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

Q2 2019 USA Truck Inc Earnings Call

VAN BUREN Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of USA Truck Inc earnings conference call or presentation Friday, July 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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* Adam Kramer

Cowen and Company, LLC, Research Division - Associate

* Barry George Haimes

Sage Asset Management, LLC - Managing Partner and Portfolio Manager

* Jack Lawrence Atkins

Stephens Inc., Research Division - MD & 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 USA Truck Second 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, Allison. Good morning, and welcome to USA Truck's second quarter earnings conference call. Joining us this morning from the company are James Reed, President and CEO; and Jason Bates, Executive Vice President and CFO. We thank you for joining us today.

In order to help you better understand USA Truck and its results, some forward-looking statements could be made during the call. As we all know, forward-looking statements, by their very nature, are subject to uncertainties and risks. For a more complete discussion of factors that could affect the company's future results, please refer to the Forward-Looking Statements section of the company's earnings press release and the company's most recent SEC public filings.

In order to provide more meaningful comparisons, certain information discussed in this conference call includes non-GAAP financial measures as outlined and described in the tables in our earnings press release.

I'll now turn the call over to Jason.

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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. And we hope you all had an opportunity to review our earnings release from last night.

We are pleased to report that our team has delivered an eighth consecutive quarter of consolidated profitability. And over the last 3 years, we have grown our adjusted EBITDAR 124.1% on a TTM basis. We are encouraged by the dedication and hard work exhibited by our entire team this quarter in spite of its many challenges.

If you please turn with me to Slide #3 for a review of our financial results. Consolidated operating revenues came in at $133.6 million for the quarter, which represents a 1.3% decrease year-over-year. Consolidated adjusted operating ratio for the quarter was 98%, which represents degradation of approximately 160 basis points year-over-year, and was predominantly a function of a weaker freight environment and its corresponding effect in both our Trucking and Logistics segments.

Turning to Slide #4. Trucking revenue before intersegment eliminations increased $10.8 million or 12.6% to $96.5 million for the second quarter of 2019. The majority of this increase was associated with the acquisition of Davis Transfer.

Our Trucking segment generated $1.2 million of adjusted operating income in the second quarter of 2019. This represents a $1 million decrease year-over-year. Our Trucking adjusted operating ratio for the quarter was 98.6%, which was a decline of 150 basis points year-over-year.

Base revenue per available tractor per week decreased $99 or 2.9% year-over-year for the second quarter. Base revenue per loaded mile was essentially flat when compared to the second quarter of 2018, although this was primarily due to increased participation in the spot market year-over-year. Loaded miles per available tractor per week decreased 43 miles or 2.7% year-over-year, while deadhead percentage for the second quarter of 2019 improved 80 basis points year-over-year.

Our average available unseated tractor percentage for the second quarter of 2019 was 5.2%. This represents an improvement of approximately 260 basis points sequentially. The average available tractor count for the second quarter of 2019 was 1,916, which is a 17% increase when compared to the second quarter of 2018, which had an average of 1,638.

Turning to Slide #5. We will review the results of our USAT Logistics segment. Revenue before intersegment eliminations was $39.6 million for the second quarter of 2019, a decrease of $11 million or 21.8% year-over-year. This was driven by lower revenue per load as a result of contractions in the spot market when compared to the second quarter of 2018. Revenue per load decreased 18.4% or $310 per load year-over-year.

Adjusted operating income was $1.1 million, a decrease of $1 million year-over-year. Adjusted operating ratio was 96.8% in the first quarter of -- in the second quarter of 2019 compared to 95.3% for the comparable 2018 period.

Gross margin dollars decreased 13.1% or $1 million year-over-year to $6.5 million for the second quarter of 2019. Gross margin percentage for the second quarter of 2019 increased to 16.5% from 14.8% when compared to the same quarter in 2018. Load count decreased 4.2% or approximately 1,300 loads year-over-year

If you'll turn with me to Slide #6, we will highlight some key balance sheet and liquidity measures. Pursuant to the adoption of ASC 842 and the inclusion of operating leases as liabilities, we now present our debt to adjusted EBITDAR as a comparable to previously reported debt excluding operating lease liabilities to adjusted EBITDAR.

As of June 30, 2019 total debt and lease liabilities were $192.7 million. Total debt net of cash was $192.5 million, and total stockholders' equity was $84 million. Net debt to adjusted EBITDAR for the trailing 12 months ended June 30, 2019 was 2.9x, giving pro forma effect to the Davis Transfer acquisition. The company had approximately $59 million available to borrow under its credit facility as of June 30, 2019

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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Thank you, Jason. USA Truck took another step forward in our self-help story this quarter despite an unusually difficult second quarter. We delivered consecutive profitable first half results for the first time in 11 years. It's been since 2007, 2008 that we could actually say that. And the EBITDAR growth that Jason referenced earlier is evidence that this is more than a small change we fundamentally overhauled our model.

