USA Truck’s (USAK) CEO James Reed on Q2 2017 Results – Earnings Call Transcript


Q4 2017 Earnings Conference Call

August 09, 2017, 09:00 AM ET


Jody Burfening – IR

James Reed – President & CEO

Jason Bates – EVP & CFO


Brad Delco – Stephens

Matthew Elkott – Cowen and Company

Kevin Rendino – 180 Degree Capital Corp

Michael Vermut – Newland Capital

Jason Seidl – Cowen and Company


Good day, and welcome to the USA Truck Second Quarter 2017 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. [Operator instructions] Please note, this event is being recorded.

I would like to turn the conference over to Jimmy. Please go ahead.

Jody Burfening

Good morning, and welcome to the USA Truck’s second quarter earnings conference call.

Joining us this morning from the company are James Reed, President and Chief Executive Officer; and Jason Bates, Executive Vice President and Chief Financial Officer.

Please be reminded that this call will contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended; and Section 21E of the Securities Exchange Act of 1934, as amended; and such statements are subject to the Safe Harbor created by those sections and are made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995, as amended.

Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated by the forward-looking statements. Please review and consider the factors that may affect future results and other disclosures by the company in its press releases, annual report on Form 10-K and other filings with the Securities and Exchange Commission. Any forward-looking statements speaks only as of the date on which it is made. Also, on today’s conference call, management will be referring to certain non-GAAP financial measures in its analysis of the results that supplement the GAAP financial statement. A reconciliation of these non-GAAP measures to GAAP is provided in the table at the end of the slide presentation that is accompanying today’s conference call.

Now I will turn the call over to James.

James Reed

Thanks Jimmy. I want to start by acknowledging the various new additions to our leadership team, which were all onboarded in the second quarter, which you can see on Slide 3 of the presentation.

Jason Bates, our EVP and Chief Financial Officer; and Cheryl Stone, who’s our Senior Vice President of HR, were both announced in our last earnings release, and have had the immediate impact and heightened our capabilities, just as expected.

Werner Hugo joined in the quarter as our Senior Vice President of Trucking Operations and as a former driver, trucking company owner and operational leader in other U.S. based transportation companies has brought in energy, accountability and perspective of the day-to-day operation of our business that has even exceeded my own high expectations.

We also added Kim Littlejohn as our Chief Technology Officer in the quarter. Kim has many years of logistics experience, and her abilities will prove invaluable in getting us on a technology roadmap to compete with the best in our industry.

Rick Hainen returned to USA Truck as our Vice President of Revenue Operations, where he leads our network, pricing and customer service. His is an end-to-end accountability, to the operational elements of the revenue cycle. He is widely regarded as one of the best in the business, and that will become apparent as we talk about the quarter’s results and his immediate contribution upon joining our team.

Finally, Allen Lowry joins USA Truck as our Vice President of Safety, just here in the third quarter. Please reference our press release from earlier this week for more on Allen. Know this though, his role is as important as any on our team, and we are counting on him to make us one of the safest organizations in American industry, not just in transportation.

The second quarter marked my first full quarter as CEO, and my immediate priority was to assemble a leadership team that is capable and committed to helping this company return to profitability in short order. As I look at our team, I’m confident we have delivered on that objective. Each of these leaders has had an immediate impact on our business in meaningful ways, and all have either relocated or are in the process of relocating to the Van Buren/Fort Smith area.

And that is noteworthy, because it hasn’t been the case in the recent past. We now have a team with families in our communities, children in our schools and on our sports teams and a combined unified and equal interest in our mutual success. In fact, Werner is not the room with us today because he is literally moving his belongings to Western Arkansas as we speak.

Each of these leaders truly represent the type of principles, focused, experienced, results-driven people that it will take to get USA Truck to its full potential. We know that this will not happen overnight. However, this new leadership team and I are helping the entire organization feel the appropriate sense of urgency around immediately improving results.

While we are not happy with the consolidated results for the second quarter, they do show progress in the specific focus areas we had previously outlined and with team now fully assembled, we expect progress to accelerate.

Just as we said last quarter, our approach is working, as we again improve yield, we again improve tractor productivity and we again improve our revenue proceeded truck in the quarter. It’s true that we have further to go, but we are outpacing the industry in our operational improvements, and we see that as a positive indicator of our potential.

Let’s now turn to Slide 4 for a look at our consolidated results. The second quarter was still a relatively soft freight market throughout the quarter. The freight trends in April were slightly lower than the other two months. As we progressed through the quarter, our focus in our Trucking business was on unlocking rate through changes in network management and working hand in hand with our customers to accomplish this without compromising our service.

The logistics environment throughout the second quarter remained relatively soft as well as capacity tightened, costs rose and margins were under pressure. June was the best month of the quarter, with much of that momentum carrying over to July for a strong start to the third quarter.

July has historically been a seasonally difficult month in our business, and the 4th of July holiday caused the month to get off to a slow start in both our Logistics and Trucking businesses. However, we have been pleased with the positive momentum coming out of the holiday in both volume and pricing as the month continue to build.

For the second quarter, consolidated operating revenue was down 2.3% over last year, and we had an operating income loss of $3 million or a net income loss of $2.8 million. Our operating ratio was 102.8%, below our results for the 2016 period.

There were a couple of noteworthy items recorded during the second quarter that we want to draw your attention to. As we feel they are unusual in nature and should be taken into consideration when evaluating the operational results for the quarter.

The $2.8 million net consolidated loss included the following: a $1.3 million or $0.10 per share net of tax expenses related to the onboarding of our new management team for relocation and sign on expenses; there’s also a $300,000 or $0.02 per share net of tax related to a change in the expensing of board compensation. I want to be clear that the Board of Directors elected to receive their customary annual equity award in cash, and each Director then used the next tax proceeds to purchase shares in the open market.

This decision was made to preserve shares under our 2014 Omnibus Incentive Plan, especially in light of the company’s recent stock price, that consumes more shares when granting awards. The net result is an acceleration of expenses into the period but not an incremental increase in director compensations for the year.

Another item was $300,000 or $0.02 per share net of tax relating to non-escheated liabilities to various jurisdictions that was also recorded in the quarter. And finally, we had $100,000 or $0.01 per share net of taxes of severance cost related to some personnel changes in the quarter.

Also recall that in 2016, the company bought back shares and then in the second quarter of 2016, there were 700,000 or 8.1% more diluted share outstanding, which account for approximately $0.03 per diluted share for the consolidated earnings impact on a comparative basis.

In Trucking, we had an operating loss of $4.8 million, largely driven by a smaller seated tractor count. We had 159 fewer tractors than we did in the second quarter of 2016, which have been exceeded, would’ve been accounted for an additional $6.3 million in additional revenue.

Another contributing factor was carrying more unseated tractors than expected in the fleet than we did have. These challenges were partially offset by improvements in rate, combined with an approximately $2.4 million improvement in operations and maintenance expense year-over-year or $0.04 per mile.

In Logistics, and this is a huge accomplishment given the environment, we generated a 4.2% increase in operating revenue when compared to the same period in 2016, and an impressive 14.1% sequential increase. We generated operating income of $1.9 million in the second quarter of 2017, which was down $300,000 from the same period in 2016, with a remarkable increase of 157.5% sequentially.

Let’s now move to Slide 5. As I alluded to you previously, we instituted new leadership in our Trucking business, which was a key factor in the second quarter, as Werner Hugo joined the organization on May 22, and Rick Hainen joined May 30. They both were onboard for those last months of the quarter. Their immediate focus was on key metrics, such as revenue proceeded tractor per week and miles proceeded tractor per week, which has led to immediate progress.

Although, the second quarter started off disappointingly in both revenue and utilization, we saw improved market demand from the impact of our network engineering initiatives, as rate increases began to take hold in May and June. Notably, rate per loaded mile increased $0.05 per mile in the second quarter 2017 when compared to the second quarter of 2016, moving from $1.71 per mile to $1.76 or nearly a 3% increase.

