delivered through the hard work of implementing our self help improvement plan and a promising start to what looks like a sustained performance improvement for USA truck.

Today, we will offer updates on a few distinct vectors. The first as market dynamics and segment performance in the quarter next I will discuss an update on our progress and our self help transformational initiatives and finally I'll give some commentary on how we see things going forward before we began it we want to give a brief update on our COVID-19 response and what we're doing in the <unk>.

Realm of diversity and inclusion as well October 19 response has gone quite smoothly, our well established contingency planning criteria and governance policies born from our experience in the 500 year flood of 2019 here in the River Valley.

Have allowed us to continue to run our business seamlessly. The USA truck team is mostly working remotely still and we have it today semester view of onsite work arrangements currently our non essential functions are working remotely through the end of the year, we find it less worrisome and more predictable for our team when it comes to child care and managing outside coming.

Men's to be definitive about our plans.

Over a longer horizon, and thus the semester view of things. So our next assessment will be in the spring and we'll update you on our next release adds to that all.

Our essential and clause I essential customers made up just under 80% of our freight mix in the quarter, which is down slightly from the second quarter and so we had some really good performance in the quarter. Despite the weak non essential shipper market I've said this before that while there may be an honest essential elements of the economy. They were essential to our network.

Second we'll talk a little bit about that later, we believe that when the non essential shippers return and they have started shipping again in the fourth quarter, there will be even more freight to service in the marketplace than there is today and that's a great thing if you're a trucker.

Last quarter, we made some pronouncements about our efforts to become even more diverse and even more inclusive in our business. Since then we've had over 90% of our non driving team complete unconscious bias training, we recognize Hispanic American heritage month, together and I took on the role as chair of the American trucking associations diversity working group, we're taking diversity and.

Inclusion at USA truck very seriously and you should all expect to hear even more from us in the future.

Now moving to dynamics and segment performance in the quarter.

The third quarter. This year came in like a lamb and went out like a line and Zach noted earlier the current market didn't even really get started until the middle of August and at that point, we thought demand strengthened significantly capacity constraints exacerbated, allowing us to benefit from both a healthy freight market and an enhanced business with many initiatives ready to leverage the arm.

Cindy.

We believe today's market will be strong for at least several quarters because of the structural industry changes that are not quickly resolved inventory levels are relatively low, especially retail inventories, which are near all time lows driver availability remains a challenge for all the reasons Zach noted and there does not appear to be a Russian capacity into the marketplace. Additionally.

There have been five hurricanes that made you EPS landfall this year for the quarter, causing nearly $30 billion and damage, we hope and pray for the safety and quick recovery. The people in communities affected but also realize that there was a time in the not too distant past that hurricanes had a profound impact on supply chains I'm certain that these hurricanes only further broad.

On any shortcomings and trucking supply that already existed so to recap there was a significant two dimensional market and play both supply and demand dynamics supporting a strong trucking market and the key economic drivers of this dynamic or not quickly resolved what a great time for operationally improving business to intersect with the opportunity.

Trucking segment made meaningful progress in the quarter by delivering the best third quarter O R. We've seen in over a decade. It is clear to us that our regionalization efforts have truly taken hold as a model has ceded more and more local control to of the operations to the regional leaders, we have found that they make better more profitable and more consistent decisions and our.

Previously centralized model could accomplish truly it's a case of think globally act locally as our strategy is working to improve profits even beyond the market.

The signposts to this progress are all in the normal indicators, we like to look at and trucking base revenue per available tractor was up 10.1% year over year, and 15.2% sequentially base rate per loaded mile was up 9.1% year over year, and 13.4% sequentially loaded miles per available tractor were up slightly but have risen Eva.

Further in the fourth quarter, so far our utilization in the fourth quarter is up over 5% when compared to September which was the highest utilization month in the third quarter and finally deadhead percentage improved by a 110 basis points year over year, and 70 basis points sequentially.

Last earnings call, we discussed initiatives that we're working on this quarter our results reflect our progress.

I want to talk about some of those things specific to trucking regionalization has affected all of our key operating metrics through our efforts to regionalize weve recognize higher utilization better deadhead miles lower maintenance costs and significantly higher driver retention rates utilization, our loaded miles per tractor was up only slightly in the quarter.