The second quarter difficulty I alluded to primarily arose from increased industry capacity led to market-wide declining spot pricing. Multiple sources estimate additional truckload capacity over the last 12 months having increased anywhere between 2.5% to as high as 7%. This environment understandably led many customers to take a portion of their contract business to the spot market and resulted in less contract freight demand than we had expected. Both segments of our business were adversely affected by this environment.

As freights slowed and volumes awarded to us in the RFP process were not tendered or actualized, we took remediating steps that have had encouraging results. And they were just too late to have a desired effect in the quarter. Ultimately, we chose to procure freight from the spot market in Trucking to keep trucks moving and earning revenue and saw lower load count in Logistics as our pricing with the declining spot market was too slow to keep pace.

We also experienced some unusual challenges specific to USA Truck in the quarter. The Arkansas River Valley, where our headquarters is located, was gripped for several weeks of the historic 500-year flooding. Due to the headquarter proximity to an untested levee system in the river, we made the decision to evacuate our Van Buren campus during this crisis. We employ approximately 400 people at that campus who are all relocated to temporary facilities for 10 days during the quarter

Also, during the quarter, we completed a strategically important upgrade to our operating software system. We have planned for a modest reduction of efficiency during the transition, but the magnitude and duration of the disruption was greater than we had anticipated. The 6 weeks immediately following implementation were tougher than expected, but mostly marked by normal validation and integration procedures that required our full focus.

The combined effect of the spot market decline, our temporary relocation and our upgrade of our TMS software are important to consider because the quarterly results, while not near our own aspirations, demonstrate our progress in our self-help story.

We believe this quarter's results show that the improvements and changes that have been implemented over the past few years are permanent, structural and different to the point that we withstood real headwinds yet remain profitable. The USA Truck of old would not have been profitable navigating this environment.

Finally, I want to recognize the passing of our Chairman, Bob Peiser. After 7 years leading the Board and helping us through so many challenging times, his loss in the quarter was emotional for us all. Bob was more than a mentor to me, and I miss him every day.

I will now discuss our segment results. On Slide #4, revenue per available tractor decreased 2.9% year-over-year to $3,350. During the quarter, customers did not tender the expected volume of bid awards we received during the RFP process. This resulted in lower actualized freight volume that had to be supplemented with freight from the spot market at a lower rate per mile and much less efficient transit times to fill the gaps.

This pressured our realized rate per mile to decrease slightly to $2.14 year-over-year, down 0.2% and down $0.104 or 4.6% sequentially. Notably, our increased dependence on spot freight had a weighted average impact on our rate per loaded mile of $0.09 in the quarter. Overall, we expect the remainder of the year to remain relatively flat on a loaded rate per mile basis compared year-over-year.

We have had one of the most successful bid seasons this year that we have ever seen. Customers are inviting us to the table like never before, and we are bidding traditional and dedicated freight opportunities daily. We have been awarded significant new incremental volume over the last year with about 60% of our bid activities completed so far.

Since January, we have added 68 new customers to our customer base as a reflection of just the great work that's going on in the sales front and our resounding message with our customers.

We've had one -- excuse me. However, as spot pricing dropped throughout the first half, customers were incented to not tender all of their awards to incumbents in favor of spot market opportunities as a cost savings measure. It's understandable, but was challenging for us.

Our remediation of this situation has been multi-tiered and focused on increasing the size of the intake funnel for the business. If we can land more business at now-reduced realization, we believe we can counteract the key 2 trends, and we've begun to see that already. We've added sales resources, which we believe to be a smart investment in sales talent as that leads to more opportunities. We have rebid awards at more competitive pricing on strategic lanes that help build out our network, and we desired but did not win in our original RFP events.

We've rebid secondary tender lanes at more competitive rates in an effort to win those lanes from our competitors, and we have separated Logistics sales and pricing from our Trucking segment to intensify focus on immediately securing more business in each of the segments.

Going back now to the operating results. Loaded miles per available tractor decreased 43 miles year-over-year, but were up 4.1% or 61 miles per tractor sequentially. When comparing year-over-year results, one factor in the declining utilization is the increase in the less transit efficient spot market freight due to lower actualized freight volumes on committed lanes. These loads take trucks out of our most desirable areas and network density and thus compromise efficiency.

Recruiting and retaining drivers remains at the top of our priority list. We did experience a slight uptick in unseated tractor counts. That ended at 5.2% of our fleet, but still in the 5% range we have discussed publicly in the past. We continue to focus on attracting and retaining qualified professional drivers in this challenging recruitment environment.

Also, cost is a pressure in this business as driver pay is up over $2 million in the quarter year-over-year. This is not going away as driver recruiting and retention is critical to our success, and competitive driver pay is a key contributing factor in that calculus.

The combined effect of these factors weighed down our adjusted operating ratio 150 basis points to 98.6% in the Trucking segment for the quarter.

Moving now to the Logistics results on Slide 5. Operating revenue was $39.6 million for the second quarter 2019, down 21.8% year-over-year. The main issue contributing to this decline was a previously discussed lower spot rate environment. Average revenue per load was down 18.4% or $310 year-over-year, and volumes were compressed down 4.2% as, again, customers went to the open market for better pricing.

