Q1 2022 USA Truck Inc Earnings Call
Good morning, and welcome to the USA truck first quarter 2022 earnings conference call.
Participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the stocky followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question you May press star one on your telephone keypad to withdraw your question. Please press star two.
Note. This event is being recorded I would now like to turn the conference over to Mike Stevens Senior Vice President of Finance strategy and Investor Relations. Please go ahead.
Thank you Jamie good morning, and welcome to USA <unk> capacity solutions first quarter earnings Conference call.
Joining us this morning from the company are James Reed, President and CEO , Zach King Executive Vice President and CFO .
For joining us today.
In order to help you better understand USA T capacity solutions 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 you 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 James.
Great Good morning, everyone and thanks, Mike.
First quarter performance that USA truck represents the seventh consecutive quarter of record setting results.
Our team delivered the best Q1, adjusted operating income and adjusted earnings per share in our company history, and the highest revenue quarter in the history of USA trucks first quarter was also our fourth consecutive record setting revenue quarter.
We have been consistent in our messaging and approach. This was a business in need of an operational and financial overhaul and we've delivered that our task was to bring consistent industry level results with more consistency and predictability over time.
USA truck now has among the highest performing businesses in the sector with a trailing 12 month return on invested capital of 14, 1% and a trailing 12 month adjusted earnings per share of $3 93.
The approach has never changed is we took specific measures to derisk and bring resilience to the business that we feel will endure through all cycles.
We reengineer the network to optimize for profitability, we grew our dedicated and quasi dedicated portfolio to just under 40% for the trucking segment.
This is a less volatile more cycle resistant and predictably profitable business.
We have always stayed focused on contract rate, we use the spot market very sparingly in fact over the last eight quarters, our average percent of spot market freight is less than 6% and in the first quarter. It was approximately 7%.
And significantly we have shifted our revenue and asset light and non asset businesses to approximately 65% of the business are nearly two thirds of our revenue.
This creates higher returns on capital in a more consistent margin construct especially in our owner operator business, which makes up 27% of the trucking segment.
Each of these contracts reduce the inherent risk of downward pressure on financial results No doubt we've had a great run our results over the last several years and yet despite a slightly cooling market. We still expect 2022 to be our best year ever for our results.
Our internal models and current view of the market have us putting up a 2022 result that both raises our last our latest.
Railing 12 month results and obviously result in the best year ever for USA truck.
USA truck continues to post record profits, we now have $3 93, and trailing 12 months adjusted earnings per share and see upside to that this year with current market conditions, we understand the sensitivities of our model to potential downside pricing pressure and even if we assume rate reductions barring any other unforeseen catastrophe.
Maybe set the company or industry, we still see trough earnings above $2 50, a share.
We believe in the markets over the long term as arbiters of value and expect proper consideration of trough earnings and actual results will soon be recognized we intend to just keep improving earnings and controlling what we can in the meantime, our balance sheet is strong and improving and our liquidity and leverage metrics position us well for future growth.
We will offer updates on the market dynamics segment performance in the quarter and finally on the outlook 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 three we will do a brief review of our financial results.
<unk> quarterly revenue, which excludes fuel surcharge was up 22, 3% consolidated quarterly operating revenues came in at $201 1 million, which represents a 26, 9% increase year over year consolidated adjusted operating ratio for the quarter was 89, 2% down from 95, 6% in the prior year.
Primarily driven by improvements in base revenue per mile in our trucking segment as a direct result of our continued network optimization efforts and market uplift the full year maturation of our dedicated business unit growth and increases in revenue per load and load count and our <unk> logistics segment.
The results of these initiatives generated adjusted earnings per diluted share of $1 48, and $27 4 million and adjusted EBITDA for the first quarter. This brings our trailing 12 month adjusted EPS to $3 93, and adjusted EBITDA to $86 5 million turning to slide number four trucking operating revenue before intersegment.
<unk> increased $13 million or 12, 6% to $116 1 million base revenues, excluding fuel were up seven 6% to $99 9 million compared to $92 8 million for the first quarter of 2021, our trucking segment generated $13 million and adjusted operating income and an 80 87.
1% adjusted operating ratio. The primary driver of these results was a <unk> 40 to <unk> increase in base revenue per loaded mile when compared to the first quarter of 2021, and the full year maturation of new dedicated contracts within our dedicated business unit.
Utilization decreased 65 miles per truck per week or approximately four 2% for the first quarter from the first quarter of 2021. This decrease is a result of decreased utilization of our owner operator fleet, which represents approximately 30% of our available tractor fleet and our network optimization strategy that optimizes for operating profit.
Fit and revenue per tractor over miles and other variables.
In addition, a transition to a higher percentage of dedicated business within our trucking segment has also impacted our utilization.
These rate and utilization outcomes positively affected base revenue per available tractor per week, which increased $451 or 11, 8% year over year for the first quarter.
The average available tractor count for the first quarter of 2022 was 1821, which is a three 8% decrease when compared to the first quarter of 2021.
