USA Truck, Inc.
Q2 2020 Earnings Call Transcript

Published: 28 Jul 2020

[Operator:]

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

[Mike Stephens:]

Thank you, Sarah and good morning and welcome to USAT Capacity Solutions second quarter earnings conference call. Joining us this morning from the company are James Reed, President and CEO; and Zach King, Senior Vice President and CFO. We thank you for joining us today. 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 including 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:]

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 said in the second quarter, the second quarter was unlike any quarter we have experienced as a management team. The coronavirus pandemic pressured our non-essential customers, which make up approximately 20% of our active trucking customer base, causing many to stop shipping altogether or significantly reduced shipments. This caused us to move trucks into the spot market, which has been at a four year low. The move caused a decrease in utilization, rate, and base revenue per tractor per week. In logistics, we were able to increase load count 16% year-over-year and 23% sequentially to help offset the rate pressure in the marketplace. If you'll please turn with me to slide number three, we'll do a brief review of our financial results. Consolidated operating revenues came in at $123.7 million for the quarter, which represents a 7.4% decrease year-over-year. Base revenue was down 2.8%, which excludes fuel. Consolidated adjusted operating ratio for the quarter was 98.6%, up from 98% in the prior year, primarily driven by weaker freight environment due to the COVID-19 pandemic which affected both of our operating segments. Our adjusted loss per diluted share was $0.06. Turning to slide number four, trucking operating revenue before intersegment eliminations decreased $7.8 million or 8.1% to $88.6 million. Base revenue excluding fuel was down 3.5% to $80.5 million compared to $83.4 million for the second quarter of 2019. Our trucking segment generated adjusted operating income of $1.7 million, an increase of 47% year-on-year. As a result, our trucking segments second quarter 2020 adjusted operating ratio was 97.8%, an improvement of 80 points year-over-year, and 370 basis points sequentially. Trucking base revenue per loaded mile decrease from $2.14 to $2.02, or 5.7% and utilization decreased 76 miles per truck per week or 4.9% from the second quarter of 2019, largely due to network interruptions, caused by non-essential customers freight volumes. These rate and utilization outcomes negatively affected base revenue for available tractor per week, which decreased $347 or 10.4% year-over-year for the second quarter. Our debt head percentage for the second quarter of 2020 improved by 10 basis points from the first quarter. Our average available unseated tractor count percentage was 5.8%, a 60 basis point increase from the second quarter of 2019. The average available tractor count for the first quarter of 2020 was 2,063, which is a 7.7% increase when compared to the second quarter of 2019. This truck count growth was due to additions of owner operators. Turning to slide number six, we'll review the results of our USAT Logistic segment. Revenue before intersegment eliminations decreased $0.8 million from the second quarter of 2019 or 2.1% to $38.7 million. Our Logistic segment generated $172,000 adjusted operating loss and had 100.5% operating ratio. Gross margin dollars decreased $1.8 million to $4.7 million. Gross margin percentage for the first quarter of 2020 was 12.2% versus 16.5% for the comparable quarter of 2019. Load count increased to 33,400 loads during the second quarter of 2020 from the 27,200 loads in the first quarter, an increase of 22.8% and increase by 15.9%, or approximately 4,500 loads year-over-year. The primary drivers of these results were a decrease in revenue per load of approximately 15.6% and only an 11% decrease in purchase transportation cost per load when compared to the robust brokerage market experienced in the second quarter of 2019. This market environment drove our margin per load to $141 per load from $227 per load year-over-year. If you'll turn with me to slide number seven, we'll highlight some key balance sheet and liquidity measures. As of June 30th, 2020, total debt and lease liability $189.5 million and stockholders' equity was $75.5 million. Net debt was $189.4 million and our net debt to adjusted EBITDAR for the trailing 12 months ended was 4.1 times, down for 4.2 times as of Q1. This represents a net debt decrease of $6.8 million from Q1 2020 and a 10 basis point improvement in our leverage ratio. The company had approximately $38 million available to borrow under its credit facility as of June 30, 2020. The continued impact and uncertainty caused by the COVID-19 pandemic on our customers, employees, and communities has caused us to continue to focus on minimizing cash outflows. We continue to expect minimal CapEx in the near-term. However, during July, we did enter into an agreement to lease 189 new tractors and dispose of certain high-cost tractors during the back half of 2020. We expect this agreement to allow us the opportunity to reduce our average tractor age and improve our maintenance and fuel costs, while controlling our cash outflows near-term. One other item of note is our 2022 second quarter tax rate. For the second quarter of 2020, our effective tax rate was 211.4% as compared to 99.5% in the second quarter of 20219. Our tax rate was primarily affected by close to breakeven operating loss for the quarter, coupled with permanent differences. The most significant of which is the effect of the partially nondeductible per diem pay structure for our drivers. When our pretax income approaches breakeven, the sixth portion of tax expense related to the permanent differences begin to skew tax expense by making it less variable when compared to pretax income. With that, I'll now turn the call over to James for discussion of the business and current initiatives.