The loaded miles per available tractors I mentioned earlier began to rise late in the quarter as we found a regional cadence and improved utilization by slips feeding and shuttling or swapping freight.

Essentially since we had a hard time finding in seating teams due to the pandemic concerns we found ways to get pain like utilization from our assets, while preserving solo job since the quarter closed our loaded miles per available truck is up more than 5% as I mentioned earlier maintenance costs are tough to discern did the mix and tractor ages from year to year.

However, a cohort analysis by tractor age across multiple years found that our average CPM is down 6% since launching our regionalized maintenance. This shows up in the form of lower overall costs year to date and year over year total cost that are about level, but we see the best to calm as our tire programs. Our in house maintenance program and our latest terminal opening in law.

Actually I had two Texas becomes fully operational.

Intersegment collaboration between our logistics business and our trucking segment reached an all time high in the quarter, one might even say that the expected synergy between the two segments that so many companies aspire to actually is occurring here at USA truck. It is in large part a credit to the leaders of the two segments that they have figured out how to flat.

Collaborate and engage customers in a way that the business truly benefits during the quarter. There were weeks, where the trucking segments top 10 customer list included U.S.A.T. logistics, our other operating segment for the quarter. We average just 5% of our business in the spot market at large, but we were able to access.

The spot environment through a collaboration with our logistics team whereby logistics customer freight moved on USA truck assets. It made up 9% of the truckload business. Excluding Davidson dedicated this created a wonderful margin upside while supporting customer commitments in our logistics space. It truly was a win win.

Another aspect I want to hit on is pricing discipline. It is perhaps the most impactful most lasting and most important thing we did in the quarter. We deployed an executed our pricing discipline. This is part of our cadence. It came as a direct learning from 2000 from 2019, we learned in 2019 that we want to bid and win freight abundantly.

Okay, and we counted on as we said then the prisoner's dilemma in the sense that it is always best to have more freight and negotiate either up or down then not to have enough rate to begin with we bid aggressively in the last bid cycle. The when freight and continued to do so today that gave us a strong freight base from which to work I want to be very clear about this.

We did not institute across the board price increases. However, we increased our rigor a benchmark in pricing by lane and revisited areas, where price market and capacity imbalance is warranted surgical customer conversations we had collaborative and constructive conversations with our customers and Saar contractual.

Per loaded mile, which is a measure we use internally that excludes any sort of at the soil. It increased by 9% in the quarter for the first time in my career. Some of these increases were preemptively instituted by large customers themselves, but most were directly the result of our engagement with our customers. It was tedious and time consuming.

But we believe it will accrue to our benefit to the fourth quarter and beyond.

The next point in the trucking segment is driver retention driver retention improved nearly 20% year over year in the quarter and 50% in September alone. So much of our success is the result of our rhythm of the business. Our cadence finally, taking hold daily reviews are drivers at risk of leaving daily outbound calls to drivers who have applied to compare.

And marketing our own features and benefits to exist existing drivers have been key to our improvement and driver retention. Additionally, the management team now does unsolicited outbound calling the drivers on a monthly basis and the relationships forged by regular regional terminal interactions cannot be overstated, our plan is coming together.

And I'd be remiss, if I didn't mention Davis transfer and dedicated they both continue their consistent cadence marks as they have in prior quarters, our dedicated or did slip a little bit but remains accretive to the business as we have been engaged in multiple startups. This year, especially in the dollar store category dedicated truck count is up another 20% year over year and.

As a great growth engine, if we can only find the drivers to see these trucks, we have over 100 additional contract and trucks that we are working actively to see the data's business in particular has been a steady low ninetys. So our business through the trough of the cycle and we are now expecting even better performance in the fourth quarter is the first of several quarters, we expect to have the full benefit.

We have a healthy cycle Davis is our best evidence of what is possible in a truly regionalized model and we continue to model our regionalization efforts after Davis.

And finally technology, we completed what we call our back to basics Tms project in the quarter that literally took operators working in six or more screens simultaneously to two besides improving the work flow and the work experience, we simply have happier operators and we believe finally getting our technology from a legacy platform.

