USA Truck Inc (USAK) 2017 Q4 法說會逐字稿

Good morning, and welcome to the USA Truck Fourth Quarter 2017 Earnings Conference Call. (Operator Instructions) Please note that today's event is being recorded.

I would now like to turn the conference over to Jimmie Acklen, Financial Reporting Manager. Please go ahead.

Good morning, and welcome to USA Truck's Fourth Quarter Earnings Conference Call. Joining us this morning from the company are James Reed, President and Chief Executive Officer; and Jason Bates, Executive VP and Chief Financial Officer.

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

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

I'll now turn the call over to James.

Thanks, Jimmie. I hope everyone had a chance to review our earnings release from last night. Just as the third quarter was important to show what our team could do in a short period of time, this quarter was critical for a different reason.

It was an opportunity to prove our thesis has merit and has leg. But there's latent value in our network that has been untapped for years. And that this team knows how to manage in a way to access that value, keep our trucks moving and grow our logistics business further. And let's not forget, this assembled management team has only been together for 2 full quarters.

I'd like to offer some historical perspective on our quarter. The fourth quarter represents the third-highest adjusted EPS for USA Truck in the last 10 years. Our base revenue per loaded mile in our trucking segment was up 20.1% year-over-year and 13.5% sequentially. This was the largest single quarter year-over-year or sequential price increase in our company's recent history. Consolidated operating revenue was up 19.5% year-over-year to a $123.3 million and up 7.9% sequentially. This represents the highest quarterly operating revenue in more than 2 years on a smaller-fleet basis. And we're just getting started. The quarter was not a spot market play, but rather an intentional and concerted acceptance of commitments with existing customers to meet their needs in the quarter. For the first time, due to our strategic network reengineering initiative, we were well-positioned to meaningfully participate in the retail surge. And while participation in the surge was a contributing factor to our best-in-class rate per loaded mile moves year-over-year, it was not the whole story. We saw a significant improvement in our core network performance, in addition to the surge-related impact. Thus far, our network has been a reflection of in-flight repricing, rationalization of the current network and the optimization of the hand we were dealt. Moving forward, we expect our strategy to emerge as our efforts to reprice and reorganize the network take effect in the first quarter of 2018 and beyond.

We remained focused on closing the gap on the base revenue per loaded mile metric that USA Truck has historically had versus the competition. We are all happy for our employees, our shareholders and our community. They all deserve the reward that come with being part of a winning team. But getting to a consolidated 95 OR in the fourth quarter does not constitute victory for us. We continue to see opportunity for growth, gaps to close with our peer group and a business that is poised to continue on a path and plan just as we've laid out in the past. It would be a mistake to declare success at this early stage, and while we are proud of the outcome, we quite frankly feel we could have performed even better.

Let's now turn to Slide 3 for a look at our consolidated results. Freight demand in the fourth quarter on a seasonally adjusted basis was strong when compared to the same period in prior years and sequentially. Indicative of the company's ongoing efforts, consolidated operating performance, as I said earlier, was strong. Operating revenue came in at $123.3 million for the quarter, a 19.5% increase year-over-year. Operating income was $5.5 million and net income was $14.8 million or $1.84 per diluted share. Adjusted net income was $2.8 million or $0.35 per diluted share, excluding the impacts of the tax law reform.

Consolidated adjusted operating ratio for the quarter was 95%. This represents an overall improvement of 990 basis points year-over-year and 320 basis points sequentially. Trucking adjusted operating ratio for the quarter was 95.2%, an improvement of 1,460 basis points year-over-year and 660 basis points sequentially. And finally, USAT Logistics adjusted operating ratio for the quarter was 94.6%, an improvement of 40 basis points year-over-year and a decrease of 310 basis points sequentially. Recall, however, that the third quarter of 2017 was unusually robust in the wake of natural disasters.

Moving to Slide 4. Base revenue per loaded mile in the Trucking segment increased to $0.352 or 20.1% versus the fourth quarter of 2016 and $0.25 or 13.5% versus the third quarter of 2017. Approximately $0.17 of the year-over-year increase in base revenue per loaded mile for the fourth quarter was driven by our increased participation in the retail surge. Historically, USA Truck has not been a significant player in this annual phenomenon. We expect this to be a recurring element of future fourth quarters, as these opportunities exist each year for the best carriers.

The change in surge strategy was accompanied by our continued efforts to retool our network, customer, market and lane strategies that are essential to our trucking turnaround. These efforts resulted in approximately $0.182 of the year-over-year increase in base revenue per loaded mile for the fourth quarter. Said differently, we saw a network-driven increase in base revenue per loaded mile, excluding the surge, in the fourth quarter 2017, of approximately 10.4% year-over-year. To summarize, the year-over-year increase in base revenue per loaded mile, just under half of the 20.1% increase, was surge-related, while just over half was network-driven.

