USA Truck, Inc.
Q1 2020 Earnings Call Transcript

Published: 9 May 2020

[Operator:]

Good morning, and welcome to the USA Truck First Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note, this event is being recorded.I would now like to turn the conference over to Mike Stephens, Senior Vice President, Finance Strategy and Investor Relations. Please go ahead.

[Mike Stephens:]

Thank you, Danielle. Good morning, and welcome to USAT Capacity Solutions First 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. In order to help you better understand USAT 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 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 Zach.

[Zach King:]

Great. Thank you, Mike. We want to thank everyone for joining us on the call today, and we appreciate your interest in and support of USA Truck. We hope you all had an opportunity to review our earnings release from last night.As we stated in the release, we did make meaningful progress in several of our key performance indicators. Our Trucking segment, we saw increases year-over-year and sequentially in both loaded miles per available truck and available truck count. However, the freight environment we experienced in 2019 had some carryover effect on the first quarter of 2020, especially in our base revenue per loaded mile. As mentioned last quarter, the freight market has been soft, allowing shippers the opportunity to move a large portion of their freight at reduced prices. We remain committed to improving our cost structure, our trucking base revenue per available truck, our logistics load count and logistics margin dollars regardless of market conditions.If you'll please turn with me to Slide no. 3, we'll do a brief review of our financial results. Consolidated operating revenues came in at $126.8 million for the quarter, which represents a 5.4% decrease year-over-year. Consolidated adjusted operating ratio for the quarter was 101.7%, primarily driven by the weaker freight environment mentioned previously, and affected both of our operating segments. Our adjusted loss per diluted share was $0.26.Turning to Slide no. 4. Trucking operating revenue before intersegment eliminations decreased $900,000 or 1% to $94 million. Our Trucking segment generated a $1.3 million adjusted operating loss, and 101.5% adjusted operating ratio. The primary driver of these results was a $0.159 reduction in base revenue per loaded mile when compared to the first quarter of 2019. This rate reduction also negatively affected base revenue per available tractor per week, which decreased $152 or 4.5% year-over-year for the first quarter. The offset to the rate reduction was an improvement in utilization of 72 miles per truck per week or 4.9% when compared to the fourth quarter of 2019. The aforementioned base rate per loaded mile reduction was the result of increased year-over-year pressure, which began in the second quarter of 2019, and has continued throughout the last 12 months. Loaded miles per available tractor per week decreased 42 miles or 2.8% year-over-year, and our debt head percentage for the first quarter of 2020 improved 100 basis points from the fourth quarter. Our average available unseated tractor count percentage was 5.2%, a 260 basis point improvement from the first quarter of 2019. The average available tractor count for the first quarter of 2020 was 1,974, which is a 3% increase when compared to the first quarter of 2019, as a result of our continued focus on improving our driver experience here at USA Truck.Turning to Slide no. 6. We will review the results of our USAT Logistics segment. Revenue before intersegment eliminations decreased $5.6 million or 13.6% to $35.8 million. Our Logistics segment generated a $600,000 adjusted operating loss, and had a 101.9% adjusted operating ratio. Gross margin dollars decreased $3.7 million or 48.4% to $4 million. Gross margin percentage for the first quarter of 2020 was 11.1% versus 18.5% for the comparable quarter in 2019. Load count increased to 27,200 loads during the first quarter from the 25,800 loads in the fourth quarter of 2019, an increase of 5.4%, but decreased 1.5% or approximately 400 loads year-over-year. The primary drivers of these results were a decrease in revenue per load of approximately 12.3%, and only a 4% decrease in purchase transportation cost per load when compared to the robust brokerage market experienced in the first quarter of 2019. This market environment drove our margin per load down to $146 per load from $278 per load year-over-year.If you turn with me to Slide no. 7, we will highlight some key balance sheet and liquidity measures. As of March 31, 2020, total debt and lease liabilities were $196.3 million, and total stockholders' equity was $76.1 million. Net debt was $196.2 million, and our net debt to adjusted EBITDAR for the trailing 12 months ended was 4.2 times. The company had approximately $37.9 million available to borrow under its credit facility as of March 31, 2020, and as noted in an 8-K filed on April 20, we reduced the lender commitment under our collateralized credit facility from $225 million to $170 million, but retain the option to access our credit facility supporting feature of up to $75 million, if needed. This commitment reduction was primarily driven by an effort to reduce costs throughout the business, and is expected to save approximately $125,000 annually in credit facility fees.In addition to the availability provided by our credit facility, we also have other sources of liquidity we could access if needed, such as acceleration of our accounts receivable through a variety of quick pay programs, and loans against our non collateralized assets.With the recent impact of the coronavirus pandemic on our customers, employees and communities, which James will discuss in more detail later, has caused us to focus on minimizing cash outflows given the unknowns in the marketplace. We continue to be diligent in controlling both our cost and CapEx by only investing in high ROI projects and initiatives. As a result, we expect minimal CapEx in the near term. We continue to generate positive quarterly EBITDA, and with reductions in CapEx in the near term, we expect this to allow us the opportunity to slightly delever our balance sheet through 2020. We expect net debt to adjusted EBITDAR to peak in the second quarter and fall below 4x by the end of the year.As I noted previously, we ended the quarter with $37.9 million in availability. This is down from the $55.1 million at the end of 2019, due in large part to a biannual appraisal that reduced our collateral base as a result of deterioration in the used equipment market. We also purchased replacement tractors and trailers in the first quarter that were deferred from 2019. Based on current projections and CapEx reductions, we expect availability to be more than sufficient for the remainder of 2020.With that, I will now turn the call over to James for a discussion of the business and current initiatives.

