USA Truck Inc (USAK) 2018 Q3 法說會逐字稿

Good morning, and welcome to the USA Truck Third Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

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

Good morning, and welcome to USA Truck's third quarter earnings conference call. Joining us this morning from the company are James Reed, President and Chief Executive Officer; and Jason Bates, Executive Vice President and Chief Financial Officer.

Please be reminded that this call will contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. And such statements are subject to the Safe Harbor created by those sections and are made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995, as amended. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated by the forward-looking statements. Please review and consider the factors that may affect future results and other disclosures by the company in its press releases, annual report on Form 10-K and other filings with the Securities and Exchange Commission. Any forward-looking statement 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 tables at the end of the slide presentation accompanying today's conference call.

I'll now turn the call over to Jason.

Great. Thank you, Jimmie. We want to thank everyone for joining us on the call today, and we appreciate your interest in and support of USA Truck. 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 a fifth consecutive quarter of consolidated profitability. We are encouraged by the commitment and hard work exhibited by our entire team this quarter in spite of its challenges.

Q3 marks the first time in nearly 3 years USA Truck has achieved 5 consecutive quarters of consolidated profitability. A trend we intend to build upon. As you may have noticed, we issued a press release and 8-K last week, announcing the acquisition of Davis Transfer Company. We are excited to have the Davis team as a part of our organization and expect them to be immediately accretive to our consolidated earnings, which we will discuss in more detail later in the call.

If you will please turn with me to Slide 3 for a review of our financial results. Consolidated operating revenues came in at $132.6 million for the quarter, which represents a 16.1% increase year-over-year. Net income was $3.3 million or $0.40 per diluted share for the quarter, and adjusted net income was $3.6 million or $0.43 per diluted share, when adjusting for transaction-related expenses. This represents a $0.38 adjusted EPS improvement year-over-year.

Consolidated operating ratio for the quarter was 95.6%, which represents an improvement of 279 basis points year-over-year and 119 basis points sequentially.

Our Trucking Segment generated $2.6 million of operating income in the third quarter of 2018. This is a $3.8 million improvement year-over-year and $0.5 million improvement sequentially. Our operating ratio for the quarter was 97%, an improvement of 460 basis points year-over-year and 52 basis points sequentially.

And finally, our USAT Logistics segment generated $3.2 million of operating income in the third quarter of 2018. This is a $200,000 improvement year-over-year and a $1 million improvement sequentially. Our operating ratio for the quarter was 93.2%, a decline of 113 basis points year-over-year, off an unseasonably strong third quarter of 2017. But an operating ratio improvement of 246 basis points sequentially.

If you'll turn with me to the next slide, we will highlight some key balance sheet and liquidity measures. As of September 30, 2018, our total debt and capital lease obligations was $96.3 million. Total stockholders' equity was $73.8 million, and the company had $76.2 million available to borrow under its credit facility.

Net debt to adjusted EBITDA decreased sequentially to 2x compared to 2.1x as of the end of the second quarter of 2018, and improved from a high of 6.4x in the second quarter of 2017.

As of October 18, 2018, upon closing of the Davis Transfer acquisition, the company had approximately $44.3 million available to borrow under its credit facility.

Our pro forma leverage ratio for the Davis transaction, as of October 18, 2018, will be approximately 2.5x versus our actual September 30, 2018, reported figure of 2x.

So as you can see, while the acquisition slightly increased our leverage, we did not need to significantly lever the balance sheet to execute the transaction, and we remain within our previously communicated target leverage range of 2 to 3x.

We've had several people reach out to us with questions about how to model the Davis transaction going forward. As disclosed in our 8-K, we are required to perform and disclose a 2-year audit of Davis's financials within 75 days of closing the transaction. As such, you will all have that information available to you in the near future. Having said that and reiterating that this information is unaudited at this time, we would share the following data points with you to utilize for modeling purposes over the next couple of months until we provide the audited financials.

First, currently, Davis Transfer has approximately 250 trucks. Roughly 2/3 of which are company-owned and 1/3 are independent contractors.

Second, their trailing 12-month consolidated revenues are roughly $50 million.

Third, their trailing 12-month adjusted operating ratio is in the high 80s.

Fourth, with a purchase price of $53 million and the pro forma leverage data I just provided, you can see that the acquisition was executed within industry market ranges for similarly sized transactions.