We believe this is a unique accomplishment when compared to the industry this quarter and speaks to the work of Rick and our network engineering team in conjunction with Warner and the operations team’s execution on the network changes.

This quarter’s results continue our string of revenue per-loaded mile increases in 3 of the last 4 quarters and represents our highest rate per loaded mile in the last five quarters. The combination of gains in truck utilization at the higher rate per mile led to improvement in revenue proceeded truck per week, highlighted by the second quarter of 2017’s $3,046 per seated truck per week compared to the second quarter of 2016’s $2,969. That’s an increase of $77 or 2.6% year-over-year.

I think, it’s worth noting that June’s revenue proceeded truck was $3,181, nearly 6% higher than the same month last year and 5% higher than just this May. And June miles proceeded tractor was 2,070 miles proceeded tractor, up 57 miles versus Q1 and 58 miles versus May or 3% higher. That’s immediate results from Warner and his team.

This is all about asset utilization, and the ultimate measure of that utilization is revenue per truck per week, which we are steadily and consistently improving through our efforts. Additionally, in the quarter, miles proceeded truck per week marginally increased year-over-year from 1,985 miles to 2,007 miles.

Revenue per truck and utilization per truck improvements reflect a more efficiently deployed fleet of company assets. Our unseated truck count is above our expectations and has been an inhibitor to top line revenue progress. A smaller fleet this year put a greater premium on seating trucks, and we have come up short, ending the second quarter with 8% unseated trucks, effectively flat over last quarter. As a reminder, our goal is to maintain this measure around 5%.

Last quarter, we outlined a number of retention initiatives that have this worked this plan to address this issue. However, when we realized our retention efforts were not increasing seated trucks, a deeper analysis revealed our recruiting efforts as the culprit.

We have immediately responded to this by increasing our capacity recruiting, engaging outsider recruiters to help fill our pipeline and increasing targeted spend and internal driver-based recruiting efforts to drive immediate results.

Although this is just a point in time, I am pleased to say that as of today, our unseated truck count is down to 112, so significant, immediate improvement.

I think, this example is worth spending a little time on, because it is indicative of how we are doing things at the new USA Truck. We failed on this metric, period. As long as we fail fast, use analysis to root cause the problems and immediately enact countermeasures as we did in this case to address shortcomings, I’m okay. And that’s exactly what we’ve done here.

So, our outlook in the second half of 2017 remains positive. Q3 market conditions are favorable, which combined with accelerated tractions from our earlier rate, network and operational improvement, lends support to improved performance expectation.

Leadership, time and attention is focused on the key operational metrics of a well-managed truck operation. And while the market is helping, we are not relying on it to improve our results. We control that ourselves.

With that, I’ll turn the call over to Jason.

Jason Bates

Thank you, James. I’ll go ahead and cover the USAT Logistics portion of the call today, and would like to excuse Jim, who’s spending some well-deserved time with his family.

So, turning to Slide 6. The second quarter of 2017 for USAT Logistics started with the same general market challenges experienced during the previous three quarters. April demand for capacity and the brokerage market remains soft, and logistics revenues and margins proved disappointing.

We saw improving market conditions in May, which were more favorable to our Logistics Asset-Light operating model and led to the strongest month since March of 2016.

June continued to strengthen through the month. While second quarter revenues were up $1.4 million or 4.2% over the same quarter in 2016, gross margins still trailed prior year. Even more exciting is the fact that the sequential quarterly improvement in revenue was close to 15% and more than 18% in the month of June. This revenue growth reflects year-over-year improvement for the first time in 10 consecutive quarters, despite a difficult operating environment.

Margins are similarly strong and improving. For June 2017, year-over-year gross margin increased 16.8%. We are encouraged that this trend had continued into July, with both revenue and gross margin improving year-over-year.

Despite the improving financial results, we continue to focus on cost control. And improving our operating model. Late in the second quarter, we closed one of the last remaining branch model locations in support of our regional center network-model concept.

Our two largest regional centers are delivering the kind of results that validate the migration of this model, generating second quarter year-over-year revenue increases of 54% and 77%, respectively.

The combination of office closures along with other headcount reductions eliminated over $1.5 million in annual expenses for the Logistics segment.

Last month, we realigned our carrier manager duties with the geographic origin of the freight versus the locations of the customer relationship. This will allow us to develop deeper carrier relationships, strengthen market rate and capacity knowledge, create greater density and realize the associated leverage to improve our buy rates, which will positively impact yields.

The improvement in revenue and margin coupled with the operational changes noted above, give us confidence in our strategy. We will continue to stay the course, support and expand our customer base, while aggressively managing overhead.

So, turning to Slide 7, I’ll give you a quick update on our balance sheet and liquidity. As of June 30, 2017, our total debt and capital lease obligations net of cash, or net debt was $127.6 million, and our stockholders’ equity was $51 million. Net debt to adjusted EBITDA increased sequentially to 6.4x compared with 5.6x as of the end of the first quarter.

The company had approximately $42.2 million available under its credit facility as of the end of the second quarter. We have a modest CapEx plan for the remainder of the year. Any free cash flow will be directed toward the repayment of debt, with the goal of further reducing our leverage ratio to more comfortable levels.

Through the actions discussed by James, we expect our operating cash flow to increase over our 2016 levels. And then noting this outcome, coupled with our reduced CapEx requirements for the remainder of the year, we expect to make significant progress on reducing our leverage ratio towards our long-term goal of 2.5x to 3x adjusted EBITDA.

So, with that, I’ll now pass the call back over to James.

James Reed

Great. Thanks, Jason. And to recap, I’d like to highlight some of the comments we’ve made in this and prior releases. We have previously provided operating income improvement ranges as outlined on Slides 8 and 9, and we remain committed to these initiatives.

Our team is now in place, as Warner and Rick have hit the ground running, we saw immediate impact in our revenue per tractor per week, and our operational execution that we expect to continue and accelerate in coming quarters.

Allen is starting a journey to make us some of the safest fleets in our industry, which will affect lives and save costs. We will update you as that strategy takes shape. We have noted, our relentless focus on fixed cost reductions, and we have kept that commitment.

We targeted $3 million to $4 million of fixed cost reductions in our third quarter of 2016 release. As of last quarter, we indicated that we had about $1 million to $2 million remaining through the remainder of 2017 to hit that goal. And in the second quarter of ’17, we delivered on that commitment by eliminating another $1.6 million in annualized fixed cost headcount reductions.

We expect to grow to 20% of our fleet in independent contractors, and we ended this quarter at 18% of the fleet. We are on track and now refining our model to ensure its positive contribution to net results.

We expect USAT Logistics to generate approximately 35% of consolidated revenue by the end of 2017. In the second quarter, it represented just north of 33% of consolidated revenue, and our logistics business grew revenues, as Jason said, quarter-over-quarter for the first time in 10 quarters.

We expect improved cash flow and EBITDA, versus 2016, sufficient to cover future CapEx requirements going into 2018, and maintaining our fleet strategy. We reiterate an expectation of the return to operating profit in the third quarter of 2017 and beyond, especially as expected industry dynamics materialize.

We still hate losing at USA Truck and are disappointed to report these results. But as noted above, we are making and keeping the commitments made to the market and our employees and it confirms that the actions we have been taking are the right ones to build a solid operating company with a bright future and more consistent results.

As we evaluate a journey to this point, we see a natural progression in rehabilitating a company that was not well. In recent quarters, we wrote down assets held sale through appropriate levels.

Next, we were reevaluated reserves on claims, and most recently, we incurred expenses to bring on one of the best teams in our industry and tighten up execution administratively. Those things are unusual in nature and if we consider them in that context, we have a quarter that while yet unprofitable, shows real progress.