[James Reed:]

Great. Thanks, Zach, and good morning, everyone. Our results are not at the levels we expect from our team, but were notably better than we had discussed in our fourth quarter 2019 earnings call. We had expected the first quarter of this year to look a lot like the fourth quarter of last year as 2019 freight trends were consistent, rate pressure continued to carryover, and January and February, seasonality was in line with normal demand cycles. Then the impact of the COVID-19 pandemic came into clearer focus, and our business implications likewise became clearer. While there was no way to fully anticipate the arc of the viruses impact, our team was able to respond capably and decisively. This was a direct result of the experience we had in the 500-year flood just last year, and through our enterprise risk assessment and emergency response planning that we perform annually. We never would have guessed in 2019 that our flood response, the required overnight relocation of assets, remote work arrangements and emergency communication protocols would have such immediate and relevant application. Our highest priority during this trying time has been the health and safety of our team, customers and communities, and communicating with those constituencies was our first order of business. We have consistently followed the centers for disease control and prevention, and the World Health Organization health recommendations, while following local, state and federal guidelines where we operate. We took immediate action moving to remote work for most employees. We eliminated all travel. We disallowed outside visitors, enhanced deep cleaning guidelines and increased cleaning frequency of facilities. We developed policies related to employee quarantines. And made some amazing sourcing efforts to get masks, hand sanitizers and gloves to drivers at our facilities. We even commissioned local church groups to manufacture masks. We had to get creative to protect our team.Additionally, we send daily COVID-19 updates to our drivers and driver support teams. We host weekly driver calls to answer questions and concerns. And the exec team meets 3 times weekly to assess unanticipated COVID-related issues. These efforts have now shifted to assessing our return-to-work planning. The efforts of our amazing and devoted coworkers, who provide our country with vital products and services, has been inspiring during this time in history. I especially want to recognize and thank our drivers and their families for their efforts. They have been amazing, as have all our employees. We have had only a small number of drivers who have chosen not to drive as a result of pandemic concerns, and we have followed the recommended quarantine protocols in those cases where exposure was suspected.So in light of world events, we think it's important to offer some in-depth updates on a few things. First, our customer dynamics, the monthly optics within the quarter and segment performance. Second, our ongoing transformational initiatives. And finally, how we see things going forward.With respect to customer dynamics and monthly optics, during February, before the virus was thought to be a global concern, we had conversations with all of our largest customers regarding their supply chain and preparedness for potential interruptions. Then as the scope of the pandemic broadened, one of the first things we did in February, as part of our contingency plan exercise, was bifurcate our customer base into essential quasi-essential and nonessential categories, to help us understand short and long-term financial exposures related to the COVID-19 pandemic. 2 years ago, when our Chief Commercial Officer came on board, we did a market scan to understand our customer universe, and determined at that point that we needed diversification into the dollar stores and broader diversification into discount retailers. We have executed on that strategy, and frankly, it has provided a welcome source of safety and stability through this crisis. So as we perform this analysis of essential and nonessential customer types, we determined that just over 80% of our customer volume fits into the essential and quasi-essential categories. Given the strength and complexion of our customer base, we gain confidence in that analysis that, even in our downside case and despite a potential prolonged duration, we could expect to continue our strong track record of generating positive EBITDA through the cycle. That understanding has allowed us to move forward more decisively.So let's move now to the monthly optics within the quarter. We'll step back for a moment, and this feels like ancient history now. But January and February looked seasonally normal. But as we moved into March, we had about 2 weeks of pandemic-driven spike in demand in the essential and quasi-essential customer categories I mentioned earlier. That surge has since subsided. Our nonessential category customer volume dropped 50% from the first week of March to levels where they are today. While that demand is important to us, and we are working with customers to ramp up as soon as possible, it makes up only about 10% of our overall normal customer freight volumes. So with that burst of demand, March ended up being the best month of results we've seen since last March, a full 450 basis points better than our 12-month rolling average of consolidated OR. So a pretty good month.Looking at the segment performance within the quarter, it was generally encouraging. The Trucking segment continued progress towards our self-help improvement plan on a few different vectors. On the cost front, and in a continuing effort to manage our costs lower, we closed our Van Buren, Arkansas maintenance facility in the quarter, which we expect to have near- and longer-term positive cost impacts to our business. The facility sits outside our newly densified operating network, and couldn't be cost-justified as we move to our regional operation, so we made the decision to shutter it. We also noted in our Q4 2019 earnings call that we had cut headcount in that quarter by about 8%, a decision that proved serendipitous and prepared us to be lean entering into the first quarter. Our headcount overall right now is down about 10% year-over-year. Next thing -- the initiative I'd like to discuss is regionalization. We made great progress in the quarter toward our plan to regionalize the business and now have each of our regional operations leaders in place we have 3 out of our 4 operating centers up and running, and we expect to have the fourth coming online in the third quarter. We expect that operating regionally will allow us better revenue efficiency and yield lower driver turnover, improved engagement scores and lower over-the-road maintenance costs.Next is our dedicated and our Davis businesses. We believe our performance in the Davis Transfer acquisition and our dedicated operations give great credence to our strategy. The dedicated business, we are growing our dedicated presence, and are happy to report that we've grown dedicated trucks over 21% year-over-year and expect to add more through the year. In March, and for the last 12 months, our dedicated business has performed at industry comparable results for similar dedicated operations, and thus, the focus on growing it further. The Davis businesses have been everything we expected. The ability to produce great results even in a protracted tough market was a bit unexpected toward the positive, Davis is our best evidence of what is possible in a truly regionalized model, which is why we are skating there as quickly as possible. We characterize this business as quasi-dedicated, given its strong and consistent roster of recurring and repeat business. Davis has consistently maintained a low-90s OR over the last 12 months despite the challenging environment and was even better in March. From a driver retention standpoint, I'd like to discuss the Trucking segment driver retention. Late last year, we identified a specific tenure cohort of drivers that were turning over to high rate. We analyzed the factors affecting this group, and made informed changes that positively affected the cohorts retention by 50%. Our operational retention has improved by 18% sequentially and 12% year-over-year, driven predominantly by the improvement in that 1 driver cohort.Now I'd like to turn our focus in the quarter to the Logistics segment. Logistics continued to wrestle with lower margin percentages throughout the quarter, just as we have seen since the second quarter of 2019. The dynamic in the quarter was that January and March looked similar for different reasons, and February showed improving fundamentals. January