Finally, I'll provide a brief update on our tractor in-service situation as discussed on our last call. We, along with others in the industry, continue to experience unanticipated delays from some of the OEMs on new truck deliveries, which was a contributing factor to some of the unseated truck count issues we experienced in the quarter, which James will address later in the call.

Year-to-date, we received 245 new trucks as opposed to 350 scheduled deliveries. New trucks receipts at this juncture are critical for us for a variety of reasons, including improved fuel economy, substantially reduced maintenance expense as well as driver satisfaction. The OEMs are still telling us they expect to be able to deliver on their original commitment of 350 to 400 trucks for calendar year 2018. However, based on their track record, we would not be surprised if some deliveries were to slip into the first part of Q1 of 2019.

So with that, I'll pass the call to James.

Thanks, Jason. As you can see from these results, we had another strong quarter, and as Jason noted, the fifth consecutive quarter of profitable performance.

This is a testament to our previously outlined turnaround strategy and our ability to execute it well. But more than that, it is a testament to the strength and capability of our team, starting with the drivers, but also including our operations and logistics teams as well as our management team. We're just so proud to be associated with this group of professionals. It's hard to believe that this result marks the first full year that our newly assembled leadership team has been together. This is the first call that Jason was on last year as he was beginning his new journey with us. So we're glad to have him here.

The market has been strong from a rate perspective, but much of what we're accomplishing is independent of an improving environment. We reiterate our self-help story that we have opportunities yet to seize, but also believe we have outpaced market moves in rate, OR improvement and year-over-year improvements in profitability.

Moving now to Slide 5 for discussion results in our Trucking segment. Base revenue per available tractor per week increased $408 or 13.6% year-over-year for the third quarter and decreased $34 or 1% sequentially. The sequential decrease was primarily driven by our higher-than-expected unseated tractor count during the quarter. However, the year-over-year increase in revenue per truck per week, our most critical measure, is a solid outcome on a comparative basis.

Base revenue per loaded mile increased $0.381 a mile or 20.5% when compared to the third quarter of 2017, an increase of $0.092 or 4.3% sequentially. Loaded miles per available tractor per week decreased 94 miles or 5.8% year-over-year and decreased 82 miles per available tractor or 5.1% sequentially.

Deadhead percentage for the third quarter of 2018 increased 150 basis points year-over-year and 30 basis points sequentially. Even though we expect some utilization pressures will refine the network and see corresponding reductions in length of haul, the sequential drop was partly driven by growth in our dedicated service offerings, which have grown 20% year-over-year.

We faced real challenges seating trucks throughout the quarter, and at one point, had the highest number of unseated trucks we've seen in more than 3 years. As Jason mentioned, the delays in receiving new tractors as a result of OEMs supply chain and delivery performance exacerbated the issue. We won't belabor the point other than to say that we bring older trucks off the road according to a very thoughtful, strategic and financially prudent plan. When the new truck that is meant to replace the older truck doesn't arrive on schedule, we see a resulting glut of used trucks, drivers' influx, unexpected burden in volume in our maintenance facility.

Our average unseated tractor percentage for the third quarter of 2018 was 6.5%, which was 260 basis points worse year-over-year and 160 basis points worse sequentially. I just looked at the numbers this morning, and as of today, we're at 5.5%. So we're improving that number every day.

In our last quarterly call, we shared that our average age of fleet had peaked at 3.3 years. The oldest in our company's recent history. Despite the delivery issues noted earlier, our average age of tractor ended the third quarter of 2018 at just under 3 years. Still older than we originally expected, but progress toward our planned replacement cycle. We reiterate the goal of driving our average fleet age to approximately 2.5 years on an ongoing basis and still hope to accelerate fleet replacement and make up the lost ground with the OEMs by year-end.

Our team was quick to respond to the headwinds that we had in the quarter and took immediate measures to counteract them. As we discussed last quarter, we changed to a more intelligent and targeted driver recruitment strategy, we modified our recruitment advertisement approach, and we rolled out a reduced driver-to-driver manager ratio in our fleet. We also announced the driver pay change at that time that would take effect in the third quarter, which we successfully launched without any response from our professional drivers. The result of all this is that the average available tractor count for the third quarter of 2018 was 1,641, which is a 3.1% reduction when compared to our third quarter 2017 average of 1,693. And relatively flat compared to 1,638 in the second quarter of 2018. However, as a result of the team's actions outlined above, I'm pleased to report that we are over 1,700 available tractors today. And when you include the impact of the Davis Transfer acquisition, our fleet is now nearly 2,000 trucks.