We are running a transportation company that has seen logistics growth for the first time in 2.5 years. And a trucking business with fundamentals improving steadily quarter-after-quarter and an environment that looks like it may help a bit in the coming quarters.

We are more in the details and day-to-day grind than just about anywhere, I’ve ever seen before, and we love it. And our response to improved results is to raise the bar higher and higher, until we take our place as one of the best names in the business.

So, with that, Franchesca, I’ll hand the call back over to you for Q&A.

Question-and-Answer Session


We’ll now begin the question-and-answer session. [Operator instructions] The first question comes from Brad Delco of Stephens. Please go ahead

Brad Delco

Good morning, James. Good morning, Jason. How are you?

James Reed

Hey Brad. We’re well thanks. How are you doing?

Brad Delco

Good. James, you probably answered most of my questions, just given all the detail, and I think, while I appreciate all the color you provide us. But I want to touch on the unseated truck count. To me, that was kind of the key issue here in the quarter.

And I know you alluded to seeing improvements. Just want to get more details on what is driving the improvement in the unseated truck count? Was it the market being strengthening in June? Or you think it’s something more specific than that?

James Reed

Yes. I think, there’s two things, and I’ll address them, really head on. So, the first one, Brad is, as we said in last quarter’s release, we put some retention initiatives in place around having, what I call, kind of a Concierge white-glove onboarding service for new drivers. That has been really successful.

We have a team internally that’s been focused on driver retention. And although we don’t report the number, we’ve seen our — especially, our experienced driver retention improve significantly to what I would say is, kind of in the range of industry-average turnover.

So that’s real progress for us. But as I was going through the quarter, we saw about halfway through the quarter that those efforts weren’t materializing into improved seated tractor counts. And I really personally take accountability for not realizing it sooner.

And so, we had a rather heated discussion in my office where the analyst and me kicked in, and we very quickly discerned that we didn’t have enough recruiting capacity on our recruiting team to handle the recruiting leads that we’ve been getting.

And so, it’s really not a market dynamic. It’s more of a recruiting shortfall. And so, what we’ve done immediately, is we’ve added two recruiters. We are adding some temporary recruiters. We’ve gone to some outside recruiters to help us fill our pipeline. And it is absolutely the most important thing.

I think I’ve been consistent on these calls and in our discussions with the market to say the two things we’re focusing on is seating trucks and raising price. We’ve done a great job raising price. But seating trucks, we’re focused on it right now.

And then your second question is, well, why is it suddenly better? It’s suddenly better because all those things that I talked about are taking root over the last two weeks that we got our advertising spend and our targeting, really started materializing in the last two classes both this week and last week, we’re significantly larger than the classes that we had in the prior weeks. So, starting to get so tactical, but it’s at that detail level where we’re working.

Brad Delco

And just to be clear, so and that — I think, we kind of heard this from other industry calls. The driver market is challenging, some people are willing to push through drive wage increases without kind of corresponding rate. I guess, I shouldn’t read into this, that’s something that you’ve contemplated or doing?

James Reed

Yes. I’ll just remind everybody that we were on the front end of that curve. So, we consistently benchmark our driver pay strategy against the marketplace with some kind of readily available data. We realized in Q1 that we were a little bit lower than we had hoped to be.

So, in April, we instituted a driver pay change that, on a weighted average basis, we estimated to be about $0.015 per mile. In our last call, what we told the market was — it’s about a $1.8 million annualized impact of that increase. So, we already did that.

Jason Bates

Yes, and just to add to that, Brad. I mean, we feel like, obviously for the drivers, it’s about the total take-home, right? And we have a lot of right, wrong or otherwise opportunity with regard to the amount of miles we put on these trucks every week. And therefore, with the relatively competitive pay structure that we have in the market, if we get them more mile, it helps accomplish the same thing.

Brad Delco

No, absolutely. And then, James, I think last quarter, you said, you expect to see $6 million to $10 million of operating improvement. I think I saw it on the slide, you’ve changed that range. But is that — in terms of how we should interpret that guidance, and I think, you maybe you referred something relative to EBITDA as well. Do you expect to see that improvement — that type of improvement relative to 2016, is that fair?

James Reed

Yes. I — thanks for asking that question, because we probably should have address that. Yes, we still think that range is appropriate. Yes, it’s fair. Yes, it’s a comparison versus ’16. But don’t forget, if you now look at Q1 and Q2, we had kind of $4.5 million bogey that hurt us with respect to claims adjustment in — reserve adjustment in the first quarter.

And the $2 million of kind of exceptional items that we just talked about on the call here. So, I would net that against those to get an idea of where we think we’re going to land vis-à-vis last year.

Brad Delco

Got you. So, if I do that, and I’ve done that math, it suggests that you’re going to generate $13 million of operating income in the second half of year? I mean, it seems like a pretty dramatic inflection if that’s — unless we should just go through this offline?

James Reed

Yes. No, I think we should talk about it off-line, because that isn’t — that’s not where our head is right now. I think we need to talk about this a little bit more with you, Brad, and with others. So, let us take a look at it. If we need to update some disclosures to make sure everybody’s aware of what we really think on this, we’ll do that. It’s a fair question.

Brad Delco

Okay. And then, maybe finally, Jason, these kind of unusual items. Is there any color you can give us on what specific cost buckets those impacted in the quarter? And then maybe if those expenses were allocated to USAT or Trucking. Because I think, when you guys were talking about the ORs in each of those segments, those were on a GAAP basis. I’m just curious if you have allocated these unusual items to those specific segments?

Jason Bates

Yes. Fair question. So, the $1.3 million is recorded under salaries and wages. The $300,000 associated with the acceleration of the Board of Directors compensation would recorded in under other. And then we have the escheatment of the liabilities, which would also flow through other.

And then finally, we have the $100,000 of severance, which also again, flow through salaries and wages. Now as it relates to the allocation to the various segments, it does get allocated out to both the Trucking business as well as the Logistics business. Each of these different line items have different types of allocation methodologies that we use, different drivers. And so — but the methodology is consistent.

Brad Delco

Okay. All right. That’s good enough. Thanks Jason. Thanks James for the time.

Jason Bates

Thanks Brad.


The next question comes from Jason Seidl of Cowan. Please go ahead.

Matthew Elkott

Good morning, gentlemen. This is Matt Elkott for Jason. Thanks for taking our question. I was wondering, you did reiterate your operating profitability target in the third quarter. I was wondering when you expect to maybe reach that profitability? Once you reach operating profitability in the third quarter, how sustainable do you think that is beyond the third quarter and into 2018?

Jason Bates

Yes. Great question, Matt. So yes, obviously — and James has talked about this a lot. And we want to be careful here. We have a lot of internal goals and target that we’ve set for ourselves, and James alluded to the fact on the call that, once we achieve one, we raise that bar and raise that bar.

And so, I think James has stated publicly that we strive to be profitable every day. I mean as it relates to getting to that net income profitability, we haven’t given a firm timeline for that. But I will tell you that, that is the goal. But as it relates to right now, we’re looking at a company and I’ve been here just little over 90 days now, and we’re trying to do a lot of things in a short period of time.

And some of those things are going to take some time to take hold. But we also recognize that it has to happen faster. And so, our goal for the third quarter is to generate operating income profitability. And then in terms of your question about sustainability, we don’t plan on turning back, right?

So, the intent is to take that operating income profitability and build on it, each sequential quarter. So that we get some positive momentum, positive trajectory in that each year — each quarter, we’re having year-over-year improvement. And that’s a goal starting this — that’s been the goal.

And while we don’t provide monthly financials, I think, if you were to look at the trajectory, setting aside onetime items that we experienced in the second quarter, quite frankly, from April to May to June, I think it would give you some comfort around the trend and trajectory that we’re seeing. And we — we’re, like I said, cautiously optimistic about that direction.

Matthew Elkott

That’s very helpful, Jason. Would you then say that you are a bit more confident in reaching the operating profitability target in the third quarter than you were when you first talked about this?

