USA Truck, Inc.
Q3 2019 Earnings Call Transcript

Published: 1 Nov 2019

[Operator:]

Good day, and welcome to the USA Truck Third Quarter 2019 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.I would now like to turn the conference over to Chad Lane, Assistant Treasurer and Investor Relations Officer. Please go ahead.

[Chad Lane:]

Thank you, Alyssa. Good morning, and welcome to USA Truck's third quarter earnings conference call. Joining us this morning from the company are James Reed, President and CEO; and Jason Bates, Executive Vice President and CFO.We thank you for joining us today. In order to help you better understand USA Truck 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 in this conference call includes non-GAAP financial measures as outlined and described in the tables in our earnings press release.I'll now turn the call over to Jason.

[Jason Bates:]

Great, thank you, Chad. We want to thank everyone for joining us on the call today and we appreciate your interest in and support of our company. We hope you all had an opportunity to review our earnings release from last night. As we stated in our release, the third quarter of 2019 marked the continuation of the challenging freight environment we had experienced so far in 2019. The freight market has been soft, allowing shippers the opportunity and motivation to move a larger portion of their freight in the spot market at reduced prices. This continues to weigh on our operational metrics.If you'll please turn with me to Slide number 3 for a review of our financial results, consolidated operating revenues came in at $130.9 million for the quarter, which represents a 1.3% decrease year-over-year. Consolidated adjusted operating ratio for the quarter was 99.7%, which represents degradation of approximately 470 basis points year-over-year, and was due primarily to the weaker freight environment and its effect in both of our operating segments.Turning to Slide number 4, trucking revenue before intersegment eliminations increased $6.8 million or 7.8% to $93.6 million for the third quarter of 2019. The majority of this increase was associated with the acquisition of Davis Transfer completed in October of 2018. This represents a $2.50 decrease year-over-year, I'm sorry, our trucking segment generated $0.1 million of adjusted operating income in the third quarter of 2019, which represents $2.5 million decrease year-over-year. Our trucking adjusted operating ratio for the quarter was 99.9%, which was a decline of 340 basis points year-over-year.Base revenue per available tractor per week decreased $273 or 8% year-over-year in the third quarter. Base revenue per loaded mile decreased $0.14 or 6.3% year-over-year for the third quarter. This was primarily due to increased participation in the spot market as mentioned earlier. Our spot market participation in the third quarter of 2019 was approximately 15%, up from approximately 4% for the comparable period in 2018. Loaded miles per available tractor per week decreased 28 miles or 1.8% year-over-year, while deadhead percentage for the third quarter of 2019 improved 30 basis points year-over-year.Our average available unseated tractor count was flat year-over-year at 6.5%. The average available tractor count for the third quarter of 2019 was 1,991, which is a 21.3% increase when compared to the third quarter of 2018, which had an average of 1,641, again, due in large part to the acquisition of Davis Transfer.A real bright spot in our trucking segment is the combined performance of our dedicated lines of business, including our quasi-dedicated Davis business, which together comprise of approximately 30% of our total fleet. This part of the trucking business traditionally performs at a higher level than our core truckload operations, generally in the high 80s to low 90s from an adjusted operating ratio perspective depending on the quarter and provides a platform and focus for future expansion.Turning to Slide number 5, we will review the results of our USAT Logistics segment. Revenue before intersegment eliminations was $39.4 million for the third quarter of 2019, a decrease of $9.7 million or 19.8% year-over-year. This was driven by lower revenue per load as a result of deterioration in the spot market when compared to the third quarter of 2018.Revenue per load decreased 25.7% or $442 per load year-over-year. Adjusted operating income was $0.2 million, a decrease of $3 million year-over-year. Adjusted operating ratio was 99.3% in the third quarter of 2019 compared to 92.9% for the comparable 2018 period. Gross margin dollars decreased 42.2% or $3.5 million year-over-year to $4.8 million for the third quarter of 2019. Gross margin percentage for the third quarter of 2019 decreased to 12.2% from 17% when compared to the same quarter in 2018. Load count increased 8% or approximately 2,300 loads year-over-year.If you'll turn with me to Slide number 6, we will highlight some key balance sheet and liquidity measures. As of September 30, 2019, total debt and lease liabilities were $188.9 million. Total debt net of cash was $188.7 million and total stockholder's equity was $82.5 million. Net debt to adjusted EBITDAR for the trailing 12 months ended September 30, 2019 was 3.1 times. The company had approximately $54.7 million available to borrow under its credit facility as of quarter-end. It is worth noting that even in the difficult operating environment over the past two quarters we were able to reduce our overall debt this past quarter while continuing to invest in refreshing our truck and trailer assets as well as standing up new terminal facilities.Now I'll turn the call over to James for discussion on the business and go forward strategies.

[James Reed:]