Four years ago to a current version release last year to finally and optimize delivery. This quarter is contributing to our much improved results.

I'd now like to talk about our logistics segment.

The logistics segment revenue engine that we have been discussing last couple of quarters had a chance to hit its stride in the quarter gross margin dollars grew 21.9% year over year, and 24.8% sequentially, while gross margin percentage was down both year over year and sequentially owing to the increasingly competitive market. The revenue per load was up considerably by 20.

7.2% year over year and 39.

0.6% sequentially.

Operating income with a high throughput load count slightly lower margin on a high a higher revenue per load translated into $984000 in adjusted operating income in the segment.

Our 303% higher than last year, some of the things I'd like to talk about.

Logistics first revenue per load, we intimated in our Q2 2020 release that revenue per load in our logistics business was the lowest it had been in over a decade as the market. We described at that time gained momentum and accelerated through the quarter. We saw average revenue per load accelerate back to more normal levels next is gross.

Arjun percentage the weaker gross margin profile of freight reflected ongoing compression between purchase transportation and revenue per load as noted previously we pivoted to use our company assets to fulfill a portion of this freight to our mutual benefit between the segments next load count in volume. We continued the trend that we've seen over the last several quarters and putting up.

Near record highs, while load count was down sequentially from all time record high it was still up 4% year over year as we did last quarter, we want to share. What we believe are some amazing results from our team one U.S.A.T. logistics revenue per employee is up 90% year over year I almost feel like I should reread that bullet it's up 90.

Percent year over year and in August we saw base revenue per employee over $200000 in a month for the first time in our history second USA feed logistics loads per employee is up 41% year over year and finally third August and September were the two highest revenue month in the history of the logistics.

Business at USA truck.

If you'll recall last quarter I went into an old manufacturing finance analysts mode, where we kind of predicted that minor shifts and upward revenue per load would allow our logistics business to flex its muscles well. It happened we proposed a hypothetical that would get us to a million dollars in net margin and then the third quarter, we delivered adjusted operating income of $984000.

We were so close to that I pathetically, but it came true let's recap logistics base revenue grew in the quarter and had the two highest revenue month in the history of the business, while margins were down and revenue per load rebounded well improving revenue and load per employee efficiency improved 90% and 41% respectively. Just as we did last quarter we improve.

Execution and lowered cost significantly both year over year and sequentially any tough margin environment that fiscal discipline led to a profit rebound that we see as just beginning.

Each quarter, we like to give an update on our progress on our transformational self help initiatives I'll be brief about our ongoing initiative updates as I've hit on most of them already and I in my prior remarks ours is the original self help story in the truckload space, we have been consistent in addressing our self help initiatives since 2017, we are more.

Enthused about our prospects for chains now than at any time in the last several years, we have done a ton we manage the age of our fleet.

We completed the acquisition of Davis, we closed down high cost facilities, we manage headcount aggressively regionalize the business lower maintenance costs expanded our dedicated business and supercharge our logistics business.

We believe this company is well positioned to leverage these improvements in whatever market, we face while the trajectory of a recovery is unknowable, we expect a non essential shippers come back and they will freight will inevitably improve further capacity has come out of the market and the challenges to that are not short term fixes. We truly are in the midst of a dual.

Threat supply side and demand side resurgence and we have worked tirelessly to be able to take advantage of it. These factors are all positive for USA truck, we remain focused on ways to increase utilization improved revenue per available tractor and drive profitable logistics load count growth the initiatives, we outlined in prior quarters are moving ahead and bearing.

Fruit first.

First initiative is increasing utilization on existing fleet as we reported utilization moved ahead and the quarter marginally and is up over 5% more per available truck. Thus far in the fourth quarter second is increasing our team presents and utilization is an interesting one we made an intentional pivot here in light of the pandemic it was very difficult to.

The team operators and in light of the pandemic. So we focused last quarter instead on the slip seat and shuttle arrangement as a direct response to market challenges and it is really driving results.

Next is network optimization, all the footwork, we did to optimize our network profitability model the implementation of a cadence and discipline I review process in refining market opportunity and the rigor of approaching customers has paid off 9% base rate improvement in the quarter is remarkable and reflective of our focus and commitment to getting that.