was mostly a continuation of the prior year, February had improved volume and improving margins, and then the pandemic pushed brokerage type business back into a trough in a tough cycle of lower margins. Our goal in Logistics is to create an environment where margin and volume are adequate to cover our fixed costs in the short term, while providing the basis for profitable growth in the future. In fact, we accomplished notable growth as March volumes were the highest volumes we produced since August 2019, and one of the highest ever -- actually second highest ever. But margins were still lower than we had hoped. As we have said in past calls, we are not on a loss leader path to grow volumes at all costs. We just don't think that's responsible or right for us in our business. And thus, as we are squarely focused on growing volumes and gross margin dollars in what appears to be a lower than historical margin environment, and because of that, we have to lower our transactional costs. We made investments over the last 2 years in a new TMS system in logistics, have partnered with outside technology firms and refined our processes to drive efficiency into the business and to drive transactional costs lower. As a result of those investments, we were able to increase revenue per employee in the quarter by 16% year-over-year and 23% sequentially in a decreasing revenue per load environment. Similarly, load count per employee was up 31% year-over-year and 19% sequentially. This is remarkable, and I commend our logistics team for this result. We improved execution and lowered costs significantly, both year-over-year and sequentially in a tough margin environment, and we believe that fiscal and operational fitness will bode well for that business in an improving cycle. More to come on that when I talk about second quarter trends.So that's the update on the dynamics within the quarter. I'll now move to our ongoing transformational initiatives and how we see things going forward, including some brief insight into April and the second quarter.As Zach mentioned, despite a tough business environment in the first quarter, we continue to see our operational initiatives take hold, as loaded miles per available truck increased by about 5%, empty miles were down, and we had a low unseated truck count, it's even lower today. Most on this call are aware of our transformational efforts here. We have often called it a self-help story, because we believe there are many things we have done and many we can yet do with or without market tailwinds to continue improving this company's financial results. We have managed the age of our fleet. We've completed the acquisition of Davis close down high cost facilities, manage headcount aggressively, regionalize the business, we have lowered maintenance costs, we've expanded our dedicated business, and we've lowered the cost per transaction in logistics. We believe this company is well positioned to leverage these improvements in whatever market we face. While the trajectory of a recovery is unknowable, we expect consumers have to return to the market at some point, capacity will come out of the market and economy-wide productive capacity of all sorts will inevitably come online. These factors are all positive for USA Truck. We are focused in 2020 on ways to increase utilization, improve revenue per available tractor, and drive profitable logistics load count growth. The initiatives we outlined last quarter are moving ahead irrespective of the market challenges. The first initiative is increasing utilization on existing fleet. As we reported, utilization was up 72 miles sequentially, a 5% improvement, and we're intent on raising that further. The second is increasing our team presence and utilization. Our team operation as a focus is a means to increase utilization. And we've had some success, but not what we had hoped. We made the decision in the pandemic to intentionally slow the pairing of teams out of an abundance of caution for their own health, but we're making progress on this initiative.Next is network optimization. The network remains a focus, but volume fallouts related to the pandemic caused us to backfill network shortfalls with brokered freight. This hurts the network balance. We are currently performing in network rationalization to find our highest profit centers and pairing back to maximize yield. We've built the network, which didn't exist previously, and now we're determining how to harvest it.Growing the dedicated business. We are ahead of schedule on this critical initiative. Tractor count is up, as I reported, 21% year-over-year. The next is driver retention. We're doing what we said we would do. Turnover is in line with industry levels and improving daily. And finally, driving logistics load count. This really should say driving logistics profitable load count, but this is the title that we used in last quarter's slides. And so for consistency, we're going to keep it. But logistics load count was the highest in March that we've achieved since August, and it's a little premature, but April volume was even higher, higher than any time in the last 6 years.So now as we move to April in our outlook, we've continued to monitor customer shipping behavior closely throughout April. And overall, our customer freight realization percentages are slightly higher than in 2019 despite recent slowdowns in demand across all customers after the initial pandemic-driven high demand that subsided the last week of March. As noted earlier, our nonessential freight customer volume decreased about 50% in businesses like clothing retailers, manufacturing, appliances and others, it is tough to imagine that freight gets worse from here, and so we're quite optimistic that is nonessential customers return, and they are starting to, this should be good for us. Our essential customers are beginning to ramp back up their own traditional freight patterns with increased volumes in retail and home improvement events starting up in the next few days, and inbound retail starting up mid month. We remain in very close contact with customers who have been deeply affected and are doing all we can to be their first call when freight begins moving again for them.April trucking results were steady as essential customer freight continued to move at fairly consistent volumes, but a challenge, and this has continued into May, is that to keep load count up and trucks moving with adequate utilization, we've had to move more spot market freight than we would normally. As traditional customers return to more normalized patterns, we will diligently replace spot market freight with contract freight, which should result in better trucking segment results later in the year.Logistics has been a resurgence to what I would call normal. All the groundwork laid in late 2019, and the volume momentum gained through the first quarter of this year has paid off. We now have a high output volume engine. And so far, in the second quarter, we have seen margins in that business return to the low-teens percent range. Logistics had a robust April and is off to a similar start in May. We are hopeful that this will continue. But broader market moves will tell the final tail on the quarter. We are optimistic about the trend. All in, April's performance was positive from a consolidated operating income standpoint. And the back-to-back profitable March and April is the first time we've accomplished that since August, September of last year. Last quarter, we said the market notwithstanding 2020 is a year in our plan, as it always has been, that several elements of our strategic plan gain traction. That's still true. There are things out of our control. Spot rates fell to 4-year lows this week, excess capacity is rampant in the marketplace, and some aspects of customer freight have come to a complete stop. But there are many things within our control. We are moving ahead and making progress on every initiative that we have outlined. This team has proactively lowered our headcount by 10%, shuttered underperforming locations, managed the average age of the fleet, launched our company regionalization and opened regional facilities that fit our network, expanded our profitable dedicated business and added a profitable Davis business within the Trucking segment, and logistics is producing all-time highs in load count and employee productivity at all-time lows in transactional costs. We hope the detail we've provided here is helpful in contextualizing the dynamics within the quarter, our ongoing transformational initiatives and how we see things going forward.So with that, Danielle, we'll turn it over to you to open it up for questions.