Turning to slide number six we will review the results of our USA logistics segment revenue before intersegment eliminations increased $20 9 million from the first quarter of 'twenty, one or 42, 5% to $97 4 million, our logistics segment generated $6 1 million and adjusted operating income and had a 93, 2% adjust.
The operating ratio gross margin dollars increased $5 1 million to $13 3 million in the quarter.
Load count increased to approximately 41300 loads during the first quarter of 2022 from the 33100 loads in the first quarter of 2021, an increase of 24, 8% and an increase of two 5% or approximately 1000 load sequentially.
This increased our margin per load to $321 from $249 in the first quarter of 'twenty one.
Turning to slide number seven we will discuss our key balance sheet and liquidity measures as of March 31, 2022, total debt and finance lease liabilities were $161 1 million net debt was $149 1 million and our net debt to adjusted EBITDA for the trailing 12 months ended was one seven times down from one eight <unk>.
In Q4 of 'twenty. One this represents a net debt increase of $10 8 million from Q4, 'twenty, one and a <unk> one turn improvement in our leverage ratio as.
As we announced in our fourth quarter earnings call and subsequent 10-K, we entered into a $131 million asset backed credit agreement on January 31, 2022, along with a series of fixed rate term loans. This new structure provides a more predictable equipment evaluation and increased borrowing capacity as well as equipment financing array.
<unk> that secure low cost fixed interest rates over time. This new structure provides full availability under our credit facility as of March 31, 2022, and liquidity of $142 million.
Looking at the remaining months of 2022, we expect 45% to $55 million of net capex for the remainder of the year, while procuring tractors and trailers remains uncertain. We have we have seen consistent deliveries through the first quarter and expect to receive the remainder of our orders throughout the year.
We have also seen elevated used equipment pricing, which is resulting in increased gains on proceeds for the period offsetting a significant portion of the capex incurred on the delivery of new equipment.
With that I'll now turn the call back over to James to offer more insight into the quarter and our outlook.
Great. Thanks, Zach the quarter dynamics, where seasonally about average on a historical basis, we used an arithmetic moving average model to understand the seasonality of our low tender demand signals in January and February were strong on a seasonal basis with March slightly below normal seasonal trends.
Pricing remains strong on a historical basis, even as we do see declines in spot pricing that has been widely reported and yet our base rate per loaded mile was the highest in our history and remains strong.
Supply side issues have persisted regarding the availability of drivers and tractors from Oems. It remains historically difficult to recruit drivers as our cost per hire while down two 7% quarter over quarter is still near all time highs each of the Oems have imposed bill of material cost increases or surcharges, some reaching <unk>.
$10000 trailer costs are up almost 50% in the last three years in insurance premiums remain near all time highs as well these structural factors affect the entire industry, even among private fleets and thus this cost pressure ultimately support sustained price strength relative to past cycles.
Spike continued OEM delays.
We have received 186 trucks year to date and expect to receive 344 more by the end of the year. So that puts us in a good spot from an age of fleet standpoint, with average age of our trucks at two six years exiting the quarter with expectations that we will be just above two years by the end of this year.
I'd like to now talk about the segments in our trucking segment, we had an outstanding quarter delivered sequential and year over year improvements in financial results that demonstrate the exact trajectory of expected over the last five years.
We think it's important that the investment community understand the dynamics in this segment and how it has changed over the years. This is not the business people might assume it is USA trucks trucking business is not the traditional asset based businesses of the past, we are intentionally and methodically diversified and Derisk. This segment.
Through thoughtful shifts in our asset allocation between traditional irregular route trucking dedicated and quasi dedicated growth and our asset light owner operator business.
I'd like to talk about the dedicated business unit unit first this business makes up just under 40% of our trucking segment revenues. It produces recurring or in the mid eighties on balance overtime and is currently performing even better than that we delivered low eighty's or performance in the first quarter.
Core dedicated business has been on a historic tear up 38% year over year in terms of revenue growth. The beauty of this business, particularly in moderated markets is that it actually performs best in these market conditions as we've reported before and an exuberant market with rapid expansion this business incurred startup.
Costs that masks the true underlying economics of the investment now.
Now that the majority of startup costs have been incurred or infrastructure equipment and people are in place and we can sustain these results for the foreseeable future, even if the broader market softens.
Add to the underlying stability and consistency of the dedicated business that we have nearly 200 trucks of dedicated business sold and committed to we just need to see the trucks and have the assets. This gives us great flexibility amid market uncertainty and immediate opportunities to further grow the business within our existing footprint we have the.
<unk> ability to move underperforming assets into this relatively more predictable business and thus we are actively identifying assets and our traditional truckload business to move over to this more profitable more consistent and better insulated business unit as a risk mitigation and profit maximization strategy in shifting markets.
Now, let me add some detail on owner operators and.
An important element of our tactics and executing a more asset light business model has been our shift to more and more owner operators. These independent contractors are phenomenal business partners, who supply us with predictable reliable capacity to meet our customers' needs the.
