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Edited Transcript of USAK earnings conference call or presentation 26-Apr-19 1:00pm GMT

Q1 2019 USA Truck Inc Earnings Call

VAN BUREN Apr 30, 2019 (Thomson StreetEvents) -- Edited Transcript of USA Truck Inc earnings conference call or presentation Friday, April 26, 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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* Albert Brad Delco

Stephens Inc., Research Division - MD

* 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

* 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 morning, and welcome to the USA Truck First Quarter 2019 Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Chad Lane, Investor Relations Officer. Please go ahead.

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

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Good morning, and welcome to USA Truck's First 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.

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. We're pleased to report that our team has delivered a seventh consecutive quarter of consolidated profitability. We are encouraged by the dedication and hard work exhibited by our entire team this quarter in spite of its challenges.

If you please turn with me to Slide #3 for a review of our financial results. Consolidated operating revenues came in at $134 million for the quarter, which represents a 7.2% increase year-over-year. Net income was $1.5 million. Consolidated adjusted operating ratio for the quarter was 96.1%, which represents an improvement of 170 basis points year-over-year.

Turning to Slide 4. Trucking revenue increased 20.4% or $16.1 million year-over-year to $94.9 million for the first quarter of 2019. The majority of this increase was associated with the acquisition of Davis Transfer. However, even if you were to exclude Davis, we were able to increase our revenues by 5.1%. Our Trucking segment generated $2.3 million of adjusted operating income in the first quarter of 2019. This represents a $2.9 million improvement year-over-year.

Our adjusted operating ratio for the quarter was 97.2%, an improvement of 360 basis points year-over-year. Base revenue per available tractor per week increased $129 or 4% year-over-year in the first quarter.

The year-over-year increase in revenue per truck per week, our most critical measure, reflects the continuation of our methodical network and yield management initiatives.

Base revenue per loaded mile increased $0.235 or 11.7% when compared to the first quarter of 2018. Loaded miles per available tractor per week decreased 112 miles or 6.9% year-over-year, while deadhead percentage in the first quarter of 2019 increased 70 basis points year-over-year.

Our average available unseated tractor percentage for the first quarter of 2019 was 7.8%, which increased approximately 150 basis points sequentially. The challenging driver recruiting environment combined with the OEM equipment delays late last year were the key contributing factors to our unseated tractor percentage. Our average tractor age is now 2.5 years as of March 31 versus a peak of 3.3 years during 2018.

The average available tractor count for the first quarter of 2019 was 1,916, which is an 18.3% increase when compared to the first quarter of 2018 average, which was 1,619.

Turning to Slide #5. We will review the results of our USAT Logistics segment. Revenue decreased 11.4% or $5.3 million year-over-year to $41.4 million for the first quarter of 2019. This was driven by lower revenue per load as a result of contraction in the spot market when compared to the first quarter of 2018.

Revenue per load decreased 16.1% or $276 per load year-over-year. However, adjusted operating income was $2.3 million, a decrease of $700,000 year-over-year. Adjusted operating ratio was 93.9% in the first quarter of 2019 compared to 93% for the unusually strong comparable 2018 period.

Gross margin dollars decreased 2.5% or $200,000 year-over-year to $7.7 million for the first quarter of 2019. Gross margin percentage for the first quarter of 2019 increased to 18.5% from 17% when compared to the same quarter last year. This improvement in gross margin percent was a function of our strong contractual business in a lower purchase transportation environment. Load count increased 4.1% or approximately 1,100 loads year-over-year.

If you'll turn with me to Slide #6, we'll highlight some key balance sheet and liquidity measures. Pursuant to the adoption of ASC 842 and the inclusion of operating lease as liabilities, we now present our debt-to-adjusted EBITDAR as a comparable to the previously reported debt excluding operating lease liabilities to adjusted EBITDA. As of March 31, 2019, our total debt and lease liabilities were $182 million. Total net debt, net of cash, was $181.4 million and total stockholders' equity was $83.3 million. Net debt-to-adjusted EBITDAR for the trailing 12 months ended March 31, 2019, was 2.6x, giving pro forma effect to the Davis Transfer acquisition. The company had approximately $50 million available to borrow under its credit facility as of March 31, 2019.

Now I'll turn the call over to James for discussions 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. USA Truck has begun to demonstrate a much more consistent and predictable business cadence with this first quarter results. Not only did the team deliver a seventh consecutive quarter of profitable growth, by the way, it is the best first quarter of adjusted EPS since 2006, but we did so in, what I would call, a seasonally normal first quarter. Our analysis of seasonality showed that the first quarter 2019, at least for us, demonstrated a very consistent pattern with historic first quarter demand. There is no doubt the weather was bad this year, even worse than last year's battering of the Eastern seaboard. And we think that cost us a couple of cents in adjusted EPS and weather-related tractor unavailability.

The foregoing facts are critical because this result proves that USA Truck has the ability to not only survive in normal seasonally soft environments, but can simultaneously improve results in the midst of them. Nevertheless, we cannot miss the point Jason already made, that in a tougher market, USA Truck improved adjusted consolidated OR 170 basis points. The Trucking segment, the pariah of what we call the lost decade at USA Truck preceding our team's arrival, improved 360 basis points versus the first quarter 2018. Just want to say that again, our Trucking segment improved 360 basis points year-over-year.

We're not sure how much more clearly we can state our plan than the way we have since mid-2017 that we expected to see 300 to 400 basis points of adjusted Trucking OR improvement annually for the next several years. 2018 resulted in a 730 basis points annual adjusted Trucking OR improvement over 2017 as we reported in our Q4 results. And now, in Q1 2019, when the market was decidedly tougher, we still delivered on that promise in Trucking. We continue to feel like we are ahead of our plan, but the team is confident we have many opportunities for further improvement.