Jason Bates

Well, I can speak for myself. I mean, when we first talked about it, I’ve been here for like two days. So, I can say, definitively, I’m more confident now having been here for 90 days than I was when it was said after I’ve been here for two days.

But in all sincerity, Werner’s been here for 1 month, 1.5 month. Rick’s been here for one month. And the things that I’ve seen them do in terms of execution in terms of revamping the network and the things they’ve been able to unlock in terms of value creation that — just given my 15 years in the industry, some of these things are part of the reason I’m here.

You look at — there are certain levers that are going to drive huge value, and rate is one of them. And we’re unlocking a lot of rate. And it’s not like going to customers and demanding huge rate increases, although we’re working on that as well. But it’s just that we’re being smarter about how we manage this network.

And there’s a lot of untapped potential here, and the quicker we can unlock that and the more time we give Rick and Werner in their seats to be able to do that, the sooner we’re going to see some really positive results here. And we’re excited about it.

But again, James said it all the time, and he has engrained it in my mind too. This can’t happen fast enough. So, we want everyone here to know that while we want to be cautious and realistic about the timetable for the turnaround, internally, we are pushing very hard and we recognize that needs to happen yesterday.

Matthew Elkott

Got it. And now that you’ve been there — you’ve been at USA Truck for a few months, and this is also for James, you guys knew there were major issues that needed to be addressed coming in. Would you say, now that you’ve been there a few months, things are actually worse than you thought. They were or not as bad?

James Reed

I’ll take that one first, Matt. It’s a great question, because I’m trying to remember where my mindset was 9 months ago when I first started at USA Truck and talking to folks. But my job immediately before this was also a turnaround at a Trucking company, which for a period of time, we more or less accomplished. And the issues that are here at USA Truck, I would not say are unique.

There was an era of family-owned trucking companies or newly started or even public trucking companies that had trouble with technology, that had trouble with generational handoffs from the first to the second to the third-generation leadership, it had trouble with consistency of execution, discipline and just day-to-day rigor in decision making.

And I think, it’s fun to sit back and hear Jason talk to you guys. Because, one, you know him; but two, to have somebody that’s so equally minded and equally yoked in helping turn this business around and if Werner and Jim were here, they’re riding this with us together.

So, it’s no worse than what I expected, because I’ve seen this movie before, and we know how to fix it. The thing that I will say to you is, as I have confidence in our team fixing some administrative things that we don’t talk a lot about, but the discipline that was missing in our network, in our pricing, in our execution, also existing in our back office.

And so, as we’ve rectifying those things and improving those things, you look at a transportation business that, frankly, it’s not that complicated. We fixed the fundamentals, which we substantially have done over the last three quarters and began operating at our potential, as Jason said, around price and around productivity. We have a great opportunity to be just as good as anybody else in our space.

And so, I guess my synopsis to your question would be, no, it’s no worse than what I was expected. There are little gremlins that you find occasionally that can be incredibly frustrating. But every company has those, and we’re through them methodically, and we’re working through them quickly. I don’t know if you have a different opinion, Jason.

Jason Bates

Yes, So I mean, I guess, I would say, having spent in a little bit of a different environment for the last 14, 15 years, but having been through various ups and downs in that prior life, when I looked at the financials, when I talk to people in the industry, I ask a lot of questions of I have a lot of smart people, several of your — you and your peers as well.

And the thing that stood out to me was that there were a lot of very fixable things. And that’s what got me excited. I look at a lot of these things, whether it be cost takeouts, whether it be rates enhancement, whether it be utilization, and those things are very fixable, in terms — and scalable as well, in terms of the impact that they have. And so yes, were there things that as I got more into the details over the last 90 days, that I was like, shoot, that’s a little bit of a nuisance and something we need to deal with.

Yes, there have been some of those. But some of those things just come with having five different CEOs over the last five years and different people throughout the organization getting a little distracted and people focusing on one thing then shifting gears and focusing on other thing.

And so, for me what I was really looking for when I came here was, do we have a team that really wants to win? And can we provide direction and strategy and leadership to them and the get out of the way and let them execute? And are they willing and capable? And do they have the desire to do that?

And the answer to that, after 90 days, from what I’ve seen is, absolutely. We’ve got a great group of people here. We’ve got a great team. We’ve got a great asset base. We’ve got a good customer base. And now it’s just a matter of kind of putting it all together.

And I’m excited about the opportunity, because in spite of what many would say are headwinds or things that we’ve kind of done to ourselves over the past five to seven years, I look at that and say, there is a ton of untapped potential and a lot of opportunity.

So, on the one hand, it’s — it can be a little frustrating, and it can’t happen quick enough but on the hand, it’s like, man when we get this thing, all these different things going in the right direction it’s just going to be exciting.

Matthew Elkott

No, I mean, you guys have provided a lot of great detail on your plans and the improvements so far. That’s very, very encouraging to see that. Going forward, things that you don’t control, there are many dynamics going on in the trucking industry right now.

There are some opportunities and there are some threats. The opportunities, I guess, the rate environment seems to be recovering. That seems — starting to look more and more sustainable as we go.

On the other hand, we have ELDs, which could exacerbate the driver retention issues. What kind of keeps you up at night? I know you’re doing all the things that you — within your control, and you feel very confident about the steps that you’re taking.

What is it that you dread, maybe, waking up and hearing something that you did not expect in the market. What’s the major potential threat that you wouldn’t control that could derail your efforts?

James Reed

Matt, it’s James. I’m a finance guy by training. I come from that side of the house. And so, my answer will probably surprise you. With respect to the market, there is not a lot that keeps me up at night. We got to remind ourselves, depending on which one of the sales side guys I look at, the markets between $500 billion and $700 billion. It’s a gigantic market. And so, my perspective is that there is plenty of freight for great operators. Even in a down market, there’s plenty of freight for good operators.

So, some of those things that you talked about, ELDs, changing — shifting rate environment, even a prior question we had about driver availability, those are realities of our market, but they don’t keep me up at night. The thing, honestly that keeps me up at night is our people. How do we keep our people safe? How do we teach them correct principles, such that they can kind of govern their own daily actions and make the right and best decision, because the force multiplier that comes in getting that kind of values alignment and goal alignment, all the way down to every soul in the organization, that to me is the hardest part of our job.

It’s taking an organization, I said this two quarters ago, we’ve got a company that’s gotten used to losing. And last night, with the passing of Notre Dames, famous coach who brought them back to glory, that team, he said, got used to losing. And he taught them to win again. And we’re trying to teach our people to win again. And as Jason alluded to, and I gave specifically my remarks, we’ve got outstanding performance on our revenue per tractor per week in June.

We’ve got in for significant measurable increases in our productivity per tractor. Those things are not from an inanimate object. Those are from human beings, doing their job and getting it better and getting it right every single day.

So, for me, the thing that keeps me up is getting this into the hearts and the souls and the bones of the people that work with us and for us. So, I know that’s kind of a mushy answer, but that’s really what concerns me most about our path forward.

Matthew Elkott

Great. No. Thank you very much for that James and thanks very much for the time James and Jason.

James Reed

Thanks Matt.


The next question comes from Kevin Rendino of 180 Degree Capital. Please go ahead.

Kevin Rendino

Thanks guys. Couple of questions have been answered. Really, two questions. One big picture, and one’s in the weeks. On the big picture, can you talk about ELD? A lot of attempts stuff builds and get the thing delayed here. So anxious to hear your views on what’s going to happen between now and the end of the year?

And then back to just in the weeks. You talked a lot about specifics relative to be unseated tractor problem that you’re undergoing. Can you talk about specifics? I know you mentioned execution and unlocking value relative to the average miles proceeded truck per week that’s kind of — what are one or two things that you actually are doing that’s enhancing those numbers?

I know you’re enhancing the numbers, I want to know how. Those are my two questions.