Gross margins in the quarter of 16.5% were an improvement of 170 basis points year-over-year, reflecting our strong focus on remaining profitable even despite the challenging headwinds of the pricing market.

Our heavy dependence on contract relationships predisposed us to be less nimble than we should have been. We were losing opportunities in the RFP process as spot rates were shifting under our feet. We've taken immediate steps to resolve this. The following gap-closing actions have been implemented as we move into the second half of 2019.

As I mentioned, we hired additional sales personnel, but we also did that specifically in the USAT Logistics segment, to increase volume. We've reorganized our network and pricing department within the USAT Logistics segment to be Logistics-focused separated from Trucking. They have previously been combined.

And we've rebid RFPs out of cycles with -- out of cycle with customers to win more freight. That is reflective of the current environment.

All of the above weighed on the Logistics group, and that's resulted in an adjusted OR of 96.8% in the quarter, a degradation of 150 basis points.

Finally, company-wide, we are focused on driving improved results through initiatives discussed in each of the segments and the additional following company-wide efforts as well. We're continuing the company-wide campaign to reduce our fixed costs by 5% to 10%. We continue to target customer campaigns to improve actualization of bid awards, and we are expanding our terminal footprint and decreasing our dependence on outside repairs in high-volume locations while offering amenities to our drivers in those locations

Let's now move to Slide 7. You will recognize the 2019 company objectives that we've talked about in each of these calls. Our safety record remains among the best in the truckload carrier space as measured by preventable DOT collision. Our professional drivers, their fleet managers and our safety team do a fantastic job in making this a high priority.

We have disclosed that we have both outward and inward-facing cameras in our trucks. I'm happy to report that our occurrence of unsafe behaviors has improved over 80% since putting the recorders in our trucks and coaching our drivers to safer outcomes.

Our service has held steady with what we have previously communicated. Our customers have rewarded us with more new business in response to our improved service levels over the last year. Service is even more challenging than ordinary in a higher spot market environment, where lanes and freight characteristics take us out of our optimal network configurations. Service remains among our highest priorities

On the technology front, this quarter, as discussed, we migrated to a new version of a TMS. We now have an upgradable platform upon which we can build and integrate applications that remove tension and friction from the business. We are now in the midst of our telematics transmission -- transition, which will allow us to comply with the ELD mandate, and we hope leverages technology for even more insights to our business in the use of artificial intelligence and machine learning.

Competing commercially, our investments this quarter in additional sales resources, coupled with the actions to remain competitive on price, are a surefire sign that we take this imperative seriously. While we did better in the quarter than USA Truck historically has, we are still not happy with this outcome. Competing commercially means more than just getting by, it means thriving, and we aim to do just that.

And finally, investing in our people. Our leadership academy that we mentioned last quarter is moving ahead, and the team is working in cross-functional teams to address real strategic priorities. It is amazing what smart, motivated people can do when we give them the tools and then get out of their way. This, combined with my ongoing CEO tour, has given me confidence and faith in the ability of positive intent of our people as I talk with them every day. We are individually and collectively committed to the long-term success of all stakeholders.

Even in the face of a challenging environment, the company remained profitable in the quarter. USA Truck's recent past would suggest this is a function shift from prior results in down markets. We believe that staying profitable in this market and growing EBITDAR demonstrates that the USA Truck self-help story is working to improve results. We feel that our story of self-help remains in place more now than ever. We have room to improve asset utilization, reduce maintenance and operating costs, improve our service and materially improve our profitability.

We also believe some of the headwinds we experienced in the second quarter were unique to our community and somewhat self-inflicted. We have learned from the experience and confident our team is the right team and has the appropriate focus, urgency and nimbleness to improve results going forward.

Looking ahead, the market remains tough. July has been similar to the last couple of months on a seasonal basis, but with our gap-closing measures, we believe we are responding to the challenging market appropriately. Our focus remains on execution and improvement in our key measure of revenue per tractor per week. As we do so, we hope to see seasonally normalized freight volumes emerge. But even if we don't, we expect to be able to grow our revenue base through the measures outlined in this call.

There are also some structural things I just want to remind everybody that have happened in the business since our leadership team was in place. Part of that is bringing this leadership team that drives better and more accountability every single day. We've reengineered our network to have 40% more lane density, it's a measure of freight per lane per week, than we had just 2 years ago. We've invested in a fleet, taking the average age of our tractor from over 3.5 years to below 2.5 years.

We have driven maintenance costs down from 11.6% to 9.2%. In this quarter, it was 10% for the quarter, but that's a 14% reduction over just the last 2 years.

As I said earlier, we've added 68 new customers since January. And as I also have mentioned, we've opened and reopened facilities in places where we can have cross-advantages.

I'm not sure if I've ever shared this before or not, but I love this statement espoused by TCU legend, Dutch Meyer. He said, "Fight them until hell freezes over, then fight them on the ice." We're building a team of fighters here at USA Truck. And even though second quarter was difficult and didn't meet our expectations, we fought through it and can be proud of what we continue to accomplish.