Thanks, Jason. As we stated in our release, the third quarter marked a continuation of the challenging freight environment that we've experienced so far this year. As we look at our internal leading indicators of seasonality, EDI turndowns, and seasonal surge thus far in the fourth quarter, we see a bit of a mixed bag. We began to see an increasing number of EDI turndowns indicating some strength returning to our demand side, but our surge revenue is down considerably year-over-year indicating minimal needs, urgent capacity compared to our own experience over the last two years amongst our customers.We see more transactional customers taking advantage of low spot and ultra low margin platforms to drive their own shipping spend down. But the health of the bid season with more strategic partners remains quite strong. We have bit over 1.8 million loads thus far in the bid process and we're still pricing some of our largest bids even as we speak. We are optimistic that this will allow us to continue to build out a strong network and improve pricing dynamics through our own network design, even in the face of a tough environment.And before I move on, pricing and lanes that we already have with existing customers is trending mostly flat. It’s even a bit down going into 2020 and that would be my best view of the market at large. That said, we actually expect our consolidated trucking rate per loaded mile to be up a little bit in 2020 by low single digits through continued development of our network strategy, and I'll talk a little bit about that later.We're in the midst of an environment that is quite challenging, especially when compared to last year. As we noted last quarter, we compounded the environmental difficulty when we failed to bid to win on enough freight in the 2019 bid process late in 2018. We don't plan to let that happen again. Despite the headwinds and that misstep, we continue to take steps forward in our self-help story.You'll turn ahead with us to Slide 8. I want to be abundantly clear about our perspective. We are in no way pleased with our performance in absolute terms. And 99.7% OR, excuse me, 99.7% consolidated adjusted OR will never be okay with us. However, despite our disappointment with that result, it is instructive to compare our relative performance versus our public peers. When we make that comparison, as you can see in this graph on Page 8, it is clear that the team has begun to fundamentally and structurally improve our operations. Since taking over in early 2017, our team has improved trucking's adjusted operating ratio, 560 basis points when compared to the average adjusted operating ratio of our public peers. The 2016 USA Truck trucking segment adjusted OR was 1,370 basis points higher than the peer group. And now not quite a full three years later, it is 810 basis points above the peer group average and that comparison includes some consistently high-performing outliers in the analysis.Since this management team arrived, our primary mission has been to close the gap with our competitors. And with this quarter's result, that's over 40% of the gap closed and it's still early. We have a long way to go and a lot of opportunities ahead. This improvement has occurred through the ups and downs of the current cycle. The outcome is only the third time in the last 31 quarters, the USA Truck’s trucking adjusted OR was not the highest in the peer group. This demonstrates that our long-term plan we laid out at our Investor Day in May is not only progressing, it is happening despite the broader environment. We will continue our methodical approach to make the changes necessary for the company to perform at a consistently high and competitive level.Now I'd like to talk about some of the initiatives that we have underway that we addressed in our release. We've instituted gap closing measures in the second and third quarters in response to the challenges arising from the freight environment. These measures are aimed at stabilizing our operational and financial performance for the remainder of 2019 and to set the stage for further improvements in 2020.Some of these measures include eliminating 5% to 10% of our fixed costs across all departments. We have this year thus far implemented approximately $5.6 million in annualized cost savings in 2019, with additional areas under review cost. A stewardship is a primary part of our job. The second one is to increase the actualization a bid awards. We've implemented bid award tracking to more closely monitor customer commitments at the lane level. This has enabled us to identify customer-specific opportunities and impact our freight realization.Third, we've expanded our terminal footprint to enhance alignment with our improving network. The goal of this terminal expansion is to drive further reductions in outside repair costs throughout our network. In addition to offering more accessible amenities to our drivers, we recently entered into a lease agreement to open a terminal in Carlisle, Pennsylvania that will provide tractor and trailer repairs, as well as provide driver amenities. We've also opened maintenance facilities in South Holland, Illinois, and Atlanta, Georgia, and are making improvements to driver amenities in several other terminals across the network.And finally, we’ve sales force in the USAT Logistics to increase volume. We added 11 personnel to the logistics sales force to broaden our sales pipeline and extend our customer reach at a time when freight volumes are critical. This team continues to press forward in this environment to make sure we create our own positive outcomes rather than sitting idly by and letting the tough market determine our fate. We believe that taking these actions constitute investments in the right places to allow us to further close the gap with our peers in 2020 and beyond.Let's move back to Slide 7. You'll recognize the 2019 company objectives as we've talked about them in each of our prior calls this year. As we reached the final quarter of the year, I intend to focus a little less on these objectives and instead give you some more insight about our emerging view of 2020 as well. These objectives include improving our safety. We are so proud of our professional drivers and their continuing near best-in-class safety performance in the truckload space and improvement investment this year has been in our transition to a fully ELD capable system, which is more than 90% capable or excuse me, complete and well ahead of schedule for completion before the FMCSA deadline.We have focused on becoming a service organization. Service to our customers remains our highest priority. This quarter, we rolled out our focus to our organization which will guide us in the future, service to our drivers, service to our customers and service to each other, watch for more on this than coming month. We've invested in our technological capability. This year we completed a TMS implementation, and the telematics implementation as I said, is nearly complete. And add to that, the notable accomplishment of integrating AI enabled load and capacity matching and predictive analytics in real time track and trace in our logistics business and we've made some real progress.Competing commercially, the most important element to our competitive position is in our expanding customer base and our approach to bid activities. We have added over a 100 new customers this year in an effort to diversify, deepen, and broaden our customer base. We also have become much more efficient in pricing, creating a specialized logistics pricing function and being much more assertive in winning freight. We have come to view the pricing exercise a bit like a prisoner's dilemma and to minimize impact to our organization have gotten very committed to winning freight, not via a price war but winning the right freight in the right locations with the right characteristics. That should almost always be one and now we're winning it.And finally, investing in our people. We just can't say enough about this. Our people are our highest priority. We've invested mightily in teaching our people to lead our developing comprehensive onboarding and training experiences, and we'll continue to find ways to make USA Truck a great place to work.I really want to spend some time on the outlook. As we said earlier, closing the performance gap with the competition has been a high priority for us and this quarter we made even more progress toward that goal. We think accomplishing that kind of doing what we said we would do, lends credibility to our thesis, that the USA Truck self-help story is working to improve results and that our opportunity to improve the self-help remains in place more now than ever. And we see the opportunity to close the entire gap well within our reach. We believe this is truly a unique story in transportation. We still have massive room to improve asset utilization, ample opportunity to reduce maintenance and operating costs and then drive to improve our service that should materially improve our profitability and customer experience.What does that all mean for 2020? Well, it's still going to be a tough and absolute terms. Seasonality is neutral the soft, demand is not showing signs of breaking out, but it also seems to not be dropping off significantly either, rate pressure on incumbent lanes looks to be flat even a little bit down. As I said earlier, and insurance costs have risen considerably as of our October 1 insurance renewal. It's a brutally tough insurance market right now. On the other side or positive side of the equation, IMO 2020 should have fuel implications which ultimately will play in our favor. The ELD implementation should have some minor influence on reduced availability of capacity, which helps us, and the FMCSA drug and alcohol clearing house in January, 2020 should have similar effects.Unfortunately, we don't have a crystal ball, but based on where we sit right now, taking into consideration the various puts and takes, I just outlined, we currently anticipate the fourth quarter of 2019 to be relatively similar to the second and third quarters from an earnings perspective with the first half of 2020 looking relatively similar to the second half of 2019. However, just as we outlined the offensive play calling we deployed this year, we will fight for our company in 2020 as well. We have several elements of our strategic plan shared at the May, 2019 Investor Day that move into play in earnest in the next 12 months.The first one is network improvements. The last two years have been the stage setting for a revamp network design. In that time, we've mostly managed the freight we already had into more profitable configurations, and in doing so we've eliminated over 750 lanes from our network. We have reduced our lanes with one load and one move by 42% and we've improved lane density which is a measure of freight per lane per week, a staggering 51% that we've improved that. 2020 is the year we embark on our power lane and market hub driven five-year network strategy. In full force, this model unlocks yield, productivity and velocity in ways we have never seen at USA Truck.And we've already made significant progress in the network design for next year in the bids we've completed year to date. We're 60% of the way complete and setting this up. The fourth quarter is a critical bid season to put the final pieces in place. It's also worth noting, that the pricing in bid tech we have pursued should allow us to return to our intended strategy of minimizing spot freight. We have been pressed into being too dependent on broker in spot freight on our assets in 2019 and expect that to return to more normal trends in 2020 with this strategy.The second important measure to outline for 2020 is our logistics and trucking pricing to win. As discussed, each of the last two quarters, we have significantly increased our intensity enterprise engagement and focus on pricing in both our logistics and trucking businesses. We anticipate that these changes will result in more flexibility and opportunity in both businesses in 2020 and beyond. This is still a huge market with plenty of profitable freight to be had. We learned from the mistakes of the 2018 bid season and are on a more mature, more seasoned and more capable team as a result.Next is our regional maintenance facilities. Jason alluded to this, and I did too earlier. We have done exactly what we said we would do, and we opened at least three new facilities in the last 12-months in new Holland, Atlanta and now Carlisle, Pennsylvania, which we just signed the lease on. The cost benefits of these strategic locations have yet to be realized, especially in the latter two locations. The cost in cultural benefits that arise from servicing our equipment in house, seeing our drivers face-to-face on a more regular basis and coordinating with regional customers from a regional presence are hard to quantify here, but this emulates the model run by our most capable and successful competitors and is the one we will pursue as well.Next is expanding our customer breadth. We’ve built out and expanded truckload sales force and our logistics center, internal sales team, both of which we believe to be among the best in the business. We've already added over a 100 additional customers in 2019 and we'll continue to add customers to the fold. This base provides the pool to expand our logistics business and deepen the opportunities in truckload.The fifth is regionalization. We talked about this last quarter. We will begin staffing our regional facilities with regional operations staff to bolster the existing centralized structure. Overtime, we expect to get closer to our customers and drivers through regionalization. Again, it is the model followed by the best of the best in our business. This effort has begun in earnest with the recruitment of our regional staff, and we expect to have at least one of our regional operators in place and functioning by January 1. And have several other regional operations up and running no later than mid-year.And finally, growing our dedicated service offering. We run an excellent dedicated operation within our trucking segment that operates very profitably and more importantly offers best-in-class service experience to our customers. As Jason mentioned, it makes up about 30% of our business and operates at an OR consistent with what other dedicated operators achieve. It is a very profitable aspect of our trucking segment that we intend to grow. The pipeline for this business is as strong as it has ever been after two years of focused efforts to grow it, and we expect 2020 to be an important year in adding more trucks to true dedicated operations that run well and run very profitably.We said in our Investor Day, that 2019 would be the year that we converge on industry level results. We're getting much closer overall to that goal with this latest result and we're not done. We believe the actions outlined above ultimately lead us to higher base revenue per tractor, improved trucking or higher utilization, lower outer route and consistent cost control. So much of this will have to be considered relative to the market though, because it's just not clear what will happen in the market in terms of capacity and therefore price pressure.One thing we are clear about is that we expect to improve our relative performance no matter what the market does, just as we have done thus far since our team arrived in 2017. No one in our company is pleased with the result in this quarter, we are more capable than this financial result indicates and strive every day to improve on that outcome. We have however closed a considerable amount of our gap with competitors, thus indicating that we have become more competitive even in a tough environment and we are proud of that. We feel the actions we have deployed coupled with the 2020 path forward that I've outlined here today should combine to close even more of the performance gap as we move forward. And more importantly, these same actions we believe are the right steps that can lead us to the sustained profitability that we expect and that our stakeholders deserve.So with that, Alyssa, I'll turn it back over to you for questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Jason Seidl with Cowen. Please go ahead.