The financial profile of this business in the context of USA Truck's trucking segment is quite remarkable to they make up 27% of our trucking segment available trucks consistently provide around a 90 or in all market conditions and become more predictable and reliable and softening markets.
The reason this businesses. So financially predictable is that we pay this group on a percentage basis of revenues, meaning.
They receive a fixed percentage of the contracted rate on a load and that model persists in all market conditions think about that when the market strengthens as it has over the last couple of years. This group mix about a 90 or for the company at elevated rates and in a down market. They would also deliver a 90 or now we acknowledge that a 90 or.
On a lower revenue number is a lower number but it is predictable and provides an excellent return on capital for the company in all market conditions. Additionally, this group is more incentive to grow and softening markets typically owner operators move to the relative safety of large carriers like USA truck with access to robust contract freight established.
Relationships and lower price volatility when compared to what they would encounter in the spot market for this reason, we expect more opportunities with our owner operator fleet as cycles migrate from all time highs.
And finally I want to discuss traditional company owned over the road fleet.
This fleet, excluding the owner operators makes up just under 40% of the segment in fact, the dedicated business is actually a larger percentage of the segment now than the company owned truckload tractors are.
Historically this has been the focus of investors and yet it is a proportionately smaller facet of our business than ever. This doesn't mean, we don't focus on it we do but we need to calibrate the impacts of the market and the performance of this business in a broader context, we continue to improve the network. We are focused on reducing the age of the fleet we have.
Dramatically improved our driver turnover and retention statistics and we do all this with a very minimal exposure to the spot market I want to add some commentary here about fleet size and trade cycle dynamics as well. We're currently behind our own internal plan for fleet size Boeing mostly to difficulty in getting owner operators to either come over to USA truck because <unk>.
We've done so well in our historic rate market or to the fact that they simply cannot get a truck on the first point, we have always seen owner operators migrate to our fleets in more moderated markets and we have already seen that occurring over the last couple of weeks and on the latter point of funding a truck. We believe our strategy has led to some great optionality around this.
Overall with respect to fleet size, we have by virtue of reducing our trade cycle from five to four years, many more trucks coming out of the fleet a year earlier than in the past and with many fewer miles we have the option therefore of either selling those trucks for gains keeping them in our company fleet, which is not our strategy strategy right now.
We're converting these trucks via our leasing company or an outside lessor to owner operator available trucks, the likely path will be a combination of all three end market dynamics will have a great influence on what we choose to do well, we can audible real time based on market conditions with over 400 owner operators on our waitlist and a network built to accommodate them.
We expect modest growth in fleet size over the coming quarters, and we'll certainly keep everyone updated on how we choose to navigate this great opportunity.
Finally, the truckload business itself has the most exposure in our portfolio to market moves in defense that freight softens or declining contract rates at.
Great softens or declining contract rates have the most direct impact here and thus while this group delivered a sub 90 or in the quarter. We would expect it to perform in a high <unk> to mid ninety's or range, depending on where we are in the freight cycle.
Let's now talk about our logistics segment logistics had a record quarter in revenue margin and profit. This business is a significant contributor to our company and now makes up 55% of base revenues and this quarter accounted for 31, 9% of consolidated adjusted operating income if we were to exclude gains.
On sale of assets. This business would have accounted for 48% of consolidated adjusted operating income.
This business alone adds significant value and worth to our company that we continue to believe is absent in the market evaluation of our performance one of the things we like about logistics is that the margins are reasonably predictable across market conditions, and so being able to crank significant volume through the business I think the supermarket model because.
Our highest priority and an installation against for trading markets. We continue to grow rapidly in this segment, where we consistently deliver best in class results other than record profits margins and revenues in the quarter. Our greatest accomplishment was the addition of over 40 more people year over year and a legendarily tough employment market. We expect this team and these results.
<unk> to continue to grow.
Now I'll update listeners on some metrics, we become accustomed to sharing the first is load count volume.
Our load count continues to be strong Q1 volumes were up two 5% sequentially and 24, 8% year over year. This is critically important in any market condition. We now produce the throughput to harvest profits in all markets.
<unk> USA logistics revenue per employee is actually down 1% year over year, we're ramping our many new associates into this organization I expect their revenue productivity to accelerate our risk of course is as market rates decline. It does get harder and harder to post revenues and so volume is our primary leading indicator in this space and.
We expect to see gains there.
The next metric is margin dollars per employee it represents another staggering statistics, our logistics team produced over $102000 and gross margin dollars per employee in the quarter. This represents an $11000 increase per employee year over year or 12% improvement year over year, and finally, our USA logistic loads.
Per employee is actually down 13, 3% year over year. This is a function of our growth with head count up over 40% and load count up just under 25%. We know that the key to our growth will be getting our new associates ramped up and productive as quickly as possible. This will be a key measure to watch going forward as spot market.
Pricing has abated from its highs this business is quite well positioned to expand margin margins in the portion of our portfolio that is contract based.
Where we have contracts in place and now lower and sometimes decreasing capacity costs, we see margin expansion opportunities that makes up about 50% of this business the.