Allison, 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) And our first question today will come from Jason Seidl of Cowen and Company.

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Adam Kramer, Cowen and Company, LLC, Research Division - Associate [2]

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This is actually Adam on for Jason. I guess just first, I obviously kind of understand the self-help dynamic here, and I think you guys have done a great job kind of presenting that. But I guess kind of I also want to ask, how much of kind of these issues that you guys saw in the quarter were you able to fix? How much of the stuff on the cost side were you guys kind of able to fix? Or how much of this is kind of going to kind of roll over sequentially and we'll see it in the third quarter as well?

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

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Yes. So I'll address kind of the revenue side even though you asked about costs, and Jason, I think, will jump on the cost elements. I mean the message that I want to be crystal clear about is that coming out of 2018, we went into a bid process that reflected an expectation about lanes and pricing and realization of that pricing that has not occurred. And we got caught a little bit flat-footed. And so what we've done, most of our gap-closing measures, Adam, has been in the form of really targeted, lane-specific repricing to go expand the top end of our funnel. Because we have said historically that less than 5% of our business is in the spot market. It actually -- Q2-to-Q2, last Q2 was less than 1% of our business. And this Q2, it was 10% of our business, which had a significant degradation on our rate. And if you -- I mean you can do the math, but we ran about 38 million miles at $0.09, so you can figure out what the implications are. We're going to fix this, and we're in the midst of fixing it right now. And I think we're making pretty good headway on that.

Now that said, July just kind of consistent with everything everybody else is seeing. We're seeing the same things. July's not very good on a seasonally adjusted basis, but those measures don't necessarily rely on July there. We can play offense often. So Jason?

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

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Yes. So on the cost side, obviously James and the team are driving on the revenue side. So on the cost side. I'm leading some initiatives on that front. We've actually got a cost council that we created at the end of last quarter when things started getting a little tight to really heighten awareness, ownership, accountability on that front. We have about a dozen different teams that have put -- that put together, and we meet weekly to review the status on each of the different teams. I won't go into all the details of what we're going after, but suffice it to say, we believe that there is a several-million-dollar annualized opportunity once fully implemented.

Just to give you a flavor of what some of those things are, we're going after nationwide vendor benchmarking and contract renegotiations. Areas that would fall under that would include outsourced maintenance. We do a lot of over-the-road maintenance, and we don't always have consistent pricing nationwide. And you're not always going to get that because sometimes you're going to end up in little mom-and-pop places, but where there is that opportunity, we want to leverage it.

We're doing a nationwide parts procurement exercise, where we're benchmarking and renegotiating contracts, to streamline what we're acquiring on the parts side, and then where there's a lot of time and energy being spent on what we're doing with our OEMs in terms of how we're specking our equipment to maximize safety but at the same time minimizing costs and providing drivers with what they need. And so there's opportunity there for us to be better in terms of how we acquire things in there.

We rolled out a corporate travel policy, just a little more structured. We've got a tool that will allow people to be more streamlined and controlled with regard to how they're recording that.

And then finally, we're just going through every part of the business and cutting out underutilized third-party applications and subscriptions. You'd be surprised how over time, you end up acquiring or agreeing to licenses and contracts, some things that 2, 3, 4, 5 years ago people were using, and they've kind of fallen by the wayside and aren't really being utilized. And it just takes discipline to go back in and cut those things out.

So those are the type of things that we're going after just to give you a flavor on what we're doing on the cost side.

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Adam Kramer, Cowen and Company, LLC, Research Division - Associate [5]

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Got it. No, I really appreciate the color there. And so I guess kind of my next logical question based off of that is, be it on the revenue side with some of the rebidding or be it on the cost side with some of these initiatives, what kind of sequential improvement can we expect? I mean how much of an effect on OR could this have sequentially in 3Q?

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

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Yes. So I mean a lot of it's going to come down to how well the team executes on the revenue side candidly. And that's something that James is and myself are intimately involved in. It's -- crystal ball is a little fuzzy, but we've got to do the best we can with what we've got. We expect to return to levels that are more aligned with what we saw in the first quarter than what we saw in the second quarter as it relates to our EPS. But again, that's going to require all of us to continue to execute on both the revenue and the cost side, which we've got very detailed action plans in place to help us facilitate.

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Operator [7]

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The next question will come from Jeff Kauffman of Loop Capital Markets.

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Jeffrey Asher Kauffman, Loop Capital Markets LLC, Research Division - MD [8]

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So basically, we're carrying a lot of freight and not making any money at the end of the day. So the one thing I haven't heard anybody talk about is what we're doing with our equipment orders, what we're thinking about with fleet size. I hear a lot about we're going back to customers and offering to cut our rates in exchange for more volume, I've heard that. And I've heard that you're going to cut costs internally to help improve the profitability. But at the end of the day, isn't the issue that you have too many trucks and contracts that you can't enforce?

