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Edited Transcript of USAK earnings conference call or presentation 1-Nov-19 1:00pm GMT

Q3 2019 USA Truck Inc Earnings Call

VAN BUREN Nov 5, 2019 (Thomson StreetEvents) -- Edited Transcript of USA Truck Inc earnings conference call or presentation Friday, November 1, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chad Lane

USA Truck, Inc. - IR Officer

* James D. Reed

USA Truck, Inc. - CEO, President & Director

* Jason R. Bates

USA Truck, Inc. - CFO & Executive VP

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Conference Call Participants

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* Barry George Haimes

Sage Asset Management, LLC - Managing Partner and Portfolio Manager

* David Griffith Ross

Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics

* Jack Lawrence Atkins

Stephens Inc., Research Division - MD & Analyst

* Jason H. Seidl

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* Jeffrey Asher Kauffman

Loop Capital Markets LLC, Research Division - MD

* Michael David Vermut

Newland Capital Management, LLC - Founder

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Presentation

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Operator [1]

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Good day, and welcome to the U.S.A. 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.

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Chad Lane, USA Truck, Inc. - IR Officer [2]

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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 the 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.

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Jason R. Bates, USA Truck, Inc. - CFO & Executive VP [3]

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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've 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 #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 #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 $2.5 million 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 a $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 80's to low 90's from an adjusted operating ratio perspective, depending on the quarter and provides a platform and focus for future expansion.

Turning to Slide #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 #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 stockholders' equity was $82.5 million.

Net debt to adjusted EBITDAR for the trailing 12 months ended September 30, 2019, was 3.1x. 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 a difficult operating environment over the past 2 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 a discussion of the business and go-forward strategies.

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James D. Reed, USA Truck, Inc. - CEO, President & Director [4]

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Thanks, Jason.

As we stated in our release, the third quarter marked the 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 need for urgent capacity compared to our own experience over the last 2 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've been 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 improved pricing dynamics through our own network design, even in the face of a tough environment.

And before I move on, pricing in lanes that we already have with existing customers is trending mostly flat to 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 are 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, a 99.7% in 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 of 560 basis points when compared to the average adjusted operating ratio of our public peers.

The 2016 USA Trucking segment adjusted OR was 1,370 basis points higher than the peer group. And now, not quite a full 3 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've 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 U.S.A. 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 GAAP closing measures in the second and third quarters in response to the challenges arising from the freight environment. These measures are named -- 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 stewardship is a primary part of our job.

The second one is to increase the actualization of 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 impacts 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 drive our amenities in several other terminals across the network.

And finally, we've added sales force in the USAT Logistics to increase volume. We added 11 personnel to 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 reach 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 they're continuing near best-in-class safety performance in the truckload space. An improvement in 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've 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 in coming months.

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 and 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've added over 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've come to view the pricing exercise a bit like a prisoner's dilemma and to minimize the 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 mildly in teaching our people to lead our developing comprehensive on-boarding 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 U.S.A. Truck self-help story is working to improve results and that our opportunity to improve via self-help remains in place more announced 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 services should materially improve our profitability and customer experience.

What does that all mean for 2020? Well, it's still going to be tough in absolute terms, seasonality is neutral to 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 to 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, our 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 clearinghouse 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 2 years have been the stage setting for our revamped 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've reduced our lanes with 1 load and 1 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 5-year network strategy. In full force, this model unlocks yield, productivity and velocity in ways we've never seen at USA Truck. And we've already made significant progress in the network design for next year and the bids we 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've pursued should allow us to return to our intended strategy of minimizing spot freight. We've been pressed into being too dependent on brokers and 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 2 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 or leased 3 new facilities in the last 12 months in New Holland, Atlanta, and now, Carlisle, Pennsylvania, which we just signed a lease on.

The cost benefits of these strategic locations have yet to be realized, especially, in the latter 2 locations. The cost and 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 an expanded truckload sales force and a logistics-centered internal sales team, both of which we believe to be among the best in the business. We've already added over 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. Over time, we expect to get closer to our customers and drivers through regionalization. Again, it is a 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 1 of our regional operators in place and functioning by January 1 and have several other regional operations up and running, no later than midyear.

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 2 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 for 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 autoroute 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 results this quarter. We're 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've 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.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

The first question today comes from Jason Seidl with Cowen.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [2]

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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? And can you tell us how this is going to impact your model from a financial side going forward?

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James D. Reed, USA Truck, Inc. - CEO, President & Director [3]

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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 into 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.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [4]

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That's all right.