[Jason Seidl:]

Thank you, operator James, Jason, good morning, gentlemen.

[James Reed:]

Hey, Jason.

[Jason Seidl:]

I want to talk a little bit James about the power lane 2020 initiatives and network design that you talked about. Can you tell us on this bid season, is this just trying to win those particular lanes that you want to beef up in 2020? Can you tell us how this is going to impact your model from a financial side going forward?

[James Reed:]

Yes. So I'll talk kind of tactically and strategically about how we're addressing it. And then I'll invite Jason to kind of weigh in on the financials. I mean, we're going to be a little hesitant to give you predictive numbers about the impact, but I can give you some directional.

[Jason Seidl:]

That’s all right.

[James Reed:]

So this isn't necessarily anything new. What we've done and I tried to make the point in my prepared comments, what we basically done the last couple of years, and we've talked about this a lot publicly as we've taken, I use the metaphor of a pickup sticks game. We had pickup sticks that were lying all over the table and we just organize the existing freight into better, more profitable configurations. And in so doing, like I said, we got rid of over 750 lanes. So we're doing that on fewer, more efficient, more profitable lanes, and that's contributed to our success.Now we're – it's subtle, but critically important, we're pivoting away from just reorganizing the freight that we've already got to being really thoughtful and strategic about the freight we want to go play offense and get. And so with that said, I threw out a data point that I think is pretty interesting in my comments. As we go through the bid process of all the bids that come across from all our various customers, we're able to stitch together a network of what I'll call desirable market hubs. And for competitive reasons, I don't want to tell you the exact number of hubs and the exact number of lanes, but we've got, call it, more than a handful of hubs that constitute the desired origin and destination, the OD pairs for the network. A lot of those we already have in house.We're using the bid strategy – the bid process this year, we've been doing it for the last six months, to go drive volume into those hubs so that we can proactively match profitable loops. And we look at it on the OR in and out and what we call on the turn, so what the next possible load is for that lane. And that helps us identify these power lanes. We've already got three power lanes, where we run a considerable percentage of our business. So it proved out the model in 2019. So it's not a win, we've been experimenting on it. And then we're going to expand that considerably in 2020 through the bid process.And so that said, I've said this time and time and time again, it's an $800 billion market. And even if we assume that it's down a little bit, it's still a massive market. There's plenty of freight. This is all about picking the right freight, with the right characteristics, with the right directionality that kind of combine and collude to give us the best opportunity for profitability. And what I will tell you is we have done the math on the theoretic OR potential of this configuration, and the power lanes themselves have a potential executed with our operating parameters that we assume to be kind of a mid 80s OR business just on those power lanes.Now I don't want anyone to get confused and say USA Truck’s guiding the mid 80s OR, that's not what we're doing because to get trucks out of their domiciles into the power lanes takes some inefficient moves, it takes some empty miles. You've got to chase some freight. But we see this as a really big opportunity for us to leverage going forward what we've been experimenting on over the last year. So that's what I'd say to that. Jason, is there anything you want to add to that?