Miles per seated tractor (sic) [truck] per week decreased 2.9% versus the fourth quarter of 2016, down 58 miles per tractor per week year-over-year, but increased 0.4% or 8 miles per tractor per week sequentially. Our average unseated tractor percentage for the fourth quarter of 2017 was 5.5%, which represents a 380 basis point improvement year-over-year and a 100 basis point improvement sequentially. The average seated tractor count for the fourth quarter of 2017 was 1,588, which represented a 2.7% improvement over our fourth quarter of 2016 average of 1,547. While the change in both unseated tractor percentage and total seated tractor count improved year-over-year on average for the quarter, each trended unfavorably throughout the quarter. As the driver and independent contractor markets continue to be challenging, this is as tough a driver market as any of us has ever seen. We have implemented a variety of initiatives designed to help mitigate this headwind, and this will remain a significant area of focus for our organization throughout 2018.

Base revenue per seated tractor per week, among our most critical measures, improved for the fifth consecutive quarter to $3,505, up $487 or 16.1% versus the fourth quarter of 2016 and up $378 or 12.1% versus the third quarter of 2017.

As we stated last quarter, our trucking focus has been, and will remain, improving our safety, increasing rate through further densification of the network and disciplined pricing and improving utilization. Our performance in tractor utilization lags the progress we have achieved in other key metrics and, thus, remains a significant focus. We know that to truly compete, we must close the gap between ourselves and the industry on this measure.

I'll now turn the call over to Jason to give you an update on our logistics business and financial position.

Thank you, James. Turning to Slide 5. As noted previously, in the fourth quarter, USAT Logistics generated revenues of $39.5 million, which is up 19% year-over-year and 4.5% sequentially. Gross margin came in at $7.1 million for the quarter, reflecting a $0.9 million increase or 14.6% year-over-year improvement. Load count was down 5.5% year-over-year, which is reflective of tighter capacity in the market, and gross margin decreased 70 basis points to 17.9% compared to 18.6% in the fourth quarter of 2016.

During the fourth quarter, tighter capacity drove significant but anticipated increases in purchase transportation costs, which facilitated higher revenue per load, but compressed margins when compared to the third quarter of 2017. Given the market conditions, USAT Logistics increased participation in spot market activity to counteract the sharp increase in purchase transportation cost and to respond to the spot market opportunities. USAT Logistics will continue to focus on increasing market share by providing a transparent and value-driven model to its customers. This model is designed to increase volume and normalize gross margin while providing our customers with transparent and market-based pricing, with the intention of building stronger customer loyalty and sustainable market share gains.

Turning to Slide 6. As of December 31, 2017, our total debt and capital lease obligations, net of cash or net debt, was $107.4 million. This represents the $13.3 million reduction in net debt sequentially during the quarter. Total stockholders' equity was $66.5 million, which marks an improvement of $15 million sequentially. Net debt to adjusted EBITDA decreased sequentially to 3.9x compared with 5.8x as of the end of the third quarter. The company had approximately $61.8 million available to borrow under its credit facility as of December 31, 2017.

As previously discussed, we will be reinvesting in our fleet in 2018. We expect to replace approximately 300 to 400 tractors during the year, with an anticipated net CapEx between $40 million and $50 million. Any free cash flow, after our CapEx requirements have been satisfied, will be directed towards debt repayment. We made significant progress in reducing our leverage ratio during the quarter and expect this trend to continue throughout 2018. And we remain committed to achieving our previously communicated long-term goal of 2.5x to 3x.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 was signed into law, which reduced the federal corporate income tax rate from 35% to 21%. This change required the company to revalue its deferred tax liabilities as of December 31, and at the new corporate tax rate -- at the new corporate income tax rate, which resulted in a reduction of income tax expense by approximately $12 million or $1.49 per diluted share.

With that, I'll go ahead and pass the call back to James.

Thanks, Jason. We have previously provided a range of operating improvements that we expect it would be accretive to results in 2017, and we wanted to review those with you. We've largely delivered on those commitments.

Slide 7 shows the focus areas we said were most critical to our success, raising rate and seating trucks. We said we would, by our pricing and network reengineering, raise base revenue per seated tractor per week by 3% to 5% by the end of the year. We accomplished that goal. For the full year average, base revenue per seated tractor per week was up just over 6% from $2,998 in 2016 to $3,179 in 2017. And on an exit-trajectory basis, in the fourth quarter of 2016, base revenue per seated tractor was $3,018 compared to $3,505 in the fourth quarter of 2017, a 16.1% increase.

