Q2 2021 USA Truck Inc Earnings Call
[music].
Good morning, and welcome to the USA Truck's second quarter 2021 earnings Conference call.
All participants will be in English and 1.
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After todays presentation there.
And opportunity to ask questions.
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Please note this event is being recorded.
I'd now like to turn the conference over to Mike Stevens Senior Vice President Finance.
<unk> and Investor Relations.
Please go ahead.
Thank you Shirley and good morning, and welcome to the USA USA T capacity solutions second quarter earnings Conference call. Joining us. This morning from the company are James Reed, President and CEO, and Zach King Senior Vice President and CFO. We thank you for joining us today and all.
Order to help you better understand USA truck capacity solutions.
<unk> and its results some forward looking statements could be made during the call as we all know forward looking statements by their very nature are subject to uncertainties and risks for a more complete discussion of factors that could affect the company's future results. Please refer to the forward looking statements section of the company's earnings press release, and the company's most recent SEC public filings.
In order to provide more meaningful comparisons certain information discussed on the conference call could include non-GAAP financial measures as outlined and described and the tables and our earnings press release I'll now turn the time over to James.
Great. Thanks, Mike and good morning, everyone for the fourth consecutive quarter USA truck results.
Filings and a record quarter and the history of the company our team delivered the best Q2, adjusted operating income and adjusted earnings per share and our history.
And the highest revenue quarter in the history of USA truck and want to emphasize that last point Q2 of 2021 represents the single highest revenue quarter and the history of USA.
Say truck since its founding 38 years ago.
When we first brought this team together back in 2017, we laid out a self help story and a focused on improved asset business performance continued success and our logistics segment and a rebuilding of our leadership team and culture that could deliver value to shareholders.
We told our investors that we would focus.
On price and our network that we would improve seeded truck percentages and.
And that we would improve utilization all while growing our logistics franchise with market competitive operating ratios and we have done just that.
We've also been consistent and our story that we would improve operating ratio of 200 to 300 basis points annually for 3 to 5 years.
Exactly what we have done and are doing our performance and trajectory match almost precisely what we thought they would.
This is by no means a victory lap and have a long way to go to deliver the results shareholders and we expect but we come to you. This morning, believing we will produce even better results and coming quarters and.
And that <unk> resolved to ensure that these record setting results are appropriately recognized and the equity markets.
What we will share today is the story of a company that has outperformed the market in terms of price performance.
And that continues to improve profit margins each quarter and 1 that has a $1.92 and trailing 12 months adjusted earnings per.
Per share and our balance sheet with liquidity and leverage metrics and healthy condition that we expect will enable future growth today, we will offer updates on the market dynamics and segment performance and the quarter, our progress and our self help transformational initiatives and finally on the outlook. Additionally, we will for the first time provide.
And some forward guidance based on our team's recent strategy work wherein we considered the strategic roadmap for the company through 2024, I'll now turn the time over to Zach to discuss the financial results. Thank you James If Youll. Please turn with me to slide number 3 we will do a brief review of our financial results consolidated.
Consolidated quarterly operating revenues came in at 100.
$70 million, which represents a 37, 4% increase year over year and as James mentioned and all time quarterly record consolidated adjusted operating ratio for the quarter was 95, 3% down from 98, 6% and the prior year. This was primarily driven by improvements in our base revenue per loaded mile and our trucking segment.
Driven by our network optimization initiatives and market uplift and increases and load count and revenue per load and our USA logistics segment. Our adjusted earnings per diluted share was <unk> 50.
Turning to slide 4 trucking operating revenue before intersegment eliminations increased $16.7 million or 18, 9% to.
And 5.4 million base revenues, excluding fuel were up 15, 9% to $93.3 million compared to $80.5 million for the second quarter of 2020, our trucking segment generated $3.4 million and adjusted operating income and a 96, 4% adjusted operating ratio. The primary driver of these results.
Also the $44.4 <unk> increase in base revenue per loaded mile when compared to the second quarter of 2020 utilization.
Utilization increased 29 miles per truck per week or approximately 1.9% from the second quarter of 2020, these rate and utilization outcomes positively affected base revenue per available tractor per week, which increased 700.
Hundred $32, a 24, 4% year over year.
Our deadhead percentage for the second quarter of 2021 improved by 190 basis points year over year.
The average available tractor count for the second quarter of 2021 was 1922, which is a 6.8% decrease when compared to the second quarter of 2020, However represents a 1.
5% increase from the first quarter of 2021.
Turning to slide 6 we'll review the results of our USA logistics segment revenue before intersegment eliminations increased $40 million from the second quarter of 2020, or 103, 3% to $78.7 million our logistics segment generated.
$1.9 million and adjusted operating income and had a 94, 7% adjusted operating ratio.
Gross margin dollars increased $5 million to $9.7 million and the quarter gross margin percentage for the second quarter of 2021 was 12, 4% versus $12.2 for the comparable quarter in 2020.
Low count increase.
Increased approximately.