[Operator:]

[Operator Instructions] The first question comes from Jason Seidl of Cowen.

[Jason Seidl:]

James, just to clarify something you said. Did you say that in April, you guys had positive operating margins overall or income overall? Or is that just for logistics?

[James Reed:]

Overall and in logistics. So we had -- we were really worried about April coming into the pandemic. It was uncertain for everybody. And our April month ended being mostly positive because of logistics, frankly.

[Jason Seidl:]

Okay. Perfect. And how should we think about sort of that spot mix business that you have in terms of you see, ultimately, you'd love to get more contract business in. But as I look at how states are coming back, it seems extremely disjointed, right? So that's going to -- that's going to lead a lot to one event for you guys getting back to that mix that you like between contract and spot because of how we're going to be coming back as a nation.

[James Reed:]

I wish I knew the answer to that. It's a really great question. So let me kind of split it into 2 sections, and then I'll throw it over to Zach and see if he has anything he'd like to add to that. So in the quarter, our brokerage freight outside spot freight was about 10% of our volume. As we moved into April and May, that's gone up, and it's more like 15%. And just to be completely honest, we've had a couple of weeks that got as high as 20%. Yes. So it is a challenge. And with spot rates being what they are, it is a risk that we worry about, to be frank. Now that said, we're still running well above our variable contribution, so we're still creating cash in every scenario that we've planned through. And so we're not concerned about that. But we are actively trying to work with customers that haven't been shipping to be the first ones they call, as I said, to start shipping again to be their freight provider or they're a carrier of choice. And we're seeing some things. We have some nationwide retailers, I won't name them, who are starting up big retail pushes this weekend, and we are front and center on those pushes. We've got our largest customer, which we disclosed in our K, has informed us to expect that their inbound port business will be picking up in the next week or so. So there are really good and positive signs. And just as you pointed out, as those things come on, it's a no-brainer to replace the brokerage volume with contracted customer freight.To your broader question of, is this a 2021 or -- I really hope it's a 2020 thing. But we just don't know. I mean, we don't know -- and by we, I mean collective we, we don't know -- we believe that consumers are going to come back. I certainly -- I don't want to challenge the gods, but they can't consume less than they did in April, right? That's got to be a positive. Shippers have got to be shipping more freight going forward, but we just don't know how COVID-related consumer revised behaviors will manifest themselves in shipping patterns going forward. So great question. Extremely difficult to answer. The best answer we can give you is we're going to keep pushing forward on our initiatives, because we believe at the end of the day, EPS is the best indicator of success in this space. And everything we're doing is moving towards a better EPS model. I don't know, Zach, do you have a different thought or...

[Zach King:]

No, I completely agree. And just to echo what James said, I think we want to be in a spot to where -- whenever they do come back online, ours is the first call they receive. So that's what we're aiming for.

[James Reed:]

Jason, I just want to add one other thing, which is I was really intentionally specific in my comments, over 80% -- it's just over 80% of our customer base fit in the essential and quasi-essential. Quasi-essential kind of -- it's a little comedic to me. When we first did the analysis, we weren't sure that beer and beverage and home improvement were considered essential, but it turns out that they are. And so we've got over 80% of our freight that just is moving at pretty much pre-COVID levels.