James Reed

Sure, thing Kevin. I’ll answer both of those. So, thanks for asking. On the ELD picture. I’ve — yes, we’ve all seen kind of the pieces in the squawking, if you will, about some legislation hitting the floor.

Look, I’m not a politician. I don’t know what’s going to happen. Here’s what I do know, is that we have had ELDs in our trucks for the last two years. Any productivity impact that’s occurs to us or other big carriers that are playing by the rules, small carriers that are playing the rules for that matter, has already impacted us, and we’re living with it day to day, and we’re figuring out how to be even more effective every single day.

I will say that as a leader of the company, I actually kind of irrespective of what Congress decides, I think ELDs are a good thing for our business. It helps us to be safe. It helps us to be compliant with the rules that we have committed to play by. And it helps us to be more disciplined in our day to day execution. So maybe going a little further than you wanted there.

But yes, I don’t know what’s going to happen here. But I think ultimately, it’s a good thing for our business, and it helps us manage more tightly and more disciplined fashion.

On your question in the weeks. I’ll give you some real specifics about what we’re doing to improve miles per truck per week and the network and the pricing. Because I think those are interrelated things.

So, I’ve described in the past to many of you that if you look at the network that we inherited when we got here, it’s like taking a game of pickup sticks and dropping it on the table. And if you look at the freight kind of characteristics and network in the U.S., the proponents of the freight is east of I35 in this country, which not coincidentally, is where we run. But we’ve lacked disciplined in running that in a dense way.

And so, with Rick coming on, we’ve identified through some pretty robust analytics, where are our power lanes that we want to run. Where we have customers on those lanes. We’ve used our sales force to go target those lanes to fill in freight where we didn’t have it. And then I’ll just give your a very specific example.

We did a five-week analysis of our density on our network. And one of our biggest and best and most important customers to us had sent us over a five-week period on 800 one-way loads that didn’t have backhaul associated with them. And we wouldn’t characterize them as being in our core network.

That could be devastating if not managed well. And we went to this customer and instead of just cutting them off, we said, hey, look, we know you want us to be profitable, because no one wants an unprofitable partner in the business. And as I said, they’re a great partner.

We suggested some alternatives. They came back to us. They immediately helped us improve the network and densify it. And I’m happy to say, we’re not running those 800 one-offs anymore. I think of those a lot like an athlete that’s off-balance.

You get a driver out of your network without a backhaul, with a lot of time to get online and finding other job and get frustrated. You have higher fuel cost. You have higher over-the-road repairs, because you don’t have economies of scale of being in the densest part of your network. There are a lot of bad things that happen and like a unbalanced athlete, you can push us over with one finger when we do that.

And so that’s as specific example where we went to a customer, we remediated it almost immediately and it had two really important effects, one, it increased the trust and confidence between the customer and us, and two, to your question, it improved our ability to run miles effectively and efficiently. It helped us raise our price, and it helped us with our drivers.

So, we’re really happy about those kinds of things and at that level kind of tactical execution that we’re looking at this every single day.

Kevin Rendino

Thanks guys.

James Reed

Thanks Kevin.


The next question comes from [Andrew Stein of AJS Capital].

Unidentified Analyst

Hi guys. Interesting commentary. Just had a couple of questions, little macro in nature. You guys kind of you talked a little bit about going through five different CEOs and different people trying to optimize the network. But when you look at it today, I know a lot of folks are talking about rate, you’re going to bounce but if you look at kind of a well-run trucking company,

Jason worked at Swift or Knight. Now they’re the same thing. These companies that are kind of Spot Market trucking businesses. They’re doing 20 ORs and their 80 ORs is 20% operating margins.

And then when the world ends, and freight comes out, they end up going kind of low double digits. I mean, they have a 110-operating ratio. That looks like — I don’t know what this business like on the — with lower rate and lower volume, 130. I mean, you guys aren’t generating any profits. You have 130 of debt.

If I look at a well-run company like Knight or Swift, maybe you can chime in on interstate, these companies, their networks are balanced and utilized because they’re well-run organizations but be those organizations started with 2 trucks, and then they built a network around that.

So, the network built over 30 years. So now you’ve got a pickup stick network, and you gave a nice little story about how you fixed the backhaul. But as you’re well aware, in a game of pickup sticks, if you’ve got one, and you fix it you got still got 50,000 other sticks on the ground.

And, I guess, my question to you would be, as an executive at this company, you’ve got two roles: one, to protect shareholders; and two, to protect people within the organization.

It sounds to me like you guys are optimistic, and you’re working through it. But, I mean, how do you balance protecting shareholders? Because when I look at the financials of this company, it looks like if freight comes down or we hit an economic thing, this company is dead. I mean, more than dead.

And so, I’m just trying to think about how you balance that. I mean, I — the previous CEO gave guidance and then in 4 weeks, they missed it. I know you guys aren’t giving guidance.

But, this is a company that’s never been able to perform in many ways. This is a company that — I don’t know, to me, it seems like it’s a more likely chance that this company goes bankrupt and doesn’t make it than not.

And so how do you balance kind of trying to operate against your plan and then trying to make sure you preserve some semblance of shareholder value?

James Reed

Yes. No, I understand. Thanks for asking the question.

Unidentified Analyst

But I got one after when you’re done, more granular. But just…

James Reed

Yes, sure. So, a couple of things. Why do I love the pickup stuff — stick example, for those that have played the game is, not only are there more sticks lying there, but when you move one stick, you sometimes move other sticks? And that’s the same thing that happens in a network model.

I think one of the key differences, not in all, but in some of the examples that you offered, is exposure of the spot rate versus contracted rate. What we have found is, as we go to — and these are kind of name brand, kind of the usual suspects, they are our top 10 or 20 customers. As you go to them, they want stable, contractual relationships.

We play less than 5% of our businesses in the spot market. We do very little in the spot market. And so, going back to my earlier comments on Kevin’s question, we believe, one, there’s an abundant freight, even in low times.

Two, that relationships matter in this business and that being able to services at a fair price with your customers, provide you some insulation in even tougher times. And I guess, the third thing I would say is, as we look at this abundance of freight, it really becomes about your ability to put together a profitable network and be disciplined about staying out of the places that hurt you.

And so, we think we have in the June numbers that we shared, in particular, real evidence that, one, there’s upside, but two, that upside is really unique to USA Truck because of the reasons you outlined. We have not been as disciplined. We weren’t built the way some of these were built.

And because of that, in our own network, we’ve got untapped, unlocked value that just by organizing ourselves better, we can get and we’ll sustain the test of time.

I will not provide guidance on this call, but I will tell you, my long-term expectation is that we’re running a business that’s kind of 8 out of 10 years is in that 88 to 92 OR space on trucking. That’s where we’re headed.

One other thing I want to say to your comment is, and yes, I do have a responsibility for our employees and it’s silvering at times and I take it very seriously. And they probably won’t like to read this. But I consider it my highest priority taking care of our shareholders. Our shareholders aren’t in the room to represent themselves.

And so, Jason and Jim and Warner and I have to do that every single day. And we take that very seriously. And so, our current thesis is the best and highest use of the precious resources that they’ve given us is to be a going concern and fix this and get the business performing at those level that we discussed. But we are ever mindful of the other alternatives and as leaders, we have to be.

So, we think there’s plenty of room in this market. We think there’s plenty of room in our network, and we just need to organize ourselves better. And we think our strong dependence on contracted rates gives us an opportunity to be more consistent over time.

Unidentified Analyst

Yes. One or two more things. The other thing is, so when I talked to other folks about this company who’ve been invested off and on, one of the previous management teams had suggested that the business needs to get bigger to become profitable.

And basically, they said — they were fully against shrinking the fleet, because they thought that there would be deleveraging at terminals and stuff like that. And turns out that that person was actually right, wrong about lots of other things but right about that.

What — it seems to me at least looking at the results, as you think the tractor count, while some of the kind of the per mile metrics and whatever base revenue in this have improved or stabilized, you have this massive deleveraging that’s coming from sales.