[Jason Bates:]

The only thing I would add is, what we're talking about is almost like a quasi-dedicated type setup. And if you think about Davis, we've talked about Davis a lot. They operate in the high 80s, low 90s before we bought them and they've been relatively consistent. Even in the downturn, they slid a little bit, but not much. And what we're talking about setting up is something very similar to that.Where we got burned and we've been very open about this and this was our strategic misstep, was that we didn't anticipate through the bid season last year that the market would turn as quick as it did. And so we not only went after the lanes that we wanted to fulfill this strategy, but we did so while trying to command pretty good rates and that's where we stumbled. If we hadn't been as aggressive on the rates, we might've been able to fill out this network strategy this year. That was the plan all along. And then when we started getting into the year and seeing a lot of the realization contract freight not being there, that's when we realized that we'd made a mistake.And so we're now ensuring that we don't make that mistake again as we now go through these more recent bid cycles. As James alluded to, a lot of our freight is underway right now. But that's the goal is to we kind of took a step back, but the strategy hasn't changed.

[Jason Seidl:]

No, I completely get it, being exposed too much to the spot market that you guys get caught. Ultimately, if we look out somewhere between three and five years, what percentage of your business in the trucking business is going to come from the power lanes? I'm assuming you expand beyond three.

[James Reed:]

Yes. So I'll just tell you, our goal for the end of next year is to have 60% to 80% of our business in the power lanes.

[Jason Seidl:]

60% to 80%, okay, perfect. Let me switch focus for a minute and talk about your logistics business. One of the things we're seeing on those, especially on the brokerage side, is just a massive spending war on technology. Just wondering what you guys see out there. What are your plans on the technology spend? And do you think smaller brokerage players such as yourself are going to be able to keep up with this to compete with some of the larger players somewhere over the next 5 to 10 years?

[James Reed:]

Yes. So it's a great question. And it's got kind of a bit to unpack there because there are multiple competitive elements to it. So the first one is, these big brokers are these well-funded kind of what I'll call ultra low cost platforms, they are making massive investments and it would be easy to resent that. It might even be easy to blame customers, which you should never do because it's a highly commoditized business. It is making an impact in the way people think about it. And so rather than being victims about it, our goal is to transform ourselves a bit in the process and get better and smarter and more effective in how we do that.So I kind of re-characterize us as small brokers. I mean, we've got $150 million to $200 million brokers. There's lots of guys that are a lot smaller than us. So we think we've got enough scale and size to be relevant. But maybe to your point, not enough scale and size to be bleeding edge investors that can afford to put literally tens of millions or even hundreds of millions in some cases into new platforms. And so the smart strategy to us is to leverage co-travelers or other technology companies that have a technology that we can use that help us kind of compete with the big boys.And so some of the things I said in my prepared comments was that we've deployed, we've got an AI partner on the logistic side that helps us automatically match capacity solutions with available demand. So there's no humans in the middle. It's frictionless. And I call it, I'll give you the PG version of this stuff through a goose model, where the freight comes in automatically, it gets tendered automatically, it gets capacity matched automatically and never does a human intervene. And we're doing that through a strategic partnership, which we haven't named publicly yet, but we may do that soon.And then the other side of it is we use predictive analytics in that space to significantly improve our throughput. And again, we're using an outside third-party who has made significant investments in technology. And so that's kind of the long winded answer. I think the short answer is we're not big enough to put lots of dollars to the middle of the table. And so we're going to leverage our outside partners to help us do that. And we think we're doing it pretty well. The margin environment's tough. There's people that are selling freight at a loss. We know that. They say that. Customers know it too. How long it lasts, we don't know. But what we'll do now is invest in the capabilities so that when the market turns, and it will, it always does, we'll be in a good spot to leverage it.

[Jason Seidl:]

I think we all know that selling freight at a loss is not a long-term strategy. Just really quickly and this is somewhat related to this, but how should we think about CapEx in 2020 and then size of the truck fleet in 2020?

[Jason Bates:]

Yes. So our – we have – one of the things we inherited when we got here was a need to invest in the fleet. And I talked about that in our prepared remarks that even though the market's been soft we've continued to invest because we believe that it's important for us to stay on top of that from a maintenance expense perspective and from a driver satisfaction perspective. Having said that, we are – you're talking to a CFO and a former CFO, and James, I mean, we're finance guys and so we run the numbers, we do the ROI. And the residual values of these trucks play a big factor in that ROI. And so we're going to pay close attention to that this year and in the market in which way it's going. And make sure that we're not excessively investing.Another thing we're doing is we're looking really closely. We think there could be some opportunity to add some independent contractors this year and we think it could be a good year for us to be able to make it attractive for them to come run for us. Whereas, we might be able to offer them something that other people wouldn't be able to offer because it would be accretive to us but dilutive to them. And so we think there's an opportunity for us to maybe swap out, still maintain our fleet relatively consistent, but swap it out by bringing on owner operators and letting go of company trucks. Therefore avoiding unnecessary capital deployment in an environment where that ROI might not pencil.Having said all that, our current plan is to replace. We've got roughly 300 to 350 trucks that are coming off next year and our plan is to replace them. We don't expect to shrink our fleet, but we do want to try to grow our owner operators by roughly 100 or 150 if we could. And so that'll help on that capital deployment, if we're only having to go out and buy a couple hundred trucks as opposed to 350.

[Jason Seidl:]

And so on packing that Jason directionally for CapEx, are we going to expect something a little bit flat, maybe slightly up next year?

[Jason Bates:]

Honestly, I think it might be flat to down next year in terms of our capital, CapEx.

[Jason Seidl:]

Much appreciate the time as always, gentlemen.

[James Reed:]

Thanks.

[Jason Bates:]

Our pleasure.

[Operator:]

The next question comes from David Ross of Stifel.

[David Ross:]

Good morning.

[James Reed:]

Hey, Dave.

[Jason Bates:]

Good morning, Dave.

[David Ross:]

So you talked about being 90% of the way through the AOBRD-ELD conversion. What have you seen there? What have you learnt? Is there any cost productivity issues?