USA Truck has proven to be and remains a self-help story that has room to improve even in challenging markets, and Q1 allowed us to demonstrate that fact without ambiguity. We believe this quarter's results validate our thesis that these improvements and changes are permanent, structural and different from past USA Truck performance. Our message remains unchanged. This is a commoditized market. There's no reason USA Truck cannot compete. We're focused on a turnaround that moves results more toward our peers over time through appropriate pricing, consistent seating of trucks and putting more and more revenue on our trucks and through our logistics regional offices. All this has to be done while being hawkish on cost.

I briefly touched on the market conditions earlier. There is no doubt that it has been slower than we had planned for internally. However, the economy remained strong. The U.S. economy is at near full employment, mortgage rate moves early this year led to more housing activity, and that all points to a healthy freight environment ahead. Home improvement has definitely picked up in the last several weeks, and the normal flow of freight should soon follow. Our customers remain optimistic about the rest of the year and with that backdrop, so do we. One thing that became clear in recent reporting is that retail inventories had risen out of the fourth quarter. We think that will work itself out now that spring is upon us.

Now I'll shift to our segment results. Our Trucking segment results on Slide 4 demonstrate good progress on revenue per available tractor, which is up $129 versus the first quarter of 2018. This is an impressive stat, given the dilutive effect of our dedicated and Davis Transfer businesses on this measure, both of which are included in the segment results. Factor in that we also decreased our utilization in the form of miles per available tractor per week by 6.9%, one can readily see a positive trend in the profit model. Higher revenues on lower cost equal a healthier margin profile. To be clear, though and to dispel any confusion, our operating model intent is to increase our utilization while proliferating this improved margin performance going forward.

Our unique network focus and densification strategy continue to bear fruit. The first quarter of 2019, base rate per loaded mile was up 11.7% over the first quarter 2018 and reflects our existing and new bid award success. We have talked about this in the past, but I especially want to remind the investment community that strong second half 2018 pricing has a direct carryover effect to the first half of 2019. Shippers are trying to move the bid cycle forward to the first half of the calendar year in 2019 to take advantage of a softer spot market, but we still expect mid-single-digit increases year-over-year.

Recruiting and retaining drivers remains at the top of our priorities. And in the first quarter, we experienced higher-than-desired unseated tractor counts that ended at 7.8% roughly by the end of the quarter. A contributor to the elevated unseated count was a necessary change in our business. We mentioned last quarter that we had begun reorganizing into regional fleets. Our analysis, experience and benchmarking led us to this model as the most profitable path forward. In the process, we had to move many drivers from some longstanding relationships with their driver manager to the right manager, who covered the driver's home region, and this affected turn over. As Jason mentioned, there were seated trucks late in the fourth quarter, was a contributing factor to our unseated tractor percentage during late Q4 of 2018 and the first quarter 2019. The unseated truck counts spiked early in the quarter and improved each month through March.

We often say that all politics are local and having regional fleets with driver managers and planners who know the unique challenges and opportunities in a given region should give us accelerated results. I'm happy to report that we are maturely through that change to regional fleets. And as of this morning, we have unseated truck counts back below 100 unseated trucks with our longstanding target remaining at 5% or fewer of our trucks unseated.

Throughout the quarter, we continued to reduce our fleet age. As of March 31, our fleet age was 2.5 years. Our fleet grew 17.5% year-over-year to 1,916 available trucks in the quarter. The addition of Davis to the results is clearly the most impactful contributor to this growth.

Finally, we've had a recent change within the leadership of our Trucking operations. We welcomed [Justin Cramer] to our team. He has more than 20 years experience in industry leading transportation companies. Justin has the urgency, understanding and ability to increase our pace on utilizing tractors, getting miles for drivers and meeting and exceeding customer service needs. It is a palpable heightened intensity, and we're delighted to have his experience now permanently on the team. There will be an upcoming press release for more information on this change.

I think it's worth recapping the Trucking segment results from the first quarter 2019 as follows: We changed to a regional model; we made a change to our Trucking leadership and the market was tough compared to prior periods. And yet, we increased rate per loaded mile 11.7%, revenue per available tractor per week was up $129 or 4% year-over-year and we delivered 360 basis points of adjusted OR improvement year-over-year.

Now let's move to USAT Logistics. The Logistics segment, in fact, may be the story of the quarter. Many of the headlines in our industry highlight the tough spot market that clearly affected USATL. Lower spot rates mean that customers begin shopping this variable capacity for the best rate possible. Revenue per load even on contracted freight is thus negatively affected, and that is exactly what happened in the first quarter.

Revenue per load, a direct reflection of spot market health, dropped 16% or $276 per load versus the prior year. The play in this situation is clearly to buy as low as we possibly can for as long as we can, thus protecting and expanding margins as much as possible. The team at USATL was successful in expanding gross margins in the quarter to 18.5% versus 17% in the same period of 2018. We had no material change in our contract versus spot market activity on the revenue side, a fact that helped us preserve margin even as customers sought lower pricing ground related to the spot market.

Understandably, segment-specific fixed cost coverage becomes an issue as top line revenue numbers drop. Despite this, the team kept our adjusted OR for the quarter in line at 93.9%, a solid result consistent with our long-term expectations for this business. We have always felt that 95% adjusted OR constituted a sustainable model in this space, but now are working additional cost opportunities with our industry partners that, we believe, can push this number even lower into better ground.

We are not sitting back in Logistics in this environment. We continue to invest in people and resources to grow this business longer term. Logistics team has been on a mission to blitz markets and customers to expand book of business, the breadth and depth of customer-shipper relationships and is actively working to solidify carrier strategies that should provide longer-term stability and even upside in turbulent markets. We've had great success in these efforts. And while none of this is terribly innovative, we do think it is special and unique to us.