Network right next what's growing the dedicated business what a difference a quarter makes we had warned of a slowing pipeline last quarter and that has completely flipped customers want dedicated capacity more than ever and we have over 100 confirmed trucks in the immediate contracted pipeline, we just need to see them. We remain ahead of schedule on this critical initiative.

The next initiative is driver retention driver retention went through a downward slide in the second quarter, but that completely reversed in the third quarter. We have put intense focus as a management team on interacting with marketing to and working with our drivers to retain as many as possible and we're being very successful at that and finally driving profitable logistics load.

We covered this comprehensively earlier, we're just so proud of what this team has accomplished we are well ahead of schedule on this one as well so.

So our outlook as I went back and looked at our commentary in the second quarter I was just amazed at the absolute difference a quarter can make we are seeing more than double the EDI I'd turn downs, we were seeing just three months ago, we have strong dedicated demand and interest. Unlike three months ago, our logistics business looks great with tight margins, but super productive people in a rising revenue per load and.

Moment and pricing trends are strong cuts.

Customers are rewarding the best service providers with access to high paying freight and the capacity crunch truly look structural and appears to have some legs for the next several quarters combined all of that together with our self help initiatives and we have the perfect recipe for progress one of our favorite metrics to look at internally is a comparison of our truck you know our with our.

Public industry competitors trucking hours since our team began this journey in 2017, we compare everything to 2016 as a starting point and since that starting point, we've closed over half the gap with the competitors in that time period, and we estimate you have made up another 100 bips in closing the gap in 2020, so far and we think the fourth quarter looks even more promising.

The third quarter of 2020 was the third best quarter performance from a truck you know our standpoint that we have AD in over a decade, that's amazing if in February at the beginning of the current prices someone had told US we would have had that kind of historic performance I'm fairly certain we would have taken we all would have taken it and as we look ahead, we only see.

Things, improving owing partly to the market dynamics, but mostly to our team's tireless and relentless commitment to making this one of the best transportation stories in the industry USA Truck's best days are ahead and coming quickly so that grant I'd like to turn it back over to you to chew us up for Q and a.

We will now begin the question and answer session.

Good question Press Star then one on your Touchtone phone you are using a speakerphone. Please pick up your handset for personal care as well.

Well, it's all your question. Please press Star then too.

At this time, we'll pause momentarily to assemble our roster.

Our first question will come from Jeff Kauffman with loop capital markets. Please go ahead. Thank.

Thank you very much congratulations everybody just terrific quarter.

Thanks, Jeff.

So I wanted to do a little algebra here, because I can't seem to equate the Rev per mile.

In truckload, so if I take your revenues up about 4% your fleet was down one so add that so that's 5% your miles per truck was up a little less than 1% so that 6% than it implies to me that your Rev per mile should have been up about 6% in the quarter and then your documents you were saying.

So what am I missing in the algebra there I take fleet times miles per truck sales rep per mile that should equal revenues.

Lead times, while times revenue per truck.

Uh huh.

Rev per month.

So Zack and his team are digging into that I mean, I'll just talk a little bit philosophically I think the one piece that you may not fully appreciate is mix, although that should come out in the segment analysis. So we'll we'll run some numbers here, but you know our fleet size shrunk.

Which I don't think we talked much about.

Our miles was up marginally our revenue per tractor was up it owing partly to the utilization, but also to the rate increase the rate number you said it was 4% I think we reported that it was up 9.1% so that maybe well do math of about 6% right. Because you reported revenues up for your fleet was down one.

And your miles per truck was up about one so that that that's about 6% to get so I'm just trying to figure out where the algebra breaks down I figure, it's mixed but I'm just trying to understand that.

Yes, so let us get back to you on that launch after I.

I'm not sure where the four numbers coming from I had in my head. It was 9.1, I think thats, even what the earnings release and.

In the earnings release reported.

To 28.8, and then versus two or 9.7.

All right. So that's my error then okay.

And then I want to think about 2021 forward outlook, Jim you know it's hard to.

Thank God the idea that this environment stays.