We said we would increase seated tractor count 5% to 7% versus the fourth quarter of 2016 average tractor count. And despite exiting the third quarter of 2017 5.2% over the baseline, we backslid in the fourth quarter almost exclusively in our independent contractor count, and end of the year, just 2.9% ahead of 2016 year-end seated tractor count. We noted this concern in our third quarter earnings discussion. And at that time, we had identified new industry partners who, we believe, are even better than the prior options. We did ramp the new partners in the fourth quarter and have just begun seeing the impact of those efforts in the last 3 weeks. So while the uptake on the programs has been slower than hoped, we are encouraged at the direction. During our last update, we indicated that our independent contractor count was approximately 17% of the fleet, and today, it's just about 15%.

The final 2017 initiative we reported on throughout the year was a reduction of fixed controllable cost, which are down $4.1 million year-over-year and in the high end of the $3 million to $4.5 million range we had initially indicated 1 year ago. We expect costs to remain core to our execution strategy going forward, and we'll offer periodic updates on our cost performance in the future.

Now moving to Slide 8, we want to set the tone for our 2018 key focus areas. Just like in 2017, we consider these touchstones that we will return to quarterly to update investors and analysts on our progress. Safety remains our highest priority in the business. And to that end, we will have all of our tractors operating with both inward- and outward-facing in-cam recording devices by the end of the first quarter of this year. We began this process in the middle of the third quarter of 2017, and I have been delighted with our professional drivers' response to this change and pleased with the management team's skill in navigating what could have been a tough issue. Our whole team has handled this professionally, and the value is beyond what I expected in terms of coaching and insights gain.

Additionally, with the replacement cycle of our tractors Jason mentioned, we will have 51% of our company's fleet equipped with Forward Collision Mitigation Systems by the end of the year. Other key measures outlined on this slide that we will report on throughout the year will include the following: continued improvement in base revenue per seated tractor per week, with the goal of an additional 5% to 7% over 2017 averages; increase our seated tractor count 4% to 6% due to recovery and expansion of our independent contractor or owner operator program; maintaining our unseated tractor percentage at or below 5% and a reduction of $3 million to $5 million in costs on a CPM-comparative basis through a series of corporate initiatives. I had intimated in prior calls that we were considering opening maintenance facilities to reduce our over-the-road repair cost, and I am happy to announce the reopening of the new Holland, Illinois maintenance facility in the first quarter of this year. And finally, a goal to grow USAT Logistics year-over-year volumes by 6% to 10%. We maintain our long-term intent to get this business to 50% of consolidated revenues, but in 2018, are striving to get that back to 35%.

In summary, our logistics business is a great new story, that consistently is producing healthy margins and a growing base of business with limited investment capital required to run it. Our long-term focus remains on running a well-executing trucking business, paired with this profitable logistics business. It is a powerful combination, and we believe we have the business, the people and the customers to deliver on that, as I've said before.

Our Trucking segment experienced a truly transformative quarter, and now we will look for sustainable repeat performances. I'd like to modify the cliché, a high tide raises all the boats in the harbor, to also add, but it also hides all the rocks. Some of the rocks have been cleared in the last few quarters, but many still remain. One effort we are pursuing is to update our TMS system, beginning in 2018, to have better continuity in operations, 21st century optimization capability and improved latency. Mine is mostly a tech background, and our CTO and I have undertaken this task before together. But it is a big task that outside observers should be aware of. We will periodically talk about this over the course of the effort, which could take until the middle of 2019 to complete.

While this is a time for our team to have some pride in signs of positive progress, we still see significant opportunity in each of our businesses. As we discussed earlier, we have got to get better at recruiting drivers and seating our trucks. We have got to do a better job of recruiting and growing our independent contractor fleet. We have no choice but to improve our utilization. And our logistics business has got to gain market share if we are to reach our potential. The widely reported market observations about this January are also true for USA Truck. There is more freight than trucks right now and more spot pressure on the logistics business than we've seen in a long time. It is a unique January in all our collective experience. And the only thing keeping us from our potential is us.

There have been some serious weather challenges in January. I was told there were 11 storms by our count, so execution will be key. In spite of the slower-than-expected seating of our trucks and overall fleet size, we still expect to improve our performance over prior first quarters of past years. As I said before, our intent is to measure our performance against the industry and close the performance gap in meaningful ways, like it's never been done at USA Truck before. Based on what we've seen, it's clear that the fourth quarter was a significant step in that direction as our results speak for themselves. This is no accident. It is a result of bringing together a great team, unified in purpose, aligned on our goals and a fantastic group of professionals on the road and in our back offices for making this potential a reality.

Operator, we'll now open the call to questions. And after the questions, I will wrap up with a summary.

(Operator Instructions) Our first question comes from Brad Delco of Stephens Inc.

James, you gave us a lot of great detail. And it seems like you have some good momentum. I think it is, given the low share count, pretty difficult to kind of guesstimate where numbers can go. And I know you guys don't give guidance, but when you think about the portion of the rate that you got that essentially is network-driven, not just spot or seasonal, where directionally should we take rates for first quarter? Because I know, at least in January, spot rates were up even greater than what they were in 4Q. So just trying to kind of get a sense.