[James Reed:]

Great. Thanks Zack and good morning to everyone. As we have in quarters past, we will offer in depth updates today on dynamics and segment performance in the quarter, an update on our progress and our self-help trip transformational initiatives, and how we see things going forward. But before we begin, let me give a brief update on our COVID-19 response and what we're doing to be a better corporate citizen given our heightened sensitivity awareness and concern about issues of equality in the world. Our COVID-19 response has gone well. As we outlined last quarter, we have well-established contingency planning criteria and governance policies born from our experience in the 500-year flood of 2019 that allowed us to continue to run our business seamlessly. Recently, we made a significant change in our protocol as we began taking temperatures of essential employees as they enter the workplace and review CDC-provided questions to evaluate fitness for work. We continue to have the vast majority of our non-working work -- our non-driving workforce, working from home and the technology and business cadence tools we have in place have allowed us to do so effectively. Sadly, we have experienced some illness and one driver and one non-driver have lost their lives in the pandemic. Our thoughts and prayers are with them and all who are affected by this pandemic around the world. As Zack outlined in his comments, from a business perspective, about 80% of our customer freight is from what we call essential and quasi-essential customers. We have been able to survive through the COVID crisis and believe we are well-positioned to thrive as we gain even more momentum with those customers, have made adjustments to our network to reflect the short-term and possibly permanent loss of non-essential business, and as our business cadence strengthened through this cycle. I want to take this opportunity to thank truckers everywhere for their continued perseverance and diligence and keeping America's freight moving and supply chains open. These men and women have all the same concerns and worries as the rest of us and yet, they get up every day and do what only they can do. Our heroes drive trucks and we are proud of them. We've also recommitted to being a more thoughtful, more aware, and more engaged community and creating equality in the workplace as we have reached out to trusted advisors and mentors, thought leaders in this space and have worked with our Board, we have engaged in a concerted way. We're working with our internal diversity council to heighten awareness internally. We will continue to recruit diverse candidates in our new college graduate program as we always have. We are focusing on developing diverse talent into leadership roles. We began recruiting at more diverse universities, including HBCUs and we're working with the Board to emphasize diversity in leadership. We're also partnering within our community to provide pro bono access to technology and business advice from our team. We believe the best way to advance equality is through our actions and we are and will be active in making a difference. So, first, I'd like to talk about the dynamics in the quarter and segment performance. Given the uncertainty in the world, we had expected the second quarter to be more or less level with the first in terms of financial performance. We were able to improve on that performance through a lot of grit, commitment to our self-help plan, and execute on key initiatives. Broadly, we were able to keep volume steady in the business throughout the quarter. Our customers and segment diversification efforts, first began two years ago, have provided some installation through the uncertainty of the economy and beginnings of a cyclical upside. We are far from certainty about what the evolution of the virus will be, how that will affect the economy, and how the upcoming elections will manifest in our business. However, as we noted last quarter, our deep understanding of our customer makeup and their relative strength in this environment has given us confidence that we are well-positioned to execute and take advantage of a turning cycle. We still expect to continue our strong track record of generating positive EBITDA through the cycle and are moving forward decisively. When we last met, we had come off a strong April and we're beginning to experience a softer May and we shared that at the time. It was a sign of things to come. While volumes remained relatively balanced through the quarter, industry-wide capacity availability drove May spot price to near historic lows. When this happened, customers withhold some of their committed freight, take it to the spot market, and then asset carriers with committed freight -- preserve as much committed freight at committed prices as possible. I intentionally use word committed there a lot to make a point. The alternative when this freight is not tendered is to play in the spot market at lower rates, not a good situation for profit. And yet, that's what we had to do in the quarter. We had one six-week period in April and May, where our asset business relied on nearly 20% spot rate in an unfavorable rate environment just to keep our trucks moving and producing variable contribution. On the logistics side, this same environment can result in margin expansion in as much as committed customer freight can now be met at a lower spot purchase transportation price, except that customers longingly observe market dynamics and lament the perceived loss cost savings so they too go to the spot market, which we also experienced in the quarter. As spot rates have rebounded nicely, logistics customers now want to lean into their committed bit of ordered freight at the exact time we'd rather be in the spot market. It's fluid and dynamic, and we're getting much better at balancing through the cycles. I'd like now to talk about the Trucking segment. We want to make two points abundantly clear to anyone who's listening or reading this commentary. Point number one, our Trucking segment is making substantial progress. And number two, we have made significant investments in our own self-help prescription throughout the cycle and we expect that those investments will yet yield performance gains going forward. The USA Truck Trucking segment improved sequential adjusted OR performance as Zach said by 370 basis points sequentially and year-over-year improved adjusted OR 80 basis points at a time fraught with economic uncertainty. We achieve that result despite the uncertainty. We saw revenue per tractor down mostly attributed to rate changes year-over-year, we had challenges and driver retention recruitment related to the broader economic environment. We saw tractor productivity slipped due in large part to COVID related network disruptions, and slightly higher empty miles. These are all areas that we are working to improve. Despite those headwinds, we made meaningful progress as evidenced by the results. So, 97.8% adjusted OR in Trucking is the best we've had since the end of the last cycle back in Q1 of 2019 and yet with rates and utilize utilization depressed versus that comparable, how are we doing it? Recall, as we've discussed previously, that we expected to have some short-term challenges in our transition to a regionalize operation. The network effect of COVID-19 added to those challenges, as all of us in the industry had non-essential customers who are absolutely critical components to our respective networks stop shipping freight. But we made many preparations in advance that were necessary to improve our results despite the headwinds. We had the foresight to reduce headcount in the fourth quarter of 2019 and the first quarter of this year that provided us much needed cost