The remainder is transactional and thus requires the kinds of efficiencies we've discussed to continue to improve and we expect they will.
The logistics story is straightforward. The team continues to set records in terms of revenue load count margin and profit were quite bullish on the prospects of that continuing.
Now, let me say some.
Something about the outlook.
The outlook for USA truck is very good as I noted earlier, we expect 2022 to be a record year for earnings we don't live in a vacuum we see and hear all the market changes that everyone else sees load tenders have softened generally tend to rejections are down market wide and at USA truck spot rates have softened considerably.
And it's likely to contract rates, we will see some downward pressure in the coming months, noting all of that our performance year to date is far ahead of last year April year over year is at least as good and maybe even slightly better than last year, and remember 2021 was a record year and.
And we have not seen any downward move in our contract rates as previously.
As we discussed we have successfully restructured our network and de risked and rebalanced our portfolio. We've created a business that insulates against downside risks through a growing dedicated business more emphasis on asset light owner, operator business and a non asset logistics business that on its own is nearing top 50 broker by revenues in this country.
Our non asset and asset light revenues are now 65, 6% of revenue and we have never relied on the spot market for our business improvement we were right around 7% of our freight derived from the spot market in the quarter. While some companies are retreating to the safe harbor of contractual rates away from the exposure to spot rates, we never left the safety of.
The harbor and therefore are much less exposed to market moves on pricing.
SA truck has been transformed.
We think context is missing in the marketplace. Despite the moves at all time highs in the freight market by almost any measure. This market is still one of the best markets of all time.
Widely read measures of loads per truck rate performance and indices measuring sentiment and capacity variability all mostly indicate a historically strong market in our estimation. This is still the second or third best market of all time.
The toughest headwind remains finding qualified drivers and a close second is the lack of readily available new tractors. These factors will continue to provide a ballast to downward concerns there arent enough drivers are enough trucks in our view to warrant the comments from the balcony.
And if things do reach the fever pitch pronouncements, it's still an enormous market, where we are gaining share improving our reputation and out executing our prior ourselves.
Finally, I want to give a brief strategic update last quarter, we introduced that we would update observers on our progress towards our strategic objectives recall that it is our goal to be over $1 billion in revenue between $4 25, and $4 50 in EPS with a low ninety's trucking or in doubling the size of the logistics by the end of 2012.
Four we are happy to report that we are ahead of schedule on each of those outcomes are three specific strategic priorities to achieve these outcomes are as follows one expand and densify, our asset business east of I 35 <unk>.
By virtue of our continued revenue and profit expansion all of which occurred within our defined footprint. We are marching forward ahead of our plan there may be a time in the future or expand to other markets and modalities, but that time is not now we believe densification is a winning formula in this business and we intend to continue to densify Easter by 35.
Until such point as the next best opportunity is elsewhere, we're nowhere close to that right now.
To double the logistics business. Our goal is to grow this business just $400 million of topline revenue by the end of 2024, there is a chance that happens by the end of 2022 by almost any measure. We are two years ahead of schedule on this factor, we expect great things from this business and three reduce the asset fleet.
<unk>. This is the one area we are behind schedule. Our average age of fleet is two six years with a goal to get to two we believe we will be very close to back on plan in this metric by the end of 2022.
As we consider this strategic plan in the context of our recent results, we expect to see corresponding responding value creation for shareholders.
We truly appreciate those who have invested with us and stayed committed to the stock in our opinion USA truck remains one of the best stories in this space.
Jose truck has returned our leverage levels to below two times, we've improved liquidity with a full unencumbered credit facility at our disposal. We have delivered profitable results in 16 of the last 20 quarters. We've delivered record quarterly EPS results in the last seven consecutive quarters, and we have 12 months trailing adjusted EPS of $3 93.
The highest of all time.
With a 14, 1% trailing 12 return on invested capital.
With these earnings the stock has been trading just under two times EBITDA plus debt less than four times last trailing 12 months earnings and less than six times trough earnings estimates. All we can do is remain vigilant and committed to the idea that earnings drive value over the long term and continue to put up record results on a comparable multiple alone or even on an ear.
EBITDA multiple USA trucks market value is substantially undervalued by any measure the logistics segment is now over half of company revenues and our overall asset light and non asset business account for nearly two thirds of revenues. It is our belief that a demonstrably higher multiple valuation as warranted, we cannot and are not sitting idly by.
Our board will continue to work with management to evaluate means to return value to shareholders. We are keenly aware of our responsibilities and alternatives and confident that we will solve this gordian knot evaluation and the discharge of our responsibilities. It is a great time at USA truck, we've had yet another quarter of record results. We believe 2022 will be a record.
Year for earnings we have restructured rebalanced and Derisked, our portfolio and we have a solid balance sheet that affords us some near and long term strategic flexibility with that I'll now turn the call back over to Jenny for Q&A. Thanks.
Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time.
That while posing your question. Please pickup your handset if you're listening to speak of and to provide optimum sound quantity. Please hold while we poll for questions.