Moving now to Slide 7, you'll recognize the 2019 company objectives that we talked about last time. On the safety front, our safety record continues to improve year-after-year and the first quarter was no different from the recent trend. As we think ahead to what this means to the business, we see potential for improved development trends that are a reflection of improved safety performance.

On the service front, services held steady with what we previously communicated. Our customers have been overwhelmingly supportive and appreciative of our improved service offering. They simply want to see it as more of than a 6-month trend. We have seen positive bid award results and sustained pricing support through the bid process, a sure sign that our service is valued and valuable.

Technology has been the Achilles heel of USA Truck. Our dereliction of technology tools over time has set us at a disadvantage to the industry. Early in April 2019, we migrated to a new version of the TMS system. We now have an upgradable platform upon which we can build and integrate applications that remove tension and friction from the business.

Next on our list is an exciting telematics transition, followed by optimization software. The technology gap is one of the things we have to close to truly compete. But think of it, we've made substantial improvements in performance over the last 7 quarters with poor technology answers. Integrated TMS, new telematics and optimization are things all of the competition use today. These are things that contribute to this unique story. USA Truck is different because we still have opportunities to improve across the board.

We talk about the next point, competing commercially. Keeping our rates competitive but fair, growing logistics and reducing cost, each contribute to our long-term vision. USATL shrunk as a percentage of revenues in Q1 because of the top line compression in logistics, but we invested in growth, which bottom line profit -- which was manifested in our bottom line profits in the short term. We have to invest in our strategic priorities, especially in challenging times like Q1 -- like we experienced in Q1 for Logistics.

Another way we compete commercially is by reducing our cost. And so we're excited to announce the opening of an Atlanta area maintenance facility next week. This will further allow us to improve maintenance cost and affect driver retention positively as we get closer to where they live and where our network runs.

The last point I want to make on this slide is the investment in our people. The search for great talent is never ending. And so we decided to build our own through our Leadership Academy, which is kicking off in earnest in May. Additionally, I have been on a company-wide tour meeting with every employee. No managers are allowed in those meetings. It's a means to get feedback on what is working, what's not and what we could do better. Our people are really smart. We also have hired our first management rotation employees, super bright, super driven recent college graduates, who we believe will contribute in meaningful ways long term.

Our mantra this year is tradition with a new vision. Our distant past was amazing and highly profitable. We lost a decade, and now we are back with a fundamentally different, fundamentally better strategy, fundamentally better team and results. This is a totally different USA Truck than it was just 3 years ago. Structural shortcomings, like ballooning tractor age, lacking technology investments, absence of the right facilities in right locations, a poorly designed network, a lack of pricing discipline, outdated TMS, absence of optimization and not yet having a regional model and the list goes on, are all things we found when we got here and all things we have fixed or are fixing. The opportunity here is unique. It is real, and we are making USA Truck one of the best transportation companies around.

USA Truck now has delivered 7 consecutive quarters of profitability by doing exactly what we said we would do. This story is unique in the industry. We have made and kept our commitments about the magnitude and timing of improvements. We clearly understand where the next opportunities lie, and we intend to continue on this trajectory for the foreseeable future.

So with that, Nancy, I'll turn it back over to you for questions. Thanks.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Brad Delco from Stephens.

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Jason R. Bates, USA Truck, Inc. - CFO & Executive VP [2]

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Brad, you're on mute.

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Albert Brad Delco, Stephens Inc., Research Division - MD [3]

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Can you hear me now?

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Jason R. Bates, USA Truck, Inc. - CFO & Executive VP [4]

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Yes, that's better.

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Albert Brad Delco, Stephens Inc., Research Division - MD [5]

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I wanted to talk about the truckload OR. I mean, clearly, we're seeing good progress there. I guess, the one thing that's hard for us to maybe sort of decipher is how much of the margin improvement is a function of Davis being folded into the mix versus how much of it was truly organically driven? And to the extent, you could provide us some comments there, that would be helpful.

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

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Yes. I'll kick that one off and then let James add to it. I mean, I think we talked about it when we did the acquisition, the rough size and rough profitability of Davis, meaning that it was roughly a $50 million top line in the high 80s operating ratio. And so that's really all we've said about that. And other than to also include the fact that it is doing exactly what we anticipated that it would. We got a great team down there that is executing. And so when you think about the magnitude of the improvement, 360 basis points year-over-year, you can obviously do some quick math there and realize that there's a lot of organic improvement that's been driven into the business. We love Davis, we love the accretive nature that it brings. And that's -- any acquisition that we look out, that's what we'll be looking for. But it is important to keep in mind that it was roughly 1/10 of our overall business. So even though it's accretive, it's not what's driving the overall operating ratio improvement.

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James D. Reed, USA Truck, Inc. - CEO, President & Director [7]

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Yes. And I'll just add to that. The -- it is accretive and that's why we love that business. But at the same time, we said this in Q4, Davis' rate per loaded mile is actually lower than what we would call the organic USA Truck business. And so it has a slightly dilutive effect on the rate overall. So you kind of combine that calculus and the answer is, we had a pretty good quarter on both fronts. Davis did what we expected and USA Truck continued on its trajectory.

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Albert Brad Delco, Stephens Inc., Research Division - MD [8]

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Got you. Great. And then as we think about going forward in light of your comments and, of course, what we've heard from others that have reported thus far, market is more competitive, pricing or contract expectations are moderating or coming down. How do you think we should be looking at the pace of margin improvement in truckload from this point forward?