relief. Reducing headcount nearly 10% was a hard call to make, but the right one. We had the courage to close our Van Buren, Arkansas maintenance facility. It is co-located with our headquarters and is where a company was founded. Closing that facility required robust analysis, dependence on data-driven decision making, and the courage to follow the math in the interest of all stakeholders. Our team had the wisdom to grow and expand our asset-light owner/operator program as a means and way to enable revenue stability as we implemented our regional model. This allowed us to grow our paid miles even as network dislocation from COVID affected productivity on company assets. And we had the insight to make investments in capital, people, and processes to improve our safety performance to a level that provides us a financial advantage due to our top tier safety performance. We made a decision a couple of years ago to add in-cab recorders that face outward and inward. Beyond a significant financial investment that one decision probably hurts our retention and turnover stats. But the results are tough to argue, our collisions per million mile and our Do T collisions per million mile are down approximately 40% over the last four years, and the financial benefit of those decisions are beginning to accrue to the results. And while all of those decisions and the execution of those key initiatives have been important to our Trucking business improving, they're just the beginning. We'd like to remind everyone of the investments we have already made thus far and making this a company that will deliver competitive results in market environments of all shapes and sizes. Even as the market cycle has been against the industry over the last couple of years, we've taken this opportunity to improve the underlying execution engine that makes up USA Truck. We have not been resting in a down market; we have been anxiously engaged in improving the core of the business. Some of the things that we've done regionalization; we have made the transition to a regionalized fleet and then the result of those decisions are expected to be better driver retention, improved utilization and productivity, lower maintenance costs, and even better safety results. We've also invested in regional maintenance facilities. We announced last quarter that we would have all four of our new regional centers open for business and we have accomplished that. Just this month, we secured and have begun staffing up our Waxahachie, Texas terminal. We now have eight regional maintenance facilities where we know we have the best chance to cost effectively maintain, inspect, and manage our fleet. We made the purchase of Davis Transfer. This significant investment expanding our southeast regional footprint has paid dividends in the form of increased presence, exposure to quasi-dedicated business with long-term trusted partners and financial results that meet our expectations for Davis, and are aspirational for the rest of USA Truck. This business has been a steady low 90s OR business even through the trough of the cycle and we are now leaning into the Davis leadership team to teach the rest of USA Truck to do likewise. Davis is our best evidence of what is possible in a truly regionalized model, which is why we're we are moving to the regionalized model as quickly as possible. We've made technology investments. We made a big investment last year in transitioning to the latest and most modern TMS available for our business. We're now stripping out our TMS of unnecessary intermediate application layers that were implemented here over 10 years ago and we expect doing so to increase throughput by decreasing transaction times and that will be completed this quarter. We've also talked in the past about our dedicated expansion. Our dedicated truck count has grown 26% year-over-year and is up nearly 40% since the beginning of 2019. If we count Davis in our dedicated and quasi-dedicated trucks, we're approaching one-third of our Trucking business in this space. As each of these businesses continue to perform well, we feel compelled to pursue this as a key strategic vector. Finally, a significant investment that Zack mentioned earlier was consummated just last week when we closed the deal with a major truck OEM to replace an incremental 189 tractors in our fleet this year. We worked a contract to replace these tractors without incurring additional CapEx, while minimally impacting liquidity and our debt ratio and reducing our maintenance and fuel costs on the fleet. This deal is exciting to us and is expected to be completed by mid-Q4, and will have positive impacts on this year's performance, especially from a maintenance and fuel cost standpoint. We expect this investment will reduce our average age of fleet by four months by the end of the year, bringing us below 30 months average age of our fleet. Let's now shift to talking about our Logistics segment. It is no secret that the Logistics segment has been a challenge for the last several quarters. And this has not been a unique experience to USAT Logistics; it's been industry-wide. We believe the increasing transparency in the marketplace and freer flow of information to market participants has changed the environment and the windows for harvesting gains. When spot rates dropped in May, customers fled to the spot market and in June and July, spot market pricing is flipped to the high end those same customers try to enforce bid commitments that they themselves were all too willing to abandon in May. It's tricky. As we said last quarter, our goal in logistics remains 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. The formula in Logistics is quite simple, revenue per load times gross margin percentage times load count or volume equals profits or losses as the case may be. We think it's important to address these inputs to help investors and The Street understand exactly what the moving pieces are in our assessment of each. First revenue per load. The second quarter of 2020 revenue per load and our Logistics business was the lowest it's been in over a decade. Candidly, we went back and looked as far back as we have records, we can't find a time that the revenue per load was lower than in Q2 2020. The reason for the extremely low market driven revenue per load is twofold; one, capacity. The excess capacity that contributed to a challenging 2019 also bled into 2020 contract pricing. And two, fuel costs. Fuel is a significant aspect of nearly all brokered freight and is down 30% sequentially and 44% year-over-year. When revenue per load is down, margin dollars go down. A percentage of a smaller number is a smaller number. Second gross margin percentage. As we disclosed, our margin percentage in the quarter dropped to 12.2%. Margins get squeezed when there's a market mismatch between pricing which is still too low, and capacity availability, which is also too low. Said differently, carriers are charging higher rates, while customers continue to dig in on low pricing. This is all coming to a head soon as rates are beginning to rise as spot pricing pushing expectations higher and this capacity comes back into the marketplace, thus driving supply higher and costs lower. We do believe that capacity stayed on the sidelines with government incentives and that when the artificial buoy effect of subsidy goes away, that some modicum balance will return to the marketplace. And that finally leads us to load counter volume as our third variable. This is the area we most control in the equation. A thorough review of our numbers will lead the observant reader to some amazing insights. First, USAT Logistics revenue per employee is up 33% year-over-year, despite the low revenue and low margin market that we just described. Second, USAT