I want to take this opportunity to briefly comment on the Davis Transfer acquisition. For all practical purposes, Davis will continue to operate as it always has. The benefits of the transaction are immediate. We instantly have a greater density in the Southeast, we instantly have a conduit for freight into and out of markets where we've had a high number of driver domiciles, and we instantly have access to a yard and facility network in the areas where we need them most. These are all areas we noted and need to address in prior quarterly calls.

One may notice that we've made no reference to synergies in our discussions of Davis. While they exist, this transaction was not done for the value of the synergies. We will give an update in a future call on identified opportunities, but we are in the early stages of completing a 2-year audit, as Jason mentioned, and have just begun our detailed review of shared saving opportunities. What we do know is that as is, Davis provides immediately accretive earnings and the chance to address key strategic areas that have been a focus of the USA Truck story previously.

Overall, our trucking business has made tremendous progress. But we acknowledge it still has a long way to go, continuing to improve revenue per tractor per week and seating tractors remain our top business priorities.

Turning now to the next slide. USAT Logistics generated operating revenues of $47.1 million. This represents a 24.5% or $9.3 million year-over-year improvement. But it's a reduction of 5.5% or $2.8 million sequentially.

Operating income increased $200,000 or 6.7% year-over-year and $1 million or 48.2% sequentially.

USAT Logistics generated $8.3 million in gross margin in the third quarter. This is an improvement of $700,000 year-over-year and $800,000 sequentially.

Our gross margin percentage for the third quarter of 2018 was 17.7%, a reduction from 20.2% in the unseasonably strong third quarter of 2017, and an improvement of 2.6% over the second quarter of 2018.

Finally, our load count increased 5.5% year-over-year and declined 4.9% sequentially.

Our logistics business continues to be a strong contributor to our results. These operating metrics are a direct result of continuing to service our contractual freight as opposed to abandoning commitments and purely pursuing spot market transactions. The strength of our logistics business was clearly evident in this quarter as the spot market softened sequentially and our margins improved. This is a direct reflection of the higher measure of our volumes in contracted business. In the quarter, approximately half of our logistics business was contract based. This allowed us to buy better in a softer spot market, thus preserving margins, and lend support to our decision to not dive headfirst into the spot market fray earlier in the year.

Moving now to Slide 7. As we've mentioned previously, we will report back quarterly on a few key strategic targets. Most of these have already been discussed in some detail on the call. The first, we are ahead of schedule versus our communicated plans on base revenue per available tractor per week, which is already 13.4% better than the 2017 average.

Our 6.5% unseated tractor percentage remains above our targeted level of 5%, but we close most of this gap near the end of the quarter, with the mitigating actions that I outlined earlier.

Available tractor count today is roughly 2.5% higher than last year's full average of 1,662. Our goal remains 4% to 6% growth. And the receipt of the OEM delayed trucks combined with the Davis acquisition should help us close the gap on the low end of this target in the fourth quarter.

We've also been targeting $3 million to $5 million reduction in cost on a CPM comparative basis through a series of corporate initiatives. While we have identified many cost-saving opportunities to date, our success on this front is dependent on increased miles to get the CPM comparative reductions. We have pivoted to an intentional focus on driving revenue per truck improvement through rate initiatives, dedicated business expansion and network and freight mix changes, which put downward pressure on miles driven and thus this metric.

We remain committed to driving cost reduction initiatives wherever possible, and it's the significant focus for us day-to-day. But will not achieve the range of savings we had previously targeted this year.

Finally, USAT Logistics revenue was 35.5% of consolidated revenue in the quarter, just ahead of our targeted levels. Our long-term goal remains to get this business trending towards 50% of our total revenues. And that task gets tougher every day as the Trucking segment continues to grow and succeed.

We've now delivered 5 consecutive quarters of profitability by doing what we said we would do and then some. We've consistently said that we expect 300 basis points of OR improvement per year for the first 3 years or so, after which we'd still expect OR improvements but on a slower trajectory. Year-to-date, in 2017, our consolidated adjusted OR was 102.3%. Year-to-date, in 2018, we are at 96.4%, which is a 590 basis point improvement. That puts us well ahead of schedule on our commitment.