Yes. It's a great question, Brad. It's interesting -- I'll give you a little more color than just the first quarter. The -- as you look at our 2017 Q1 and Q2, we have relatively easy comps, right? We had a low rate per loaded mile in the first half of 2017, especially at USA Truck and especially relative to the industry. So mind you, the -- really the first 2 quarters is -- I'm expecting, what I would call, low double digits. But as the back half of the year goes, we're planning on that kind of moderating to mid- to high single digits. And we're going obviously update you guys in future releases as we get more clarity about that. We're aware obviously of kind of the momentum in the market and the speculation about what the back half will do. But we're kind of in a wait-and-see mode, and we'll see what actually happens. So for now, overall, it's in mid- to high single digits for the year, with the first half having relatively easy comps. And I'd look for low double-digit increases year-over-year, Q1 and Q2. Jason, you want to add anything to that?

No.

I'm out of striking distance, by the way.

He's across the table. I can't reach him. But I mean, I think the one thing is, obviously, this -- when we were putting together our plan for 2018, we weren't anticipating these types of increases that James just alluded to. Obviously, the market has strengthened in that regard. Keep in mind, we are more contractual than spot in our trucking operation. And so while some of our peers may play more in a spot market and may have an easier time achieving those types of increases, our goal is to be more contractually oriented. Again, that's something that we'll evaluate as we progress through the year. But the other thing I want to make sure it gets people catch on to it is that, in an environment like that, there's going to be inflationary costs as well. That we just need to make sure that we don't just flow through high single-digit rate increases in the model and get ahead of ourselves. And I know that's not what you would do, but I think that, that is the knee-jerk reaction and tendency for some people with models out there to do. So we just encourage people to keep in mind that there will be inflationary cost drivers, equipment, things like that, that we have to factor in as well.

That's a perfect segue to question number 2 then, Jason, if you don't mind. So I think the way to stabilize, or in your case grow the fleet is, obviously, the need to attract drivers. You're bringing on new equipment, but you probably need to raise wages. Where do you think USA Truck wages are on a per company mile year-over-year for '18?

Yes, that's a great question, Brad. It's -- we suffer a little bit of not being as vocal about our successes as we should be. You might recall that in the fourth quarter of 2016, we did a reset on driver pay where we regionalized the pay, and the net impact of that was $0.015 on average for all of our drivers. So unlike many of our competitors, we did a pay increase in the fourth quarter of '16. Prior to that, we also changed our performance-based quarterly per mile bonus opportunity that drivers have to a monthly payout, which also had a kind of moderating effect on the entire fleet. And so we have not sat on the sidelines as some others have intimated in the past. We've actually actively been managing driver pay. And so we asked the same question during the quarter. And we went -- we have a expressed strategy that we want to be in, kind of, the bottom of the top-third driver pay. And so we look at a quarterly driver pay survey. We benchmarked ourselves again this quarter. We're confident that we're right in the sweet spot where we need to be. But we think we need to get better at being marketeers about it. And so we just published a really nice glossy piece. It's going to go out on our website as well. We're kind of readvertising to our existing drivers and drivers that we're recruiting, that we have a great pay package that not only includes a very competitive base rate but also includes bonus and loyalty opportunities that overall make us a very competitive strategy for anyone. Now that said, we're also not silly, as things get going, I would expect that industry rates tend to rise at about -- 25% of that makes its way back to drivers typically. So Jason?

Yes. The only thing I would add to that is, I think we've talked openly in the past and James alluded to in his prepared remarks, utilization is going to be a big area of focus for us in 2018. And so unlike some of our peers who are already running fairly stout utilization numbers, we openly admit that we've got opportunity to improve there. And so, obviously, that has multiple effects, one of which is, we as the company run more miles and better utilize our assets, but the other is that drivers get more pay. Their total take-home improves in terms of having the same amount of time away from home, they just make more money while they're doing it. And I think that's something that many of them will start to see this year as Werner and the ops teams drive that change in methodology and, kind of, perspective throughout the organization that will be -- that will have multiple benefits there.

Yes. And Brad, James again. We just love talking about the successes of the company, right? But you can't talk about driver pay without talking about the network. And the point that Jason just brought up is, and it's a little bit of a DO loop, right? You've got to have the customers to have the network, and you got to have the network to get to customers. But as we're tightening our network density, we are getting -- we're starting to see ourselves get better at utilizing the equipment. And as to Jason's point, I mean, we have many drivers that could give themselves a 10% pay increase, just because now we have a better network for them to run. And so we don't see these as independent variables, but actually quite opposite to that, we see them as highly and tightly linked. So...

Got you. And maybe to summarize that, if your rates are up, let's just say, for the year, high single digits, low double digits, whatever kind of a math works out to be, just to put some more context around Jason, your concern about us not taking into account inflationary costs, salaries, wages and benefits, you think are up a similar percent year-over-year?