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James D. Reed, USA Truck, Inc. - CEO, President & Director [9]

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Yes. So the comments I made about 2018 were pretty intentional. Having over 700 basis points improvement in '18 versus '17, clearly, and we talked about that last quarter, was affected by a pretty robust market. But even that notwithstanding, we still saw 350 basis points -- or 360, excuse me, basis points improvement in Trucking in the first quarter. And we said all along, we kind of joke about this, Jason always says 300 basis points, I say 400 basis points. And so now we're saying 300 to 400 basis points. But our goal in a, what I'd call, I'm using air quotes here, Brad, normal trucking market is 300 to 400 basis points improvement, and we expect that in the next several years. Our opportunities are things like out of route, improving our fuel compliance, improving our idle percentages. I mean, there is so much continued low-hanging fruit that while the market helped in '18, we weren't independent on it, and we're kind of glad to see it slow down a little bit, candidly, because it proves our thesis and we're delivering on that. Jason, did I miss anything there?

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Jason R. Bates, USA Truck, Inc. - CFO & Executive VP [10]

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No. That's exactly what I would have said.

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Albert Brad Delco, Stephens Inc., Research Division - MD [11]

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And then can you give us any update in terms of the types of improvement you've seen on out of route or fuel compliance or idle? I know that was -- at least out of route was part of the hopes or motivation or synergy opportunities from Davis, but where does that stand right now?

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James D. Reed, USA Truck, Inc. - CEO, President & Director [12]

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Yes. So it's not a number that we report publicly, but we have seen in the fourth and -- fourth quarter and first quarter pretty significant improvements there. I'd say we're -- we've improved a quarter of what we perceived to be a pretty massive problem. Jason, sorry, I interrupted you.

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Jason R. Bates, USA Truck, Inc. - CFO & Executive VP [13]

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Yes, no. I was trying to jump in there, Brad, before he did to make sure we're clear on what we want to say there. But it's like he said, it is -- this is a huge opportunity for us. I mean, every mile we run, whether it's deadhead or out of route that's uncompensated, is opportunity. And we do a lot more of that than the best-in-class operators out there. And so we feel like we're slowly clawing away at that, but there's still a lot of meat on that bone.

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Albert Brad Delco, Stephens Inc., Research Division - MD [14]

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Got you. Maybe last one. As we've gone through this bid season, and I'm sure you're working on trying to improve the rate and balance of your freight or your network, should we be thinking about USA Truck targeting new customers or are these existing customers that you think are willing to see the value in what has been changing here? I guess, give us some context as to what you're trying to accomplish or what you have been trying to accomplish during this bid season.

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James D. Reed, USA Truck, Inc. - CEO, President & Director [15]

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Yes. So that's a fantastic question because you kind of nailed it on both fronts. Our service has been improving considerably over the last 2 quarters, which gives us a lot of runway with our existing customers. I mean, customers love USA Truck, they always have. And so we're seeing pretty positive results in terms of increased bid awards, in terms of bid award volume and strong, what I'd say, market competitive pricing that's in line with expectations that we have and that we've set. But the flip side of that coin and part of eliminating out of route, improving our densification is we are on an absolute quest to diversify and add a multitude of new customers to our business. And in the last 1.5 quarters, we've actually brought on 45 new customers that we didn't have going into the fourth quarter of 2018. So we feel really strong about both of those, but it's not an either/or, it's a parallel strategy on both fronts.

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Operator [16]

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The next question comes from David Ross from Stifel.

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [17]

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Just to follow up on the service commentary there, how do you measure service?

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James D. Reed, USA Truck, Inc. - CEO, President & Director [18]

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We measure it 2 ways -- well, actually, 3 ways. I'll tell you the 2 that we look at internally, which is on-time pickup and on-time delivery, and that's a pretty normal way for most people to look at it. The third way is a little bit more drawn-out answer, and I hope you will accept my apologies in advance for being a little verbose here. This is a commoditized market. It's taken -- one of the things that USA Truck didn't recognize historically is that fact. And because of that we tried to behave in ways that were dictatorial a little bit to the customers. And so what matters on service is how the customer views service. And so as we shared last quarter, one of our strategic priorities for 2019 is to be in the top 3rd of customer scorecard rankings for our top 10 customers. And so the way we -- and again, I'm using air quotes here, measure service is we measure service however the customer wants to measure service, and that varies by customer. The customers have the power in these relationships when it comes to commoditized businesses. And so we seek to understand how they measure it, improve it, monitor it and work it a little bit. So it's a little complicated calculus and it depends on the customer.

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [19]

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And have you seen in those discussions, in the scorecard exercises, a trend in terms of shippers focusing on one area of service over another?

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James D. Reed, USA Truck, Inc. - CEO, President & Director [20]

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Yes, that's interesting. I mean, obviously, last year, a huge focus was owed to there has been some changes there with Walmart, who is a huge customer for the entire industry. But the basics still apply, right? On-time pickup, on-time delivery, within certain time windows. And 2018 was a year when people mostly just wanted to get their freight. And they were a little less worrisome about whether it came on time or not. And so this year is a chance for us to sharpen the saw and get back to the basics. But no, Dave, I don't -- there's no, like, complicated nuance, hard-to-understand priority. I mean, customers just want their freight when they want it, and we do the best to provide that.

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Global Transportation and Logistics [21]

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And I think what's important, as you mentioned earlier, was how the 700 basis point improvement last year, the 360 basis point improvement in the first quarter, that was all before a lot of this new technology was implemented. So it's not a tech-is-here-to-save-the-day story. It's saying, no, we just need trucks in different places so we can use them better and make more money. And then if you have technology, you can put on top of that to further improvement, then that's great. But it's -- what I like about this story and what you guys have done is making improvements without trying to pass tech off as the savior. So I guess, how do you think about going forward how much you're going to need technology for that extra juice, or how much juice is left even without this tech?