Thank you. Your first question is coming from Elliot Alper. Please announce your affiliation and pose your question.
Great. Thank you guys and I appreciate the detailed prepared remarks.
I guess starting off on the trucking side, so clearly pricing is holding.
Holding up nicely would be curious to hear your thoughts on kind of what happened in the spot market and then if you could talk about any recent conversations you had about repricing with customers in April and as well as the percent of repricing in the first quarter. Thanks.
Yeah. Thanks Elliot.
So.
In terms of kind of what's happening in the spot market.
There is no doubt that theres been a softening we don't see anything unique that other people don't see.
And we think one of the benefits of our model is that just really doesn't affect us.
We have a logistics business that is about 50% contract based and so they see margin expansion in that type of environment and then on the rest of their business, which is highly transactional they are exposed to the spot, but you've got to think about what that means that gives us an opportunity to turn some of that freight into contract freight.
Longer term, so we see that as a net positive on the logistics side on the asset side, it's almost a non factor for us because we just simply don't play that much in that space in terms of repricing. There is some really interesting dynamics that I think people need to consider.
Are you guys still there can you still hear us.
Yep.
Sorry, I just got a text that says they lost us.
On the on the pricing side, there are a couple of dynamics I'd like to kind of.
Elaborate on the first one is yes.
Admittedly, we do have some of our customers who.
We have come to the table and expanded.
They are bid process to additional rounds, which is usually an indicator that they are searching for some lower long term prices.
But on balance.
Sure.
Our contract price Hasnt moved at all April was and has been extremely strong with virtually no movement in our in our contract pricing.
And as kind of that pig in the Python, a rat through the snake. However, you want to say it works its way from a pricing standpoint through the bid cycle.
Even the largest customers don't implement their bids until the middle or end of July and so.
Whatever downward contract pricing, which I will say has been very limited.
Whatever does go into effect would be later in the year. That's point number one point number two.
Other than additional.
Rounds of bids we've seen no material change from the number of customers asking for.
So in past cycles, you see people kind of are sprinting to the front of the line trying to move their bid behavior.
To a time when they think they can take advantage of the market and we just haven't seen that yet we don't we don't see that occurring I hope that answered your question.
Yeah, no definitely so I guess on the dedicated side how quickly can you grow that percentage revenue within the trucking segment is this something that takes some time to ramp I believe you said it was about 40% of the siding segment first quarter.
Yeah exactly so one of the comments I made in the prepared remarks, we literally have 200 trucks, where we have contracts and commitments with customers and we just don't have drivers and those trucks and so we are going right now through a fungibility exercise to identify any underperforming company assets on the traditional truckload side that we can move over the truck.
Our 100% fungible the humans aren't always so it becomes an exercise of can you match. A driver is currently driving OTR into a dedicated truck or can you find somebody that is looking for a job that once the more desirable features of that job their home more frequently it's more consistent work.
More predictable et cetera. So.
I wouldn't say, it's a flash in the Pan but I also wouldn't say, it's a stretch to say we can get there in a quarter quarter and a half acted do you want to add anything there no.
That's what I was going to just expand that but you hit it yet the trucks are fungible and we can move those around between the business units. The people aspect there is a little bit more.
Strategic.
Okay, Great and then you mentioned some owner operators coming onto the USA truck network is this purely.
Just the dynamics of the spot market.
I don't think purely thanks for asking that by the way I should have put something in my prepared remarks, we took some kind of specific thoughtful cogent actions I don't know, maybe four or five weeks ago, we increase the amount of fuel discount that we share with drivers with owner operators I should say we.
We actually put a safety bonus on them because.
Even though they own their own trucks, and they're liable for damage to their own trucks.
We are.
Super serious about improving our safety record and so we put a bonus in place for them that allows them to.
Earn some some additional compensate our pay I should say not compensation, but pay for their their performance.
And then.
The challenge as I mentioned is it's been very very difficult for them to get trucks and I think that's what's missing in some of the public commentary that people are making it's still really hard to get trucks and so with the paucity of trucks.
The challenges in getting drivers those are two limits to a cycle change that we havent seen simultaneously in the past and in fact.
And we don't want to hide from the data. If you look at the BLS data there was about five months or they are increasing drivers coming into the marketplace, but in the March report, which Ive heard no. One talked about this number of truck drivers actually went down in the BLS data. That's point number one point number two the number of drivers working in the industry in the sector.
Still well below where it was pre pandemic levels. So I just think people are missing some of the broader factors.
And those all play into what's going on with the owner operators. So we enhanced our program, we do see spot market pricing falling off which naturally when you squeeze that balloon they fleet to the relative safety of large carriers like us and we actually have some trucks coming off a year earlier than they ordinarily would that allows us to put them into our lease.
Program and we think we can go fill some of that backlog. So we think we're in a really good spot.
Okay, great. Thank you guys.
Thanks Elliot.
Your next question is coming from Jack Atkins of Stephens Jack Please pose your question.
Great Good morning, and thanks for taking my questions and great great quarter guys.
Thanks, Greg.