From a demand standpoint, but the capacity is certainly tight right. So the rate should be up for a while and you're going to be repricing for the next couple of quarters.

You said you started to take some trucks in the second half every truckload carrier I'm looking at is still the fleet numbers are down.

In the third quarter.

What do you think.

Just given the outlook right now capex looks like in 2021 relative to where you are in 2020 and.

What do you need to see in terms of either AR or level of confidence before you decide okay. It's time to start growing the fleet again.

So let us kind of answer that question in reverse all kind of talk about the broader issues and that can talk about what the capital outlook looks like I don't know that we're ready to give a number but we can kind of be in the ballpark. So our intent first of all and taking 189 trucks in the back half of this year, we're not growing the fleet in fact, our fleet is going to be down in the truckload fleet by about 100.

Thanks.

We did that intentionally and on purpose.

And that is owing really to a performance discipline that you alluded to in your question. When you asked will at what point do you decide to grow we really believe Jeff.

We don't get permission to grow until we execute well and so when I referred to that internal metric, where we look at our trucking know ours compared to our competitors trucking or we're still about 500 bips away from the average and so from my perspective, you know this business for us to really get serious about a growth mindset.

Needs to be performing in that kind of 88 to 90 to all our space. So we're really focused over the next couple of years of refining the model getting it profitable paying down debt and then when we have what we consider to be acceptable performance or results.

Then we'll start to grow.

With that that can kind of give you some ideas about what that means for 2021, yeah. As we look at 2021, we know we have a certain number of trucks that are coming up based on our trade cycle of five years. So there's going to be certain amount that we're going to have to take just to help control to get better fuel efficiency better maintenance cost per mile to drive to that 80 890 million 92 are that James out.

Line. So as we look forward, we do expect there to be some capex in next year and by Capex I mean, we're going to take delivery of trucks, but we're going to take out an equal probably an equal amount we stopped to complete that analysis, but as we look forward. There's a variety of ways structure that as you know with it may not be cash and may be leaf southern Maine.

I'll be cash coming out.

But more to come on that yeah.

Yeah, and I'd, just say, Jeff that so everybody just so everybody is clear our replacement cycle is a five year trade cycle. How many trucks. We have you can do the math I'll just tell you a normal year would be EPS, replacing about 350 ish trucks.

And but that's very good point and he is right. We don't intend to grow the fleet. It will just be replacement capital and then of course, there's some trailers you know if you think about our trailer ratio is pretty normal for the industry. You can kind of back in your same your own number there, but I'll just tell you mean this summer is going to be our normal replacement net of.

Trade credit is 40 to 50 million Bucks a year.

Okay. That's that's a good way to think about it. Thank you final question.

So the balance sheet leverage is coming down because EBITDAR is going up and you're paying down a little bit of debt.

Same kind of thought process before you would a gauge in acquisitions take advantage of market opportunities is there a place you want the balance sheet or is there a place you want that ratio obviously for the right acquisition you'd stretch even if you weren't there, but just kind of as a way for me to think about.

Appetite for acquisitions is there a place you want to see that debt.

Debt to EBITDA number or just total balance sheet debt before you'd say okay.

Strategic acquisitions move up in the pecking order.

Yes. So you know we've mentioned before that you know are we'd like that leverage ratio to stay in that two and a half to three times, we think that for a company our size, that's an appropriate amount of leverage given the shares we have outstanding.

So to answer your question I would say, we feel pretty good about closer to two and a half to three times. When we start looking for other uses of that debt now we reserve the right, though to be opportunistic right [laughter] understood well congratulations its great to see execution and you guys kind of movement.

Ball down the field so congratulations to you and your team. Thank you. Thanks, Jeff. Thanks.

Our next question will come from Jason Seidl with Cowen. Please go ahead.

Thank you operator, James and team good morning, guys age.

Hey, Jason did you guys.

Wanted to focus a little bit on the near term that will go longer term after that.

You talked you sort of hinted that hey for Q is going to be better than Threeq Q.

I want to just sort of look at it as on a per mile basis, and also on the utilization basis, because utilization is clearly picking up you are having a lot of success going more local how should we think about that or maybe you can give us some numbers for the first lets call. It whatever we are 18 19 days in October.