Yes. I think from a modeling perspective, if we're talking about high single-digit rate increases, I think it's fair to assume, like James said, 25%, depending on how tight the driver market gets, could flow through. And so depending on what you're assuming for driver pay, yes. I mean, it's going to be -- it could be similar in terms of the growth there.

Okay. And a real quick last question. I don't remember if it was in the release or not. Expected tax rate on a go-forward basis?

Yes. I mean, obviously, we all would expect to see roughly a 14% improvement on that corporate tax rate from where we've been. We are at an inflection point as a company where we're moving from not having profits and then kind of being subject to the minimum state and per diem taxes that cause that tax rate to be a little bit higher. And now as we move into having gains income and taxes that we kind of space ourselves from that. And so, I think if you look in the first half of the year, we were in the low-40s, whereas in the fourth quarter on an adjusted basis, it was in more like a 37% tax rate. That was for 2017. And then, obviously, then the tax reform will move everyone down next year. And so our hope would be that it moves us down similarly.

Our next question comes from Jason Seidl of Cowen.

Wanted to drill down a bit on your efforts to sort of reprice and sort of change your book of business, which has been ongoing since you guys took over. Clearly, the effort showed up in the quarter. If I recall, on your second quarter call, you said the back half of '17 were priced roughly 2/3 of your business. Could you talk a little bit about the repricing cadence that you saw on the contractual basis? What you guys were getting as you move through the quarter? And what you're seeing here in 1Q?

Yes, absolutely. It's a good question. So as we went through the third and fourth quarter, these things aren't exactly synchronous, right? So third quarter bids don't always go in, in first quarter, and fourth quarter bids don't always go in, in second quarter. So we have a little bit of third quarter and fourth quarter bids that are going in to affect this quarter right now. And as I think I mentioned before, and we checked the map again this morning, we expect our rates on that business, apples to apples, to go up 6% to 7%. So it's a pretty tight range. We're pretty comfortable with kind of what -- where that -- that's hard to bake in your models because you don't know exactly what percentage of our total businesses. And I'm not going to tell you that. But we're seeing 6% to 7% on those bids that went out in the third quarter and fourth quarter that are being implemented right now. And I'm just going to anticipate your next question to say, as the market is changing, our customers are also changing their bid sequence. I mean, one very large customer that most people know has pulled their bid in and made it a 1-year bid for all of their business that's going through right now. And that bid goes into effect -- the results of that bid go in effect in the third quarter. So our cadence, what it looks right now, I have the bar chart right in front of me, is we expect about 30% of our business to be bid in Q1, about 20% in Q2 and then the back half of the year, I guess, should be about 49%, call it, 50-50. So 50% the first half of the year, 50% the back half of the year. And the first half is split 30-20.

Although that's great color. So If you guys were getting about 6% to 7% in third and fourth quarter, I mean, everyone's going to assume that in this market right now, and 1Q being a very unusual strong -- usually strong January, that you probably have the ability, depending upon, obviously, who the customer is, on average to get above those totals?

That would sound like a rational position to take. I mean that -- certainly, that's what our intent is, right? But I also want to be, kind of, give you guys some unique insight into the dialogue that goes on inside our 4 walls. We're very mindful. As you look back at the history of this company, 2014, we were super opportunistic when capacity got tight. And as a result, customers remembered that in 2016, and it hurt the company immensely. So we have a lot of conversations about let's not alienate our customers, let's make sure we're investing in the relationship, let's make sure this is long term. The other thing that I would add is the nuance that I don't know how you modeled it, is – there is also an important network effect. So I literally had a conversation with my pricing team 2 weeks ago where we were looking at a customer, and we actually went down in price on one of their critical lanes because taking that lane out, they had a more competitive bid from another carrier. Taking that out of our bid would have had a disproportionately deleterious effect on our network. And we now, like never before, understand the combined effect of network, pricing, balance in managing our business. And so we were able to economically demonstrate that, that was the right decision. So I don't mean to put a -- kind of a fly in the ointment, but yes, we're pushing for higher prices. We're trying to do so sustainably and responsibly. And in some cases, we picked network over price.

Yes. And just to add on to James' point there. I mean, when you talk about the 6% to 7%, and he talked about high single digit, low double digit in the front half of the year, I mean the network optimization and the mix component is what -- covers that gap.

It makes it so hard to compare, too.

Yes. Yes. And so, obviously, as we continue to refine the network, and we start being more consistent with regard to the type of freight that we're hauling, the comparables will be easier. But that's why you may -- it's not unlikely to see USA Truck be disproportionately higher than others in the market who already have a defined network this year.

Okay. No. That's great. Wanted to talk a little bit about cost. I guess since you brought it up, you mentioned the TMS system coming in, in 2018. What's the financial impact of that on the P&L? What should we expect?