Increased to approximately 37000 loans during the second quarter from 33000 loads and the second quarter of last year and increase of 11, 2% and and increased by 12, 2% or approximately 4000 loans sequentially.
If youll turn with me to slide 7 will highlight some key balance sheet and liquidity measures.
Measured as of June 32021, total debt and finance lease liabilities were $138 million net debt was $136.1 million and our net debt to adjusted EBITDA for the trailing 12 months ended was 2 times down from 2.3 times and Q1.
This represents a net debt decrease of $9.5 million from Q1.2021.
And a free.
<unk>, 3 turn improvement and our leverage ratio.
The company had approximately $87 million available to borrow under its credit facility as of June 32021.
Looking at the remaining months of 2021, we expect $30 million to $40 million and net capex for the remainder of the year. However, acquiring new revenue equipment has been challenging due to the <unk>.
Imported OEM supply chain issues, and while we expect to receive new equipment and in the third and fourth quarter there may be delays.
This could negatively impact our operating costs as our equipment ages.
With that I'll turn the call back over to James to offer more insight on the quarter and our outlook.
Great. Thanks.
And the.
Widely was remarkably level loaded this year, we had steady demand from our customer base that was seasonally consistent but at elevated levels Adi.
Adi turn now and has declined throughout the quarter, but that was by design as we implemented new bids for a number of our largest customers and that included intentional pruning of lanes, we simply didn't need and our optimized network.
So those demand signals disappeared on purpose and by design, while the market at large remained robust across the rest of our customer base and.
In fact pricing activity remains strong as a simple illustration, we recently implemented contract awarded freight from 2 of our top 5 customers that we expect will lift our contract rate.
Another 8 tenths of a mile overall or 3% above the Q2 results and Thats just 2 customers. We expect the contract rate environment remained strong through the end of the year and into 2022.
On the supply side noteworthy secular trends include the availability of drivers and the replacement tractors from Oems driver.
And it remains a significant challenge as high quality frequent home time jobs are in high demand and the cost and bring drivers into the work force is accelerating as competition for the best and the best Tightens.
I will address some of our mitigation efforts and results later in the trucking segment results.
Tractor availability from the Oems continues to be a signature.
<unk> headwind, we've not received any tractors year to date and while we expect to receive tractors and the third quarter. We are prepared if they continue to be delayed the challenges associated with this are clear older fleets are more costly to maintain and have negative effects on driver retention. So we're finding ways to mitigate these concerns through additional driver outreach expanding national.
And all over the road repair partnerships to enable faster and more readily available repaired and driving more awareness and inspection points through internal campaigns to ensure preventable repairs are recognized before they become real issues.
We believe the market will remain strong well into 2022 due to structural industry wide capacity challenges that are not quickly.
Spelled inventory levels remain low driver availability remains a challenge and there is no relief and site in terms of the new driver capacity into the marketplace.
Add to this the impact of the worldwide chip shortage that Zac just mentioned on new truck deliveries and we think we have a sustained healthy transportation market for awhile.
Now moving to the trucking segment.
And the self help progress and the trucking segment continues to gain momentum and Zach noted many of the core underlying metrics like rate per loaded miles revenue per truck and empty mild percentage continue to improve this quarter and that was manifest and a segment adjusted operating ratio improvement of 143 basis appointment basis points excuse me year over year.
I'd like to update everyone on some key accomplishments and progress from the quarter and the trucking segment. The first is network improvement.
Or 22% rate per loaded mile increase year over year benefited from a strong market rate environment, while exceeding peer averages due to structural and fundamental design elements of our network that we have discussed this morning and and prior calls.
We highlighted last quarter that we have shifted our weekly cadence and pricing to 1 and pruning and lifting the lowest shielding freight and a disciplined and cadenced approach, we consistently manage our free basket on a weekly basis and ensures we only hall free we desire and our newly Optimised network. The way, we think about our evolved network over the last several years is that we began.
By optimizing the freight we had and now we are architecting. The freight we desire and this has been a very effective approach that has improved lane density approximately 10% more year over year and has increased freight yield over that same time period.
Somewhat surprising to me, we've actually seen a marginal decrease and our broker frayed over the last 3 quarters. As a result of this approach at the same time, we have seen a 67% increase and the amount of our free that is hauled and our tier 1 highest yielding terminal to terminal lanes and.
And simple terms, we are managing the poorest yielding free out of our network, we're getting more of the highest yielding free and our tier 1 lane and we are expanding density. These are all great things, we are leveraging of robust environment to architect and network that will stand the test of time and the inevitability of market cyclicality.
Next I want to talk about driver retention, our driver retention was fantastic again, and the quarter better than industry averages and over 4000 basis points better than last year year to day and may be the most noteworthy accomplishment. We have had in the context of the current marketplace. As we noted last quarter. This as a result of a team that is communicate.
Better creating driver jobs that lead to happier and higher performing teams and as a result Ah retention measures have outperformed the industry.