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James D. Reed, USA Truck, Inc. - CEO, President & Director [22]

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Yes, that's -- first of all, thank you for understanding our story. What you said is exactly right. Investors and we, as shareholders ourselves and as a management, kind of don't care what the technology situation is. You have to provide returns that are acceptable and consistent with industry expectations and return on invested capital needs pursuant to this asset-heavy business.

That said, kind of the old models of trucking, you can get another, call it, 500 basis points out of this thing -- or excuse me, I said -- yes, 500 basis points out of the thing just by beating it down. I mean, by heavy lifting and physical and manual labor. Lot of companies ran in a very low 90s OR without any meaningful technology solutions for many years. So I think people should realize that through just the sweat of our brow we can get quite a bit further. That said, your instincts are correct, which is the computer systems and the predictive modeling that's available in the marketplace can make better decisions than humans every time as long as you configure it properly and put the right data in there. And so I'd say kind of the next 500 basis points can get there from just heavy lifting and sweat and hard work. But the technology is what's going to take us kind of from that low 90s OR to high- to mid-80s OR type level. And so I say this very reluctantly, but I spent 22 years working in technology companies. I don't know if anybody else in our industry has that background. And yet, one of my favorite things to say in our building is "Let's not solve with technology what we can solve with process." So we're going to use it intelligently. We're going to use it in ways like predictive modeling. We're going to use it in ways like optimization software, but we're not going to use it exclusively. So Jason, what would you add to that? And IT is up to Jason now. So I am kind of flying off the cuff here a little.

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Jason R. Bates, USA Truck, Inc. - CFO & Executive VP [23]

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Yes. No, you're fine. I think the one thing I would just reiterate is what you said. I mean, we attend different conferences and are regularly meeting with companies that their technology is even more dated than ours. And I mean, there's people out there using key cards to dispatch and build loads. And they're running in the high 80s, so -- to low 90s. So there is -- it is just a lot of process, discipline and hard work that we're trying to infuse into this organization to continue to drive it down. And I think the way you characterize it, James, in terms of the next 500 and then the 500 after that is probably not far off of what we would be thinking about over the next few years in terms of -- and in terms of the sequencing as well.

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Operator [24]

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

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Barry George Haimes, Sage Asset Management, LLC - Managing Partner and Portfolio Manager [25]

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I had a couple 3 questions. First, within brokerage, just curious if you guys are seeing any of the small -- smaller firms go out of business with the pressure that we're seeing on spot rates. We've got higher fuel, insurance costs. So I'm just curious if you're seeing any changes there? That's first question.

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

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You mean in terms of the capacity providers, Barry?

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Barry George Haimes, Sage Asset Management, LLC - Managing Partner and Portfolio Manager [27]

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Yes.

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

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Yes. So we did actually see a little bit of that. We have upwards of 15,000 available capacity solutions that are part of our business. And so we -- each quarter, we see some of that. I don't know that we would say that it's accelerated. But if you've read between the lines in my prepared comments, we are working with some of USA Truck's vendors to help find ways to ease the burden on those capacity providers and help make them a little more profitable. And we are capitalists in the end. We think we can make some margin off that as well. So that's something we haven't done historically, is provide kind of ancillary services and we're very close to a go-live on that. So Jason, anything you'd add?

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

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Yes. No. I mean, it's such a gigantic industry, Barry. And the amount of data that's available out there from a lot of those little guys. I mean, there -- you may very well be right and I fully expect there's a lot of little guys that are going to get into tough spots and are going to go by the wayside. But it's just so fragmented, it's hard to really quantify that. But there's no question that as it gets tight, guys will fall.

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Barry George Haimes, Sage Asset Management, LLC - Managing Partner and Portfolio Manager [30]

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Got it. Okay. Then the second question is the -- when you talked about up mid-single-digit rates for the year, I'm presuming that's a weighted average. And so if that correct, I'm wondering if you could give us a little bit more color around contracts so far this contract season year-to-date? Is there a range you could give us on where contracts are settling for you guys or any color around that?

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

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Yes. So you're correct in terms of the way we think about it. We've been talking a lot over the last couple of calls about the fact that we had some catch-up work to do in 2018. So we were putting up 20-plus percent quarters for the first 3 quarters last year in terms of year-over-year improvement in rate, which -- that rolls through this year and that's part of what you saw here in the first quarter. But -- and we expect to continue to see that until those comps start getting a little tougher as the year goes on. So that's important to note. But more to the point of your question, I think the second part of your question, I'll touch on it briefly and then let James add some color, is we hear people out there saying that shippers are wanting -- that the environment's going to get really tough and there's not a lot of opportunity for an increased rates. And that's just not what we were seeing candidly. I mean, it's not -- they're not just rolling over and agreeing to 10% rate increases, but they're also -- I've heard some people talk about, are we going to be going backwards on rates this year? And I think that this isn't 2009, right? That's definitely not the environment we're in. So we do anticipate there to be -- I mean, there's still a driver shortfall out there. People are having to pay more for drivers. And so as long as you have capacity concerns and driver availability concerns, there's going to be inflation that has to be accounted for, and those are conversations we're having everyday with our customers. James?