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

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So let me talk about the revenue side of that for a moment, which is to say you're right that part of the strategy is to go back to customers. So we've been very successful at this to reprice some lanes that we didn't previously have. But if you're kind of doing the calculus of a weighted average impact of that, you need to consider that those rates have an accretive effect on the overall weighted average of the rate per loaded mile, right? So we're hauling 10% of our freight in the brokerage space. We replaced that even with slightly lower-rated contract freight, and it has an overall positive impact. So we think that's a real positive. I wouldn't paint it as a negative, and you didn't, but I just want to say that publicly.

On the tractor side and the equipment side, the procurement of that reports up to Jason. I will -- and so he can address some of the core elements of what we plan to do and when our capital's going to come in and all that stuff, but you're not wrong.

So we're constantly looking at our fleet size. We actually made a decision late in the quarter, where we did cut some variable capacity out of the picture, to help drive the same amount of freight through the funnel. I don't want to get into particulars, but it was 100-ish trucks of capacity that we took out at the end of the quarter, an exact response to a question you're asking. So we're asking all the same questions. We're both finance and data guys, and we don't get emotional about it. We just let the numbers guide us to what we should do next. And you're right, that was an action that we took at the end of the quarter.

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

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Yes. And just to add a little bit of color to that, I mean, we're looking at both our tractor and our trailer fleet. The one variable that's just important to remember is that you've also got to look at what used truck pricing is doing and take that into consideration as you're evaluating whether the better ROI decision is to get rid of that asset or hold on to it. And so those are things that are going in the equation as well that we're evaluating.

But with regard to our capital investment, we continue to remain committed to investing in our fleet. And we -- if things get really, really tight because of all the work we've done over the last 2 years of getting that average age of our fleet closer to that 2.5, it gives us a little bit of flexibility if we had to pull back on capital spend for asset.

But that's not our preference. Our preference would be to maintain that 2.5-year average age for a variety of reasons. It has driver recruitment and retention benefits. It has maintenance costs per mile benefits. There's a lot of reasons why. But if things get tight, that is a lever that we have to pull if we need to. So that's a good observation.

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Jeffrey Asher Kauffman, Loop Capital Markets LLC, Research Division - MD [11]

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All right. And, well, another way to get there is to bring in the new vehicles that are more efficient and give you benefits as you say, but just reduce the 5-year old trucks in the fleet, right?

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

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Yes, exactly.

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Jeffrey Asher Kauffman, Loop Capital Markets LLC, Research Division - MD [13]

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Okay. Did I hear you correctly that your goal near term is to kind of get back to where you were first quarter-wise in the business, and then kind of look forward and take it from there?

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

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Correct.

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

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Yes. I think Jason was talking -- I don't mean to speak for you, but from an EPS standpoint, that's probably a good watermark, especially given this result in the second quarter. So don't mishear us. We won't be satisfied with that. We need to get to the levels we're putting up industry-competitive ORs, and we're not there. But, yes, there's a watermark and kind of a reference point. I think that's where you're trying to take them.

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Jason R. Bates, USA Truck, Inc. - CFO & Executive VP [16]

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Yes, yes. I mean we're going to do everything in our power to exceed those expectations. But we also, given where we're at through July, we just want to make sure -- we are very competitive people here. I think you know us, Jeff, and you know how we're wired, James and I and the whole team. We hate losing. And we feel like we didn't achieve what we should have done in the second quarter. And some of that was on us. Some of it's the market, but you've got to respond to that. And we feel like we've learned a few lessons from that, and we want to make sure we're smarter going forward. But we also want to set the bar at an appropriate level, so that we give our team a chance to exceed expectations.

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Operator [17]

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The next question will come from Barry Haimes of Sage Asset Management.

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Barry George Haimes, Sage Asset Management, LLC - Managing Partner and Portfolio Manager [18]

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I had a couple of questions. One is we know the freight market was tougher, but I wondered if you could give us a little color on how many of your contract customers give or take, live up to their commitments? So maybe their freight wasn't quite as much, but you were down commensurate with that, versus how many of the contract customers in effect just went to the spot market and gave you guys less freight? And again, I'm not looking for precision, but just some color.

And then based on the answer to that, how are you thinking about managing the customer mix in the business differently to the extent that some of those guys maybe screwed you guys, let's say?

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James D. Reed, USA Truck, Inc. - CEO, President & Director [19]

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I think between you and Jeff, Barry, sometimes you ask questions, and I think, man, I wonder if they've been sitting in our meetings. So as always, we aim to be just absolutely as transparent as we can be with the public. And so I'm probably going to say more than other people might say in this instance, and my team may mute the phone in the midst of my comments, so my apologies ahead of time.

I think it's fair to say that everyone has gone to the spot market at some level. Now that said, we have gone through a really robust review of our lane-by-lane and customer-by-customer commitments to understand who truly are our strategic customers and who are not. I will tell you that it's just a handful of customers that coming out of this we really consider strategic.

We had one customer last year that said, "We know who kind of took advantage of us in this market from their perspective, and we'll have a long memory." And they've been true to that. They've given us most of the freight that we committed to. Our largest customer, which you can go look at our K, is disclosed in there. They have been very faithful in giving us the freight that we agreed to. Another big customer or 1 of our top 3 customers also likewise has been faithful.