It is true that we are experiencing a historically challenging recruiting environment and that's why we see our retention performance as a competitive competitive advantage. While those are struggling with retention hours has improved all time best levels of performance. Our approach is multifaceted. Our culture is permeating our actions, we have taken specific actions and soliciting and.
Acting unemployed feedback using innovative technology solutions, we've done meaningful and consistent driver outreach and we have been able to create driver jobs that are desirable and inherently result, and better retention.
I want to address driver recruitment for the first time driver recruitment has been a challenge we signaled and our last earnings call that we would be instituting a driver pay increase and we did that in may the combination of higher paying dedicated accounts. The recently implemented driver pay increase and creating driver jobs that have higher pay cash.
Victor <unk> things like shuttle jobs regional work local jobs and higher paying dedicated roles have resulted and year over year driver wage increases of $14 and 7% I want to be clear and some of that is about mix. Some of that is about the pay increase about half.
We have leverage this better pay and benefit profile to boost our recruiting efforts and it has really paid off June of 2021 saw the highest number of new drivers attending and driver orientation and 3 years and even as of as recently as this morning, we have the lowest number of unseeded truck that we've had since the first quarter.
We view that surge of drivers as an investment and a quarter that is now beginning to bear fruit and and the third quarter.
Other things we were doing to combat the challenging driver environment include.
1 we operationalized, our truck leasing company and the quarter and while it is just starting up we have redeployed over 20 trucks into and owner operator lease configuration that we consider and early great success. We currently have over 100 owner operator independent contractors awaiting access to this program and to my second point, we also reached.
And we entered a relationship to release program that leases trucks to a us based operator, who employs b..1 visa drivers. This is just and startup now but will ramp through the third quarter and we expect to create additional available driver capacity through this relationship.
And now I want to talk about technology.
USA truck received an award and the quarter as the 2020 transportation innovator of the year from Cc J magazine. The award recognize the practical use of technology, and creating and internal company driver load Board whereby company drivers owner operators and power only independent contractor providers, all have access to and the ability to.
Self dispatch this technology called driver connect and encourages drivers to drive your plan and has played a critical role and creating a digital fleet of drivers with low turnover and high productivity as.
As great. As that example is it is illustrative of a broader philosophy that we will use technology as a means to and and in addressing longstanding business challenges and innovative ways. We similarly introduced new network optimization software and our fleet and the quarter. We recently converted to a new real time capacity available.
<unk> mapping system and we've also worked for the startup and creating optimized load acceptance optimizing customer commitments and creating real time visibility to load preferences based on yields and profitability. These innovations are real and tangible and we expect that they will further enhance our execution and profit profile.
The bottom line is that delivering freight safely with high levels of service remains our core business, we strive to use technology as an enabler that creates differentiation, but we are not a technology incubator, where a transportation company that uses technology to enhance our competitive positioning and find.
<unk> on the trucking segment and I want to talk about dedicated briefly we have noted in the last couple of quarters, the challenging startup environment, especially and hiring drivers and the dedicated business are dedicated truck count remained flat from Q1 Q2. This fleet size still reflects about a 13% increase year over year and most importantly.
We have moved beyond the start up phase and we expect this business to growth throughout the year and do so it and <unk> level and the low nineties.
Let's moving out of the logistics segment.
The logistics segment continues it's March is a high throughput revenue and margin engine.
The first quarter was the highest revenue quarter and the history of the segment until the second quarter, which set another record and grew $15 and 2% sequentially. Our logistics business is a significant contributor to our business and now makes up 38% of based revenues and this quarter accounted for 56% of consolidated adjust.
Operating income this business will continue to grow rapidly as we see emerging opportunity and the logistics space have a highly capable and efficient engine through which to drive that business and see our segment performance as a best in class organization with best in class results.
Zac already highlighted the key performance indicators from this segment and is prepared remarks, but I would like to add some emphasis to a few noteworthy efficiency gains that continued throughout the quarter. The first is load count and volume are load count continues to be strong Q2 volumes were up 12, 2% sequentially and 11, 2% year over year. This is critic.
Really important in any market condition, if margin compression is real and it may be longterm, having the throughput to harvest profit is critically important. The second is that USA logistics revenue per employee is up another 92% year over year, we continue to emphasize us because it is simply astounding the lab.
12 months year over year growth by quarter have been starting and Q3 of 2020 up 79, 8% up $136, 3% up 96.5% and now up $92 and 4%.
The next point, we have not discussed before that's margin dollars per employee.
But this is another staggering statistic, our logistics team produced over $100000 and gross margin dollars per employee and the quarter for the second time and our history. This represents a $54000 increase per employee year over year or 108% improvement year over year.
And finally, USA logistics loads for employees up 5.2% year over year going back to Q2.2019, our logistics load count per employees up over 66% are people processes and tools are all getting better and better each quarter. The logistics story is straightforward.
Higher revenue per load is being pushed by the market at large but the team continues to set records in terms of revenue load count and margin per employee even with the high throughput of volume the team found a way to expand margins year over year, that's a winning formula that we expect to see over and over again and the coming quarters and years.