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James D. Reed, USA Truck, Inc. - CEO, President & Director [5]

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So this isn't necessarily anything new. What we've done -- and I tried to make the point in my prepared comments, what we've basically done in the last couple of years, and we've talked about this a lot publicly as we've taken -- I used the metaphor of a pickup sticks game, we had pickup sticks that were lying all over the table, and we just organized 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 has 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 an 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, and we've been doing it for the last 6 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, out, and what we call, on-the-turn. So what the next the next possible load is for that lane.

And that helps us identify these power lanes. We've already got 3 power lanes where we run a considerable percentage of our business. So it proved out the model in 2019. So it's not a whim. 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 colludes to give us the best opportunity for profitability.

And what I will tell you is we've 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 to mid-80s OR. That's not what we're doing, because to get trucks out of their domicile, into the power lanes takes some inefficient moves, it takes some empty miles. You 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?

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Jason R. Bates, USA Truck, Inc. - CFO & Executive VP [6]

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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 have been able to fill out this network strategy this year. That was the plan all along.

And then when we start getting into the year and seeing a lot of the realization contract freight not being there, that's when we realized that we've 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.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [7]

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No, I completely get being exposed too much to the spot market and you guys get caught. Ultimately, if we look out somewhere between 3 and 5 years, what percentage of your business, in the Trucking business, is going to come from the power lanes?

I'm assuming you expand beyond 3?

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James D. Reed, USA Truck, Inc. - CEO, President & Director [8]

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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.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [9]

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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 the -- especially, on the brokerage side, is just a massive spending war on technology. Just wondering, what do 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?

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James D. Reed, USA Truck, Inc. - CEO, President & Director [10]

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Yes. So it's a great question. And it's got -- there's 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 recharacterize us as a small brokerage. 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 logistics 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, that's 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 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 is tough. There's people that are selling freight at a loss. We know that, they say that. Customers know it, too. How long will it last? 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.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [11]

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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?

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Jason R. Bates, USA Truck, Inc. - CFO & Executive VP [12]

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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're -- 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 is -- plays a big factor in that ROI. And so we're going to pay close attention to that this year in the market, and 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 will 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 our owner operators and letting go of company trucks, and 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 will help on that capital deployment if we're only having to go out and buy a couple of hundred trucks as opposed to 350.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [13]

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So unpacking that, Jason, directionally for CapEx, are we going to expect something a little bit flat, maybe slightly up next year?

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Jason R. Bates, USA Truck, Inc. - CFO & Executive VP [14]

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

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Operator [15]

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The next question comes from David Ross of Stifel.

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [16]

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

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James D. Reed, USA Truck, Inc. - CEO, President & Director [17]

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Yes, it's really interesting. So I'll give you a little look behind the curtain, actually had our finance team. When we first saw these results, and I think sometimes the CEO's 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 had 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 to profitability, and productivity of the trucks was nearly identical between, both ELD and AOBRD. So that's a good thing.

Now that said, we've 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, 1 of the 2 traditional in-truck solutions, we did a combined solution that has a software company that we've a lot of confidence and experience with, designing the interface with our drivers. And then an outside partner with a more of puck-type solution, it allows 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 2 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% scanner 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, much as many of our kind of crowd-sourced apps that some of us use on our phones used 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.

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [18]

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

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Jason R. Bates, USA Truck, Inc. - CFO & Executive VP [19]

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Well, I have to say, in reading some recent releases, I was giving my controller 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 -- so 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 dissatisfaction 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.

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [20]

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And the TMS implementation, sounds like that's behind you there, James. Is that hurt near term? And it's going to help long term? Or has it been a benefit from Day 1.?

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James D. Reed, USA Truck, Inc. - CEO, President & Director [21]

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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.

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Jason R. Bates, USA Truck, Inc. - CFO & Executive VP [22]

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And we'll continue to tweak.

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James D. Reed, USA Truck, Inc. - CEO, President & Director [23]

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Yes. And my point in saying that is -- and I think the reason Jason's kind of weighing in there is the IT department is reporting to him. And rather, we've been focusing a lot on long-term IT horizon issues and instead have pivoted to day-to-day IT issues. And so we've literally got 4 or 5 IT people downstairs every day, 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. It -- we had hoped that it would be super helpful. It's -- that's clearly not the case.

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Operator [24]

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The next question comes from Jack Atkins with Stephens.

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [25]

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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 Q3 '16, you guys had 100 OR; 3Q'19, you have a 99.7 OR.

So I guess, why haven't we've 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.

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James D. Reed, USA Truck, Inc. - CEO, President & Director [26]

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Yes .I think it's a fair question, Jack.

I mean, some of it is environmental. Right? 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 cost 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 cost, 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 has seen.