James I guess, if we could maybe kind of start with the logistics business I appreciate it.
Well a number of things that you said in your prepared comments, but.
Within logistics in particular, you guys are just.
Great job, improving the profitability, there and growing the top line.
I would just kind of be curious if you would help us for a minute kind of think about that business today and sort of how it has changed relative to the last.
A down cycle, where we saw the operating ratio.
Our approach of 100.
There were some cyclicality in that business in the past do you think things have changed there where you can avoid that type of cyclicality.
I know that.
To see some margin pressure at some point, but do you think.
I'm just curious if you could maybe talk about how that business has changed cycle trough to potentially the next cycle trough.
Yeah, No. It's a great question and observation Jack and it also is indicative of the thought process. We took to get where we are and let me tell you what I mean by that we were pretty irritated in the second half of 2019 in the first quarter of 2020, when that business essentially turned negative and we did a bunch of backward testing analysis.
As to figure out what we could have done to avoid that outcome and the bottom line is we needed more throughput in the business, we needed more fixed cost coverage with volume and velocity through the business and we realized and we've never shared this publicly and I'm not going to share. It now, but we realized kind of the critical mass that we need to.
To put through the engine to never face that situation again, and so all the metrics, we talked about with regard to employee productivity throughput just absolute volume. We think we're in a great spot 2019 was historically low if you look over time.
The average revenue per load in the history of history is around 800 Bucks.
And they are if you go back and look at our Stat, We got down into the 11 hundreds in 2019 and early 2021st of all we don't see that happening again, it was a historical aberration.
And a statistical aberration, but secondly, if it were to happen again, we don't see our.
Our or going anywhere near 100, because we now have plenty of throughput to sustain a threat and you could go forward test that in your model than you've reached the same conclusion back anything you want to know.
In 2019, and early 2020, when when we saw those 100 or so in that segment I mean that was at a crucial time of the industry to the industry whats changing in 2018 right you have the.
But yes, the democracy of freight or wherever you want to call it.
There were some entrance into the marketplace that truly changed the dynamic of the industry. We got caught early on a little bit on our heels and that's what we've worked on for the past 18 months 24 months now is getting back to a position where we compete in that marketplace and we can compete profitably and I'll just add to that Jack.
The democratization and the digital freight brokerage it did really change People's perspective, but we settled in very nicely.
Wonderful model and so as I shared that we were off a little bit in our overall productivity metrics, it's still great.
Our leadership team understands they have to get these new employees up to speed quickly because if it softens you get into the risk of not being able to cover your fixed costs, but we just don't see that right now is the risk and frankly, we can flex.
Our cost structure they are quite easily so we're not.
Fundamentally different space because of the volume throughput.
And productivity that we have I hope that helps answer your question, yes. It absolutely does and thank you for taking the time to kind of.
We got through that.
With regard to the to the trough or any scenario and I'm glad you guys put that out there because I think it's super helpful for folks as we sort of think about the valuation to your point around the stock.
You sort of thinking about the trough like scenario are you layering onto 2019 timeframe recession or is it something like we saw back into.
I'm just trying to get a sense for how deep is the trough that you guys are trying to bake in there.
Yeah, So it's really interesting.
And everybody kind of has to do their own analysis to reach their own conclusions. We made a big deal out of this and I've even seen this in some of the notes that I think you and others have published we think because of the rising.
Costs associated with the business, whether it's fuel drivers trucks trailers insurance you name. It there is kind of that raises the floor right. There just over time, that's what happens in this this industry, but in terms of coming off the highs I don't think we've looked at it in terms of absolute drops.
See no scenario where rate gets back to where it was <unk> 19, and I don't think anybody thats really thinking that through thinks that but if you look at in terms of percentage drops that's how we've modeled it and if you look at decreases over history and all the data we can see.
Post 1980 with publicly available information, we've seen two drops of greater than 5%, that's 2019 and 2009.
And so we've modeled in that scenario.
We've actually modeled it even deeper than that.
At the <unk>, we think is going to happen.
I Shouldnt say that way, we don't know what's going to happen in the scenario that we think is a worst case, we think our trough earnings or where I stated in the call. If it gets worse and that we still have.
A relatively long profitability ramp that could endure that so we feel really good about it even factoring in kind of percentage basis kind of historic drops, which we're not forecasting by the way okay.
That's helpful as well last question and I'll turn it over but.
James you referenced there.
And that.
That you and the board are really trying to think about ways to enhance shareholder value and try to solve I'd like to turn the scorpion not around valuation.
Could you maybe talk about some of the things that you guys are contemplating.
What do you mean, when you say that.
And sort of what form could that potentially take.
Yeah. So.
I've said this since the day I became CEO and everybody learns this in business school, the Ceos job the board's job. The CFO job every day is to consider should.
Should we keep doing what we're doing.
Should we sell all the assets and give the money back to shareholders or should we do some kind of combination whether it's buying somebody else being bought by someone going private whatever it is.
That's not to say that we think about those every single day, but those are the ongoing considerations I've said that since day, one and we continue to think about that.