Last quarter, we mentioned the deployment of API pricing and this segment essentially a touch free call response pricing mechanism to get spray priced tenders offered and accepted and freight moving without human interaction. We continue to develop and deploy this unique capability and will continue to do so and coming quarters.
I'd like to now shift to talking about the outlook.
The business environment remains healthy and both segments of our business. Our trucking team is improving core operations optimizing the freight network and steadily improving financial performance over time, and our logistics business is leveraging a high service high throughput model and a healthy pricing environment to create what we believe is 1 of the very best logistics businesses and North America.
The toughest headwind remains finding qualified drivers to join our team, but our attention has gone from being a perennial weakness 2 and undeniable strength.
Pricing is healthy and customers are more interested than ever and finding innovative solutions that address the cost headwinds, while allowing us to optimize our network. It feels like the most constructive environment and we've seen and the almost 5 years that I have been here now referring to slide 8 will just update everyone on our 2021 Touchstones that were introduced a couple of quarters.
So the first is trucking segment O R. I already discussed this and detail. We are on track and ahead of plan on this measure the next is logistics load count growth.
Our target is 10% annualized profitable load count growth was and internal and all that exceeds that and we continue to expand our API pricing capability is discussed and we are ahead of our commitment in terms of low Cal growth and.
<unk> is dedicated growth of 10% truck count growth are more dedicated up 15% year over year and the quarter or excuse me a year to date with a robust pipeline and several opportunities and near contract phase. We expect this success to continue and accelerate and finally employer of choice, we expect to improve our driver turnover by 10 percentage of more on the.
<unk>.
Our second quarter results and year to date results turnovers under 80%, which is significantly outperforming this goal.
So I would like for the first time to offer a strategic update we haven't done this before during the second quarter of the leadership team undertook a comprehensive review of the company's business strategy with the output being a very thoughtful analytically robust and well vetted path forward, we considered 16 separate strategic business alternatives.
And analyzing the market and the competitive landscape against our organizational strength and capabilities. The evaluation of alternatives was multifaceted and led to 3 specific strategic priorities going forward. The first is to expand and densify our asset business East of I 35, USA truck expect to remain a significant and.
Important asset provider and the network areas. We already served by further Densifying. Our network, we will continue to leverage existing cost infrastructure recruiting presence and customer relationships improve our yield on freight through and optimize and Architected network and expand our dedicated and terminal network. We expect this to result, and an asset based business that performance.
Between and 90 and 92 operating ratio and the next 3 years.
The second point is that we will double the logistics business. We believe our team has created 1 of the best logistics businesses, and North America, and that by doubling logistics revenues, while maintaining and industry competitive or structure. We can add significant earnings growth with modest corresponding capital investment. This is a high roissy invest.
Midstream and we expect the logistics business to grow to $400 million and top line revenues over this same time period and third is to reduce the assets. We age some of the best operators and the space run fleets that are about 6 months newer than ours.
Our analysis of this proved why there is a meaningful operating income impact from a younger fleet and we expect to bring our average age and fleet to 2 years over the course of our next trade cycle and during this window.
The combined effect of the strategic thrust outlined above his and organization with top line revenues of just over $1 billion, a blended or of 93% and 94 and and EPS of $425 to 450 by the end of 2024.
USA truck has returned our leverage levels to just below 2 times, we have improved liquidity to near $87 million. We have delivered profitable results and 12 and the last 16 quarters, we've delivered record quarterly EPS results and the last 4 consecutive quarters and we have 12 months trailing adjusted EPS of $1 and 92.
And the highest of all time and yet the stock remains and a trading band and multiple that to us at least seems to suggest that the market sees these results is unsustainable and unlikely to improve further as 1 would expect we disagree we believe USA truck is meaningfully undervalued.
And we will continue to take actions that a firm the confidence of those who share our view and demonstrate to others that the changes we've made are made.
And are making are meaningful and enduring.
In addition to the comprehensive exercise undertaken and the second quarter, we created a permanent committee of our board of directors focused on business strategy. This committee replaced and now incorporates technology strategy as well as all facets of business strategy and its translation into value creation and finally, we embarked this quarter on and targeted.
Investor outreach to tell our story and expand our shareholder base among managers, who may have been unaware of USA truck on account of our size or historical performance. We're delighted with the reaction we received to date and many from that outreach or on the call with us here today, so that she Molly I'll turn it over to you to assemble the list of questions. Thank you.
And at this time, we will be conducting a question and answer session.
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1 moment, please while we pull for questions.
Our first question is from Jason's.
Cowen and company.
Please proceed with your question.
[laughter], Hey, James and team up everybody as well this morning.
Drill down a little bit more on euro API and those such initiatives. You said that was ahead of schedule and could you could you let us know subtle like what percentage of the business is being done by that and maybe give us some hard and number of targets as we look through the next 3 years.
Yeah, that's a great question, Jason I'm going to kind of Dodge, giving you a specific answer on the percentage of the business I will say this 2 of our largest customers are using it in a subset of their business.