Logistics loads per employee is up 51% year-over-year. Again, despite the environment, this efficiency drives transactional cost down and improves our ability to compete in the marketplace. And third, our volume production in the quarter were the three highest months of volume production in our history and add those together and the team just delivered the highest load count volume quarter in the history of the company in a tough environment. Why does any of that matter? Well, I'm an old manufacturing finance analyst by trade and we always looked at results in terms of rate versus volume effect and we do that same analysis here. All else being equal, if our volumes remain strong, if margin percentage remains low, but the average rate and revenue per load rise on a rising spot market and inevitably higher fuel costs, it bodes well for our well-tuned revenue engine. For example, if revenue per load rose even to 2019's relatively depressed levels, it would still be an additional $200 per load more than the market bears today. At those levels, the Logistics business swings nearly another $1 million in net margin per quarter, not to mention any upside and margin percentages that usually occur in the cycle. Let's just recap that. Logistics base revenue actually grew in the quarter, while margins and revenue per load were down, while improving revenue and load per employee efficiency improved 33% and 51% respectively. And we forgot to mention they did all this while lowering headcount 28.5% year-over-year. Just as we did last quarter, 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. I'd like to now shift gears to talking about our transformational and self-help initiatives. So, that's the update so far on the dynamics of the quarter. We've been consistent in addressing our self-help initiatives in past quarters and I'll try to be more brief today. But it's fair to say that we are more enthused about our prospects for change now than at any time in the last three and a half years. As I said, last quarter and earlier in this call, we've managed the age of our fleet, we completed the acquisition of Davis, we closed down high cost facilities, we managed headcount aggressively, we've regionalized the business, we've lowered maintenance costs, and we've expanded our dedicated business, and we've lowered the cost per transaction Logistics. The first initiative that we talked about and this is on slide eight, I believe, is increasing utilization on the existing fleet. As we reported utilization was a minor setback in the quarter, but as our regionalization and governance the standard work is taking hold, we are already seeing utilization per available tractor and revenue per tractor performance through July that's above and beyond our Q2 performance already, it's early but promising. The second thing, as we said, we increase our team presence and utilization. It's a slow burn as it requires intense coordination with our network design and it's been a challenge to get people to want to team in a COVID environment. But we've seen some big moves in revenue per tractor in this space, and we're continuing to be encouraged on that vector. Next is network optimization. I'm really not giving it as much time to this as we should, but in the face of COVID, we refined our network model, optimizing both truck level performance and network yield and deployed both of those in the last six weeks. We did a hard pivot given the changes in the non-essential freight. We believe that this is contributing to our improved utilization and segment dynamics already in the third quarter. Again, it's just July and COVID remains a concern and a source of uncertainty, but we are optimistic about the trend. We've already talked in detail about growing the dedicated business and driving Logistics load count, so I'm going to skip over those two and go to the final initiative, which is driver retention. It's gotten a lot harder off late. We've been much more disciplined in execution of the regional strategy, and that has some fallout. When you have higher expectations, people don't like that, they leave. But we've recently gone to some more real-time and virtual onboarding options. We've instituted some regular feedback loops using anonymous text based serving surveying methods. And we expect the full deployment regionalization to improve our results on this vector as well. So, we're excited. Now, pivoting to the outlook. At best, I think we would say the outlook is fuzzy. While we shared much about market dynamics and our pricing prior commentary on this call, I think the way our Chief Commercial Officer described the market is fitting. It's like we're on a winding road for the first time and it's foggy. Rates are up so far in July about 5% sequentially. Volumes are very steady and quite strong. EDI rejections are a sign of market health are over 1,000 a day for us while in 2019 -- Q1 of 2020, we hovered around a couple of dozen a day compared to a normal July, our EDI rejections are up 80%. Productivity is improving over our reported results from the prior quarter. Non-essential shippers are still MIA and while we maintain our commercial relationships with them, we are planning for life with their freight at currently depressed levels. We're bullish over the long-term and cautious in the near-term. If July's trends continue and this is the turn of the cycle, then it will be very good for all truckers. We just have the recent experience of 2019, which was much worse than any of the prognosticators predicted in 2020, which none of the prognosticators could have predicted. So, much depends on the country's continuing practical and economic response to the pandemic. Broadly and longer term, we think it's prudent to address how and if all the heavy lifting we've applied to the business has had any effect whatsoever. We were asked not long ago by market observer if we are better positioned entering this phase of the transportation cycle than we were before? The answer is an unequivocal yes. It's easily demonstrated through a simple rate analysis. Recall the demonstration we made earlier of rate versus volume. That example was the Logistics example. Well, the same applies in the Trucking business. So, let's do some math. Take the second quarter 2019 rate per loaded mile as a point of comparison; it was $2.14 a mile. If the Trucking segment had the same rate in the second quarter of 2020 that was experienced in the second quarter of 2019, then the adjusted OR for the Trucking segment would have been in the low 90s this quarter. When compared with the second quarter of 2019, the Trucking segment that quarter OR -- adjusted OR was actually 98.6. That approximate difference of 500 bps is a clear indicator of where we are. And where we are is very close to being able to demonstrate that all the investments, the move to regionalization, the technology, the terminals, and everything else we discussed here today has been more than worth it. We believe we are on the verge of industry competitive ORs just as has been our thesis all along. It's very exciting. We hope the overview of the quarter, the update on our self-help transformation, and the perspective on the outlook in the market has been helpful. The market is better than the last nearly two years and strengthening both from a price and demand standpoint. We believe we have made the right investments in people, capital, process, and technology to be well-positioned to leverage the same and proving out that USA Truck can be a market competitive service provider, and an investment with appropriate returns. So, with that, Sarah, let's open it up to the audience for questions. Thank you.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Jack Atkins with Stephens. Please go ahead.