[James Reed:]

Yes, it's really interesting. So I'll give you a little look behind the curtain. I actually had our finance team, when we first saw these results, I think sometimes the CEO first reaction is to be a little bit in denial. And of course we're managing it every day and trying to get better and better results every day. And so one of the questions I asked our finance team was I'd like to look at productivity and profitability by truck, by AOBRD versus ELD to see if, because we have the benefit if you call it that during the quarter of having both devices simultaneously deployed in the fleet as we're transitioning and there's virtually no impact. The profitability and productivity of the trucks was nearly identical between both ELD and AOBRD. So that's a good thing.Now that said, we looked at this conversion as an opportunity not only to be compliant, but to be better. And so we went out and did a full RFP over a year ago, looked at a lot of technology solutions and rather than deploy kind of one of the, what I'll say, one of the two traditional in-truck solutions, we did a combined solution that has a software company that we have a lot of confidence and experience with, designing the interface with our drivers and then an outside partner with a more of a puck-type solution. It allowed us a lot of flexibility.So we now have a tablet in the truck. It allows drivers to do everything they need to do from that tablet. It has the same software deployed on it that they have on their driver app that they have on their personal cell phones. And so we actually expect two really important benefits from that. One is a small cost efficiency that probably won't really show up too much in the financials, but it's real and that is the ability to save some money by using our app to 100% scan our documentation, whereas they've been using a third-party provider.And then the second one is real-time mapping software. One of the really cool benefits of this program is it has optimized mapping software that takes into consideration weather, time of day and traffic patterns as much as many of our kind of crowdsourced apps that some of us use on our phone to help our drivers be even more efficient. So it's not just a compliance move. We actually think it's a competitive advantage and we're super excited about it.

[David Ross:]

And where cost of the conversion material, I mean, is that something that's going to be a tailwind next year not having that?

[Jason Bates:]

Well, I have to say in reading some recent releases I was giving my controller a hard time like, hey, should we be calling this out and adjusting it out of our earnings? So I know where you're going there, but yes, I would tell you that there's absolutely been cost to it. But I don't know that it's anywhere near the magnitude of what – it sounds like some others may have incurred. And we didn't have any impairments on the previous assets because they had been fully depreciated and utilized.So other than, a little bit of downtime as we're swapping out the machines, which is real, right? I mean, you've got downtime, you've got driver dissatisfactions as you're swapping out the technology. But other than that, we haven't actually quantified it and broken it out, but if more and more people start doing that, we'll be happy to do that.

[David Ross:]

And the TMS implementation, sounds like that's behind you there, James. Is that hurt near-term and is going to help long-term? Or is it going to benefit from day one?

[James Reed:]

Yes, Dave, I appreciate the question. It's an insightful question. Look, it hurt this year. It was harder than we expected. We made some missteps. The software provider was clear about the capability of the system, but I think we were a little bit naively hopeful about what it could do. I will say this, it won't hurt us in the future. I don't think we're significantly in a better or worse position. I just think it's kind of neutral. That said, we have totally changed the way we operate from a day to day standpoint.

[Jason Bates:]

And we'll continue to tweak.

[James Reed:]

Yes. And my point in saying that is, and I think the reason Jason is kind of weighing in there is the IT department is reporting to him. And rather we had been focusing a lot on long-term IT horizon issues and instead of pivoted to day-to-day IT issues. And so we've literally got four or five IT people downstairs everyday troubleshooting, improving the experience. We're really focused on improving our driver and our driver manager experience through this. So the net-net of all that is, I'd say it's neutral, it's not a headwind or a tailwind. We had hoped that it would be super helpful. That's clearly not the case.

[David Ross:]

Excellent. Thank you.

[Jason Bates:]

Thank you, Dave.

[Operator:]

The next question comes from Jack Atkins with Stephens.

[Jack Atkins:]

Hey guys. Good morning. Thank you for taking my questions.

[Jason Bates:]

Good morning, Jack.

[Jack Atkins:]

So, James, I guess to go back to your prepared comments around your relative performance, and I definitely appreciate the improved relative performance this cycle versus last cycle. But when I look at things on an absolute basis, in 3Q 2016 you guys had 100% OR, in 3Q 2019 you have 99.7% OR. So I guess, why haven't we seen more of an improvement on an absolute basis? Let's put aside the relative performance for a moment, just given all the actions you've taken over the last couple of years.

[James Reed:]

Yes, I think it’s a fair question, Jack. I mean, some of it is environmental, right? And we've made a lot of changes that are hard to refute or dispute. We have reduced the age of our fleet. We have added over the road repair facilities. We've reduced the costs to repair our assets. I mean, like we talked about it in last quarter’s release, we made significant improvement in our cost per mile on maintenance costs. We've upgraded our people. We've upgraded our equipment. We've upgraded our software. There are a lot of transformational things that had to happen around here, structural that we think are materially different.Now, just looking at results, I mean, the big thing this year that flipped, and Jason, actually was a lot clearer than I was on the call about it, is all of us have been at this for a long time, some longer than others. This cycle admittedly flipped faster than any of us have seen. I mean, you remember one economist said that 2018 was an A plus and 2019 would be an A. Well, this sure doesn't feel like an A to me. And it flipped a lot faster than anyone had expected. And in so doing, we got more exposed to the spot market because we just didn't have enough freight in the top of our funnel. We're never going to make that mistake again.And as a result, we did some math on this, I'm not going to say the number, I mean, if we had just maintained our mix of contract freight versus brokered freight. So if we had been 10% better, like we were last year at the current rates we have this year, it would have resulted in $3.9 million higher profitable number in the quarter. And so that's the old – ifs and buts were candy and nuts would be Christmas all year long, right? But if we had done a better job in our bid process, we would've been nearly $4 million more profitable this quarter than we were at that time in 2016. And so we think that's meaningful. We think we know what the issue is and it's – I don't want to say it's easy to fix, but it's easy to fix.

[Jack Atkins:]

Okay, got you. That all makes a lot of sense. And so I guess kind of thinking forward to 2020 then, and James to your comment around 60% to 80% of the business in 2020 is going to be in those power lanes. How does that feather in as you think about next year? I'm sure it's not going to be that way in the first quarter. So is that an average for the year? And then what portion of your business today would you say are in those power lanes?

[James Reed:]

Yes. Good question. So today it's less than 30% in those power lanes. But approaching that number, the 60% to 80% is a goal by the end of the year. I loved your phrasing. It's the same I would use it. We'll feather in relatively proportionally through the year. 40 plus percent of our bid activity goes into effect in the first quarter of next year. And so it's a little bit weighted towards the front. But yes, we expect the results of that to be meaningful and to be by the end of the year.Now, Jason, sitting next to me and I invite him to opine on this a little bit. The cost headwinds, guys, they're real. If you're not thinking about, or if we're not confronting the brutal facts about the insurance environment, for example, then we're living a pipe dream. I mean, there's some real costs headwinds that may absent a price recovery may end up in it looking a lot, at least in the first half, a lot like the second half of 2019.