I think and our next review will get our next quarterly results will get back to you with more specificity around that.
In terms of long term targets I think it's realistic to assume that this will be kind of the new normal going forward. So we've.
We've got 1 of our largest customers.
We've been and long discussions with about accomplishing this 1.
1 of the things that I like to say is there are rules and commoditize markets and 1 of the rules is the customer makes the rules and 1 of the challenges about API as each customer has their view of the right way to execute this so and it's kind of difficult to throw out a specific target, but I can tell you over a long non specific timeframe I.
Think just like Adi most of the transactional business is going to move to this and and I apologize for such a vague answer I try to give you better specifics most of the time, but I will come back next quarter with <unk>.
More particulars around what percentage of the business is there if that's all right well I'll make sure I hold you too and next quarter of that.
That.
So let me turn back to the asset base business.
This is a market that's been.
<unk> and the best trucking market I've seen in quite a while the most difficult driver environment and I've seen and 3 decades.
But if you if you look at the business is out there dedicated and across the board seems to be doing worse than people's over the road business, just because of the words swap price instead.
Is this the time to maybe gear up your dedicated a little bit more as you look out assuming the title will be turning and so when you look at your non asset based plan or your asset base plants.
Do you think you should focus a little bit more on the dedicated side at least in the near term.
We are really focused on dedicated so if you go back to our 2017 Investor day.
2070, 2019, excuse me are 2019 Investor day, we mentioned and there and nothing's changed that we expect our asset business to be 50% dedicated and 50% asset over the strategic time horizon that we talked about so we're pushing it extremely hard.
You by asking your question already know and acknowledged but I'll save for the other listeners.
Dedicated provides a safety net and down market that does limit your upside as you alluded to but we think it is.
Absolutely the right way to structure, our asset business going forward. So if I conveyed that we weren't focused on that that was unintended and and.
And and wrong.
We are squarely focused on growing the dedicated business.
There are better opportunities now than ever to get dedicated business our pipeline is really robust.
We did see and the quarter Q1, and Q2 that are truck levels stayed pretty level, we had mentioned and past quarters about some of the startup woes that we and others have faced.
Largely path to startup phase on most of those and we are starting to harvest some pretty good levels of profitability there. So.
Everything you said is point is spot on and and reflects our current business thinking that you want to add anything to that no no I agree.
And just to kind of add onto the startup.
And we had a lot of accounts come online for quarter last year first quarter of this year and that startup while we had those trucks and the plan and bike you made mention of I think with your previous question. The driver market is so tough right now so those startups. They just keep you kind of get further and further behind us are trying to hire those drivers.
Okay. That's good collar guys..1 more question here and I'll turn it over to somebody else.
James you alluded to that.
It's your opinion that USA truck is extremely undervalued by the market, obviously I would concur based upon my price target for your stock.
However, you are not the only 1 out there. There is there are several carriers and I think they're giving me ignored and this time to be trying to get more aggressive with your free cash flow and and maybe you can purchase and chairs.
Yeah, that's a really interesting question, so I'm going to take the opportunity and maybe go a little far afield.
Your question.
Start by first answering it about repurchasing shares.
And he did a share repurchase is actually predates me and we thought about $40 million of shares.
I guess that would be and 26.15 and 16 and.
1 of the inherent challenges at USA truck is relatively kind of low trading liquidity and float that we have and the shares and I only have 9 million shares outstanding and we tend to focus frankly, much more on the market and improving the market cap of this company than we do.
And.
Focusing on on share specifically that said, it's a really natural question to ask.
And this strategic this strategy committee of our board while it is not their charter to look at and.
Specifically at that or others call at strategic alternatives. It is within the scope of their consideration. So we talk about those things all the time with the board we don't have any impending.
Share buyback to announce this morning or anything like that but it's it and.
And important consideration of responsible managers everywhere and our board or committee, our management team looks at that and other available alternatives. Your commentary on our perspective about undervaluation I mean, almost by any measure that you look at.
This company's value is just not being reflected in the current market cap.
We are trading at a multiple that's half the industry average multiple.
If you were to take the logistics business alone with.
$10 million of.
Trailing 12.
<unk> income net business as a standalone enterprises worth more of the entire market capitalization and the company.
And then say you've got $58 million remaining of cause we've got $69 million in trailing 12, EBITDA, you've got 58 million that's attributable roughly to the asset business, we're getting no value consideration for that so we think on and EBITDA multiple on and enterprise value value on and.
Multiple like any way, we look at it this numbers gotta be higher so.
You are right. We are looking at all ways to extract value for our shareholders because ultimately that's our job and if I sound a little protective right now I am I mean beyond our employee safety My number 1 job. This management teams number 1 job is to create shareholder value and we're kind of Bo and up a little bit we are going to fight for our shareholders.
To ensure that they get the value reflected and their investment.
I appreciate the time is always gentlemen, and good luck and double a and a market cap.
And I do it.