[Jack Atkins:]

Hey, guys. Good morning and thanks for taking my question.

[James Reed:]

Sure. Thanks. Good to hear from you, Jack.

[Jack Atkins:]

I guess James let me go back to your comments around the rate environment in July. I thought that was pretty encouraging. You know, your comment that rates are up 5% sequentially. I'm assuming that's a loaded mile comment. And is that versus the -- the average rate in the second quarter?

[James Reed:]

Yes.

[Jack Atkins:]

I guess -- and I guess just kind of more broadly, now that there's some increased rate momentum, in favor of asset carriers here over the last, couple of months, is there an opportunity for you to maybe re-price some of the freight that maybe some of lower yielding freight that you had to take over the course of the last year. Just give it sort of where the freight market has been? And how should we think about the impact that could have to the third quarter more broadly?

[James Reed:]

Yes. Great question. Before I answer that, I don't mean to be too complimentary. But thank you for your piece last night, it was clear that you really read the details and your observation on the tax rate was, was right on point and understanding our sequential improvement. So thank you for that. With respects the rate environment, July is up 5% versus the Q2 average. So that's exactly right. The way you said that, in terms of re-pricing, I kind of casually touched on our network efforts. We really undertook an intense review of our network, because we had to make a real time pivot based on the loss of many of these non-essential shippers. We have no idea when or if they'll come back. I mean, we talked to them, and they're hopeful, but we'll see. And in doing that, we absolutely did what you said and we've identified some opportunities. And so just in really practical terms, what we're doing on a weekly basis is going back to the bottom 10% of our yielding freight, and we're raising prices. We're doing it relatively across the board, we have some strategic customer relationships, where, you know, what we really care about is kind of the profitability on the round in through and out of that market. But yes, we are absolutely undertaking that right now. And it's something that we do as part of our regular cadence. And then in terms of impact on the quarter, I mean, I didn't say this in my comments, but I'll say it now in this question. We've been very conservative in our own internal estimates. And we obviously, we don't share our internal estimates. We just feel like we got so burned in 2019 and so burned in the first part of 2020 that were reticent and hesitant to do anything risky. That said, if the market continues like July, I mean, you can kind of do your own math, you take the bottom 10% and assume that they're going to be up to average I mean, obviously you don't know the distribution of our pricing. That will be helpful. And I just encourage you to run that through. And as you know, as you and Mike talked about your model, he'll probably give you a little bit of feedback. But I'd probably be most comfortable just pausing there. I hope that answers your question.

[Jack Atkins:]

It does. It does. James thank you for that. And I guess for my follow-up question, I want to go back to your comment on the driver market. And you know, you mentioned turnover was a little bit of a challenge as you're sort of making these structural changes to the business, but I guess more broadly, you know, what are you seeing in terms of the availability to go out and find drivers? What are you expecting from a driver wage perspective in the second half of the year as the driver market and the freight market tightens? And how should we think about how all that impacts your fleet growth over the balance of the year? Sorry for the multiple board question.

[James Reed:]

No, no, it's really good. So a couple of things. In terms of driver wage, we do have a little bit of wage increase built into our internal plan. But you know that all is market related. So we've said this publicly before I'll say it again, our we study, the competitive pay surveys monthly. Our goal is to be in the bottom -- the bottom of the top third payers, so we have very competitive pay. And we will be subject to market trends like everybody else on that vector, but we're not planning any big moves. Thankfully, we have some awesome customers who understand that dynamic. And we would work with customers to defray and offset that and they've always been very good about that. Kind of the question behind your question is, you know, we've intentionally and I touched on this in my comments intentionally increased our dependence on owner operators. It's a -- a asset light play that has a relatively fixed margin on it, but as the spot market improves, those guys are more and more of a flight risk. And so we're doing things like implementing a fuel programs with them, implementing service discount programs with them purchasing discounts with them, recruiting guys that have multiple trucks in their fleets instead of just one truck to kind of increase the stickiness of the business. We've said this, I think before, but if not, we'll say it now. We've got a program where they can -- we pay differentiated pay for people to add safety features like Forward Collision Mitigation in those trucks. And we have differentiated pay for guys that, you know, voluntarily sign up for an in cab, the quarter solution. So we're doing some innovative things to mitigate and offset that risk.

[Jack Atkins:]

Okay, great. Right. And then one last question for me, and I'll turn it over. On the insurance line, you guys had a really good quarter there, actually two good quarters in a row from an overall insurance expense perspective. I know that underlying premium costs are going up going up across the industry. Could you maybe help us think about how we should be thinking about that line in the back half of the year? Maybe more broadly, I know you guys have really had a lot of traction on some of the safety equipment installation so that I'm sure that's helping. But just how should we be thinking about that line moving forward?