[Jason Bates:]

Yes, agreed. And so, and it's not just insurance. I mean, insurance is brutal. And we need to make sure that everyone's aware of that that started this month, October 1 was when our renewal went into effect. And literally, I just, because I know we're going to get the question and so I just want to put it out there. We literally will experience between $750,000 and $1 million of incremental premiums per quarter starting this quarter. So right off the bat we've got that cost headwind and that is going to be something that the entire industry feels and so I want to make sure that that's clear. So that's something we're going to be battling.And then there's also the driver environment is still tough. I mean, we've got all time lows in unemployment and it's tough to get drivers out there. And it'll be interesting to see some of the different things that James talked about with the drug clearinghouse and some of the other things, ELDs, whether or not that compounds that situation. And so that's something that we're keeping our eyes on. And we just want to be realists about how we plan that out and project that. And so we don't want to be overly optimistic about how these network redesigns and some of the things that James alluded to, how they'll translate to the bottom line because there are cost pressures as well.

[James Reed:]

Yes. And I'll just add a little bit to that though. As you know, we're kind of setting the table for that for next year, but it's also net-net good for us, right? It's a little bit of a calculus that will have an impact on capacity that should flow through to price at some point.

[Jason Bates:]

At some point, yes.

[James Reed:]

We just don't know exactly when that is. And if we did, we'd all be billionaires, right? We'd be doing something else.

[Jason Bates:]

Yes. So in the interim, candidly, I mean, the math that James shared with you we were running the numbers, I mean, just replacing and going back from 15% spot exposure or our brokerage exposure on our truckload freight and taking that down to our – last year we were at 4%. Historically, we're in that 4% to 5% range. We're looking at close to $0.70 to $.80 cent per mile differential on that freight. I mean, it's a gigantic differential. And so just being more aggressive on winning contract freight in the right places is going to really flow through from a financial perspective and help offset some of these costs headwinds.

[Jack Atkins:]

Okay. Okay. Now that all is super helpful because I think as you sort of play this out through the fourth quarter, Jason to your comment about insurance premiums being higher sequentially, I'm trying to interpret James’ comments from his prepared remarks around what the fourth quarter should look like. And it sounds like it's probably going to look pretty similar to the third, if I'm hearing that correctly, given maybe a little bit better seasonality offset by these higher costs on the insurance side. But as we get into next year, and you start seeing your spot exposure go down, that's how we should perhaps see better than normal seasonality sequentially as we kind of go into the first half of next year. Am I interpreting all that correctly?

[Jason Bates:]

Yes. You're getting a lot of head nods in the room right here. So you're right on point. I would hesitate to say that we expect fourth quarter to look just like third quarter. I think James’ comments where somewhere between second and third. So again, a lot of people like overreact to a $0.13 loss. Keep in mind, the dollar amounts that we're talking about. And we only got 8.3 million, 8.4 million shares outstanding. So you're talking about $1 million here, right?So it literally swings pretty wildly. Just because of our small amount of shares outstanding. But when you look at the dollars – what we did in Q3 and Q4, it's somewhere in that range. But again, as James said, our crystal ball is as cloudy as anyone else is. We don't have the same level of confidence and certainty that I think some of our peers have expressed on their calls about declaring the bottom and things like that. We just want to be – we want to be realists and be – we'd rather be conservative than over committal right now

[Jack Atkins:]

Understood. If I can ask one more question, and I'll hand it over. James, just sort of looking at the other side of the coin playing devil's advocate, and then thinking about sort of what could go wrong with this shift to, more your business into these power lanes. I mean, is there some potential execution risk around this going into next year? Or do you feel like the learnings from this year really puts you on a good footing as you sort of look to execute on this strategy? I just want to make sure, given the market's going to still be fairly choppy in the first half of next year or that every – I just wanted to make sure we're thinking through both sides of the coin, if you will.

[James Reed:]

Yes. No, it's a fair consideration. I would characterize executional risk is kind of internal executional risk and external executional risk. On the external side, this will look to our customers, to our drivers, to the people that are operating the business every day. No different than it looks today. The biggest risk and this is the internal risk of not bidding properly. These guys, there's a ton afraid out there. It's about bidding properly and bidding strategically and winning the bids and the right place at the right time with the right freight configurations and right directionality. And so the biggest risk exposed itself last year and we think we learned from that.And so I would characterize this risk is pretty low. We've got – I wish we could invite everyone on the call into our pricing strategy meeting. We are more coordinated, more aligned, have more operational input and more clarity about how we move forward than we've ever had. And so while there's always risk, I would characterize in your question that the primary risk is an internal bid strategy risk and we think we've successfully mitigated that by the learnings of last year.

[Jack Atkins:]

Okay, great. James, Jason, Chad, thanks very much for the time. Really appreciate it.

[Jason Bates:]

Thanks, Jack.

[James Reed:]

Thanks, Jack.

[Operator:]

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

[Jeff Kauffman:]

Hey guys. Good morning.

[Jason Bates:]

Good morning, Jeff.

[James Reed:]

Good morning, Jeff.

[Jeff Kauffman:]

I want to pursue down the ifs and buts, path that James laid out a little bit earlier. There are the things you can control and the things you can't control. What you can control is how many trucks are in your fleet, and what your staffing and headcount and expenditures are. What you can't control is how many of these bids you're going to win and at what price. And it sounds like the strategy here is, we're running freight for free, because we had too many trucks and the market shifted, so more of those trucks are carrying spot. And our strategy is going to be to go out there, lower price and bid the right lanes, so we have more of this business locked in, and we're not subject this spot. Can't we accomplish that just as easy by having say 5% fewer trucks? What, if you go out and you make the bids at lower rates and you don't get the lanes you want, what do we do then?

[James Reed:]

Yes. So there's kind of a sequencing of events here, and I appreciate the question, Jeff. So the first one is, and I'll kind of wax a little philosophical on you. I say this in our building all the time. You learn this like maybe the second day of operations class in business school. That if you have a factory with excess capacity, you should be willing to run it at variable cost and let's run it and variable cost five because it's fun to make a little bit of money, right? But you're right, at some point that becomes running freight for free. But if you look at what we did in terms of paying down debt and creating cash in the quarter, we're not running freight for free. We're still making variable margins and that's the right thing to do in this space.As Jason said, very articulately earlier, we will continue to do the ROI on those investments and when they stop making sense, we will reduce the fleet if need be. We hope it doesn't get there. But that's a consideration that we look at every single day. Now with respect to what we can control and can't control. We have employees on these calls too. And so I always, I pick my words carefully so as not to overly inspire or overly deflate them, but they know, I mean we're really blunt and upfront about this. We look at our cost structure every day, which includes people and we continue to consider not only do we have the right size fleet, but we – do we have the right number of resources in the building and around the company. And so that's hard. But that's the burden of leadership. And we are looking at that and we always look at that.And then finally, in terms of bid and at what price, I'm still glad that you said that, because I think sometimes people, and you didn't, I think imply this by your question, but I'll take the opportunity. I think sometimes people think that by pursuing freight more aggressively in a bid process that you were implying that we're starting a price war. We are not chasing the lowest price rate. Let me say that again. We are not chasing the lowest price rate. It's not what our plan is. Our plan is to identify the network which we have done, identify the right freight characteristics, which we have done and bid to win freight in those – in that network. And I often say to customers, we are a network first company and as we do that we don't set the price, the market sets the price.And so that's all an extremely long winded way of saying, I like how you characterize it. We do have internal stuff that we can control and Jason said it and I'll reinforce it. We consider our costs and the ROI on our investments every day. And we do have outside things that we don't have as much control on. The market sets the price, and we think the strategy as we've outlined addresses that as perfectly as we know how to do it. Do you add anything Jason?