And our next question [noise] excuse me. Our next question is from Jack Atkins and with Stevens. Please proceed with your questions. Okay.
Okay, great. Good good morning, James back and Mike Thanks for taking my questions.
Hey, Joe and Jack.
So I guess, maybe first if we could go back to.
The driver recruitment and retention and I I think you guys are the only public truckload carrier.
This corner and it's actually available to maintain and finally grow.
Free count sequentially, so huge kudos on that and then underscore James what you were saying and your parents.
But.
And the fleet and still.
C detractors down your over here and I'm, just sort of curious what do you think about the drag that perhaps creating.
And the overall profitability and the efficiency of the business just from like a scale perspective and is there a way to maybe walk through that because I would imagine that you know obviously.
And me extremely well, but if you were probably operating with the number of trucks you you would hope to operating which you'd be generating quite a bit more from from and operating income perspective, and you may be walk us through that and if you don't mind.
Yeah, I'm not sure that it's a big walk through I'll tell you the way that we look at it Jack.
And there were a couple of things and the quarter you alluded to so the first 1 is.
We did add trucks and the way that we've done that materially is.
Is through our owner operator program as I talk to other Ceos and the industry, both private and public they are pretty amazed at what our team's been able to do and the owner operator space and frankly I am too generally think of owner operators is at some level mercenary like and that they will chase the highest freight.
And they leave companies and times of of feast, and return and times of famine and.
We were really quiet for probably a year when we are working on this.
Driver load board that I mentioned and the call but.
But we got it really hamann and now that we're receiving awards and we're starting to talk about it publicly I am not going to hide from and anymore. The secret to our success is that we have a really off and platform that makes it easy to do business with us and we attract and retain owner operators probably better than anybody right now so that that's 1 element.
And that the other element is.
And we won't hide from this at all through the quarter, we really struggled with our unseeded truck count and that when I say that we did it struggle like what I've seen other people publishing or other people talking about but our unseeded truck count was.
30, or 40 truck above or target throughout the entire quarter and we've estimated that that cost us just under 50 miles a truck on the entire fleet as a metric. So you take those 50 ish miles multiply times the rate.
And the number of trucks, you can get a real sense of what the impact was it a couple million Bucks.
So we were doing that math. This morning, we think we could have improved ror by seeing those trucks by about another 1 and 1 hour points and that's just my rough math and I'll make sure zac double check that but but.
So there is there is a full kind of turn of O. R. There wrapped up and that I didn't have it actually written and my prepared comments, but I slipped it in and my prepared comments, which was this morning.
Unseated truck count has dropped considerably and that's because of the awesome June recruiting month, we had so when we saw the unseeded truck count rising exiting Q1, we took.
Immediate evasive action to increase our owner operator program to increase our spending on recruiting advertisement to bolster our recruiting resources and house.
And we made the pay changed that we talked about and that really bore fruit and June where we had more drivers in our orientation classes and any time and the last 3 years and so.
Sorry for the long winded answer, but it's a couple million Bucks and we I have to tell you and you know you know this drill well we went round and round about do we disposition these trucks and take it as gain on sale, which many of our competitors did in the quarter and and we just feel like our long term.
Prospects depend on us growing and we're very hesitant and resident.
Reticent to do that and so we instead invested and mitigating net which we feel like as of this morning. We've done very successfully now and that's probably gonna want to added a lot of what I said you want to add anything to that no no I would agree with most of what you said I mean, and when we look at especially the trucks and having those unseeded truck.
Throughout the quarter, we did talk.
About like you said at the end.
What do we do with those trucks and we sell them through we pushed him over into a leasing company and try to at least some which we did.
About 20 trucks is James mentioned earlier to utilize some of those assets.
But with the with the struggles and the current market to obtain new equipment. We didn't really didn't want to let go of our old equipment, we need that to operate so.
I think we're starting to see some of that fruit and now as RMT a truck counts starting to come down through July.
Okay. That's very very helpful and I appreciate all that all that color. So I guess as we look forward here then.
I've got a shorter term question and a longer term question was short term side.
How would you expect succeeded truck count to try and it sounds like higher but how would you extreme if you can maybe help us and put some brackets around that and we.
Go into the to the third quarter vs. The second quarter and.
The rate work you are talking about James with some of our customers.
And it has now been implemented and is it right and maybe think about operating ratio improving.
From the and the trucking business and the third quarter vs. The second quarter.
And.
Great questions.
So.
On the first point I would say, we expect truck count we're hedging here, we're going to underpromise and over delivered but I would say, we expect it to be up marginally and the quarter may be 1% to 2%.
We are very confident and seating those trucks, which are recruiting teams done and awesome job of we also are have I mentioned and that call over 100 owner operators waiting in line to get into our owner operator program as Zac just mentioned however, the the lack of availability of assets and the Mark.
And place makes that a real challenge that's why we want to hedge that number a little bit in terms of truck or I would absolutely expect to see and improvement and the third quarter and I'm not going to go out and tell you how far I think it's going to go but there are some big opportunities there.