[Jason Seidl:]

That's good to hear. But I think everybody's crystal ball is a little bit cloudy with COVID and probably craft on the side as well here. So don't fret if you're uncertain whether to say '20 or '21, it's -- we're all in the same boat. Just jumping to your regional centers, you said, 3 out of 4 are going to open before the end of the year. Can you give us a little more granularity on the cadence in terms of by quarter of what you expect? And also, is the fourth, did you mention -- is that next year it opens up? The fourth?

[James Reed:]

Now the fourth will be in the third quarter, and we won't get too particular about the facility because it's still being locked down, but we feel really confident about getting that done. So we have 4 regional facilities where we have operation centers. So we have -- 1 is in Dallas, Texas, and that's one we hope to open in the third quarter. Like I said, we're very confident about that. We've got Atlanta, Georgia, where we have 2 facilities where it in about 3 or 4 miles of each other. We got kind of the Central Pennsylvania, Carlisle, Pennsylvania area. And then the fourth central operating center is actually not at a terminal. It's here in Van Buren. To be clear, all of those teams are up and running, even the Dallas team, we've stood up the Dallas operations team. We got a great leader down there. He's got a wonderful team of experienced people. A couple that have come over from USA Truck and relocated down there to be with that leader, and a couple from the outside from some brand name carriers that you would all know that he used to work with. So that team is operating as a regionalized operation. They just don't have a terminal yet. But they -- we expect that they will, frankly, in July. That's what we're targeting.

[Operator:]

The next question comes from Jack Atkins of Stephens.

[Jack Atkins:]

Zach, congratulations on your new role. So I guess, let me just kind of go back to April for a moment because I think the comment that you were profitable on an EBIT basis is very encouraging, especially considering the mix shift to more spot here over the course of the last several weeks. So James, I guess, is that a big time proof point in your mind that all the effort that you guys have been putting in over the course of the last couple of years to reposition the company is really beginning to pay fruit? And as you can maybe get that spot mix back down. I mean, that, to me, seems super encouraging about profitability as we move out of this COVID crisis. I just would love to get your thoughts on that, because I think that's -- I mean that really stands out to me.

[James Reed:]

Yes. No. Thanks, Jack, and thanks for the opportunity to address that. We mentioned that we've got a really strong Davis business. They just -- I mean, they're just predictable. They do a great job and have great performance month in and month out. It was a challenging month for truckload for sure, but they continue to operate in profitable space month in and month out. We've got a dedicated business that's growing. That's still coming online. It's yet to really bear its fruit yet because we've been starting up these businesses. The real superstar in April from my way of thinking was our logistics business. We've got this really strong engine that's producing a ton of volume at really efficient transactional cost, and the margin environment flipped. And we got these low teens margins, and it's kind of back to the old model that we had. And if I can go a little off-script from your question, last year broke my head a little bit. I struggle with -- in a tough asset market, most of us expect to be able to be bolstered by our logistics business. And I think you -- if you scan the entire landscape, you'd say that wasn't true last year. Logistics was down pretty much for everybody, asset businesses were down for everybody. And that was a real concern. And we had concerns. We even addressed them a little bit in the last quarterly call about -- we're trying to make sure that there aren't any fundamental or structural changes there that we don't understand. And what seems to have happened in 2020, at least in April and the first part of May is, we got the strong engine or logistics business that's got a respectable margin and it's throwing off some earnings. So Zach, anything I missed there?

[Zach King:]

No, I think you covered that. I mean it's -- logistics last year, like James said, was a little bit of a head scratcher just in terms with all the tech brokerages that came online and their impact on the marketplace. And then how those have reacted through the first quarter and early second quarter of 2020. So hopefully, those margins continue for a while.

[Jack Atkins:]

Okay. That's all great to hear. I guess kind of pivoting for a moment. Can you help us think about how your fleet should be trending as we move into the second quarter and for the balance of the year? Would you expect fleet count to come down some? Stay flat? How should we be thinking about that? And then also, tractor age is kind of creeping up. I mean, for obvious reasons, I know you guys are doing everything you can to preserve liquidity. But how should we be thinking about where the average age of your tractor fleet will sort of wind up at the end of this year?

[James Reed:]

Yes. Good question. So let me address the last part of that first and then go back to the earlier part. So tractor age by the end of the year, 3.2 is kind of where we think it's going to be. So kind of not in a bad spot at all. Our target kind of all along has always been in that 2.5 to 3, we think is an ideal operating parameter. And even at 3.2 years, it's still considerably younger fleet than we had in 2017 and the first part of '18. So we feel really good about our fleet dynamics in terms of the age of fleet going forward. If you -- sorry, I lost my train of thought. What's the first part of your question?

[Jack Atkins:]

Well, it was like a triple compound question...

[James Reed:]

I remember.

[Jack Atkins:]

But I guess, the first part was just asking about fleet count and how you're expecting that to trend as we move through the balance of the year?

[James Reed:]

So we've got -- what is the number, Mike? Is it 160 trucks coming out?

[Zach King:]

Yes, 165.