There's all the obvious arrows in the quiver that boards need to consider whether it's dividends or buybacks or combinations and I, just I don't want to be too cryptic, but I just want to say I mean, if you look at my background I've really thought about how I want to say this today I don't want it to sound cocky or arrogant or big headed.
You know I come from Intel and Chase and EMC I've worked for some of the best managed.
Best governed.
Well run companies in the World.
And I don't think anybody else can transportation can say that and if you look at our board we have an embarrassment of riches in terms of the quality of our board and their background experience. All I can say is I promise you that we're not suddenly sitting idly by we're considering all of the arrows in our quiver, we don't have anything to announce and it wasn't meant to be some veiled message.
It's just we're working on figuring out the right way to handle that okay.
Okay, Alright that makes a lot of sense. Thanks again for the time guys really appreciate it. Thank you.
Thank you. Your next question is coming from Rob Shapiro of singular research Rob. Please pose your question.
Hi.
And have you seen any impact on your client purchases.
Being impacted by the inflationary environment.
Have they changed declined purchases.
So first of all Rob Thanks for picking up coverage on US. We appreciate that you've recognized the story and chosen to get in and cover this in terms of our.
Our purchases.
Don't mean to Dodge Your question I think what I'll say is this we did in preparation for this call a bunch of bridges on the various operating expense lines of our business and there is no doubt we are seeing inflationary pressure on our expenses in the business.
And so we work with our customers.
To pass those through as appropriate but at the end of the day. This is a highly commoditized market and the rates will flow and be supported by the underlying cost structure that continues to rise I hope that touches somewhere on your question.
Yes.
Have you seen the client.
Their behavior changed at all or have they not really change their behavior, you mean in terms of the customers yes.
Yes.
But basically.
This is due to inflationary environment, yes, so the way that.
Kind of.
Business works is we receive tenders from big shippers think of.
Any top fortune, one to fortune 500 retailer or wholesale provider or goods producer or manufacturer those are our customers and so the way that we see.
Any variability in demand is in the tenders that they give us and if you look at industry data.
Industry wide tenders have slowed down off of peaks.
And so have tender rejections, which are also a pretty good indicator of what's going on in the underlying demand cycle.
And yet as we said in our comments.
People need to kind of keep their wits about them. If you look at it in relative terms to past years like 2018, which was the best year ever before 2021 were still materially higher than our demand signals than we were in 2018. This is still the second or third best market of all time.
Great. Thank you.
Thank you very much. Your next question is coming from Mike <unk> of Newland capital Mike. Please ask your question.
Guys how are you doing.
Good how are you Mike.
Phenomenal.
Execution over these past quarters.
Can you just give it geographically I don't know if you hit on this I might have missed it earlier, what youre seeing and if youre seeing any.
I think Mike has just dropped out.
And we do have another question coming from Patrick Todd.
Yeah.
Patrick Please ask your question.
Thank you good morning, and congratulations on a great quarter.
I was wondering have you received any of your Cray Bev vehicles from Nikola yet and have you been able and if so were you able to compare to savings on the fuel on it and then also are you considering a driverless trucks to leave.
Alleviate the problem you have with finding truck drivers.
Great questions, Patrick it's nice to meet you and thanks for asking them on.
On the Nikola trucks, we have not received them yet, but we do expect to receive them in the quarter in second quarter.
Great.
And the year.
So we expect to receive them soon.
Alright.
And I actually will be with Nikola next week and so we're looking to deploy those in some dedicated formats, we're working with the customers.
Hi.
And we will update you on that as soon as that occurs we are really excited about in terms of cost comparisons one of the things. We're doing with them is working on some collaborated Tcl modeling total cost of operation our ownership modeling with them to make sure. We understand fully the question you've asked but as soon as we have that data and have some experience will come back and update the investment community on it.
On the driverless trucks, it's really interesting question I got asked on a panel about four or five years ago.
About the inevitability of it and you know I come from technology, and I kind of look like.
Yeah, it's inevitable it's already here.
We have been out and visited with and I won't name the names, but we visited with a number of the driverless autonomous truck manufacturers I've, even written in some of the trucks and had the opportunity to interact with them. We've made no commitment with them. We do frankly think there is a time.
When that will become.
Inevitable when it will become part of our fleet, we've always said from a strategy standpoint.
Because it's a highly commoditized market, we don't have to be on the bleeding edge.
Think theres no kind of strategic benefit to being a first mover. So we'll monitor this closely and we'll follow it and act appropriately just in the asking your question I just want to clarify one thing.
We don't know I don't think it's an incontrovertible fact that drivers go away. In fact, we hope that is not the outcome. We think there will be specific applications, where it makes the most sense, but you can rest assured that we will be on trend.
And in the marketplace as appropriate I hope that answered your question.
Yes, yes. It does thank you very much.
Kind of agree with George you better have a driver in a truck because that way you got better control of what's going on so to speak to them.
So thank you very much thanks.
Thanks, a lot.
Okay, Jamie I hope, we can get Mike <unk> back yet.