[Zach King:]

Yes. So, I mean, you're right on was what you said. So we've had it with -- over the last three years, we've invested heavily in Collision Mitigation, in cab recorders, both, external, so we can see what's happening outside the truck as well as internal so we can provide coaching to our -- to our driving workforce. But overall, I mean, we believe that those investments are starting to pay off, and you're starting to see that in reflected in our insurance line. So, when you look at our collisions, our collisions are down as James made, stated in his comment, collisions are down substantially, over the last four years. Our frequency is about flat, but our severity is significantly down as it's been for the last couple of years. So we're starting to see those reflected in both our actuarial studies, as well as our reserves and our collisions.

[James Reed:]

So, yes, and Jack, just as you think about that, with this new truck, well, with the truck orders that we already had for this year, which were only 65, initially, we get to 100% of our fleet with full Forward Collision Mitigation. So we think that story only gets better. And then, we've got this 189 trucks that we're bringing in the back half of this year, that are going to replace some existing trucks that already have some Collision Mitigation on them for the most part. There's a few of those trucks going out that don't. But the technology improves the interaction, the user interface, the seamlessness of it, the kind of the subtlety and suppleness of it, improves over time. So we really think this is something going forward. And we've talked about this as well publicly in the past, but I just want to reiterate it. We use an external actuary to review our loss triangles, our last pic and our loss runs on a, on a monthly quarterly basis. So they look at it twice a year. And so we're really confident that not only are our investments resulting in fewer collisions per million miles and fewer D.O.T collisions, but we're confident in the financial structure of those, the cost of the collisions that we are having are lower and lower and lower. Our management of the claims is world class, we are qualified, self-insured, we've got essentially an insurance company that's within our business, you know, by virtue of the staff that reports to Zach. So we, you know, and I have to say, I was a little skeptical early on, when I first came into the business was a lot of money to invest in a business that really wasn't doing well. It's proven to be a huge strategic advantage. So hope that answers your question.

[Jack Atkins:]

Okay, great. Thanks again for the time.

[James Reed:]

Thanks, Jack.

[Operator:]

[Operator Instructions] Our next question comes from Jeff Kauffman with Loop Capital Markets. Please go ahead.

[Jeff Kauffman:]

Thank you very much. Well, congratulations, everyone. Fantastic quarter in an uncertain environment. Just some follow-up questions to what was just asked. You mentioned that your insurance or your collisions were down and it's a function of some of the investment you've made in safety equipment, but it was a pretty steep drop sequentially from where we were a quarter ago and almost a $2 million drop in quarterly insurance cost, an 8% more miles driven. Was it more of an anomaly in the quarter where even if you do have collision avoidance and better safety systems, it was still an unusually low insurance quarter? And how should we think about, forward modeling a kind of $4 million in the quarter versus kind of a more normal $6 million to $7 million run rate?

[James Reed:]

Yes, so I'll let Zach take the second part of that question. I'll hit the first part. You're right. So you know, we look at our actuarial evaluation of our reserves on a regular basis. And, you know, there was a portion of that, you know, call it probably around a half a million. That was a one-time adjustment. And there was a portion of that that's just part of the run rate for the quarter. And we recognize it all at once. That second half, you should absolutely expect in your future modeling of that expense line item. And as we go through the end of the year, and relook at our loss triangles. We expect that, we're going to have an impact on those positively as well. So from a run rate perspective, I -- I'd say, the annualized run rate comes down about $2 million.

[Zach King:]

So go ahead, Jeff.

[Jeff Kauffman:]

Go ahead, Zach.

[Zach King:]

Yes, I would just tack on to what James said. I mean, when we do our actuarial studies, you know, semiannually, when you take a look at that, and when you couple that with the investments that we've made, you know, we did receive like James said, a little bit of a one-time true up on our actuarial models, but overall the drop in our last pick and our projections related to those models, you can kind of model in a couple million on an annual run rate.

[Jeff Kauffman:]

All right. Thank you. Just a couple of other detail follow ups, again, following up on what was just asked revenue per loaded mile up 5% sequentially. That's comparing to the down 6.7 in the quarter. So you would say, while the trend is good, we're still not up on a year on year basis. So far in July, you would have thought is maybe we get there. But as of now, we're closer to breakeven. Is that? Is that a fair way to think about?

[Zach King:]

Yes, that's right. I mean, we'll just talk and really round numbers here. So if our, rate in the quarter was right around $2, and it's up 5%, you can assume we're kind of in that $2.10 range, and last year, we exited at @2.14 in Q2 2019. So your observations exactly right.

[Jeff Kauffman:]

Okay. And with the 189 trucks that you're bringing in, I know you said these are mostly replacements. But how should we think about fleet size as we're looking toward the end of the year?

[James Reed:]

So, our fleet overall by the end of the years can be down about 100 trucks. We're cycling out kind of more trucks and we're bringing in, we grew our fleet this year. I'm kind of surprised nobody asked that question, but that was 100% through owner operators. So as you look at the overall fleet, by the end of the year, the truck count will be down about 100 trucks.

[Jeff Kauffman:]

Okay. That was the implicit question, because the fleet was up 8% in the quarter. Okay, great. Just two other details and I'm done. You mentioned a little bit about labor expense and the things you were doing for drivers but your labor costs was up 12% on miles that were only up that 8% to 9%. You talked about a pay increase being thought about, but kind of what drove that increase in labor costs above mileage? And kind of what's going to stick around? And what was kind of more expense that you ran into in the quarter trying to manage the environment?