Yes. That's such a hard question to answer. I mean, obviously, there's a project management and implementation cost to that. I -- hopefully, you picked up on some of my cynicism in my comments when I said 21st century technology. Coming from a tech background, I have a board member who says, USA Truck is the company that time forgot. And I kind of think the industry is that way a little bit, to be honest with you. There's massive opportunities for improvements. So these projects -- Jason, I'm not comfortable throwing a specific project cost out, and -- because frankly, we're still scoping the work. But I would expect long term, the P&L impact to be positive because it would show up in our utilization numbers and our efficiency, and relay our efficiency with people and resources. So -- but Jason is my cost champion. He can address that.

Yes. But I think it's an astute observation, Jason, to -- and one of the things that I was subtly alluding to about cost inflation this year. There are some things that we're going to be doing as a management team in terms of investing for the future, where it will have a negative effect in the current year. And so while we don't, to James' point, feel comfortable putting a hard number out there, it is something that we would highlight for you to think about as you're modeling.

And it's going to take a lot of our attention, right? A lot -- the team's attention.

Yes, I know. And look, any time in my history as an analyst that people put in very new big systems. I mean, it always tends to cost a little bit more than they thought, and there is always some unforeseen problem that it does cause or -- there are some minefields. And I was just trying to figure out where I should look in terms of trying to model that out. But maybe as you guys, sort of, dive in deeper in the coming quarters if -- any updates that you can give us, I think, will be helpful. And James, you remember when I started in the trucking industry, the big technology that we had were beepers to get a hold of the driver, so I'm dating myself...

Well, it's -- Jason, having got to know you a little bit, I often joke, guys, how hard can it be? They used to do this with index cards. So it's not there, but yes. Sorry. Any other questions, Jason?

Yes. One last one and I'll turn it over. You talked about driver pay a little bit and 2 questions. What percentage of your salaries, wages and benefits is driver pay now? And you mentioned you could give back 25% of the rate increases you put through to your driver base. That's typical. Given the tightness of the driver market, sort of, as tight as it's ever been, do you think it can go beyond that 25%? And then, I'll just turn it over to somebody else after you answer these.

Yes. So I was just going to jump in real quick. James is writing something down. I think the short question is, yes, it could go beyond that. Our hope is that through driving incremental utilization and through some of the initiatives that we put into place over the last 1.5 year for drivers will help mitigate that and make it not be as big of an issue. But addressing your -- first part of your question about what percentage of salaries, wages and benefits. I mean, we don't break that out. But I think -- I mean, I'm fairly -- I'm familiar with the sell side models out there. And I think we've looked through yours as well. And I've, obviously, dealt with you in a prior life. You've probably got an assumed driver wage cost per mile in your buildup, and you look at your miles. And I would tell you that we're not far off of, kind of, the industry number that's typically thrown around out there. So I'm thinking from a modeling perspective, if you're trying to run those numbers through. And again, I'd be happy to talk with you a little more about it off-line, but it's just not something that we disclose with regard to the exact amount.

(Operator Instructions) Our next question comes from Barry Haimes of Sage Asset Management.

Had a couple of questions. I'll try to go through them quickly here. One is just on your network density, what inning would you characterize where you guys are in terms of getting at where you want? Just a feel.

Yes. It's a great question. We're in the -- we're certainly in the first third, right? So I'll actually say this in my closing comments.

You're stealing his closing comments.

I literally say we're in the bottom of the second, early third. I mean, what we have said very consistently is, we think it takes our team 2 full bid cycles to make this our network. And so we are just now implementing the first bid this quarter that we did in Q3 and Q4 that reflect our new network strategy. So 2018 will be the first year of a fully deployed network strategy. And 2019, we'll be reforming that and transforming that. And I think exiting 2019, we have no excuse with what to say. This is all what we've built, and it's ours.

Got it. That makes sense. Secondly, just, Jason, following up on the tax-rate question. So when everything shakes out, are we talking a tax rate in the mid-20s? Or just give us a range of what the right tax rate is to think about.

Yes. I would say, probably more like the high-20s would be -- maybe even low-30s depending on how the -- per diem is something that we have to -- we're really trying to encourage drivers to take advantage of. Because, as I think you know, that was one of the things that changed with this tax reform is the ability for drivers to deduct expenses. And so per diem is really the only mechanism that they have to be able to help them from a tax basis on their personal income taxes. And so that's something we're going to push. And so then, obviously, that has an impact for the company as well in terms of our tax rate, right? And the way you think about that. So I think from a modeling perspective -- sorry, if I went into too much detail there. But I think the short answer is, high-20s, low-30s and we'll keep you apprised as we move throughout the year because, obviously, depending on the acceptance and adoption of drivers of the per diem program, it may cause that number to be slightly higher or lower.