Now you would say, well, some of that’s rate, which is a 100% margin, and some of it is lack of sales. And so, there’s two holes in that, right? One of it is going to be productivity of your existing equipment, but everyone’s going to say, we could just be productive, productive, productive.

And the other argument is going to be, which is kind of more sustainable is, what is the collect cost structure to be associated with the lower revenue base, right? And understanding that your revenue base is going to move around, right? The rate is something you can’t control, right?

You can try to control it as much as you want, try and get as much contracted business, this and that. Still, they are going to push back. It’s a commodity business, do your best. But I guess, my question to you back is, do you think that this business is subscale, and what are you doing to reduce?

And this goes to the employee thing, shareholder thing, which is, this business is a big employer in Fort Smith and everyone’s always saying, we don’t — we want to save Fort Smith. We don’t want to move it.. I mean, there was talks about moving the company to Texas and lowering — the dispatchers cost less money, that taxes cost less money. It doesn’t seem to me like you guys are taking the really hard steps to try and optimize the business.

And if your network is somewhere else, why do you have everybody coming back through Fort Smith to do maintenance. I guess, what I’m is, if this is really being run for shareholders and not employees, why have the really hard decision not being made, which is really end mass reductions in headcount or moving to business or selling the building or doing — I don’t know, doing stuff which can really get you to the bottom line.

Because I think, as I followed this story for a number of years, this is largely been a story around yield enhancement and revenue productivity. And I think those are things that get built over a very long time, right?

Getting great — relationships with great customers don’t get built overnight. You don’t just build a great relationship or contract overnight. Those are things that get build overtime, you do good service, they come back to.

And so those are things that I kind of credit as a multiyear story. But the stuff that you can do to prevent kind of insolvency, which I look at this as almost inevitably. I don’t know about you guys, but when I look at the financial results, I mean, insolvency is effectively an inevitability. Because the economy is great. You got Amazon, you got people moving stuff. And this is not a bad economic environment.

And so, my question to you is, what steps are being made to make sure that this thing — insolvency is an inevitably. To me those are things which are — $50 million of G&A cost, moving the company, doing things like that. I mean, where is that in this plan?

James Reed

Yes. No, those are great questions. And it almost sounds like, maybe I had a microphone in one of mine and Jason’s recent conversations. We talk about all of these things, but actions are more important.

So, if you go back to November of last year when I started to date, we have cut over $3 million in payroll cost of our nondriving associates in that short period of the time. I think that’s a pretty hard and drastic thing to do. That’s gotten, we think, our cost structure more in line as compared to other computing transportation companies.

With respective other big questions, we’re not compared to talk about some of those things. But I can confidently tell you that we are — we have got a plan be in the Fort Smith/Van Buren area long term. But as it pertains to the rest of our terminal network and what we do there, we are working on some things that we’ll probably share at a later date.

Jason Bates

The one thing I would add to that is, I think you have to take into account the scalability of things as it relates to rate and utilization. And the impact of those can have on the financials. I’m assuming you’ve probably got models, you probably run scenarios. I mean, the bottom line is, if you get a penny of rate, just penny, right?

You’re talking about $1.5 million that dropped straight to the bottom line. And when you got 8 million shares outstanding, that adds up real quick, right? And you start looking at profitability not in the way distant future, but right around the corner. Especially, when you look at what..

Unidentified Analyst

But how do you get a penny of rate? If you model rate between…

Jason Bates

Let me finish talking, and I’ll help you understand. We look at the network, right? And so, we talked about how just by reshuffling the network and saying no to customers on certain lanes and hauling more of freight in other lanes just without going to customers and demanding rate increases you can improve your rate per loaded mile, which have straight flow through to the bottom line.

James talked about, just in the month from May to June, and June to July, since we’ve brought Rick on board and Werner on board, we’ve seen substantial increases in rate per loaded mile. And again, we’re going to continue to exact those type of rate increases, as we continue to work on the refining the network.

And you do those things it’s not a function of meeting the market to dramatically improve or ELDs to have this gigantic impact to the bottom line in terms of capacity and imbalance in the market. It’s a matter of us being smarter about how we balance our own network and extracting rate that way irrespective of what’s going on in the broader market.

Unidentified Analyst

I think we’ve heard that argument from other CEOs in the past. It’s all about, there’s an infinite freight and that’s how we manage our network, right? But I guess, my question back to you is that you look at rates where they were in 2008 and ’09 and ’10, and before we had that big boom in ’14 or whatever you want to call it, right?

Rates are so — were much lower and you can — we can argue that maybe some of that has to do with driver shortage and as some it is there to stay. But I mean if you model similar rates to 12 or 13 against this cost structure. I mean, It’s over. Game over. TNT.

And so again, I understand that you guys want to fire bad customers and putting good customers and get your rate in load and all these things. And it’s one big calculus equation when it all come together. But I mean it’s been — I feel like I’m having déjà vu, because I feel like I’m hearing the exact same thing over and over again.

And so, I’m just curious, maybe you guys feel like rates can go down 50%, and you could be profitable, because X, Y and Z. But what if it you’re not? I mean, I get — I still have not really gotten the question’s answer that say what is the..

Jason Bates

Yes, so if you’re saying, what if rates go down 50%, well, tell me someone in the industry, if rates go down 50%. That it’s going to be just doing great.

Unidentified Analyst

Knight, Knight, Knight.

Jason Bates


Unidentified Analyst


Jason Bates

Look at what happened to Knight, when rates went down substantially, back when the spot market bounced, right? So, I mean, their numbers dropped dramatically, right? So again, we’re not Knight, we’re not Swift, we don’t have the capital structure or the infrastructure that they have.

But we can’t scale based on what we have today, right? And there’s tons of opportunity. And you know what, honestly, if you don’t believe in the story and you don’t believe in the team, then I would say, go invest in Knight, right? But if you believe in…

Unidentified Analyst

Or be short you, right? Be short you?

Jason Bates

Yes. And then, figure out, whether or not that ends up winning bet or not, right? Let us…

Unidentified Analyst

Yes, you guys sound like good guys. I just — my question is, even good guys with a bad asset, with the cans or can’t win. So, all I’m saying is, when you have good guys, and you have guys who want to win, guys from winning cultures.

And it meets the bad asset, the asset always wins. So, I guess what I’m trying to get out of way is to understand what you guys are going to do to make sure the cancer doesn’t kill you?

James Reed

It’s a fair question, Andrew. And like I said, we’re focused on cost reduction. We’ve been reducing cost. We continue to look at that. There are couple of wins in the quarters and things that we haven’t — that we didn’t talk about for kind of obvious reasons.

But just going back to the rate — and I understand your concerns on the asset side, but on the rate side, I mean we did increase rates $0.05 year-over-year. I don’t know any anybody else who did that.

We did increase rate $0.022 quarter-over-quarter. I don’t know anybody else who’s doing that. We have latent unlocked opportunity just to catch up with other people. And I would Just implore you and others, don’t make this harder than it is. Yes, we have to still manage the cost side.

Yes, we have to ask hard questions. But the fundamental underlying question for me on the revenue side is, why does USA Truck need to be any different than anybody else. And in a contractor rate environment, what we’re finding is we’re able to raise rates without the tailwinds of the industry. We’ve done it and nobody has been doing it.

So, I’m not going to opine on other people’s stock or other people’s performance, but we really do believe in our story. And we — I think, take your council the way you intended it, which is we got to get fit for the long race. And when I said, it’s funny — you might have been listening to me and Jason in his office the other day.

I told him that as the prices rise, so one of my favorite axioms that you’ve all heard is the rising tide raises all the boats in the harbor but it also hides all the rocks. We do not want…

Unidentified Analyst

That was 2014 at USA Truck. That’s exactly half a truck.