USA Truck is a unique story in this landscape in that we remain a self-help story. Our team is focused on structural changes in rate, network, customer mix and disciplined execution that we anticipate to be sustainable over time. We will continue to solidify those healthy changes by maintaining a competitively performing logistics business and growing it via increasing market share and share spend with the existing customers. Likewise, preserving the notable rate improvement that while aided by a healthy environment has been well ahead of industry comps, will also be a priority. Recall that USA Truck historically was priced at a deep discount. That cannot and will not happen again.

Beyond the sustained results in the areas we successfully addressed, lies the next opportunity in improving execution and our cost structure. Economic expansion is driven by productivity improvement. I had a professor who used to say, as long as people are digging ditches with shovel somewhere in the world, there is opportunity for productivity, improvement and thus economic growth. Well, that's exactly how we feel about our future prospects here at USA Truck.

USA Truck has been structurally laden with waste historically, and now that we have mostly transformed our network and revenue base, we can build a more efficient operating mechanism to support it. Like my professor taught, we believe that we may have many -- that we have many opportunities to increase our productivity and thus expand our economic and financial performance. I will also add that, that should improve our customer service experience as well.

Some examples of structural deficiencies might be helpful to articulate this point and our future focus. We discussed driver domiciles in the past being a key driver of turnover, cost and network inefficiency. Our new recruiting approach and pay plan is having very good results in attracting and retaining drivers into our network. Well-performing transportation companies don't have drivers living out of their network.

The second one is the lack of enough and properly located terminals. The addition of Davis directly addresses that in the Southeast, and we're actively working to find the right locations to further reduce the over-the-road maintenance cost and unpaid nonrevenue miles that we see as issues related to this.

Next, our past equipment replacement cycle led to a high age of fleet, expensive replacement cycles, higher maintenance cost and dissatisfied drivers. We are actively addressing this with our current replacement strategy.

And finally, this is a bit nuanced, but I wanted to share it. Simple things like a tire replacement program. USA Truck has not had an effective tire management program historically, which drives cost into the system. I don't want to paint us as idiots, but until recently we couldn't even move tires from our tractors to trailers on our own being an effective tire casing management and recap strategy. That's basic.

We won't venture to state what addressing each of these issues means from a cost perspective just yet. We're working through these and other issues that I assure you most other companies in our sector don't have. These all represent OR improvement paths that we have yet to go down or are just beginning to address. The opportunity to eliminate waste, improve productivity and thus economic outcomes are real, and we think unique to us in this sector.

Our team is excited for the future and sees opportunity ahead to even further improve our performance. Just as we stated in the past, we continue to appreciate the support from our customers and community. But above all, the belief and support of our fellow employees who are making this improving result happen quarter after quarter. Finally, I want to offer a heartfelt welcome to our new teammates at Davis Transfer. This is a great time to be part of USA Truck. And we're excited about the prospects for the future of how our, now, combined companies.

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

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

I had a couple of questions. I'll shoot a couple of them off and get back in queue. On Davis, can you give us, historically, what their driver turnover has been? What the age of their fleet is? And whether or not that fleet's financed with on balance sheet or off balance sheet financing?

So I'll take the first 2 and have Jason address the financing. So from a turnover standpoint, they have incredibly low turnover compared to USA Truck and compared to the industry. I don't want to disclose a specific number. But it's below 60%. So fantastic, fantastic turnover profile. The age of the fleet is approximately 2.1 years. And then have Jason address the financing.

Yes. So as a part of the transaction, we paid off any outstanding debt. And so all of the assets that we brought on board are on balance sheet. Does that answer your question, Brad?

Yes. But you're not necessarily taking on a bunch of operating leases? I'm trying to figure...

No. We are not.

Kind of how that business is capitalized.

Yes, no operating leases.

And then can you quantify the driver pay increase you put in place? Did you say September 15? What was the date?

Yes. September 15. So we haven't disclosed or quantified the exact amount of that increase. As you know, and I think we talked about there are different performance criteria that can cause that number to move up or down. But they're mutually beneficial, right, when that happens. And so it's hard to put a concrete number on that. But needless to say, for those that were driving the right behavior and who were willing to be in the right markets for us, it was a substantial increase.