[James Reed:]

So we've got 165 trucks that are coming out of the fleet this year. And our internal plan, and I didn't really mention this on the call, but I'm glad for the opportunity to address it, we've been growing owner operators pretty rapidly. As you can imagine, the tough spot environment and the tough economics with insurance costs and relicensing which goes on at this time of year in small trucking companies, we've had a pretty substantial influx of owner-operator trucks. So our plan internally, which we never disclose the financial elements of that, but it's always been to replace those 165 trucks with additional owner operators. We think that gives us some flexibility in our fleet. We think that it gives us, frankly, better return on invested capital dynamics, and we're pretty excited about how that's going. It's going really well. That said, and I want to be careful how I address this, we don't ever want our owner-operator friends to feel marginalized in any way. We treat them like part of our fleet. We give them access to our freight. We treat them as equal citizens. But as far as investment decisions go, if the market got worse from here, we have some real alternatives to assess if we want to compress the fleet. With 165 trucks coming out, it actually gets a lot easier, because those are decisions you can make in days, not months.

[Jack Atkins:]

And then last one for me, and I'll turn it over. But with the fleet kind of coming down some here, and the used equipment market really being a mess right now, how should we be thinking about gains or losses on sale for 2020? Is there some sort of -- maybe some parameters to think about that?

[Zach King:]

Yes. So Jack, I mean, like we mentioned in prior quarters and overall market, I mean, the used equipment market right now is tough. We think that we're depreciating our tractors down to a level at which we should be able to exit from them. But like you said, with the change in kind of the dynamic in the market, you don't know what impact that's going to have on the equipment market. So we continue to constantly evaluate that. But I wish I knew what we could sell a truck for in 3 or 4 months. But right now, we just don't know that at this point.

[James Reed:]

So well, and we've made -- we impaired some assets previously, and I don't remember, Zach, if we put it in the Q because -- if we determine it was material or not, but we did have some in-the-quarter depreciation that was a result of taking a lower retained -- or salvage value on the truck.

[Zach King:]

Right. Yes, we did have to accelerate several tractors to get those down to a market level.

[James Reed:]

Yes. It's a crazy time, Jack. I know you look at those numbers. And we stay on top of it. I mean, it's clearly a topic that we watch closely.

[Jack Atkins:]

Maybe one last quick question here. But could you update us on sort of where you are within the bid season process? And are you seeing customers trying to push out those decisions somewhat? And how should we be thinking about sort of the -- your book of business, on the contract side and it's rolling over and your expectations there this year?

[James Reed:]

Yes. It's a fair and good question. So the shift, we talked about over the last 2 years, it went from kind of a 50-50 shift in '18 kind of first half, second half bid cycle to 40-60, we're in the back half of '19, there were low contract rates and people were trying -- or low spot rates, and people were trying to take advantage of that so they delayed. We see this really weird dynamic right now. It's almost flipped towards like 60-40, first half of the year, back half of the year. But to your point of, like, do you see people pushing it off, you do, but not in the way you would expect. So we have bids that typically are a 2 or 3-round multibid bid, and I just was talking to our pricing team earlier this week. Customers are extending the bids into additional rounds, which they traditionally don't do to try to take advantage of the lower spot market. And so there are customers, and I would say, nonstrategic customers, they're trying to push for lower and lower rates. And we have some other kind of more traditional, more in that 80% of our customer base, customers that are sticking to their process, because they've had the experience of the market highs and lows, and they're a little bit more disciplined. But you're right to point out that it's a bit of a weird environment in the bid cycle. It always cracks me up when people ask, even internally, when people say, well, bid season this, bid season that. There's no bid season. Bid season shifts to follow spot market trends in terms of the timing.

[Operator:]

The next question comes from Jeff Kauffman of Loop Capital Markets.

[Jeff Kauffman:]

First of all, thank you for that color on April and May. That was very helpful. A detailed question and some bigger picture questions. So where are we right now on projections for gross and net CapEx? And I think you were talking a little bit about fleet values, and you recently took an adjustment. How should I be thinking about depreciation at this point for the year?

[Zach King:]

So we think depreciation for the most part, should remain at a level that we've seen in Q1. We don't anticipate having to take additional depreciation assuming the market stays where it's at today.

[James Reed:]

Which was pretty crummy.

[Zach King:]

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

[James Reed:]

Yes. And then on the question of gross net CapEx, I mean we haven't really had Mike talk on this call, but he's the expert on that. So where are we -- I mean, kind of laid out the expectation that we wouldn't have any CapEx, but I actually think we're net positive on CapEx. Do you want to address?

[Mike Stephens:]

Yes. We should have some net positive CapEx. We've shut down all the large projects or push them off, which will help us and not hurt us on a -- an equipment standpoint. So we'll be in a good spot there.

[James Reed:]

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

[Jeff Kauffman:]

Alright. And you mentioned 165 trucks coming out later this year. So we're probably going to generate some more proceeds as the year goes on. How much of a -- so you mentioned the fleet age up to 3.2. So as we think about 2021, 2022, kind of the out years, how should we think about capital spending?

[James Reed:]

So we have kind of -- I don't want to say danced around it, but we've been intentionally vague in the past about that. If you look at our business and you look at our size of fleet, and you think about a normal cycle. A normal business cycle for us is around, call it, round numbers, $40 million net CapEx. And so even as we look at this year, we expect to produce enough EBITDA to cover that. And -- but we don't need it this year. So we're -- as Zach said in his prepared comments, conserving that to pay down debt and expand our available liquidity through the year. So as we look, I mean, honestly, Jeff, we do have a 5-year plan, and I don't want to sound too nearsighted, but we're really focused on what happens on the other side of this pandemic. So if you were to look out and think about what your assumptions are, and Mike will get with you to look at your model and have a discussion. I would assume kind of a net $40 million CapEx schedule indefinitely, but subject to market vagaries.