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

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Yes. And I think the math is kind of telling. So if you take the great quarters we had last year and what you end up with are comparatively easier comps for Q1 and Q2. Let's just pretend -- I'm making this up, but let's pretend that Q2 was like you Q1. If you have 11.7%, just round to 12%, in Q1 and Q2, and you do nothing in the back half of the year and let's assume volume is flat for the sake of this hypothetical, then you've got 6% annualized increase in rate year-over-year, just by doing nothing, right? But Jason characterized the environment exactly right. I mean, especially, the big retail customers and the big home improvement customers and kind of those people that are involved in the tougher parts of the consumer economy, they're glad to have freight options with high-quality, good service providers. And we're beginning to be considered in that kind of pantheon of possibilities. And so as a result we -- Jason kind of hit on. I have a hard time reconciling what I'm hearing in the industry trade press and what I'm experiencing in the bid process, because in the bid process, it feels like a really normal bid process here. And single digit increases to account for cost increases that Jason alluded to, are, I don't want to say, perfectly acceptable, but they're accepted. And our customers are acting very normal right now, that's how I'd characterize it.

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Barry George Haimes, Sage Asset Management, LLC - Managing Partner and Portfolio Manager [33]

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That's great. Sounds great. And then just final question. James, you mentioned the employee meetings without the managers and you got a lot of insights there. And I'm just wondering if there are any couple 3 you could share that might lead to changes or actions on your guys part?

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James D. Reed, USA Truck, Inc. - CEO, President & Director [34]

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Yes. No. That's a fair question. We're in the midst of that. So I have now met with our Sacramento, Seattle, 1 meeting in Van Buren and I did a meeting in Vandalia, Ohio. I'll stop short of giving you 2 or 3 and I'll just say one generally and this is the point of these meetings. We are -- Jason and I are both kind of old manufacturing guys, if you go back to his Honeywell days or my days at Intel. And so we're just systematically programmed to take costs out of business. And the one kind of overarching theme is our employees have tons of ideas about how to reduce cost. And so in addition to these meetings, where I've got literally dozens of pages of suggestions, ideas, from our employees, Jason has started what we're calling a cost council, which is a coordinated effort to drive that cost reduction throughout the business because there's just too many ideas for him and me to handle alone. So it's been really encouraging. But as you know, Barry and everybody else who is listening, when you ask for employee feedback, the worst thing you can do is not act on it and you'll lose credibility. So we're actively working to synthesize those ideas, find ways to implement them in the business and further reduce our cost. So it's a great chance for our frontline employees to participate in this -- the process of our story as we've been talking about all along. So really exciting, and thanks for asking that.

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Operator [35]

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Our next question comes from Jason Seidl from Cowen.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [36]

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Wanted to touch on the driver market a little bit because some of your peers have been out there saying that it's definitely improved in terms of the ability to attract and retain drivers. I think Werner one was out saying last night that they're fine. They don't think they're having to go to raise pay any further this year. Are you seeing that out there? And if so, do you think that's going to help your seated tractor count as we move throughout the year?

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

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Yes. So one of the things I mentioned is that it got sequentially easier. From January to March, we saw a better ability to recruit, but also a better ability to retain. I think the best carriers, and we like to think of ourselves in that company, are getting more adept at using technology to get driver feedback and then act on that feedback. And so I don't know if it's getting easier, but I think some of us are getting better at it. And as I mentioned, our unseated truck count as of this morning is back below 100. And so I'm not going to opine too much on what I think the driver pay situation looks like because I always like to leave that door open and the answer is, it depends. But right now, the best way -- this has been our story for a long time for us to improve driver pay is to put more miles on those trucks, so they can take more money home. And with the change that we recently made, we're starting to see -- just in recent weeks, we've seen improved utilization on the trucks, which resulted in better driver experience, which resulted in better pay, and ultimately in better retention metrics. So I don't mean to dodge your question, but hopefully that gives you some insight on how we're looking at it.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [38]

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Good enough, James. I want to turn a little bit to the Logistics segment. I mean, you made the comment that 95% is where you guys used to thought you could operate, now you think you could be lower. What's the progression like to being sort of sub-95%? How should investors think about that for that division?

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

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Yes. So I'll address that in 2 ways. I mean, the first one -- and I'm just going to give you guys a little look behind the covers here. We had a lot of internal debate in the quarter about whether we should slow down our hiring and slow down our headcount and, frankly, our spending, so that we could keep year-over-year operating income about the same. We hate losing. And we made an explicit and intentional decision to continue to invest in the business. And so the first part of my answer is our business has always done a great job. I mean if you go back and compare our gross margins to others that are in this space, you'll see that we have a really healthy gross margin profile, and it's not because we have a unique business model, but we buy really well, we have good internal processes to ensure that we're minimizing purchase transportation and maximizing returns. And so we've always had a pretty decent gross margin, and ultimately operating income and adjusted OR number for that business. That's kind of point number one. So we're going to continue to grow, we're going to continue to double down on growth in people, resources and technology there because we have a lot of faith in that business. And we think despite short-term spot pricing lows, I'll call it, that it's still a healthy business.

The other side of that, in terms of margin enhancement and margin improvement, is itself is a two-pronged answer. One is we think we can -- and I have said this publicly before. Our internal technology strategy is to catch up, to disrupt and to disintermediate. We believe that we have to disintermediate ourselves before somebody else does. And so we're looking for ways to constantly take friction out of the process, whether it's the automating of matching freight to capacity or capacity to freight, as the case may be, or some other means, we want to take that out. And then we alluded on the call, and I said here in some of my earlier comments to earlier questions, we think we can work with industry partners. And candidly, we see what some of our competition are doing in improving their margins, that we ask ourselves, "How the heck are they doing that?" And we think we have a really good idea how that is, and that's working with outside partners to provide certain services to drivers or to small capacity providers at a lower cost and they can do it themselves and still get some margin out of that service for ourselves. So kind of complicated answer, but really simple idea, double down on the existing business model and then go find expansion opportunities working with third parties and kind of defrictionalizing the process. So that's how we think about it.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [40]

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That's great color. Last question here and I'll turn over to somebody else, kind of piggybacking on something Barry asked. You said it was a blended rate that's sort of mid-single digits what you're looking to sort of come out at this year on the pricing side. What are your current contract negotiations looking like? What's that number? Obviously, it's down from like the 10% of last year, that's [how the math will work] for a 5% blended rate. But what do the current ones look like? And I know the (inaudible) and all over in terms of what's -- what to expect and we've heard lots of different things from the public and private carriers, but I'd love to hear your commentary on that sort of the current rate environment, what you're getting?