And we kind of.
Our prepared comments were kind of sounded I think like a little bit of high 5 and and chest bumping and the hallways, but I'll tell Ya Jack we we did not play significantly and the spot market and the second quarter and I've said this for a couple of years on these calls we just haven't historically been as nimble as some of our competitor.
<unk> to get in and out of the spot market. We now with our new network tools with are really awesome operating team. That's now been and place for a couple of years and with the consistency of performance.
They're going to go play strategically in that space.
To bolster us even further so I, absolutely would expect Q3 to be better and Q2.
Okay. That's that's all that's great to hear and I guess, maybe a longer term fleet question and and James I really appreciate the strategic update and I never wanted to call. A day that you guys provided and the prepared comments when you think about expanding.
And.
And made the comments on expanding the asset base.
And especially east of I, 35, and adding density there.
What what is the underlying assumption around fleet over the course of the next 3 years to sort of get to those targets and you maybe brackett that as we think about it.
Yeah for sure so.
I'm really willing to get into this and detailed because I think you can figure this out on your own from the slides and from the comments. So if we're going to grow this logistics business to $400 million that and then tells you you've got a $600 million.
Asset business, if you make some kind of conservative historical CAGR assumptions about right yields and be able to back into what we think the truck count needs to do to get to that number and it's modest.
I'm going to tell you flat out our plan includes growing about 100 trucks a year over that time horizon. So it is not a lot. This is we're not.
Shooting at Unicorns and Rainbows here this is a.
A pretty straightforward plan that we think is readily attainable now that said.
And this is just and the spirit is being fully transparent we.
It's hard to get trucks, right now and it's harder to get drivers and so if that's the case, we may have to do that Inorganically. We don't have anything in the pipeline, we're not and I have money burning a hole and our pocket, but just as a practical consideration and our plan does depend on growth and if we can't get it organically. We may look outside for some opportunities and then just 1 clarification.
<unk> and about that growth, we expect about 60% of that tractor growth to be company trucks, and about 40% of it to be and the owner operator space, but we've had great success and the owner operator space. All of this stuff is is subject to change and because we've now put it out there were going to come back to each quarter and update you on our progress and any nuances that may occur is.
Is the market evolves.
Okay. That's that's helpful and maybe maybe a couple more questions and I'll turn it over.
Maybe a cash flow question for your back you guys have done a great job generating free cash flow this year.
That by by quite a bit.
There are some puts and takes in terms of capex and sort of win win equivalents gonna become available for you to take but could you maybe give us some some thoughts based on your current Capex plans for the year, let's assume it does play out and do you think they will.
How are you thinking about cash flow and and debt reduction over the balance of 2021.
Yeah, so assuming if we can get tractors and the third and fourth quarter, which we think we will be able to.
We probably anticipate that too.
Slightly pick up a little bit through the back half.
But we do have some truck coming off lease and we're going to continue to pay down debt, we do anticipate that to increase over the back half of the year slightly okay.
Okay got Ya.
That's helpful caller, Thank you and and I guess the last question.
Back and just.
Maybe talking about the logistics nightmare and for a moment.
James could you could you address the power only offering that you guys have I and I know it's.
Other characters talk about it quite a bit you guys have that as well and you get a lot of airtime from us on the conference calls but.
I think that that's.
That's a really interesting strategic growth Avenue for you guys and and would just especially with your enhanced technology platform there within USA.
Would just love to kind of get a little more color and the public form around what you guys are to and from a power only offering perspective, yeah. Thanks for asking so we have several hundred trucks in the power only space just to describe for people what that is our only is and an outside third party independent contractor under operating under their own authority.
<unk> hauls USA truck trailers with freight that we've contracted with customers and.
And we've been doing it for the better part of a decade, we're really good at it and as you mentioned, we gave them last year access to this load board that we've discussed earlier. So it just further enhances their free agency and their ability to choose for themselves what they will and won't hall, it's great because it provides choice to the independent.
It's great for us because it provides some capacity expansion historically and we did the sit my prior employer as well historically.
And.
It can be a challenge and times like now.
Because when prices high they go to the open market and get whatever they can by having a load board that's easy to do business with it effectively becomes a proxy for the spot market too. So we can put some high paying for it out there and they haul it essentially a guaranteed percentage of the revenue.
That as I said is is relatively close to spot market pricing and they're able.
Turn the free quickly and reliably it's a really great business for us at the business that we intend to expand further we didn't talk a lot on this call about trailers, but trailers are almost as difficult to get as trucks right now, although we did get a couple of hundred trailers and the quarter.
So that's the nature of the business, we have a great team that's phenomenal at it and has been able to sustain that truck count.
Through 2021, I will say this time last year, we actually had a spike and these trucks and it was and unnatural spike some of our and I won't name, who they are but some of our friends and industry that maybe hall do household moving or 2 oilfield projects or things like that.