And I'll just add to that, Brad. As Jason said, one of the interesting components to this and it's no secret sauce, I mean, anybody can go out and understand via some of the surveys that are out there what our structure is. But we changed the pay in such a way that drivers on a weekly basis can get a different CPM based on their performance. So they're heavily incented to really control their own paycheck and drive revenue on to the trucks. That said, we're in a situation we haven't been in a long time where we're able to be much more selective about the drivers that are coming on and filling the trucks. And we're our seeing our net kind of seated truck situation improve day after day.

And maybe if I could just come in a different way. So the driver pay went into effect September 15. I imagine that's what's driven some of the improvement in the unseated truck count. But trying to figure out if we need to be a little bit cognizant of increased cost in the fourth quarter? Or do we see an immediate benefit that would offset that cost?

No. That's a very astute observation, Brad. And we would encourage you to take that into consideration. While there will be a benefit, it's not going to be self-funding.

So it would be marginally dilutive to fourth quarter?

Yes. I mean, like I said, on an apples-to-apples basis, you will have some headwinds there, as you would with any increase in compensation.

But as we said on the last call, sorry, Brad, we did go to some of our customers, and we were able to secure rate increases in support of this. And so Jason is absolutely right. But we'll continue to drive productivity improvements, and we'll continue to work with our customers to make sure we can cover that over the long term.

Yes. So to be clear, Brad, if you're just looking at the wage line item, you will see inflation in the wage line item. So that's my point. What James is addressing is there a lot of different things that come as a result of this increase that will help offset through a variety of different line items.

Okay. And then rates have been extremely volatile for you guys. I think last third to fourth quarter, you saw 13% sequential improvement in rate, and you've sort of been holding pretty steady at high teens, low 20% increases. Can you provide us any color on what rates should look like for you in the fourth quarter as we lap those challenging comparisons from a year ago?

Yes. So I mean, I'll remind you that we've had 3 consecutive quarters at 20% plus rate increases. This Q3 is the first quarter after which we had implemented our initial network strategy. And I will just tell you going into the quarter, I had expected the comps to be tougher, and I won't say we're surprised, but definitely pleased with the efforts of our team to get the kind of rate performance that we've had. Going into the fourth quarter, there's a little bit of year-over-year comp challenge in that. I don't want to provide a specific number, but I would still say like we've always said that it's kind of, I don't know, Jason, how you'd model this kind of high single digits to low double digits even year-over-year.

Yes, because keep in mind, as you know, Brad, the fourth quarter often times presents opportunities to do special project business or surge business in support of different customers that is disproportionally profitable. And so we were able to participate in that pretty handedly last year. And we are working hard with our customers to continue to do the same this year. But until you get into it, you don't know how much of that you're absolutely going to get. So -- but when you look at the underlying business like our true contract rates and what we're doing with the network, that's still going to be solid increases.

Pretty healthy. And we don't mean to be squirrelly on you, but remember, we said this last Q4, last year was the first time in anybody's memory around here that we participated in this surge. So we basically have one data point upon which to build. So we'll get smarter and smarter about this over time. So bear with us a little bit there.

Sure thing. And then last question, I'll get back in queue. Average age is just under 3 years now. You took on a little bit more leverage for this acquisition. It sort of suggests to me that CapEx should remain elevated for '19. Can you give us any initial thoughts, Jason, on what CapEx budget looks like for '19?

Yes. I think it's probably going to be relatively similar to what we've guided to this year. We haven't gotten our final approval yet from the board. We're actually going to be having our board meetings here next week and giving them a first look at it and then getting them to bless the plan in December. But I would say that on a net CapEx basis, we're probably going to be in that $40 million to $45 million range. Again, don't hold me to that number. We'll give you a more concrete number next quarter, but for modeling purposes right now, I think that's probably a safe number to go with. And we will probably expect to invest in roughly probably in that 300 to 350 trucks next year. We want to be a little bit more disciplined about how we manage our CapEx cycles than USA Truck has been in the past. And we want to be cognizant of making sure that we're generating the operating cash flows to be able to sustain that.

Our next question comes from Jason Seidl of Cowen.

I wanted to touch on Davis and then jump back to piggyback on some of the 4Q questions. So look, it's clear you guys bought a really good trucking company, when you look at the OR, you look at the average age of the fleet. What type of things are you guys doing with their management team to try to learn and implement stuff that you could use at USA Truck legacy?