[James Reed:]

Yes. So whenever we look at our total salaries, wages, employee benefits line, I mean, there's a lot of items included in that line. But, we've had a little bit of increased in benefit costs. We've had some incentive accruals that may not have been there last year. So there's some other factors that aren't specifically related to drivers that are causing that to trend up just slightly this year.

[Jeff Kauffman:]

Okay. And then final question. James, your truck division relative to the other truckers that are reported look terrific. Logistics division less though, and I think you address some of the positive things going on in your logistics business. And I thank you for that detail, but at the end of the day from 10,000 feet the margins in the logistics business or not what the rest of the industry is? Is that a function of mix? Is that a function of not charging customers properly? Is that a function of how the business being managed? How do we fix that?

[James Reed:]

Well, it's a little bit a variety of those things. So sometimes, it's apples and oranges, right? So we do a robust quarterly competitive review of our competitors. And we peel out what we can and what we can discern from their cues and from their releases to understand their business. And some of the pure plays aren't really pure plays. They have 3PL and 4PL businesses which are higher margin, which we don't do. They have warehousing businesses, which we also don't do. We predominantly play in the truckload, brokerage space, and when you look at competitors, who play in that same space we actually compare quite well, some of our competitors. I mean, there's one close by here that lost $13 million in the quarter. But we're never going to do that. I mean I should probably shouldn't say never knocking on wood here. But that's not our model. I mean, our model is to produce high volumes throughput, basically, at breakeven levels right now in the environment, because you've got some high purchase transportation costs and relatively low customer freight contract pricing, which hurts us. So, I respectfully would kind of disagree on a truckload brokerage level that that we're not competitive, because I think we're actually better than a lot of guys a pure play. There's another notable competitor, who we know extremely well, that we believe is fulfilling their brokerage business through an independent contractor model, which has more of an assured profit components that because they work on a percentage of PC model, and we are growing that business to significantly within our brokerage business, so I think a great observation, I would just say, it's a little nuanced, but I don't think we're mispriced. We have -- we have relatively strong assurances, given our knowledge of the industry in the market that we have good competitive pricing. And as I tried to articulate with the example, in my prepared comments, look, fuel can only go one direction at this point I stopped working to the right. And as I said, the base rate per load is lowest it's ever been in the history of the company, and that's the market dynamic, too. So all else being equal, that business gets back to profitability pretty quick when the market goes back to some form of normalcy, even if that's a low margin normalcy.

[Jeff Kauffman:]

Okay. Thank you very much, and congratulations.

[James Reed:]

Thanks, Jeff.

[Operator:]

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

[Jason Seidl:]

Thanks, operator. Hey, James. Sorry. I'm jumping off another call here, but wanted to get your sense of sort of demand trends and where we are and how comparable they are to some of the prior years. I just got off a call with one of your U.S. truckload competitors said that, they're now overbooked for the first time since almost 2018. So I'd love to hear your thoughts on that.

[James Reed:]

Yes. We're overbooked every day, right now. And you probably didn't hear my prepared comments. Jason will go over those with you later. But yes, we have over 1,000 EDI rejects a day on average right now. And so it's really a situation where we're sorting through our commitments, we’re sorting through our strategic relationships. And frankly, we're sorting through the highest yield, highest probability opportunities and prioritizing those. So it's fundamentally shifted for sure. I -- what we don't know is how the economy is going to respond to I hate to say this, the elections and how you know, the broader you know what's going to happen with COVID. I saw some data just this morning, it looks like deaths are dropping again, like maybe we peaked for a second time. So, you know, we're really cautious and you were optimistic in that caution. But we're cautious about that. So yes, whoever said that is right. We're oversold everyday right now. And it's a much better situation. That said, pricing still not backward needs to be. It's just, it's not even close. And so we're re-pricing the bottom 10% on a weekly basis with expectations to push pricing even higher as capacity comes back into a constrained environment.

[Jason Seidl:]

And you have a fairly large percentage of your business that re-price is in the back half of this year, correct?

[James Reed:]

Yes. We balance we said this, the last few years it kind of shifts around but on average, it's about 50-50, 50 in the front, half 50 in the back half. So as an example, we just implemented the second week of July. Our bid with our largest customer and you can guess who that is we actually disclose it in our in our K. But so yes, we have about half of our, we have about half of our business that re-price is in the back half and half in the first half.

[Jason Seidl:]

Okay. That's excellent color. Any difficulty getting drivers right now because hearing that to people that sort of, you know, June was sort of the turning point where driver availability became a little bit tougher. And what are your thoughts on sort of the driver payout look for the remainder of the year?

[James Reed:]

Now, that's exactly right. It has gotten tougher. We actually made our own situation a little bit tougher, because in a -- we have been doing virtual orientations through Davis Transfer for about six months. It's gone really, really well. And so we said, hey, July is typically soft, and we're going to do that for USA Truck. Well, guess what July hasn't been soft. So we've been scrambling to get our trucks back full and we finally turned the corner. This last but we had a couple weeks where it was a real struggle. With respect to driver pay, I'll just reiterate what I said a little bit earlier. You know, our goal is to remain in the bottom of the top third of competitive pay packages. And we'll remain true to that. We have some pay increases, built into our internal model. But I mean, it's safer to just follow the industry, we're not going to be an industry outlier on that front. So as other people start to talk about and see and experience that, and it's reflected in their pay packages will follow suit. But I don't see anything big right now. And just more broadly, I mean, this is a little anecdotal, but, the subsidy to not work, I think is really hurting driver recruitment right now the macro environment.