So we feel like we have a pretty great customer base, a diverse customer base that gives us some insulation from this. But I will tell you, my kind of swing perspective on the remainder is last year, we took the view that providing better service in the back half of the year, which we did, we improved service about 10%, and we've mostly kept that intact through the first half of this year. So focusing on service and being fair on our pricing was kind of the path to the outcomes that we wanted.

I now have a different opinion. I think we will be more opportunistic in an upmarket with those customers who were opportunistic. And I don't mean to say that it's tit for tat, but I do feel like we left money on the table in '18 by trying -- and we use the Partner word with a capital P. We were too focused on being a great Partner, and many of those people have left us at the altar.

So our sales guy -- we have the best commercial guy in the business. He's doing a great job identifying strategic customers. We've signed on some brand names that you all would recognize that are big and the strategic in the way they think about things and literally just signed 2 of the contracts yesterday. So we expect to build our strategic relationships, not degrade them.

So sorry to be kind of all over the map with that answer, Barry, but that's really how we think about it. We're going to be opportunistic with the people who've proven that they're opportunistic buyers, and we're going to be strategic with those who have proven that they're strategic. And we think that's probably the right model, and that gives us a lot of upside.

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Barry George Haimes, Sage Asset Management, LLC - Managing Partner and Portfolio Manager [20]

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Great color. I had 2 others maybe, hopefully quicker. One is, can you give us any sense of the costs, hard or soft, of the IT cutover that you talked maybe being a little bit more disruptive. And is that now mostly behind you, still going into the third quarter? Any feel for that?

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

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Yes. So we went and looked at our revenue run rates during the transition. We have a really good understanding of how much we think the revenue impact was of that transition based on a run rate before and after. And rather than give you a really specific number, we think it was about $0.03 to $0.04 of earnings that hit us during that transition.

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Barry George Haimes, Sage Asset Management, LLC - Managing Partner and Portfolio Manager [22]

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Got it. Okay, that's helpful. And is it pretty much behind you now?

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

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Yes, it's all behind us now. And as we move forward, we were taking a view of bringing in additional applications, like I've said publicly before that we're bringing in a freight optimizer. Every company that we compete with has a freight optimizer -- the big ones, the public guys have freight optimizers to help make better, computer-driven, algorithm-based decisions in their planning. And we don't have that today. We will have that by the end of the year. And we have to get this platform in place in order to have a base to grow from. So thanks for giving me the opportunity to say that. I think it's part of our self-help story, is we're still investing in tools that absolutely will improve the OR and the profitability profile of this company.

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Jason R. Bates, USA Truck, Inc. - CFO & Executive VP [24]

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And that all of the large, well-run publics are already using. Right now, it's a disadvantage for us to not have it, and it's a part of the investment that we're making in becoming one of the better-run truckers out there.

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

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Got it. And then last one, you guys have talked a lot in the past about trying to reduce your out-of-route miles, getting the drivers in effect living closer to where they're going to be working. Any update you can share on that?

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

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Yes. We've intentionally been nonspecific about that, Barry. But I will tell you that in the quarter, from the point we started talking about this at the end of last year, we've improved that 20% to 25%. So it's been a big focus for us. We're doing things like having drivers that are close to facilities, leave their trucks at the facilities. We're being more consistent and intentional about putting drivers through the house with freight. These are basics that all good truckers do. We still are out of bed on the metric. I'd say we're a little over kind of double what we know other people metrics are with respect to out-of-route. But we're making great progress. Thank you for that question. We should have noted that in our comments.

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Operator [27]

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The next question will come from Michael Vermut of Newland Capital.

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Michael David Vermut, Newland Capital Management, LLC - Founder [28]

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When you look at it, there's a lot of tough things going on here, but there's been opportunity here if you look at it just with our capital structure. And your stock's at $8.5 right now. How do you look at capital allocation? And if you do the math, you can buy back 20% of the company right now for $17 million, $18 million, $19 million. How do you think about that? It's once in a shot kind of deal to really take advantage of it and change that capital structure forever.

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James D. Reed, USA Truck, Inc. - CEO, President & Director [29]

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Yes, it's a great question. So one of the things I haven't said in a long time, but I said when I first started, is my job as the CEO and Jason as the CFO, and this isn't a practical consideration, but it really is kind of the essence of the job, is to -- and looking out for shareholders is to do 1 of these 3 things every day, decide whether we're going to be a going concern, whether we're better off selling all the assets and giving the money back to the shareholders, whether we're better off combining with somebody else or some other form of that. And in thinking about that, we often consider whether or not we should buy back shares or put a buyback in place. So I think it's safe to say publicly that, again, we're numbers guys. We see the same thing you see. We've been doing the math to understand at which break points it's accretive to shareholders and at which breakpoints it makes the most sense, given our liquidity, given our share count, given, frankly, our coverage universe. So there's a lot of things that we're talking about. And we look at that. And if you've had insight into mine and Jason's personal conversations, he and I talk about that very topic probably 3 times a week, and I'm driving him nuts with it. But what would you add to that?