Great. And then had a question surrounding ELDs. And you guys maybe have some pretty good visibility within your brokerage unit in terms of carriers that weren't compliant. Have you found that they've gotten compliant? Or you've seen some of them quit and drop out? Or some of them have taken the tact that they're going to drive until they get caught. Just curious if anecdotally you have any color around what -- or is everybody just, sort of, waiting until April 1? Any feel would be great.

Yes. So great question. We've done a couple of surveys of our broker capacity. So independent guys, just to understand where they are. And I think one of the things that's probably most noteworthy is that between our first survey, which is kind of middle of summer, to our second survey, which we completed in November, there was a discernible change in, kind of, their expectations and their willingness. A lot of defiance in the first survey and a lot more, kind of, acceptance. Now that said, on December 18, part of what drove the spot market, we think, and part of what made it challenging to cover freight, especially in the brokerage business, and you'll see that in our numbers in terms of volume, is there are a lot of guys that kind of -- and it's amazing to us that -- that are involved in the industry, but there are a lot of guys that genuinely thought this wasn't going to come to pass, right up until, kind of, triple witching hour. And so as we've gone through those surveys, we think it's a big number. It's -- call it, mid-20% that say, hey, I'm walking away from the industry. I'm not going to do this. I think once they get home and their spouse says, how you're going to pay the electric bill? That may change a little bit. And I wouldn't say I've always had a contrarian view, but I've just had a mathematically based view. Depending on whose survey you look at, if you assume 50% of the trucks on the road didn't have ELDs and 25% of that 50% are walking away, you start to get yourself into a mass range where you think you could have up to 10%. Up -- I'd say, it's on the high end, but you have -- could have up to 10% of people that are walking away. So that's kind of what -- that's what we are seeing in our logistics business as we survey these guys. And we think in the, kind of, hot-rate environment, cooler minds will prevail and some of those folks will stay in. I mean, they're capitalists. Don't forget. So…

Yes. Exactly. Well, essentially, the freight has to move, so the market has to balance sooner or later.

We have that discussion all the time, Barry. That's a great point.

But then, my just -- final last question is, you certainly mentioned the difficulty attracting drivers, and it's an industry-wide problem and -- that you guys were focused on that. So without giving away the store to the competition, but are there any -- anything you can share in terms of what you're trying to do to mitigate that?

Yes. That's a great question. So it's interesting, we all talk about driver turnover, and we talk about driver recruitment. But Werner Hugo, who leads our operations group, I mean, I was just talking to him yesterday, and one of the things I said to him is -- one of the main reasons he got the job is because of his unique perspective. I'm talking about retention rather than turnover. And so without, kind of, giving away the store, I'll just say, we think we have, and I said this on our last call, some really insightful analysis that helps us identify the risk. We use this great, kind of, internally developed logistic regression to help us understand who's at the highest risk. And then we have a program that we use that involves all kinds of, what I'd call, normal customer retention type things. And I've got in front of me, actually, a 5-step program, and I'm not going to disclose all of the details of it. But we have a program that we use to help retain our drivers. And then, I just can't talk about this without reiterating what Jason said earlier, Werner knows and his team knows the best thing we can do to retain drivers is get them more miles and keep them busy in their trucks. And so that's -- sorry for kind of such a meandering and wandering answer, but that's really what we're doing.

(Operator Instructions) Our next question comes from Mike Vermut of Newland Capital.

Kind of expanding on that last question there. You say you need 2 bid cycles, really, to get the company where you want it to be. So for -- when we're looking to model this, would it be a reasonable assumption to say, 2019, 2020, we get us to maybe an industry average OR on the company, maybe upper 80 by 2020? And what are the buckets that you see, the big buckets that get us there and that have been keeping us behind?

Yes. That's a great question, Mike. And I'm not going to answer it. No, I'm just kidding you. I'm just kidding you. Thanks for asking it. It's funny, nobody asked us, but I'm just going to volunteer it. I'm going to be really candid with you. I think we're 6 months ahead of our schedule. I really think that the network guys and the trucking guys, and let's not forget the logistics guys, put up a really great number for -- that really for them the third consecutive quarter. So it's a hard question to answer because we are just, kind of, coming to grips with the result. But as I look at the competitive landscape, I'm now kind of going into your big buckets question. From a rate per loaded mile basis, we were out of bed a year ago. And if you look at us, and I'll let you do your own homework, but by our math, we think we're second only to one company in terms of rate per loaded mile right now coming out of the quarter. That is a Lazarus-like recovery. And so we focused on that and we've done that and we're going to continue focus on it. So price is clearly a big bucket. Another big bucket is clearly drivers. We've got to get drivers and seat trucks. Assets without drivers are useless to us. And finally, utilization. I don't mean to oversimplify the business, but to us, that's what we think about. I also should talk about safety, and I'm going to talk about that a little bit more. In that, we've made some big investments to reduce the exposure on the safety front. And that's really, frankly, our biggest cost issue. I'm using air quotes here, and so is the buckets. Safety, utilization, drivers and price. Now going back to your original question. And I've said this probably before, our goal has been to, kind of, catch up in 2019. We believe that we can get close to the industry average. Now at the time that we said that, we were thinking 92, right? The industry with the tailwinds is, kind of, running away from us a little bit, even though we're closing the gap. So I think we can have a debate about what industry averages over the long term. But yes, I think in 1920s -- I think pretty consistent with what we think. So sometimes I make comments like that, and it make Jason nervous. He doesn't look nervous right now. So I'd like him to chime in and see what he has to say.