Having right now and I'm going to say you can ask his question, Mike The Florida Sheila.
Hi, guys I don't know how I dropped off there.
So I've got two questions for you one there's a lot been said that.
In China right now you have a population locked in that.
Larger than U S population as a whole.
Have you seen geographically weakness coming off of the West coast.
Or any thoughts that you think that that's a big contributor to what's happening now and that that may reverse dramatically once everything starts to open up there and you start getting the containers moving again.
Yeah. It's a really good question, Mike I mean, I was looking at some of the reporting. This morning, I think there is less than 30 ships in la Porte.
Actually is that he is going to look at it we had a report that helps us see all the ships that are in the lineup out between China and the port but frankly.
Kind of as law goes everybody else goes I tend to joke at least mathematically there's really only one head haul up market in America in terms of the math and it's L. A and so there is no doubt that when and if that freight backlog gets dislodge. It is inevitable that that's going to have an impact on us what I.
Don't know if we can look at last year and use that as like some kind of predictive template about.
What it means to us because.
Because I just don't know inflation has gone up and that's not a great thing fuel prices are expensive and people are likely to spend less but I was just this week in my daughter's soccer game with the President of our bank and he said my deposits are at all time highs. My loans are at all time lows people are flushed with cash and Theyre not.
They have money I don't know that people care. So I don't know Mike there is a supply side. There is a demand side I'm not sure what the implications are of either of those things and so we'll just watch it closely but so far mostly because our network is.
Is east of I 35, we haven't seen any real changes in our demand, but you know that.
That kind of works its way through the system. So it's probably too early to tell.
But I think it's inevitable that 300 million people get out of house arrest and are able to start producing stuff again thats got to be good for us and if you look at containers coming off the west coast.
Later dates and if thats in the next couple of months, coupled with produce coming off the west coast the demand and.
When the capacity thats going to shift west versus operating where we operate today, it's going to drive prices and demand throughout the country and Mike. We just got a report holdup and so I will tell you that.
It's kind of weird the way the administration chooses to report this and the port chooses to report. This there are less than 30 ships that berth in L. A but there are still it looks like 75 container ships inside 25 miles of La and long Beach, which is critical to that.
That peaked out at 109 on January 9th it's currently sitting at 75.
Which is still well above basically any time and 29, 2019, 2020 and 2021 up until.
February March my eyes aren't that good so I would just say I mean, theres still quite a bit of traffic on the water and with the coming backlog like I said, there's got to be good for us all right excellent and then just expand on what Jack was talking.
It is yeah, you run screens and you can't find a company that trades below three times EBITDA four times earnings.
I guess it is five five times, what could be trough earnings rate, it's absurd and you've gotten zero credit for what you've done out there.
What's the capacity.
Yes, I agree Something's got to give eventually strategic someone comes in it it can't stay cheap like this forever.
What's the capacity to buy back stock, while we sit here and take advantage of this because I've run the number they accretion dramatic here by buying stock at $15 $16.
You know me I'm, a I'm a corporate finance guy by training. It may be one of the best ROI investments available to us right now and so.
We don't have a newly authorized buyback from the board at this point, we have not filed a <unk> one or anything like that but we do have an upcoming board meeting and I promise you that it'll be part of the discussions.
Excellent, okay, well keep it up guys and eventually we will get rewarded for that.
Thanks, Mike.
Once again, if there are any remaining questions or comments. Please press star one on your phone at this time.
Okay.
No further questions in the queue I'll now hand back for closing remarks. Thanks, Jenny It seems to me that so much of what we do and see as a matter of perspective. Some of you know that I love to play golf Mark Twain famously noted that golf is a good walk spoiled and Hank Aaron recounted his frustration when he note.
It took me 17 years to get 3000 hits in baseball. It took one afternoon on the golf course.
Golf It turns out is not for everyone and in some ways I think transportation shares comparable levels with the game one can do everything right and get a bad break and everything wrong and get a lucky one but in the end and over the passage of time. The score will always reflect who plays best and that is why we do what we do we love the challenge we own our.
And the only force that could stop our momentum is ourselves.
<unk> card should soon reflect that we have played skillfully.
<unk> truck has played the game extremely well and consistently over the last five years I am personally grateful for the great privilege. It is to lead this company, but even more grateful than I could ever express for the men and women, who have committed their careers and interest to the rebuilding of it.
We still see opportunities of bounding in our future as we execute on our strategy by leveraging our business model and executing each day better than the last we have an increasingly asset light model a wonderful dedicated business a world class logistics business, a great balance sheet very good driver retention, a diversified and intentionally stratified customer base.
And great results in short, we clearly see the opportunity to continue our improvement in financial and operational performance across the enterprise. This is a great story that we expect will continue to improve through all types of markets and that the scorecard will soon reflect our progress and we think that's pretty exciting for everyone who is in the game with us including stockholders associates cuts.
<unk> suppliers, our families and our communities. Thanks for your time.
Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your phone line at this time and have a wonderful day. Thank you for your participation.