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Jason R. Bates, USA Truck, Inc. - CFO & Executive VP [30]

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Yes. I mean he summarized it perfectly. I mean we're finance guys. That's our background. We're fairly unemotional about this topic. We have a job to do the most financially prudent allocation of capital for shareholders. And that's how we think about it. But at the same time, we have a business to run, too. And so we need to make sure that we preserve liquidity, especially in uncertain environments. And so that all factors into that analysis. But you're right. I mean at certain points, share buybacks financially make a lot more sense than others. And so that's something that we're constantly looking at.

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Michael David Vermut, Newland Capital Management, LLC - Founder [31]

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Yes. It seemed to me to spend $8 million in buybacks, 15%, of the company isn't a bad idea.

Next thing, I assume that when the windows open up, we'll see a significant number of management team and Board members buying stock. I know it's hard to speak for the Board members, but at least for management that's on the call.

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

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Yes. So if we were in court, Mike, we'd object to that, and the judge would ask you to withdraw the question. We can't really answer that, but just you guys will see what our intentions are in the coming days.

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

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Yes. I mean I think you probably have seen Form 4s filed on my behalf over the last -- before we went into the window, and James as well and I think other members of management. I mean I thought this thing was a steal. I think I bought quite a bit at $13. So you can imagine how I feel about it at $8.

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Operator [34]

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(Operator Instructions) Our next question will come from Jack Atkins of Stephens.

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [35]

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So I guess a couple of company-specific questions, and then sort of bigger-picture market question first. I would just be curious to get your sense, James, for sort of what you're hearing from your customers. It sounds like you're sort of going back out and reengaging with folks here post bid season. What people are telling you about their expectations for their own freight volumes for the back half of the year, is the thought that maybe we can return to sort of more normal seasonal freight trends as we get into the third and fourth quarter? Or I mean I would just be curious to get your sense for what you're hearing as you aggregate all those customer conversations.

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James D. Reed, USA Truck, Inc. - CEO, President & Director [36]

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Yes, and I'll take the opportunity to spin off of that a little bit, too. So just yesterday, I had a conversation with a couple of big-name customers. The last few weeks have been with customers. They're all saying that they expect the back half of the year to be seasonally normal. Now we just don't have any indicators that help us forecast that, right? We know what our normal seasonality is, and we know what we've experienced this first half, so we're understandably a little guarded about that.

That said, you didn't ask this, but I'm going to say it, they also see what's going on or has gone on in the first half of the spot market. And even as it's firming up right now, a lot of them are trying to ask for price reductions or renegotiate lower prices going forward. And they're smart to do that.

Because as we think about what's happening with ELD, I mean, the mandate was last year, but the final mandate is this December in the transition from the grandfathered AOBRs, that's going to have an impact potentially on capacity. As you think about January and the drug clearinghouses being put in place, the FMCSA drug clearinghouse. We think that's going to have a real impact on the ability to recruit drivers. There'd just be a smaller pool. And certainly the roads will be safer, but it's going to create some capacity challenges for people.

And so their position of "Hey, we think freight's coming back. And, oh, by the way, we want to lock in some lower rates," We don't blame them. But I will just remind everybody, this behaves a lot like a commoditized market. And while we may have some rate pressure going forward, we're going to behave in ways that make sure that we have a market-competitive rate.

And that's one of the things I didn't say in my prepared comments. But I meant to mention is one of the strong points that we have, if you remember, I mean, a lot of people maybe aren't saying it, but I'm sure they're thinking it, is how is this different than in the past? And if you go back and look at our rate history, we were the worst rate per loaded mile carrier out there for 10 years.

We successfully repositioned ourselves as the top 2 or 3 rate per loaded mile carrier in the business. And because of that, we're -- insulated's too strong a word, but we're a little bit more protected. We can manage some of this on the downside. We just need to get more volume of contracted freight in the door, and I think we can do that.

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [37]

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Okay, got you. That makes sense.

And then just sort of going back to the sort of the earnings bridge between 2Q and sort of that bogie for the third quarter that you guys have laid out, as I kind of think through the different puts and takes, you've got that $0.05 charge that was in the second quarter. I'm just assuming you're not expecting that to repeat. $0.03 to $0.04 from technology transition. That's not going to repeat. And then when we think about the flooding issues, obviously, that had a -- I'm sure that had a very disruptive impact. Is there a way to kind of think about the -- sort of the EPS impact that may have had to the second quarter? I'm sure it's kind of hard to put brackets around it, but I would just be curious about that.

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Jason R. Bates, USA Truck, Inc. - CFO & Executive VP [38]

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Yes. I think we try to give you guys a little bit of color on that because I expected that question. I think we said that we recorded about $0.6 million, $600,000 or $0.05 per share of charges related to whether it's the impairment, the flood, the accelerated comp expense. And that doesn't include the $0.03 to $0.04 that James talked about related to the system implementation. So hopefully, that gives you a little bit of color. You're talking about roughly $0.08 or $0.09 on just those items right there.

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [39]

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Right. But does that $0.6 million include relocating the corporate campus to a different ...