Yes. That's a really great question. So I want to, before I answer that, take the opportunity to kind of just reiterate something we said in the call, which is we bought Davis because it's a great trucking company. And we don't want to screw it up. And so our intent is to run it essentially as a stand-alone, right? It's immediately accretive to earnings. And you're right, they do some great things. So just this is kind of a funny due diligence question. But when I first met with them, I asked them, how do you handle drivers that live outside of your network? And they looked at me like I was crazy. And it turns out that well-run trucking companies don't hire drivers outside of their network. And so we actually have had Todd Davis, who now is officially in the role of Vice President, Davis Transfer, as part of USA Truck. He's been here the last couple of days. We had some pretty intense conversations about some back-office opportunities and also some network overlap opportunities. So one of the primary theses of this acquisition is that we have an opportunity to provide a springboard to get drivers into and out of our network as they go home in the South and in Florida candidly. And so we've identified real opportunities where the 2 of us can share freight back and forth by tendering freight to each other. In fact, there have been instances already where Davis was running empty on a specific lane and we had freight on that lane, and we passed it over to them. So a lot of words there. The intent is to run it essentially as a stand-alone, sharing freight and best practices between the 2. But Davis will continue to be Davis. Davis drivers will continue to report to Davis fleet managers. And the Davis name is not going anywhere. So I hope that answers your question.

No, it does. And when you guys gave the average age of your fleet, was that including the Davis transaction or excluding?

No. Good question. That number was just the USA Truck average age. And then James provided the Davis fleet average as well...

Well, obviously, Davis would lower the average age of your total fleet posted.

Correct. That is correct.

Okay. That's -- just wanted to make that clarification. Well, congratulations on the transaction, seems it's a very good company. Let me jump a little bit to 4Q. And I think the questions are going to be around this only because last fourth quarter was such a sequential improvement, right? So how should we be thinking about that, given your driver pay increase and given that we have seen some softness, at least in the spot market per se over the last month? So how should we look at the sequential numbers in 4Q versus 3Q?

So let me first take a shot at the environment, then I'll have Jason talk about the implications. And so from an environment standpoint, yes, there has been some softening of the spot market. But as you look at what that meant to our logistics business, in particular, we have a higher percentage even in that business of contract freight. And so given contract prices, lower spot market, we're able to buy better on the capacity side and hold our margins pretty healthily. So that's one of the implications of that. On the rest of the business, so on the truckload side, it's pretty interesting. Customers -- I was just talking to our sales leader this morning actually. Customer activity on bid demand this year is pulling in to be more Q4 and Q1 loaded as compared to 2018. And the reason I think that's germane to your question is, customers are still extremely concerned about capacity. And so how that translates to Q4, I'll kind of pull the pin and throw this grenade at Jason and let him deal with it, which is we're not going to be worse in Q4 this year than we were last year. So that's kind of where we're headed as a business. And maybe you could put some parameters around that, Jason.

Yes. So -- and I think you kind of [keyed it] up nice, Jason, with the way you phrased the question. Because there are going to be puts and takes, right? We are going to have some driver wage inflation that we didn't have last year. I would say that last year, customers were -- I think, the surge in blitz activity that you get, a lot of times it's based on meeting certain volume thresholds with different customers out of different locations. And I think last year with all of the capacity concerns that prevailed the industry, I think, and I'm sure that you could get shippers to back this up, they were more concerned about making sure trucks were there than if they might have tripped some thresholds on load volumes out of different locations. So that was definitely beneficial to those of us who were there, providing the capacity. This year, I think that they're -- they have similar capacity concerns, but they prepared themselves for it, I think, a little bit better and they're being very disciplined about how they handle that. So that's something that -- kudos to them. But we want to make sure that we're there providing them with the support and the capacity in the markets that they need, so that we can, again, take advantage of what is usually a very nice peak in the fourth quarter. And that's something we're actively participating in with them. But again, as James referenced earlier, last year was kind of our first foray into playing in that fourth quarter peak surge volume. And so we only have one data point. And it was a good one. And -- but we -- it's hard to know exactly what it will look like this quarter until we get through it. So I think when I'm looking at my model, I'm trying to be conservative about how I project that and model that. But I think, at the end of the day, as James alluded to, we have some pretty lofty goals internally about what we expect to see. And we expect to improve year-over-year just like we've done every quarter this year.

Our next question comes from David Ross of Stifel.