Yes. I mean, I would agree from a bucketization perspective with the things that James talked about. And I think that we've got a lot of opportunity. We've got a really good, stable logistics business. And we've got an environment where we have the opportunity to grow it. But it's funny, Jim Craig, who heads up our logistics division, we were kind of giving him a hard time the other day about we want logistics to be 50% of total revenue. He's like, well, Werner and the Trucking team are running away from us, right? And so I think it's -- we have lots of different levers that we can pull, and we've got them all going in the right direction right now. But we're not naive to the fact that -- listen, we still got a long way to go. And there's a lot of things. I mean, every single day, Mike, we stumble across things that we're just like, are you kidding me? We're doing that? Or we're spending money on that? Or we're not looking or paying attention to this? So there's a lot of opportunity. It just comes through slow, methodical, daily going to the gym lifting weights; and eventually, you turn around and you are what you want to be. And I think that we have that vision of who we want to be, but it's going to take some time for us to get there. And so I think it is a couple-of-year project to get to industry-leading levels. But I have every confidence that we're going to get there.

And I just -- a point that Jason made that I'd like to just make sure everybody's thinking about is, as the logistics business becomes more and more a percentage of our total revenue, don't lose sight of the fact -- that's kind of a 95 OR business, right? So that's going to have a proportionate weighted impact overall. So I think you -- we clearly want to look at consolidated results. Clearly, we see the logistics business that is complementary to trucking, and trucking is complementary to logistics. But logistics is what it is in terms of what the margin opportunity is there. So just -- when you're holding up the account of a long term, yes, there's a chance we could be at a 90 on trucking and a 95 on logistics, and that puts us at 92.5 on a 50-50 way. So just make sure you're thinking through the model the right way.

But from an [ROIT] perspective, it's -- that's a no-brainer.

It's a home run.

Yes.

This concludes our question-and-answer session. I would like to turn the conference back over to James Reed for any closing remarks.

Thanks, Andrea. And thank you, everybody, for participating in our call this morning. Consistency and focus have been important factors in our efforts at USA Truck. And so I'll close by saying exactly what I did the last 2 quarters.

Company-wide, we've been consistent and steady in our focus on execution and accountability. Safety, accountability and execution have been the hallmarks of the new USA Truck. And while we strive every day to meet our potential, there are times when we slip up. But on balance, we've done a great job as a team in meeting that aspiration. Built for ourselves, famously borrowed and changed the quote from Vince Lombardi, you are what the scoreboard says you are. I would characterize our new leadership team's track record on the scoreboard so far as pretty good. I'm not sure we're 2-0, but we are showing our ability to close the gap with our public competitors like never before. And I think we're still very, like you read in my scripts, in the bottom of the second inning or the top of the third of our transformation. We think it will take us 2 full bid seasons to get our network to be "our network."

My greatest concern is which USA Truck will show up in the middle innings of this mighty change. We are proud of our results for sure, but it is our job as a team to make sure that these greatly improved results become the new standard of our business, and that the prior episodes of consistently inconsistent performance are a thing of the past. That's what our goal is. And that's why we brought this team here to bring this company to a place of competitive prominence consistently over a long period of time.

We have shared snippets of our company vision in the past, but I'd like to share the part that most strongly speaks to me. That we aim to be a company that improves the lives of team members, customers, industry partners and our communities. We recognize that improved results have a discernible impact on each of those constituents and that the investment community is one of our most vital customers. Further to that point, improving and ultimately acceptable financial returns will be the most critical measure by which we measure our own success.

Our team here at USA Truck deserves all the accolades for this result. From our drivers to operations to the back office, sales, maintenance, logistics and everyone in between, everyone is pulling in the same direction. And as we do so, I expect our best days are ahead. What a privilege it is to be part of a team with so many professionals getting better at what they do every day. We are so proud of them.

Our company slogan in 2017 was, we win together. And in 2018, we'll build on that with our new mantra, which we think says is all, USA is back.

Jason and I will be in New York for an industry conference next week and in Miami the following week. You can find the details in our recent advisory announcement. We look forward to meeting you and discussing our plans further for the business at that time. Thanks again for your attendance today. We're still just getting started, and I hope you'll continue to be part of this story. Thank you.

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