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Jason R. Bates, USA Truck, Inc. - CFO & Executive VP [40]

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Yes.

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [41]

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I mean that's got to be disruptive in terms of just productivity for your workforce, I would think. Is that included in that?

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

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Oh, no. That's a good question. We did not include lost productivity associated with that -- this is hard dollars, right? So we didn't want to be presumptuous there. But you're right, there could be an element of that as well just like there was with the TM -- with, sorry, the system implementation.

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

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TMS system.

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Jason R. Bates, USA Truck, Inc. - CFO & Executive VP [44]

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Yes, TMS.

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Jack Lawrence Atkins, Stephens Inc., Research Division - MD & Analyst [45]

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Understood. And just last question for me, and appreciate all the time, but you guys think about the initiatives that you're implementing now and really have been implementing in response to just the softer overall market conditions. I guess -- clearly, some of that's going to take hold in the third quarter, but how do we think about that? Is that going to be third, fourth? And does that bleed into 2020 before you really see the full impact of that? Or is that something that you think can be in place by the time we exit the 3Q?

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

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Yes. I think it's by the time we exit. Except for on the cost measures, some of those are annualized-type effects that Jason was talking about earlier. But certainly, on the revenue front, I mean, it's interesting. Anytime you have an earnings release, it's kind of a -- positive or negative, it's always a little bit of a surprise to people. We've known about these headwinds and certainly the flood throughout the quarter.

And so we've been taking these measures, especially on the revenue front. And I'm really proud of our sales guys and our customer service team. They've landed, what did I say, 68 customers year-to-date all in response to some of these actions that we've taken. And a lot of those bids, I mean, our biggest bid went into effect just on July 12. And it comes in like a tide change, not like a tidal wave. And so that's working into our system. And say, by the middle of August, 2 or 3 of those bids, which have all gone into effect in the last 10 days, will be materially impacting our business, and we expect to the upside.

So hopefully, that answers your question. I don't have the patience or tolerance personally to let this draw on for a long period of time. My expectation is all the actions we're taking, and this really, Jack, is probably more for my employees that are listening than for you, but our expectation is these impacts are immediate because they have to be.

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Operator [47]

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Our next question is a follow-up from Michael Vermut of Newland Capital.

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Michael David Vermut, Newland Capital Management, LLC - Founder [48]

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Just one quick follow-up. Can you just give us a look into these new awards that we have, and then also what we're working on, existing customers, new customers, and then the type of rates that you're seeing on these new awards?

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James D. Reed, USA Truck, Inc. - CEO, President & Director [49]

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Yes. So interesting question. I won't get into real specifics, but rest assured we have this data, and it's been part our discussions as a team for the last several weeks. So the answer is, yes, it's new customers and existing customers. And this is a little -- I don't mean to be confounding here, but when we're looking at our network, it really is a lane-by-lane rather than a customer-by-customer approach. So we look at the lanes that we need volume on, that we don't have it on because it fell out of the prior bid and wasn't captured as a realization effect. And we go target that and roll it up to specific customers. So a lot of it is new customers. A lot of it is existing customers.

Now that said, actually, our contract freight year-over-year is up in the low single digits percentage-wise. The new freight that we're going after right now with these new and existing customers is down a couple of percentage points from our otherwise contract freight in the business, but significantly higher than the brokerage freight that we've been putting in the funnel.

And I just can't be any more specific than that, Mike, because I don't want to get in the business of disclosing now and then having to come back to that touchstone in the future. But it's not a bad rate environment. It's a little bit lighter because these are some of the lanes that we didn't go after really strongly in the initial bid process. But if the concern is, "Geez, does this materially kind of dilute your rate per loaded mile?" The answer is no. In fact, it helps it because it's displacing brokerage freight.

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Operator [50]

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This will conclude the question-and-answer session. At this time, I'd like to turn back to Chad Lane for closing.

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

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Thanks, Allison. This is James.

We've talked a little bit about the flood that affected the River Valley here. And there were even some great questions about whether or not it was a disruptive to our operations, and it was. It was a challenge. We literally picked up all of our belongings on a Monday evening at 5 p.m. And then by 5 a.m. the next day, half of our staff were operating south of the Arkansas River in Fort Smith because that's where they live, and half were operating in Van Buren, both at-lease facilities that we procured overnight. Our IT team and operations, and even 2 of my teenage kids, were up until 2 in the morning setting up computers. By 5 a.m., our operations were online and freight was moving. I just wish that everybody could have seen the binding effect that, that tough experience had on our people. Was it tough on our results? Unequivocally, absolutely, yes, but the net effect is we're stronger as a team. We're closer as a family unit here at USA Truck, and we're really proud of what we did coming out of that tough circumstance.

So with that, I just want to thank everybody that was on the call, as Jason said in his opening comments, thank all of you who have followed us. If you have any other questions for us, please don't hesitate to call. You can contact Chad -- preferably Chad, but Chad, Jason or myself will set up time, will be glad to answer any further questions you have. We look forward to talking to you in the future. Thanks.

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Operator [52]

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