They had no work and Q2 of 2020, and so a bunch of those guys flexed over into our power only fleet and we were able to help them. They were going to help us. So our truck count came down a little bit year over year, but in terms of the trend, it's upward and to the right and to really awesome business for us.
Okay. That's that's great caller. Thank you for all all of that and.
All will turn the floor.
And thank God.
And again as a reminder, if you have any questions you may price star 1 on your telephone keypad go and so on the show you place and the question and and she Q.
And our next question is with Jeff Kaufman vertical research partners. Please proceed with your question.
James and team congratulations terrific to look a quarter.
A couple of questions what I was looking at your purchase transportation and it looked like it doubled.
And the logistics segment and it looked like it was down about 7 per cent and the trucking segment and I know spot rates did and double so can you help me understand why it was so much higher and your logistics business.
I just would have looked at low volumes plus a wet spot rates were up.
So.
As we think about Petey I mean, the contract and <unk>, obviously and the logistics business is frankly, it's the entire cost structure aside from a little bit of fixed cost structure.
And that should be.
Linearly with both rate increases and.
And volume so we're kind of looking at our data set here real quick.
Yeah, and we and logistics there was pretty proportion to the revenue growth okay.
Well, yeah, because youre gross margins didn't change a whole lot, but I was just wondering why it was up so much more than I would've thought it would be opposed just looking at the market spotlights.
All right, well, Hey, Jeff we should probably get with you offline because we're not seeing that our petey was down and asset as you said and your question. So okay. We burn off why don't we get with you and will call you right. After this and follow up and if there's something we need to clarify and and the public markets we will.
Alright, I'll second question I liked the long term guidance and thank you for that can you help me understand channel.
What components drive a 97, which is about where you are right now.
And to that 90 to 92 range.
You talked a little bit about the technologies, you're implementing and other things like that but can you breakdown kind of how we gain 4 or 500 basis points over the next few years.
Yeah for sure. So if you go back to 1980 and look at the right profile over time, you expect to see an average taken out and the vagaries of of 2009, and the 2090 actually not taken them and they are included in the dataset of about 3% Kanger on right we are not as.
Assuming that we are actually modestly lower than that.
So that's 1 thing we are doing we also expect some significant improvement and our network today less and 40% of our network freight is moving and what we call tier 1 lanes tier 1 lanes, we've outlined this and prior calls are.
[noise] terminal to terminal move there are most efficient best driver recruiting best driver retention lanes also most importantly to your question the highest yielding lanes in addition to that.
We expect to reap the full benefits of regionalization, you will recall, we just started regionalization and last year and 1 of our region's isn't performing very well and so we see a lot of upside associated with that seeded truck count should improve along with that which will help our utilization you'll remember historically, we've added some more.
Maintenance facilities, just recently and those are beginning get the full benefit.
Of cost savings there, we expect to add 1 more maintenance shop per year in the network.
And then of course, the truck count growth over the next 3 years of compounding value of that and we're not going to add any more incremental.
Fixed costs I shouldn't say any there's bound to be some but will have very little fixed costs over that time horizon, it's pretty amazing when you factor and and just so.
The networks savings the right environment that we expect the yield that we expect from.
The optimized network and then he improved enhancements on utilization you get there really fast.
Okay. Thank you and congratulations.
Great. Thanks, Jeff and we will follow up with you with your first question and Mike will probably give you a call and I'll go I'll call you Joe.
And we have reached the end and the question and answer session out and and I will turn the call back over to management and foreclosed rewards.
Great Thanks to Molly.
Last week and the chance to visit Zion National Park, and hike and some of the world's most beautiful places and our family connection. There is deep my wife's grandfather was the stonemason, who built the beautiful lodge and her great uncle was the parks first superintendent during that trip my 16 year old daughter convinced me to ascend the trail.
Known as Angel's landing, a beautiful, but hairless and highly exposed trail to the top reveal some of the most stunning vistas known to mankind as many times as I've been desire and and despite our familial connection. There. This is my first visit to Angel's landing treks like the 1 we just took share parallels with.
Business journey, we are on here at USA truck not everyone is willing to do what it takes to get the results and sometimes the path is perlis and most importantly, the fact that I was on a path I had never before attempted did not mean I was incapable of the journey only that I had never been there before USA.
USA truck is it a new milestone and our history, but it is just that a milestone. It has taken resolve it has taken commitment is and has even been parallelist at times, but we are capable of this record setting performance and more assured this quote from Ralph Waldo Emerson before quote that which we persist and doing becomes easier for us to do.
That the nature of the thing has changed but that our power to do is increased and quote.
No doubt the market is good right now, but our results are the result of people who have experienced a fundamental change that has led to improve business processes improve decision, making and we believe sustained improvement and results. We believe we have clearly demonstrated that USA truck is executed our sales help opportunities with many opportunities and results.
Yet to come and there's a clear path even better results that we ultimately believe should reward all stakeholders and ultimately be reflected in a market value that appropriately rewards results.
And can for your time today.
This concludes today's conference and you may disconnect your lines at this time.
Thank you for your participation.
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