[Jeff Kauffman:]

Okay. Well, you mentioned 5-year plan, let me just switch gears for a second. So when we talk about longer-term targets before the world changed, the thought was Trucking-Logistics split of basically 65-35, with a longer-term target of $1 billion in revenue. Using technology to drive down out of route miles, you thought that you were priced about 20%, 25% below the market in terms of revenue per truck. So that was kind of the big opportunity there. Have any of those changed as a result of kind of how the world is changing and your customer base is changing?

[James Reed:]

We don't think so. Just from a timing standpoint. So we've been here really as a management team, I was kind of -- it seems like a long time. But I was doing the math. I've been CEO for 3 years. And the first year we had '17 going into '18, and we really got 1 year of reflection of our efforts, and you saw that in '18. And we got -- had certainly a lot of market tailwinds there. And I just feel like this is a baseball game, we're in the third -- and I said this before, we're in the third or early fourth inning. I still -- I think there's a rain delay. I think Mike might have said that the other day. We're in the third or fourth inning, and there's a rain delay. But everything that we laid out there, I think we owe you an update. Our view is, we want to kind of get through the other side of this COVID virus, work with our Board to understand what the timing of our ambitions look like. And then while we normally wouldn't do an Investor Day, every year, I think there's one in the future, and we'll work with our Board to figure that out because we owe it to you and investors in the marketplace to give that update. But the short answer is, it's the third, early fourth inning. We're in a rain delay, but all those ambitions remain the same. And Blair and his team are still working on driving utilization to competitive levels. And without naming names, you look at our utilization in the quarter, we beat a couple of our public competitors out there. So we're getting better, and we expect more.

[Jeff Kauffman:]

Well, your beat on utilization, and I think that was really, really encouraging, but the -- I guess revenue per truck is a different way to look at it. I always look at revenue per loaded mile, and that was below the peers. You said it's a function of your mix of spot and how you guys were using brokers to fill in. Well, thank you for the baseball analogy, made my morning. And good luck.

[James Reed:]

Well, there's more to come in my closing comments.

[Operator:]

The next question comes from David Ross with Stifel.

[David Ross:]

So I guess we just talk about the fleet for a second first, roughly 2,000 trucks. What's the breakdown? I mean, are owner-operators included in that fleet count that you give in the operating stats?

[James Reed:]

Yes they are.

[David Ross:]

What's the rough breakdown now of owner-operator versus company power?

[James Reed:]

Give me a second. I've got it written down here on our fleet statistics. So I think we've disclosed this in the past, right? So our current -- our owner-operator count is -- at the end of the quarter, was 458 of the company trucks.

[David Ross:]

Okay. So about 1,500 or so of company trucks?

[James Reed:]

Yes. Exactly.

[David Ross:]

And Davis, is that still about 250?

[James Reed:]

Yes, round numbers. Yes.

[David Ross:]

And what would dedicated be in terms of...

[James Reed:]

Yes. So we don't disclose Davis and dedicated separately as they're part of the trucking segment, but I think we have said in the past that it's kind of in that 300 to 400 truck range. It's kind of on the higher end of that now, given that we've added so many trucks.

[David Ross:]

And Teams' probably pretty small, like less than 100 trucks, I would think?

[James Reed:]

Oh yes, yes. Yes. Well, we haven't given a public number on that. We want to get closer to the 100 in number. So we have -- not to mix your question with somebody else's, but as you think about our revenue per truck measure, which we think is absolutely the most critical measure in our business. One of the reasons we want to add Teams is we think we can get utilization up, which runs into revenue per tractor. And when you think about the regionalized model that David so capably demonstrates to us, that's why we're trying to as quickly as possible move to the regional model so that we can up our revenue per tractor per week, commensurate with what they see. And same thing on the Dedicated. It's just -- it's a workhorse.

[David Ross:]

And you talked a little bit about lowering maintenance costs, if I heard correctly. How do you do that with an aging fleet?

[James Reed:]

Yes. The best way we do that is by reducing our over-the-road expenses. So those that have followed us for a while, I used to explain our network as a game of pickup sticks when I first got here. And this pickup sticks were laid out all over the table with no discernible pattern or structure to it. One of the first things we did was we reorganized our pickup sticks into a densified network, and now we've worked to bolster that through the bid process to get more and more and more density in the network. We didn't say it this time, but last quarter we said that our density was up 60% since 2017, as measured by loads per lane per week. And as you do that, Dave, you start to discern really visibly patterns about where your spend is. And so we reopened our Chicago facility, I think, last year. We got the Atlanta facility. We now have the Carlisle facility. We closed the facility here because it's out of our network. We're opening the facility in Dallas. We've got a facility in West Memphis. We got a facility in Vandalia or Dayton, Ohio. And those are hot spots in our network, where we were incurring the most over-the-road cost. So the way that we reduce maintenance costs in an environment, where basically, the truck age is going to stay flat is by taking over-the-road repairs off the road and put them in-house. And it's a significant cost savings.

[David Ross:]

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

[James Reed:]

So I believe -- that's a great question. So that line item is not just maintenance expense. I believe it has operational headcount. We're going to have to dig into that number. We're not -- give us a second, and we'll come back to you on that, Dave. Because it should be really easy for us to answer. And I'm sorry, I don't have it off the top of my head.