Yeah. So you know our.

Our average rate per mile. So far in the quarter is.

I really don't want to buy and get boxed in but I will tell you it's higher but obviously that then it was in the fourth quarter or the third quarter excuse me I think it would be helpful. If I can rephrase your question a little bit Jason to go back and just tell you more about what the quarter looks like so we said pretty clearly that it really developed in the middle of August we made.

Some money in August, but the lion's share of our quarter was made in September and October looks even better than September.

And so as we look ahead, we got this fantastic.

Operating engine that is growing miles really for the first time in three years and that's just going to are the great operators that we have.

And the cadence of the business that they have adopted it's it's it's really kind of the secret sauce.

So there is this I'd expect you know five plus percent upside in utilization on the truck and then in terms of rate I would tell you that it looks like a normal Q4 surge.

And so whatever that means in your model.

It's kind of how I think about I'm, sorry to be so nebulous, but I know, we have eight and half shares I don't want to [laughter].

Well that is saying I mean, right I mean, just around a lot. So when you say five plus percent you're talking sequentially.

Okay. Perfect can you maybe another way to ask this and maybe to give everyone on the call here a better idea of how the quarter. What's do you have a month by month numbers of utilization and Youre.

Rate per loaded mile.

We do have that but we're not going to share it.

Yes I.

Well [laughter] I appreciate you try it.

But you know I would say, it's really interesting our our utilization went up every month in the quarter and so if you go back and look at our past results I mean, it's it's it's really quite fascinating and and you know we admire you know.

Many of the best operators in this space and we try to emulate them as much as we can and that's part of why we've gone to this regional model. It's just it works right I've said before somebody asked yet you know why do you use Bella checks.

Playbook, the right answer is 'cause he wins and where are using their playbook to because they win and we think it's the right thing to do but but what you learn in that is.

It's a commoditized business and everybody subjects pretty much to the same kind of wins in the marketplace and so what becomes the secret. If you will is the cadence and so we've got you know our operators are looking at the bottom third performers every single day and coming up with gap closing actions with those drivers on a daily basis, and if you go to the frontline.

And they are keenly aware of that and locked into it and managing that process same thing on driver retention same thing on customer service and so as you get into the daily drumbeat of accountability around the core metrics we've.

We've seen this pretty.

To us it's looked like a pretty drastic turn and it's there's a little bit of a you know a sigh of relief that you know the things that we thought were the right things to do are in fact, the right things to do so just to summarize it got better every month in the quarter and October is substantially better than September.

In terms of miles on the trucks yeah.

And what does it look at the dedicated side, a little bit and look out a few years ago.

I mentioned that it slipped a little bit, but you know you guys were onboarding a bunch of contracts how should we think about that or as we go through the coming let's say six to nine months.

Yeah, I'm really glad that you caught the nuance of what I said I appreciate that 'cause 'cause and I appreciate the opportunity to clarify it a little bit we talked about this publicly I don't know a year and a half ago. We saw a unique opportunity with USA truck's combined Oh are at such a high number compared to the.

Industry, there were pricing spots in the market, where we could go Oh, let's say by business, but price more aggressively to our competitors and still have an accretive experienced to the financials and you've been with us since that time. So I'm sure you remember that conversation. So we did that we went out aggressive.

Way to grow that business over the last couple of years and we got aggressive on price intentionally kind of sacrificing CMO are to grow the business.

We also said at that time that that was a short term strategy because as the underlying truckload business improved over time, it would become effectively an internal competitor for you.

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Precious limited capital resources, and as our operators in the truckload space are getting better and better and better I'll ours that raises the bar for the dedicated guys. We don't split it out as a segment because it's critical to our trucking combined segment. So I don't know that I've ever said deal our publicly.

It's still operating in a low ish.

Ninetys, Oh, our space, but we bought a little bit of business and you know under the premise of the strategy that I just outlined and now we're tightening that up we're working with awesome customers, who are sensitive to the due to the marketplace pressures and are responding beautifully to it and we expect it to be accretive for now and into the future.