[Jason Bates:]

No. That's well said.

[Jeff Kauffman:]

No. Thank you for that answer. Switching gears briefly, Jason, I think you said you were probably going to pull back capital to about 350-ish on the truck side because that's replacement. Where are you on the desired fleet age on the truck? And can you talk a little bit about where you stand on the trailer fleet and the trailer CapEx plans?

[Jason Bates:]

Yes. So just to clarify, the 350 is the number of trucks between 300 and 350 that are coming off of this year. But like I said, we think we have an opportunity to do a little bit of a land grab with owner operators this year, because we can make it financially attractive for them to run for us, whereas – and still have to be a creative to us, whereas our peers may not be able to do the same. And that's just because of where we are. And so our expectation is that of the – let's call it 325 that are – that we're going to be getting rid of that we replace those with a 100 to 150 owner-operators. So therefore our capital deployment is not on 300 trucks, but on closer to 175 or 200 trucks.So that's the truck side. And on the truck average age, just real quick, we're below 2.5 years, so we're exactly where we want to be, where we said, that we were getting too all along. So now switching gears to the trailer side. I think we've been pretty clear, at least, I know you and I have talked in the past about – in the past the former management teams had done some large purchases of trailers that created some bubbles in the life cycle. So we're working through kind of managing that and balancing that out. But as it stands today, our average age of trailers is six years.So again that's right about where we would want it to be. So we do currently have in the plan to bring on some incremental – some additional trailers next year. But it's unclear right now exactly when that will be. We also – we have a new operator – operations team downstairs that's really digging into asset utilization. And we found some pockets where we weren't utilizing our trailers as efficiently as we should have been. And so they're going after that aggressively to make sure that we're not allowing customers to take advantage of us where we're not being able to build attention and things like that.So we may be able to not have to buy as many trailers as we previously thought, but as it stands right now, our expectation is to buy a few trailers next year as well. So when it's all said and done, we expect the net of all those things to be a reduction year-over-year in CapEx.

[James Reed:]

And I'll just say, being where we desire to be on average age within the fleet actually gives us some flexibility to be really open about what that means next year.

[Jason Bates:]

Yes.

[Jeff Kauffman:]

Okay. Jason, thank you for the clarity. James, thank you as well. Good luck.

[Jason Bates:]

Thanks, Jeff.

[Operator:]

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

[Barry Haimes:]

Thanks everyone. Had a couple of questions. First, thanks for the analysis on Slide 8. My question is, if you take the 810 basis points of remaining gap to the competition. And I don't expect quantification, but if you had a sort of bucket where you think the biggest deltas are and opportunities kind of for maybe, biggest to smallest. What are the two or three or four main areas that you can close? Can you even close the whole 810? Or are there scale advantages that some guys have? So maybe you can only close 600 of the 800. So a little flavor on that, it's my first question.

[James Reed:]

Yes. So that analysis is against our public peer group. And so while there are two kind of notable outliers in there, it includes everybody and we see no reason that we can't get there even in the explanation we gave earlier. There is really two major things that we can do. The first one is that we can improve the utilization on our tractors. I mean, if you look at it either by miles or revenue per tractor per week, that is our biggest opportunity in the business. And we closed a considerable amount of that gap simply by being competitive in terms of putting miles on trucks.The second thing, and we've discussed it a lot here, but it's improving our mix on our freight. We improve our mix on our freight. And our utilization, we were talking about this actually as a team last night. We actually more than close the gap with the competition. We ended up out actually outperforming the peers if we just get to average on utilization and we change our mix back.

[Jason Bates:]

Yes. Not all the peers, not the best-in-class peers here average

[James Reed:]

Just the average.

[Jason Bates:]

Yes. So, on that point when he talks about the network, what he's referring to there is, you're going to have a lot less out of route deadhead, idle time, things like that, turnover, driver turnover, because they're not getting the miles that they'd like, which leads to higher costs on your recruiting. So, as simple as it is to say utilization, it actually encompasses a variety of different line items within the P&L that help you get to that place of being more competitive.

[Barry Haimes:]

Got it. Thanks. That's very helpful. Second question was, in terms of the new terminals is there sort of an expected ROIC, that you get from those or payback periods. So any just feel on the financial advantage of those?

[Jason Bates:]

Yes, absolutely. Yes. I mean, again, you're talking to two finance guys, right? So we don't do anything if it doesn't pencil so on so. We have done detailed analysis on outside spend in the markets where it might be cost advantageous for us to, to do it on our own. As you know, over the road repairs or the labor rates are much higher than what you would pay if you did it yourself. And so we've done the analysis on how many we've done in those markets with our new network and what we projected the reduction to be. And there is absolutely an ROI on those. We typically don't disclose that, but I would tell you that the expectation is that like, for example, we just – lease the property up in Carlisle. We didn't buy anything or build anything. So it's a little bit of a different analysis. But we do expect that to pencil in terms of the ROI up there.

[James Reed:]

Yes. And so very easily a little humble. I'm really proud of the team on this one. This was one of those where you ask somebody to go look at something and they impressed you with the breadth and capabilities that they bring to the table. So Jason and his team did this incredibly cool kind of heat map analysis of all of over the road spent and proposed hypothetical locations that would most reduce our costs. We pick those locations, which we've now secured. And then we did the analysis before securing them. And he's being a little cryptic, but it more than cleared our hurdle, our hurdle rate. So you can just as capably as we can go figure out what our weighted average cost of capital is. And tell you that, they at least clear that hurdle rate and then some.

[Barry Haimes:]

Got it. Okay. Thank you. And then my last one is. Going over to logistics, the revenue per load was down 25.8%. What was the change in your cost of buying capacity within logistics in the quarter?

[Jason Bates:]

Not enough.