James Reed

Yes. We do not buy the thesis that price will save this company. We were talking the other day that our attitudes and our conversation, our tone cannot sway from what you’ve been talking about, right?

So, as we get better and better and better results, I expect that my ops guys are going to come to me and want to grow the fleet. And we are not going to grow this business until it’s fit to do so. And we’re also going to have to have the discipline to make sure our cost structure and all things you alluded to are right.

So, we can move forward. So, appreciate your questions. Look forward to talking to you some more. Francesca, are there any other people in the queue?


The next question comes from Michael Vermut of Newland Capital.

Michael Vermut

Hey guys. How are you doing?

James Reed

Hey Mike.

Michael Vermut

That was entertaining. Can you just give us a progression of — a couple of quick questions here? When we look at a little longer term, obviously, you guys have some internal plans. Where should we — could we — could this thing be ’18, ’19, should we be getting down there?

And then, coming back to little closer, the progression question of July, what you’re seeing in August have we hit profitability yet on a month-to-month basis? A little more granular.

James Reed

It’s a fair question. And Mike, I’m probably not going to answer it. But the — on the July and August — here’s what I will say, we don’t disclose our internal plans to the marketplace. But we have said that we expect to be at a positive operating income for the third quarter. And coming out of July, we reiterate that.

So, having seen our initial blush on that, we are still — that’s still where we are head is. That’s why we reiterated on this call. In terms of long term, we haven’t even completed our 2018 planning yet, but I would say that especially on the trucking truck side, being able to get to a 95 OR in that ’18, ’19 range. By golly, but we better get there.

So, I think, those are reasonable kind of intimations to me.

Michael Vermut

That’s excellent. And then also, when just looking at liquidity, which was obviously a concern. Obviously, there are no real covenants in our line. Is this good a line as I’ve ever seen? Is that how you see that it?

Jason Bates

Yes, correct. We — I actually met with our entire banking syndicate last week. We had a great meeting. And that was very an agreement that we entered into. A couple of years back, it goes out through 2020. We don’t have any restrictive covenants.

In fact, all we have is a fixed charge coverage ratio that can inhibit dividend payments and things like that, but as you know, right now, our focus is on paying down debt. And using any access free cash flow to help the business move forward. So yes, we’re got a great credit agreement in place. And a rate supportive syndicate.

Michael Vermut

Excellent. Contrary to that last one, I would say the biggest risk here is — other acquire or someone look at the company at this vulnerable stage with all the overhead that’s there. I assume that that’s a concern of yours at this early stage of a turnaround?

James Reed

It’s a really — Mike, it’s an interesting question. I think I’ve even had this kind of philosophical discussion with you in the past. And again, this touchy with respect to our employees. But going back to Andrew’s question, which I respect, and I think a really fair question.

My job as a CEO, every day is to think about, should we just sell all the assets and give the money back to the shareholders? Should merge? Sell? Or otherwise combine with another company? Or are we best to operate as a going concern? And I would just tell you, I’m relatively unemotional about those three alternatives.

I’m a capitalist at heart. My job is to create shareholder value in the best way possible. And if we had somebody approach us that made a deal for our shareholders that was the best option at those 3 alternatives, I am duty bound, and frankly, legally bound to do it.

And so, no, it doesn’t concern me. Right now, we believe that the best way to create value for all of our shareholders is as a going concern. But there is a realm and world of possibility, and we’ve all seen it with — I mean, deal happen that make sense, we have to remain open to those. And it doesn’t concern me. I think, it’s a reality of business.

Michael Vermut

I just hope it doesn’t happen too soon. And let’s see some of this profitability develops.

James Reed

And just if I may, thank you for your questions, Mike, if I may, I do say to Jason privately often, my biggest worry about what we’re doing, because I really want to see this through. Because I think there’s immense value that we can unlock here. My biggest concern is that market would let us do it. And that’s code for what you just asked about.

Michael Vermut

Excellent. And land one last thing. Is there any reason here, is there anything structural? You’ve been here for a year. Why we shouldn’t be operating equal to our peers, and possibly, the higher ranked peers in our group?

James Reed

Yes, I mean not to correct you. But I’ve been here 9 months. But it feels like one year. It’s funny, again, going back to Andrew’s question. Our customers, Mike, love us. I’ve been 15 years in tech and 6 years now in trucking. And we receive a better reception at our customers than I have ever seen in any industry that I have been a part of.

And so, it’s speaks highly of the long and enduring relationships that have existed here for over 30 years. And if you really look back at the history of the company, and like, be a historian for a second, our immediate situation, our immediate past are not reflective of our potential nor are they reflective of the history of the company. We have a preponderance of history that suggests, this can be a great company.

So, I don’t want to say, and I always resist the urge to say, just give us time, but Rick started on May 30, and has already an immediate impact on our rate. Werner started on May, 22 and has an immediate impact on our executions.

Jason, it’s undeniable the value that he brings to our decision making and our rigor of thought. These things are at some level a matter of time. Q3 is the quarter where we expect to have operating profit. And then, beyond that, it’s just a matter of continuing to refine the network, continuing to get price.

As Andrew talked quite passionately about continuing to improve our cost structure. So yes, we should be comparable with our competitors. And our internal voice is that we want that year to be 2019, and we want 2020 to be the best year in the history of the company. We haven’t put numbers to any of that stuff but that’s kind of our cheerleading.

Michael Vermut

Excellent. Okay. Thanks guys.

James Reed

Thank you.


Your next question is a feedback from Jason Seidl of Cowen.

Jason Seidl

Hey guys. This time, it’s me. I was on another call. So, listening in to some of the questions, just had a couple of follow-ups, and I’ve have been doing this 19 years been in Trucking. 25 and I really hope you don’t see rates fall 50%. When you mentioned that there are some things that you can do. And it sounds like more of pairing down the company to some extent.

Can you talk to us — can you give us any ballpark range about of that might mean in savings? And some of these things, maybe some asset sales that could in turn be used to pay down some debt?

James Reed

Yes, Jason. I don’t want you to misinterpret my comment. So, I appreciate you asking the clarifying questions. We do not intend to pair down the company as you look at our last four out of five quarters of performance where we’re increasing our revenue per tractor per week.

We think that’s really solid evidence that continue to see tractors and grow by virtue of being more productive on our existing assets is warranted, and so we don’t intend to shrink the business.

When I talked about cost savings, they may be a little bit counterintuitive, but we don’t intend to close other facilities, although we have been consolidating some of our business, around the Logistics business. We just think that’s smart to go toa super regional type model. But on the Trucking side, we actually feel like we have some cost exposure, because we don’t have some facilities in the right spot.

So, you may see us rework our footprint as it were to further drive variable cost lower and lower and lower. And we got to be smart about that. We can’t burn the balance sheet with additional debt in during that.

So, I don’t want to say much more about that, but I do not want to mislead everyone. We have no intentions of selling off our buildings, shrinking the fleet or anything like that,.

Jason Bates

Someone made the comment about shrinking your way to profitability. And we are firm — firmly aligned in a one mind, between James and myself and as an organization. That’s just not going to work, right? You can’t shrink your way to profitably.

And so we need figure out how to be more efficient with the way our network is designed and more — and higher expectations with regard to what we can run on a truck in any given week, in terms of miles. And then you pair that up with having difficult conversations with customers on rates and where we’re going to operate for them and where we won’t.

Also, having difficult conversations about headcount, and staffing. And I think, James alluded to some of the things that we have done on that front over the last nine months.

So, we understand, we got a play all the keys of the piano to make this work. And we’re aggressively focusing on all those areas. But yes, shrinking to profitability there is a certain fixed cost coverage that you got to have.

Jason Seidl

Okay. I appreciate the clarification. A couple of others, I apologize, if they have actually been stated before. You guys obviously are more focused on a contractual market versus the spot market, can you talk a little bit about the percentages of business that sort of rolls over in the third quarter and in the fourth quarter?