I mean, you'll remember, one economist said that '18 was an A+ and '19 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, and I'm going to say the number. I mean, if we had just maintained our mix of contracts freight versus brokered freight. So if we have been 10% better like we were last year at the current rates we have this year, it would have resulted in a $3.9 million higher profitable number in the quarter.

And so that's old, if ifs and buts were candy, that would be Christmas all year long, right? But if we had done a better job in our bid process, we would have been nearly $4 million more profitable this quarter than we were at that time in '16.

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.

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [27]

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Okay, got you. Now 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%, 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?

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James D. Reed, USA Truck, Inc. - CEO, President & Director [28]

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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 will feather in relatively proportionately through the year. 40%-plus 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 is 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 upfront, confronting the brutal facts about the insurance environment, for example, then we're living a pipe dream. I mean, there's some real cost 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 '19.

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Jason R. Bates, USA Truck, Inc. - CFO & Executive VP [29]

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Yes. Agreed. And so -- and it's not just insurance. I mean, insurance is brutal, and we need to make sure that everyone is aware 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, 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'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 will be interesting to see some of the different things that James talked about, with the drug clearing house and some of the other things, ELDs, whether or not that the 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.

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James D. Reed, USA Truck, Inc. - CEO, President & Director [30]

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

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Jason R. Bates, USA Truck, Inc. - CFO & Executive VP [31]

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At some point.

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James D. Reed, USA Truck, Inc. - CEO, President & Director [32]

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

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Jason R. Bates, USA Truck, Inc. - CFO & Executive VP [33]

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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 on 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 $0.80 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 cost headwinds.

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [34]

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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 do 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?

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Jason R. Bates, USA Truck, Inc. - CFO & Executive VP [35]

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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 were 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. We only got 8.3 million, 8.4 million shares outstanding. So you're talking about $1 million here. Right?

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [36]

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Yes.

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James D. Reed, USA Truck, Inc. - CEO, President & Director [37]

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So it literally swings pretty wildly just because of our small amount of shares outstanding. But when you look at the dollars, of 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'. 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.

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [38]

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Understood. If I could ask one more question, and I'll hand it over. James, just sort of looking at the other side of the coin and playing devil's advocate, and then thinking about sort of what could go wrong with this shift to more of 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 that -- I just want to make sure, we're thinking through both sides of the coin, if you will.

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James D. Reed, USA Truck, Inc. - CEO, President & Director [39]

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Yes -- no, it's a fair consideration. I would characterize executional risk as kind of internal executional risk and external execution 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 in this is the internal risk of not bidding properly because guys, there's a ton of freight out there. It's about bidding properly and bidding strategically and winning the bids in 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 learnt from that. And so I would characterize this risk as pretty low.

We've got -- I wish if we could invite everyone on the call into our pricing strategy meetings. 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.

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Operator [40]

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

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Jeffrey Asher Kauffman, Loop Capital Markets LLC, Research Division - MD [41]

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I want to pursue down the ifs and buts path that James laid out a little bit earlier. There's 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 you're 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 to 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?

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Jason R. Bates, USA Truck, Inc. - CFO & Executive VP [42]

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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 learned 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 a variable cost. And let's run it at variable cost. Why? 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 of fleet, but 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 bids 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 we're implying that we're starting a price war, we're not chasing the lowest price freight.

Let me say that again, we are not chasing the lowest price freight. 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 -- on an extremely long-winded way of saying, I liked how you characterized it. We do have internal stuff that we can control. And Jason said it and I'll reinforce that we consider our cost and the ROI in 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.

Would you add anything, James?

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James D. Reed, USA Truck, Inc. - CEO, President & Director [43]

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Yes. That's well said.

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Jeffrey Asher Kauffman, Loop Capital Markets LLC, Research Division - MD [44]

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Now 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?

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Jason R. Bates, USA Truck, Inc. - CFO & Executive VP [45]

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Yes. So just to clarify, the 350 is the number of trucks. Between 300 and 350, they're coming off 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 accretive 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 we're going to be getting rid of, that we replace those with the 100 to 151 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, it's 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 to 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 6 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.

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James D. Reed, USA Truck, Inc. - CEO, President & Director [46]

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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.

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Jason R. Bates, USA Truck, Inc. - CFO & Executive VP [47]

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Yes.

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Operator [48]

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

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Barry George Haimes, Sage Asset Management, LLC - Managing Partner and Portfolio Manager [49]

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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 from, maybe, biggest to smallest, what are the 2 or 3 or 4 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 is my first question.

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Jason R. Bates, USA Truck, Inc. - CFO & Executive VP [50]

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Yes. So that analysis is against our public peer group. And so while there are 2 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's really 2 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're actually more than closed the gap with the competition. We end up actually outperforming the peers if we just get to average on utilization and we change our mix back.