And maybe more importantly, we see it as a stabilizing force and the predictability of our future results. So that when the market does go bonkers, which it does at times Youve got as you are limited on your upside in dedicated but you're also protected on the downside that did I Miss anything yet at all.

So James when we when we look at the dedicated I think you said obviously there were there was there was a bunch of fleet growth within dedicated but clearly not on your own.

Over the road side, so how should we look at that going forward. You said you don't have permission to grow just yet but is dedicated still going to grow within the over the road fleet shrink a bit.

Yeah, that's exactly how we're thinking about it so.

We that's kind of our own insurance policy, we don't want to get caught up in the air irrational exuberance in the market and just go chase rate rate rate rate rate with our trucks and find ourselves exposed like we did in 2019. So we're gonna grow the dedicated business and the way we're going to do that we're going to divert trucks from our truckload business.

And we think honestly, especially in the first half of the year. It's absolutely the right thing to do and then we add it's kind of shock emin knock on wood here, we've had a lot of success recruiting and keeping owner operators in our business, which as I've talked to peers in the industry and and listen to other people. It's a.

It's a real challenge and this robust rate environment.

Sometimes owner operators become mercenaries and go to the market for that short term opportunity, but our team has just done a great job of creating a programmatic a home for these guys and so the way that we're gonna grow truckload is by adding third party.

Owner operators.

And we're doing it well.

Well that that listen that the this is a good story quarter for sure I appreciate the time as always and all you gentlemen, please stay safe out there.

Thanks, a lot thanks.

Okay.

Our next question will comes from Jack Atkins Stephens. Please go ahead.

Hi, good morning, and congratulations on a great quarter.

Hey, Jack Thanks, Thanks, Jay So James and I'm, sorry, if I missed this I was kind of jumping between conference calls here, but I think you know what's interesting is there sort of head into 2021 for you guys. I mean, there's there's a there's obviously a right opportunity on one hand, but there's there's still this opportunity to get the network right, which one.

That's accomplished its going to be hugely accretive. So I guess, just maybe goes back to an answer to Jason's question earlier, but I mean as you go into 2021 are you more focused on driving rate or are you more focused on you know.

Using that as an opportunity with all this freight that sort of being put up for grabs.

September really finally get the network exactly like you've envisioned over the last couple of years, how are you thinking about that balance between those two things.

Look at this sales side thing doesn't work out you should come over and be with us 'cause you're thinking the way were thinking what you. Just said is exactly where our mindset is and again. Thank you for the opportunity to talk about it.

Here's what our internal narrative has been and so I'm going to step back a little bit further into 2020 before I go forward in 2021.

So one of the things I talked about a lot is day to on your operations class of your M.B.A. program everybody learns they have excess capacity in a factory should be willing to run it at variable cost plus cost variable cost plus we kind of did that in Q2, I mean, everybody should remember what a tough situation it was us.

Ashley early in Q2, we made a decision were making money on our trucks variable.

We made a decision to keep the trucks running because we wanted to train our operators and trucks to run miles.

And so we did that we.

We also.

As the market turns there was a really interesting phenomenon I kind of in the middle of the third quarter I look every day at our mix of broker freight and non broker freight and we had a couple of days, where we had gone exclusively to customer freight and literally had one or two broker loads on the book and I kind of went to the business.

I said look guys. You know this is the time when we should expose ourselves a little bit to the broker business and so we opened up the valve a little bit to expose ourselves to broker but to your point in terms of structurally what we focus on that's when we really got focused on refining the network this isn't off.

Some opportunity to get the network that we've always wanted and so.

As I said earlier, we went very surgically to customers, we resisted the urge to do across the board rate increases and we and we didn't shut down anybody. So we had this I was really really impressed with our customers and how a collaborative they were in the process. We went to our customers we work through it.

We were able to raise prices in the quarter and set long term structural price increases in place that go well into 2021, and so if you think about it as the arc and sorry to be silver Bose, but it's just a great opportunity to talk about what we did the arc is we went and played in the spot market use that opera.

It means a reset some of our underlying freight dynamics. We now have been very intentional we talked about this internally all the time of moving back into our contractual relationships to support our customers now at a higher base rate water level.