And then, could you talk a little bit about driver pay and what are your expectations going forward?

James Reed

Yes. So, you’re right. We do. As I said earlier, have a huge dependence on our contract rate. In terms of rolling over, I think I talked about in prior quarters that we had about $60 million of a $300 million — excuse me, $100 million of $300 million basket that had been rebid in the first half of the year.

That leaves about two thirds of our business going through the bid process, which is happening right now. And so, getting Rick on, getting our network strategy figured out. We actually just presented to the board yesterday.

That the really kind of triple witching hour for us to really see what we can do with this horse, because the great gains that we’ve seen just in the couple of months that Rick has been there, have been, as Jason said earlier, not by going to customers, not by repricing but just being more disciplined about running the existing freight we’ve had and it had material impact. With respect — I’m sorry your question, Jason, was about? Driving wage increases.

Jason Seidl

My second question — driving wage increases. But if I can, for a second, ask a quick follow-up to that one. What’s the conversation like now with your customers as, you said, they were starting the conversations versus in the beginning of year? Can you talk a little bit how that might be different now if it is at all?

James Reed

Yes. It’s really interesting. I mean, our customer conversations in the first part of the year, people were relatively, I guess, from their perspective, bullish, from our perspective, barrish about wanting to have flat pricing.

I think, you’ll recall, and I don’t remember the stats of the top of my head, but we had kind of some pretty good success with that third of our freight basket getting $0.03 a mile, kind of — or 3% — excuse me 3% increases.

And that just was, we were being smarter about bidding freight and better lanes even before Rick got here. But as we go into the second half of the year, there’s not a lot of, other than 1 notable big customer in the Southeast, who has publicly said that they expect rates to be up.

There’s not a lot of customers that are expecting rates to be up. And our conversations are less about rate a lot of times, and more about the network.

And so, we just shared an example with our board yesterday, where a customer, a big-name brand customer, you’d all know, came back to us and as we made a mistake on our bid, because we had eliminated 500 lanes that we had previously run. And we said no it’s not a mistake, we’re just being more disciplined.

So maybe not but I’ll answer your — looking forward, their questions are more about, are you sure? and oh my gosh? Almost like while you have the trucks now and knows what they’re doing. And we can’t take advantage of their low pricing on some of these random lanes that we use to bid.

Jason Seidl

So, it’s just more about the your — in other words, there’s a company which seems to be much more freight selective than you were in the first half of the year?

James Reed

100%. And our customers would tell you the exact same thing. And it’s cool, right? It’s — and again, I don’t mean to be too detailed. But significant change in our strategy is that in the past, we get bids. We bid every lane. And we try to run their lanes that were best for us.

But then our customers would accept that are sensibly, they were directing what freight we would run we had run over all over the place and without discipline. So, this one customer that I’m speaking of, literally came back to us after a third-round bid.

So, you can probably guess who it is now but — and said, are you sure this is what you want to do? Not only were we sure, we increased our revenues with them. And we increased our rate per mile with them more than a nickel.

So, it just totally worked out for our good. And it’s all about discipline. And it’s not relying on industry tailwind. It’s a unique story for USA truck. Because we’ve been so on discipline in that network execution in the past. Now within the…

Jason Seidl

Follow-up about the drivers?

James Reed

Yes, Jason, did you want to add something?

Jason Bates

No, no, no. I was just going to remind you of the second piece.

James Reed

So, with respect to drivers, somebody asked that question earlier, we did a driver. And I don’t know, if you want to recall, we talked about it, Jason, we did a driver pay increase that was effective in April. That we’ve talked about in the past.

That was essentially a weighted average $0.015 impact to our non-dedicated drivers. And we don’t see a need for us to increase our driver pay.

We always — we look at it every quarter to make sure that we remain competitive. We have a strategic idea that we kind of want to be in the bottom of the top third of the pay structure.

And so, we’ll continue to look at and evaluate that. But we don’t see — even with some of the noise that’s been out there about other people raising their pay. We don’t think that bumps us out of the position that we want to be in.

Jason Bates

And as alluded to a little earlier, we feel like, given the utilization deficiency that we’ve kind of operated at, just getting the driver for more miles. Be more effective and disciplined. And that comes through an enhanced network.

But it also comes through Werner and the team that he’s got downstairs just kind of redefining the expectation of how many miles these drivers can run every week legally. And we have a lot of opportunity there.

And so, as these drivers come to realize that and we push them and help them. They’re able to make more money for their families in the same amount of time. Just given the confines of being more efficient about utilization.

Jason Seidl

Okay. Gentlemen. Thank you for your time. I appreciate it.

Jason Bates

Thank you, Jason.


The next question is a feedback from Michael Vermut of Newland Capital.

Michael Vermut

Hey. Just two quick ones. Was that right? You said, 2/3 of your freight is going to be repriced in the back half of the year?

James Reed


Michael Vermut

Little unusual. It’s fortunate, but it’s a little unusual.

James Reed

Yes. I think in the first half, we had said on our prior call that about $1 million year-to-date had been sold. It’s about right, Mike.

Michael Vermut

That’s great. And then also, just looking at systems and I know how some — maybe companies that are running at a little better OR. The system’s place, right? How you look at profitability of freight. Do you get to see this on a weekly basis?

On a monthly basis? And how does that turn out? And how is that changing in the organization? I know you’re quite attentive looking at that. Has anything changed the culture of the company really looking at that base profitability?

James Reed

Yes. I think, that’s a fair question. Yes, so Rick, looked at profitability of every load, every lane every day. And he has tools that we put in place that help us to do that.

In terms of culture, we have goals now that are set at the operating manager level, may understand we’re starting to rollout even at a driver manager level. Revenue per tractor per day goals that are sensibly tied back to profitability freight, right? In this market rate is a prophecy for profitability.

If you have two lanes, you want to run the lanes, it gives you the best opportunity of that. We look at our network in terms of kind of power triangles or other geometric shapes that net-net, give us the better options. So, but yes, we have tools optimizers that help us understand.

So, there are times where you may look at two pieces of freight that the lower priced freight is a better option, because it gets you in a market that on the combined turn is what Rick calls it, it’s a more profitable move, because of where it lands you, and what the opportunities are that arise from that. But that’s a new discipline.

We have had optimizers in place in the past. But I think it’s fair to say they haven’t consistently used. And so, yes, I think it’s changing the culture. We didn’t announce them but we’ve got kind of some helpers in the room from operations. They’re nodding their head going, yes that’s right. So yes, I think, it really has changed. And I think it’s something quite fundamental.

Michael Vermut

Excellent. Okay. Thanks guys.


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 everybody for participating in our call this morning, and we really appreciate the questions and the dialogue. I’d like to some up by saying that company-wide we’ve been consistent and steady in our focus on execution and accountability. I wish everyone could witness our team at work.

We are seeing exactly what I had hoped. Engage leaders and associates all pulling in the same direction, and creating results like we’ve seen this quarter and a better and more disciplined network, consistently improving yields, lower driver turnover and better cost performance.

I had a 30-year veteran of our company approach me a few weeks ago and say, it’s happening. When I asked him what he meant, he shared that our energy, focus and commitment is happening all around him and it’s palpable. Things are happening for the good at USA truck. And we’re excited to have a role in the success that is to come.

Don’t get me wrong. We are not in the business of cheerleading poor financial results. But we believe the hard work of returning this company to its one freight and consistent performance is in reach. We will forge ahead. We are improving. We are increasingly excellent in our execution.

We are more engaged than ever and there are pockets of maximum efforts emerging in our ranks that are beginning to show the expected results. And as we like to stay around here, when we do all of the above, we went together.

Jason and I will be in Boston for an industry conference early next month. You’ll see details as an upcoming advisory announcement. We look forward to meeting you and discussing our plans for the business for that time. That’s again for your attendance today. Have a great day.


The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!

Leave a Reply

Your email address will not be published. Required fields are marked *


one × one =