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James D. Reed, USA Truck, Inc. - CEO, President & Director [51]

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

And 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 and turnover, driver turnover because they're not getting the miles that they 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.

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Barry George Haimes, Sage Asset Management, LLC - Managing Partner and Portfolio Manager [52]

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Got it. 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?

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Jason R. Bates, USA Truck, Inc. - CFO & Executive VP [53]

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Yes, absolutely. Yes. I mean, again, you're talking to 2 finance guys. Right? So we don't do anything if it doesn't pencil in.

And so we have done detailed analysis on outside spend in the markets where it might be cost advantageous for us 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 project 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 leased 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.

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James D. Reed, USA Truck, Inc. - CEO, President & Director [54]

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Yes. And so Barry he's being a little humble. I'm really proud of the team on this one. This is one of those where you ask somebody to go look at something and they impress you with the breadth and capabilities they bring to the table.

So Jason and his team did this incredibly cool kind of heat map analysis of all of our over-the-road spend and proposed hypothetical locations that would most reduce our cost. We picked those locations, which we've now secured. And then we did the analysis before securing them. And he's been a little cryptic, but it more than cleared 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 they at least clear that hurdle rate and then some.

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Barry George Haimes, Sage Asset Management, LLC - Managing Partner and Portfolio Manager [55]

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Got it, okay. And then my last one is, going over to Logistics, their revenue per load was down 25.8%. What was the change in your cost of buying capacity within Logistics in the quarter?

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James D. Reed, USA Truck, Inc. - CEO, President & Director [56]

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Not enough.

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Jason R. Bates, USA Truck, Inc. - CFO & Executive VP [57]

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(inaudible) not enough. I mean, it's interesting.

If you look at spot -- 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 is 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, Barry, it's a great question. Until just a week ago, the traditional letting up that you'd expect to see in the capacity cost, it 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 is 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 log jam ease. But it's been brutal, and it's been weird.

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Operator [58]

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The next question comes from Mike Vermut of Newland Capital.

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Michael David Vermut, Newland Capital Management, LLC - Founder [59]

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A couple of quick ones for you. Yes, you're clear. When you state that, yes, it's $1 million -- with our share count, it's $1 million here, you're talking very little dollars, right, to go to below 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 are there -- those that you're looking at, so that -- and this will lead to my next question.

And as the next cycle approaches that we're a leaner company and our mid-cycle OR is up 200 basis points to 250 over the last cycle and our peak earnings are 200, 300, 400 basis points higher than last year. 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?

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James D. Reed, USA Truck, Inc. - CEO, President & Director [60]

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Yes. So Jason is going to hit the cost real quick here, and hopefully, talk about our cost count flow...

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Jason R. Bates, USA Truck, Inc. - CFO & Executive VP [61]

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That's right, I'll give you.

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James D. Reed, USA Truck, Inc. - CEO, President & Director [62]

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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 costs, investing in our repair facilities will lead to lower costs.

And now I'll turn it over to Jason. He has a lot to say about it.

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Jason R. Bates, USA Truck, Inc. - CFO & Executive VP [63]

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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 was in his comment, about having called out $5.6 million of fixed cost -- annualized fixed cost reductions, 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 million, which means there's still several million dollars of opportunity left to be had. And of those 91 total areas, we've kicked 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 of 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 a 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 9 months now and will continue for the foreseeable future.

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James D. Reed, USA Truck, Inc. - CEO, President & Director [64]

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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 2-parter. One, we said in our prepared comments, that we see within our grasp, the ability to further -- to totally close to 810 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 2 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 number.

So 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 improvement is 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 is in a really good position.

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Michael David Vermut, Newland Capital Management, LLC - Founder [65]

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Excellent. And then last question was just no one really tapped on it. The balance sheet, it looks like there are no worries whatsoever there. There are no real covenants on this, and we just extended it for 5 years, and it looks like we're not burning much cash at all, if any, you actually paid down some debt this quarter? And should that be the same as we look forward at pretty neutral on the borrowing base?

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Jason R. Bates, USA Truck, Inc. - CFO & Executive VP [66]

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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 springing 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've got a couple of finance guys here. 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 as shareholders. And so we're going to make sure that we continue to manage that appropriately.

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Michael David Vermut, Newland Capital Management, LLC - Founder [67]

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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 is the time.

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James D. Reed, USA Truck, Inc. - CEO, President & Director [68]

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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.

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Operator [69]

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As there are no further questions. This concludes our question-and-answer session. The conference is now also concluded.

Thank you for attending today's presentation. You may now disconnect your lines.