Because they're the ones that are going to sustain us in Q1 and Q2 of next year. So we feel like we played it I don't want to say perfectly what we we executed very well in terms of using the opportunity to reset the base and do exactly what you said so as we look forward to next year. If you look at freight.

That weve Reprised already this year that has contractual legs into 2021, so thats about three quarters of our freight it's already at a 5% increase over where we were in Q3 and I haven't gone back and done the math, but it's going to be against much easier Q1, and Q2 comps and so we've really.

I've done what you said, we saw this as a chance and I don't want to sound like we're being opportunistic pigs, that's not at all it just was the responsible thing to do to work and collaborate with our customers to get to a baseline that they and we are comfortable enough with in the market and to calibrate our network. So that its copacetic for a long time to come and I I'm again, I'm, so sorry, but.

I'm Super excited about the opportunity to talk about that I did I answer your question.

You did and I appreciate the job offer and I'll make sure my Dior knows about that as we go into [laughter], that's great that's great.

Maybe.

My follow up then I guess as we're thinking sort of bigger picture you know.

And using this opportunity to really get the networks that like like you guys have a vision now for for a while what would what would prevent you from a you know as we look forward and I know 2021 is going to be a good year for for a lot of different reasons, hopefully you know knock on wood.

Economy all together.

But.

The structural margin a vision that you guys have had you know mid Ninetys type of war.

There being any reason why as we sort of you know what.

For prospectively, we shouldn't be able to sort of be running at that level going forward now that the network will finally be at a place where you feel comfortable or will that be more heavy lifting to do in 22 and beyond.

Yes so.

The way, we've always talked about this and we are really consistent going back not at all for two or three years is we expect to get 200 to 400 Bips improvement every year versus the market.

This year Weve only closed that gap by about a 100 bips. So we've kind of underperformed our own expectations in that regard, but we have made progress versus the market. So as you look ahead.

And I'm not dodging your question I'm getting to it as we look ahead I'd expect because we said it'd be a three to five year process and we kind of we don't throw 19 in the first half of 20 out you can't do that but they were you know.

18 of the toughest month and post deregulation trucking I mean, it was a really tough time and so I think we're still like in the fourth inning of this thing and so as you look ahead I would expect that we closed the gap. Another couple of hundred basis points in 2021, and as we get into 2022, we should be really talking about our oh are being comparable to the.

The market average amongst our peers, that's where we are and so when you said Hey, you know is this should we expect this going forward I would say what we just saw.

His aspirationally that the bottom of what we should expect I mean, I would be really disappointed in down cycles. If our trucking SLR got above 95 again, our goal is to balance is saying and kind of that 88 to 92 space through the cycle I'd give us a little leeway for you know.

Tough years, like 17, and 19 to say, maybe we go back to a 95 or 96, but I think the days a three digit Oh ours in this business are gone forever. Okay.

Okay. That's that's great to hear you guys I'll turn it back over thanks, so much for the time.

Thanks.

Okay.

Again, if youd like to ask a question. It is star then one.

Tough question.

At this point I am showing no more questions. So this will conclude our question and answer session I would like to turn the conference back over to James Reed for any closing remarks.

Great. Thanks Grant you know 2020, it's been a year, none of us will ever forget the pandemic five hurricanes wide ranging fair elections, and everyone's life turned upside down I know I never imagined the scene like this and yet we have no choice, but to do one thing which is play often it's a singular sign that hangs in my office remain.

I mean every day.

That's the only way forward is to look ahead.

Lubricants the hall of Fame based dealer, who died earlier this year. Once said show me a guy who is afraid to look bad and also you a guy you can beat every time.

We've made some missteps along the way, but I can tell you quite assuredly that this team has done many things right. It we're making a ton of progress we continue to close the gap with the competitive set as we have each of the last four years and this just might be the best story and transportation were not afraid to look bad as Mr. Brock said, we're afraid of not realizing.

Potential. So we work every day like everything depends on it because we know our shareholders our customers our communities and our families are counting on us to return this company to its once prominent place among the more profitable ventures in the space and we're well on the way so with that thank you all for calling in today. We appreciate your willingness to follow our stock and.

Really appreciate all the questions have a great day.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.