[David Ross:]

No worries. And if -- I mean, that's why you got a CFO, right? Slide 8, when you talk about the 2020 strategic objectives and targets, and you look down that list, specifically on the performance target side, what one of those items do you think is a slam dunk, most easy to hit? And which one do you think is the biggest reach right now?

[James Reed:]

It's kind of a cultural thing. We have a little bit of a diversion to slam dunk, but that's because of a prior leader that used to say things were slam dunks and then they never work. I think that honestly, boosting utilization, increasing teams, improving the network, growing Dedicated driver retention, those are all things I'm very confident about. The one I'm probably most concerned about is improving gross margin and logistics, because a lot of that is market driven, and I don't feel that I have all the control in the world over that. So that would be the one I'd say I'm most concerned about. But as I've noted in my prepared comments, the load count engine that we've created in that group has been just remarkable, and I think probably best-in-class. So I hope that kind of addresses your question.

[David Ross:]

And then just digging into Logistics real quick before I wrap up, what's the mix currently of, I guess, what I call spot business versus contract business there? And was one of the reasons for weaker margins last quarter because you were just using it to fill your own trucks and not actually going after revenue per load or trying to make margin?

[James Reed:]

So you kind of confused me there with the question. So are you talking specifically about Logistics and what's the Logistics contract spot split?

[David Ross:]

Yes. Not the fleet, you already talked about the fleet and the spot exposure there. But specifically, how much is the, I'm going to buy a truck at X and sell it for Y?

[James Reed:]

Yes. It's about 60% contract. So that business is consistently about 60% contract, 40% spot, always has been, and that was consistent in the quarter as well. And so as margin dynamics recover, you start to see a pretty rapid flip in their performance.Great questions. And Dave, we're going to try to answer your question before the call is over. But if not, we'll follow-up with you shortly after.

[Operator:]

The next question comes from Barry Haimes with Sage Asset Management.

[Barry Haimes:]

A couple of questions maybe. One -- the first one, James, is there more contract business from new customers that you've won but hasn't started yet and will start up either this month or next month? Because presumably, even if freight doesn't get better, we all think it will, but even in the current environment, you would have some help on that having up put trucks into the spot market? So that's the first question.

[James Reed:]

Yes, Barry. So a couple of things on that. Yes, you're right. There is more business coming online, and we are very active in our bid process, consistently adding new business all the time, and we do have new business coming on. We have some pretty big business coming on this weekend, one with a national home improvement retailer and another one with a big parcel carrier. So we've got some really exciting stuff going on there. And then we have some bids that have come in on some of our big retail customers, and that retail volume is really starting to pick up. Let me rewind to what we said back in February. We had a bunch of freight coming online in February and March that we just never got to recognize the full effect of that onboarding of that freight because of the virus timing. And we have done a bunch of analysis in-house to go back and look at all the bid activity we did last year, look at the expected realization on that bid activity, fast forward that into the number of loads per week that, that should deliver, and then try to make a determination of how much of that freight is being affected by the COVID virus and how much of it isn't. And I actually personally look every day with our Chief Commercial Officer and our operators at day over day volume, day over a 4-week moving average, day over 13-week moving average of every customer by essential, nonessential and quasi-essential categories to understand those dynamics. So I'm sorry it's such a crazy, a little bit befuddled answer. But yes, new freight is coming on, and there's a whole bunch of freight that we've been awarded that we still haven't recognized from the first quarter because of the impacts of the virus. And we expect that to be kind of a positive double whammy whenever freight returns.

[Barry Haimes:]

Got it. Great. Great answer. And then second, just to be clear, could we go over if there are any covenant or other restrictions relative to the debt that we just need to know that in terms of metrics?

[Zach King:]

No. So we have one covenant in our debt facility that's -- our debt facility is disclosed in our 10-K, but -- I did an exhibit, but you can go out there and look at it. But we have 1 covenant. It's a springing covenant once we drop below 10%, so right now, we're above 20%, and with the recent change from $225 million to $170 million, that actually brought that 20% down. So we're in compliance with all covenants. We don't anticipate any issues there.

[Operator:]

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

[James Reed:]

Great. Thanks, Danielle. We want all our constituents to understand that we are forging ahead in improving our financial performance, that our balance sheet is strong and that we have plenty of liquidity. We put a lot of time, effort and resources into transitioning this company to a regionalized carrier, with cost and operational discipline that is well positioned when the cycle turns. I've been reading a book called Men at Work by George Will, the talented sports writer, and it has me thinking in baseball terms. And I'm missing baseball a lot right now, by the way, I'm sure many of you are, too. He attributes to Mike Scioscia, the idea that the harder you work, the more luck you have. We believe that here, and we believe that all the great work we have done has manifested improvement that will become even clearer as the market emerges from the lows of 2019 and 2020. We also believe that there are immutable natural laws of the universe. Gravity is an undeniable principle. Great pitching always beats great hitting. And truckload pricing and demand is cyclical. The last couple of years have been cyclically abnormal. Yet we are focused on the things we can control, making progress on the commitments we have made and improving the business for that day when the inevitable cyclical turn comes. We don't know how 2020 will play out yet. Nobody does. But we are better positioned today than we have ever been in a long time. And as a result of all the work and results that we have outlined here today.So thank you for your time. Thank you for joining us today, and we look forward to seeing you in the future. Thank you.

[Operator:]

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