[James Reed:]

Not enough. I mean, it's interesting. If you look at the spot rate year-over-year, it's down about 30%. So it's not exactly a one for one decline that would imply this totally spot market driven. But even though we have great customer relationships and a lot of this is contract driven, that business is exposed a lot to the spot market. I will tell you very, it's a great question. Until just a week ago, the traditional letting up that you would expect to see in the capacity costs just didn't happen. It's been an unnatural phenomenon that frankly, I haven't heard anybody explain in good terms. It's been tough to understand. But just in the last kind of 10 days, the market's freed up and capacity providers seem to be acting in a way that's more rational and consistent with history. The way my logistics leader told it to me this week is they finally realized, oh my gosh, to get freight, my rate needs to be right. And so I think we're starting to see that logjam ease, but it's been brutal and it's been weird.

[Barry Haimes:]

Got it. Thanks for that guys. Good luck.

[Jason Bates:]

Thanks, Barry.

[James Reed:]

Thanks, Barry.

[Operator:]

You're next question comes from Mike Vermut of Newland Capital.

[Mike Vermut:]

Hey guys, I'm good morning.

[Jason Bates:]

Hey, Mike.

[Mike Vermut:]

A couple of quick ones for you. Yes, you’re clear. When you state that, yes, it's a million with our share account, it's $1 million here. If you're talking very little dollars, right? To go to below a 100 or when you look at the cost side, there has to be additional costs that are identifiable that you can go after. On an organization, it's been running like this for 15, 20 years. There has to be additional costs out there to take out. How do you go about finding those? And or there those that you're looking at, so that, and this will lead to my next question.As the next cycle approaches that we're a leaner company and our mid cycle OR is up 200 basis points or 250 over the last cycle and our peak earnings are 200,300, 400 basis points higher than last year. Yes. How do you go look at that? And then if you can comment on, I'm sure you've run models where your expectations are for that OR and for that type of earnings next mid cycle and peak cycle.

[James Reed:]

Yes. So Jason was going to hit the cost real quick here and hopefully talk about our cost count flow. I'll just tell you. – we – what I don't want people to lose sight of, I mean, great companies invest in downturns because you don't lose sight of what's strategically important when there are clouds around you. And investing in our trucks will lead to lower cost investing in, our repair facilities will lead to lower costs. And now I'll turn over to Jason has a lot to say about this.

[Jason Bates:]

Yes. So I'm glad you asked the question, Mike. I was hoping I get the chance to talk about this. Yes. I'm really proud of our entire organization. Candidly, this is something that we kicked off almost a year ago. And we actually identified 91 areas. This was a cross functional effort and initiative. There were 91 areas that we had identified as opportunities for cost takeout. We've already kicked off 74 of those. So when James talked, I think it was in the release or maybe it was in his comments about having called out 5.6 million of fixed costs, annualized fixed cost productions. That's real. And I wish the market was better because then you would see it more, right?But right now, it's just helping us stay afloat candidly. But the target opportunity that they were going after was a $52 million spend area and we estimated somewhere between 5.5 million and 8 million of opportunity. And we've realized 5.6, which mean there's still several million dollars of opportunity left to be had. And of those seven 91 total areas, we've ticked off 74 but that doesn't mean we've seen 74 all the way to the finish line. And I could bore you to tears with all the details behind each one of these different things.But suffice it to say, there's no area in the company that is not being looked at right now. So your point is right on and it's exactly what we're doing. And it's our job to focus on bringing in incremental revenue and being better at utilization and all these things. But at the same time, when you've had a company that's been around for 30 years, inherently there's been just bad behaviors that have worked their way into the business or bad contracts or legacy systems or things that you've just continued to do. That nobody's really bothered to just say, Hey, why are we doing this? Do we need this? Can we cut this out? Can we renegotiate this? And that's what this cost council that we've got is doing. It's like I said, a cross functional team. They have multiple sub teams that meet on multiple times a month and we get together as an entire council once a month to review progress. And that's something that's been going on for probably about nine months now and we'll continue for the foreseeable future.And on the second part of your question, I want to answer it really carefully, but also really clearly. So when you ask about next cycle and where will we be mid cycle, it's kind of a two-parter. One we said in our prepared comments that we see within our grasp, the ability to further to totally close to 810 a basis point gap between us and the peer group and we do through all of the things that we've outlined here. But let's just pretend that we only get that number to 500 basis points in the next two years.I'm not setting an expectation, it's purely hypothetical. And the reason I'm doing that is because the numbers start to frighten me in a good way. If the mid cycle of the peer group is around the 90 OR which it is, and we're 500 basis points from that. You hang up essentially a $30 million operating income on a $600 million top line revenue business, you get to $30 million of operating income. I might have said that already. You tax effect that and run that to EPS. It's a scary numberSo even as we improve over time and our results improve over time, you'll start to see, I don't think the word is too strong, massive improvements in EPS at the mid cycle, and I'm not even going to talk about what happens at the top of the cycle. We're in a really good spot. We've closed the gap considerably. We know how to close the rest of the gap and if we get some help from the market, which we've always said that our improvements, not market dependent, we're going to keep improving despite the market. But if the market goes back to a normal mid cycle, this company's in a really good position.

[Mike Vermut:]

Excellent. And then last question, just no one really touched on it. The balance sheet looks like there no worries whatsoever there, there no real covenants on this. And we have, we just extended it for five years and it looks like we're not burning much cash at all. If any of you actually paid down some debt this quarter? And just would be the same as we look forward. That pretty neutral on the borrowing base?

[Jason Bates:]

Yes. Great points, Mike, and you're spot on. We did pay down debt even in a tough quarter. We have 50 – roughly $55 million of availability. There are no spring covenants that would be restrictive or hurt us in any way, shape or form. And our intent, like I said, like we've said a couple of times, you got a couple of finance guys here. Oh, we're going to make sure that we're not deploying excess capital beyond what our company is able to generate. That's our job to you shareholders. And so we're going to make sure that we continue to manage that appropriately.

[Mike Vermut:]

Excellent. Okay. And I would highlight our stock. We're right around tangible book here. If management, the board, if there's ever a time to go in there and buy stock, I would assume that at this point in the cycle, and now's the time.

[Jason Bates:]

You have to make decisions as do all individuals about what's a good investment for them. But we wouldn't disagree with what you said, so.

[Mike Vermut:]

Okay. Thanks guys.

[Jason Bates:]

Thanks.

[James Reed:]

Thanks, Mike.

[Operator:]

As there are no further questions, this concludes our question-and-answer session. The conference has now also concluded. Thank you for attending today's presentation. You may now disconnect your lines.