[Jason Seidl:]

Got you. So you would assume that the top third probably does have to take up pay if you look at it as a whole?

[James Reed:]

I think pay if you look, historically, the industry is a function of price. So if customers are willing to move price to where it needs to be, and it's still -- I mean, it's probably $0.15 to $0.20 away from where it needs to be, then, we'll do what it takes to secure the workforce.

[Jason Seidl:]

Okay. Sounds good. Listen, appreciate the time.

[James Reed:]

Thanks, Jason.

[Operator:]

[Operator Instructions] Our next question comes from Mike Vermut with Newland Capital. Please go ahead,

[Mike Vermut:]

Hey, guys. How you doing?

[James Reed:]

Hey, Mike. Good. How are you?

[Mike Vermut:]

Okay. So I'm just trying to go through some of that, that quick math you did. So we're close to where we were on a per mile basis, rate wise till 2Q 2019. But you stated that we'd have approximately 500 basis points of improvement. And I guess that's through all these initiatives that we've been going through?

[James Reed:]

Yes, that's right.

[Mike Vermut:]

So I guess…

[James Reed:]

Yes. Go ahead.

[Mike Vermut:]

No. I'm just looking at, so if I remember correctly, last to Q2 2019. We were breakeven made a couple of charges, so slightly profitable. So if we drop that knock that off by 500 basis points and pull that forward, we're putting up significant profits quarter-to-quarter, as long as rates stay where they are, or is there something else that I'm missing in there are those permanent takeouts that we should see going forward?

[James Reed:]

Yes, they are. I mean, we believe we've made a structural impact for the business and it's just really easy math. If you substitute to 2.14 for 2.01, in the quarter, you get to the number that we would have had. And so, we use that example as a specific, point to articulate. The business is different than it was we've taken out 60 heads, we've taken out significant costs. We've improved the throughput of the business. We've done a lot of all those things that we outlined going to regionalization we really Mike we think we're in a really good spot. And honestly, I wish I had what I have now year ago. And that's kind of the point, I was trying to make. You're exactly right. We think these are fundamental. They're structural. It's what we've been saying all along. And it's finally kind of coming home to roost. We feel pretty good about it.

[Mike Vermut:]

Okay. Let me say just again, so if I am looking back right now, so we had a 98.7, Q2 2019 or 98.5. Is it wrong to think that rates get back to 2.14 that we're at a 93.5?

[James Reed:]

Not wrong.

[Mike Vermut:]

Because the just put it out there, that's roughly $0.45, $0.50 of earnings. If we get there, and we can borrow it, and that rate per mile, we're not far away from it.

[James Reed:]

It's not far away. And we've got the challenges right on a consolidated basis, because you're talking about trucking right now, we've still got the challenges with logistics, I mean, that market has been a mess for four quarters. And so we're working our way through that, if that, goes back to kind of a normalized market, I kind of think of logistics as a perfect hedge against trucking and vice versa. It hasn't been that for the last year and a half.

[Zach King:]

You look at the change in logistics. I mean, in the third or second quarter of 2019, they were 96.8 adjusted operating ratio. So we have significant, you know, movements to take there to get that back to where we were Q2 2019.

[Mike Vermut:]

Got it. So the 500 basis points is in truck.

[Zach King:]

Correct. Yes.

[James Reed:]

All right. Great question, Mike. Thank you.

[Mike Vermut:]

Okay. Great. Thanks guys.

[Operator:]

I'm showing no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to James Reed for any closing remarks.

[James Reed:]

Great. Thanks a lot, Sarah. So I was asked this week, if I would have a baseball story on the call, apparently our call participants like that. So I love baseball for a lot of reasons. It requires diligence, skill unlike almost any other sport, constant and repetitive practice of the most basic skills, and the ability to fail a lot in order to win, in what other sport can a person who fails almost 70% of the time be worthy of Hall of Fame status. The parallels between life, work and baseball are pretty profound. The other reason, I like baseball is because even small guys can have a lot of success. A couple of our current and former board members are huge Astros fans and in honor of them, I'd like you to think about Jose Altuve. Altuve is the shortest man in Major League Baseball, he listed at 5.6. I'm telling you I've stood next to him and I think 5.6 is a stretch Altuve was originally turned away from an open tryout in Venezuela because of his size. The scouts actually thought that he had lied about his age, but he sure has proven everyone wrong. He's won the American League MVP in 2017. That same year, he won the Associated Press Male Athlete of the Year Award. He's won a Gold Glove once for the best fielder and four Silver Slugger award for the best hitter at his position. Most importantly, he led the Astros to victory in the 2017 World Series. How can you cheer against that guy? Well, USA Truck is a smallest carrier in the public marketplace. We're still large compared to almost anyone outside the Publix. But I think it's fair to say that we represent the little guys. And in a commoditized market, which inherently provides a level playing field. With the right skill set and tools. Even the little guys can be on top of the world, a lot like baseball, and we look forward to the continued trajectory that we're on. They're great things to come at USA Truck and I would be remiss, if I didn't think every one of our co-workers, drivers and driver support alike, for all the incredible work they have done to affect this transformation to get the company on stronger footing and to allow us to thrive together through this worldwide pandemic. They are truly the best of the best, and I want to -- I want each of the USA carriers out there to know that, I am proud of all they have done and all they will yet accomplish. We're looking forward to great things ahead from them. Thank you. Thanks, Sarah.

[Operator:]

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