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James D. Reed, USA Truck, Inc. - CEO, President & Director [41]

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Yes. I mean, it's a low- to mid-single digits, so as I said earlier, kind of normal. And one of the things that you guys -- nobody has asked yet, but I'll just proactively provide it is, the -- 2 years ago, our bid process was kind of 25%, 25%, 25%, 25% in each quarter. And this year, we've seen a pull in of bid cycle activity. And I think shippers are trying to improve their network dynamics, but in the pricing front, like I said, it's still low- to mid-single digits. And we're seeing about 65% of our bid process happening in the first half of this year as opposed to 50% in past years. So that's kind of an idea of the dynamics. Jason, would you add anything to that?

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

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No. I think that's exactly right. And I think James is saying low- to mid-single digits, but that's -- I want to make sure you're clear. There are some pieces of business where we're getting well in excess of that, but there is also the mix effect. We're continuing -- we used to talk about it a lot more about the reengineering of our network. Last year was kind of the first year, but we always said it was a 2-year process. And this year, there is some of that still going on. So there is a mix effect that comes into play as well to further muddy up the number that you're trying to get at. But I think that, net-net, we feel pretty comfortable, like James said, in that mid- to high-single digit range for the year.

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Jason H. Seidl, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [43]

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Okay. That's good color. And on the pull forward in the bid process, is this something that you think is favorable to you, neutral or negative?

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James D. Reed, USA Truck, Inc. - CEO, President & Director [44]

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I'd say it's neutral. I mean, like I said, we had great partnerships with our existing customers and they're behaving in very normal ways. We talked about the expansion of the smaller customers. And I think that really speaks -- Jason really got to the point, which is those are enhancement opportunities for our network. And so while some of those may not have the kind of robustness of pricing that we see some -- from some of the bigger customers, you get the improved network effect, which improves your yield. And so ultimately you'll see an increase in rate associated with that as well, just because we run better with more paying freight and have fewer and fewer empty and out of route miles with less unpaid freight.

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Operator [45]

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(Operator Instructions) Our next question comes from Jeff Kauffman from Loop Capital Management (sic) [Loop Capital Markets].

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Jeffrey Asher Kauffman, Loop Capital Markets LLC, Research Division - MD [46]

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A lot of my questions have been hit already. So let me go in a different direction here and talk a little bit about fleet and technology. I think I heard you mention you were about 2.5 years on the tractor fleet now. If so, are you where you want to be on average age right now? How many of these tractors are doing better than, say, 6.5 miles a gallon? Do you have the new technologies installed? So when we think about tech -- because the way Jason was describing, it was more about what you're doing in the office with the CRM and some back office stuff, but can we broaden that discussion and talk a little bit about where you are on the capital fleet?

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

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Yes, absolutely. In fact -- and I think you're already planning on it, but -- and James will talk about this, I don't want to steal his thunder, but we would encourage you to come to our Investor Day in New York here on May 8 because we're actually going to talk a lot about this. We've actually got a couple of slides specifically addressing some of the tech and the investments we're making in our fleet. But to hit your questions in the order that you went through them, 2.5 years is a good -- we're pretty comfortable with the 2.5-year-old fleet. Obviously, we'll watch it closely, but we're pretty comfortable and that's kind of right in that sweet spot where we want to be.

With regard to our MPGs, we don't specifically disclose. But I'll tell you that we're comfortably north of the number that you put out there. And so that's something -- again, it depends on where you're at in terms of the type of freight that you're hauling, what region you're in, weather, things like that. So there's some dedicated routes or Northeast-type base routes where we maybe are not getting that, but overall that's kind of what we're shooting for, that and better than that. And one of the things that we really see as an opportunity, even though we've made investments in the tech, we still feel like we just -- culturally, we've got some significant opportunity still on managing our fuel consumption, whether it's through idle or out of route or deadhead or things of that nature, we can just be smarter and better. And some of that is cultural and it takes time to change, but we're really working on it. But yes, we've made a lot of investments. We've got -- I think you guys all know, Jeff Harris, who has just finished up his term as TMC -- Chair of TMC over this last year, he runs our Maintenance team. And he and our Director of Procurement, Casey Borum, they put together a very detailed spec to make sure that we're -- kind of got the best-in-class stuff out there without breaking the bank. And they both have decades of years of experience on figuring out what's best in class and they work with our OEM partners to really put together a spec that makes a lot of sense. And above all, has the safety parameters, anything and everything we can get our hands on that makes sense. And candidly, we're testing out some pretty cool things, too, that we're some of the early -- first people to test out some of these new technologies on the safety side. And we'll talk more about that at our Investor Day.

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Jeffrey Asher Kauffman, Loop Capital Markets LLC, Research Division - MD [48]

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Okay. What about the telematics side of that? Are you at the point yet where you're starting to try to take advantage of that since more of the truck OEMs are offering it? Or is that kind of a next step or 2 down the road?

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Jason R. Bates, USA Truck, Inc. - CFO & Executive VP [49]

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No. We're absolutely taking a look at that. In fact, our team is spending quite a bit of time looking at different options and trying to make sure that we're taking advantage of the products that are out on the market, while making sure that we remain compliant. What we don't want to be is the people that are -- the early adopters of every tech that comes to market, right? That's costly, and it's not really our model. But at the same time, we want to make sure that we're doing what we need to be doing to be compliant and give the drivers something that's at or above what everyone out in the market is doing. So we're playing with a lot of options on that front.

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Operator [50]

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The next question comes from Mike Vermut from Newland Capital.

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Michael David Vermut, Newland Capital Management, LLC - Founder [51]

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Quick one for you, the Davis acquisition. You know it was a great acquisition you put in there. Looks like it's performing really well. How are you looking at the capital allocation right now? Your stocks are getting probably the lowest valuation in the truckload group. How do you balance that with looking at new, fresh acquisitions out there?

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Jason R. Bates, USA Truck, Inc. - CFO & Executive VP [52]

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Great question, Mike. So I think, there's no question that -- when we look at the valuation of the stock relative to what we feel like has been our performance over the last couple of years, it does cause us to scratch our heads. But we're really focused on just continuing to execute. A lot of people get bent out of shape and hang their heads when the stock goes one way or another. But at the same time, we have to make sure that we're doing the analysis every day to ensure that we're providing the best return on invested capital to our shareholders. So we've got to think about debt and where our leverage position is. We've got to look at whether or not the stock makes sense where it's at. There are pros and cons that come with -- we're already a very thinly traded stock and you have a lot -- you had a long kind of time horizon on that to get that return, if you're looking at share repurchases. But many of our peers are out there are doing that right now.

I think we're in a little bit of a different state in terms of -- we've got leverage and we have some strategies and goals around growth. But for us, James and I -- James said it earlier, we're -- we've joked in the past. At our core, we're both just capitalist pigs, and we're going to do what's in the best interest of our shareholders. But we want to make sure we're staying consistent with our strategy as well. And so we're going to talk actually quite a bit in our Investor Day here on May 8 about how we think about capital allocation and what our kind of mid-range and longer-term goals are for the business. But at the end of the day, we always got to go back and do that math and making sure that we're allocating those funds appropriately.

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Michael David Vermut, Newland Capital Management, LLC - Founder [53]

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Excellent.

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

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And I'll just add -- Mike, let me just add real quickly. As Jason said, we do the math, and so for us it becomes a math exercise. But we also believe that one of the greatest drivers of stock price should be EPS growth. And we continued to focus on strategies that drive EPS, and that's what we've done, and we expect that to manifest itself at some point.

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Michael David Vermut, Newland Capital Management, LLC - Founder [55]

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Excellent. And just let me go back and just go at one thing you've said. I know you said this many times before. Assuming we're in, just take this, mediocre environment. It's a decent environment, let's say, low-single-digit pricing, should we assume for the next few years modeling out that we're going to get that 300 basis points improvement overall? Is that how we should look at it?

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Jason R. Bates, USA Truck, Inc. - CFO & Executive VP [56]

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Yes. I'll go ahead and jump in there. Usually, James is the one that quickly jumps in and says, "Yes, plan on 400 actually." But the reality is we have a plan, and we're going to walk through this in the Investor Day, and I hate to keep throwing that out there, but we're going to walk through exactly what our plan is. We felt like we needed to spend a couple of years showing you -- earning a little bit of credibility, right? Listen, let us focus on just fixing this and getting it moving in the right direction. And we hope that we've gotten to the point now where we've got enough credibility that we can kind of lay out what our plans are for the long run, and have some semblance of confidence that we can do it. And so we're going to talk through that and walk through how we're thinking about it and how -- I mean, if you're saying we're going to continue to be in the environment that we're in today, we're very comfortable driving 300 basis points a year over the next couple of years. We're actually assuming that things are going to slow down at some point, and we're still believing in our ability to deliver on that 300 basis points, even if things slow down a little. Now if we go into a huge recession, that's a different conversation, but assuming things slow down -- and that's what James alluded to it earlier on the call, although nobody ever wants things to slow down, we kind of want things to slow down because we feel like people won't really believe in the USA Truck turnaround story until things do slow down, and we continue to execute. And we have so many self-help opportunities that still remain that we will be able to take advantage of in a slowdown that others, who are already operating in a much better execution-type environment, may not have those same opportunities. So we welcome it, and we're excited about where we can go from here.

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Operator [57]

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This concludes our question-and-answer session. I would like to turn the conference back over to James Reed, President and CEO.

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James D. Reed, USA Truck, Inc. - CEO, President & Director [58]

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So I was honored to attend my son's Army Commissioning Ceremony last night. He is going to be an Army aviator, flying helicopters. We're very proud of him. The guest speaker was brigadier general, Taylor, who shared this thought, which I just -- I loved and I wanted to share with you, and I especially want to share with our company. He said this, "In the absence of orders, attack." And I love this. Frankly, it reminds me of USA Truck. I have a single 8.5 x 11 piece of paper in my office and it reads simply, "Play offense." I think each of these statements explain the complete transformation that's going on at USA Truck. We are in attack mode and we are playing offense. We're building a great transportation company by getting the basics right, as we just alluded to in our answers. Who else has this much runway and this clear path to improve results and success in the industry? I don't think anyone does. And as we said, ours is a methodical quest, 300 to 400 basis points, as Mike and Jason just were discussing, have improvement year-over-year for several years. Nobody else has the runway that USA Truck has, and we are just delighted with our team and excited about the future as we continue to deliver just as we did in the first quarter. So as a reminder, and Jason already said this, we'll hold an Investor Day on May 8, 2019, in New York City at the InterContinental New York Barclay in the Rockefeller Suite. For those interested in attending in person, we would love to have you. Please contact Chad Lane. Seating is limited, so please reserve your seat soon, and we look forward to seeing you all there. Thanks a lot, and have a great day.

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Operator [59]

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