It's been a very entertaining call so far. I do appreciate your frankness in all the comments around the business. I guess, start digging into Davis a little bit more. Why Davis, other than it's a good company and you guys are looking to grow through acquisition? Was it a competitive bid process? And what is the makeup of the freight in terms of over-the-road versus dedicated?

Yes. So why Davis? First of all, we intend to grow this business and there aren't a lot of options, right? You can either grow it organically or you can grow it via acquisition. We knew that we wanted some presence, as we said on the call, in the Southeast from a terminal footprint standpoint. We knew that if we could find a smallish operator that fit that footprint, that it could not only be accretive as an addition but that it could help the USA Truck story. We've talked about this quarter after quarter. One of the deficiencies of our model has been that we have many drivers that live outside of our established network. It creates out-of-route miles, which our competitors don't encourage, it's extremely expensive on the cost side. It creates service issues with our customers, so on and so forth. So we knew kind of what we wanted. To your question of -- you didn't say it this way, but I think you're asking, was it an auction process? It was not an auction process. We've had a relationship through one of our executives with Davis for many, many years. It was a private introduction. To be candid, they've talked to other people in the past, and they were more focused on good culture fit in relationship than they were getting the highest and best price that they could. And so we felt like we got a great deal. They feel like they got a great deal. There is an amazing cultural fit between the 2 organizations. And at the end of the day, it just was a perfect fit. The other thing is I will just say this, we did a bunch of modeling to try to -- I don't know if this is behind your question, but we certainly ask the question ourselves of why are they even available? Why hasn't somebody else picked them up? And the reality is somebody that's accretive to us at a mid- to high 80s OR may not be accretive to somebody that's operating in a lower 80s OR situation. So it's a unique opportunity for us to get better that may not exist for other people, so.

Yes. And I would just add to that. Scale is also relevant, right? I mean, for us, these guys represent slightly under 10% of our overall revenues. Whereas for most of the people that are out there acquiring companies, this -- it really wouldn't have been worth the time and energy to go through the acquisition process because it just wasn't big enough for other people. But for us, it was perfect. And I think it was a mutually beneficial transaction. And we're excited about the synergies and where we can go together with this.

And why were they, I guess, selling anyway rather than just running their own business? Is there a management changeover or founder retiring?

No. It's a great question. And some of this is maybe a little personal and maybe we should have Todd in here to say it himself, but. So the business was founded in 1959 by Todd's grandfather. And his father, Gary, ran the business for many, many years and Todd's been involved in it for another 20 years. And then another uncle was involved in the business as well. And so as Gary and the uncle stepped away from the business, they're approaching retirement, Todd is a relatively young guy. Candidly, what he said to me was, I don't want the risk of being a stand-alone trucking company. And so the fact is in the purchase agreement, Todd has agreed to stick around for several years. And we've got, I guess, I could say it this way, some hooks into him that will ensure that he sticks around for a few years. So he's going to be an integral part of our management team. We plan on him being here for a long, long time. And his dad and uncle are at retirement age, ready to step away. It really is interesting. There aren't a lot of these out there, but there are a few where the next generation are great operators. But they don't want the kind of entrepreneurial risk of running a small company. And so it's just a perfect, perfect opportunity.

And what about over-the-road versus dedicated?

Oh, yes, I didn't address that. That's a really hard question to answer because the answer is it's mostly over-the-road dedicated. And what I mean by that is, they -- I think for characterization purposes, we would say they're over the road. They have a customer list that mostly looks like our customer list, but almost exclusively runs in the Southeast. And they have what I would call quasi-dedicated relationships with those carriers. They're not specific commitments to trucks and volumes on a daily basis. But they run the same customers on the same routes over and over and over again. And in fact, yesterday, as we were talking to Todd, something we didn't realize in the diligence but came out as we were going through the operations is that most of the Davis drivers are home a couple of days a week. And so it really looks like a dedicated business.

And then, I guess back to the USA Truck core truckload operation. Comments around service as the ORs improve, as drivers are paid more, as equipment comes in, even if at a slower pace than you'd like. Can you talk about how this service has improved versus a year ago or even versus earlier in the year?

Yes. I mean, service is an interesting question. And the -- we're in a commoditized business and service has to be good enough. It's a terrible way to say it, but it's the reality of the business. And so with our customers, we have agreements about what our targeted service levels are. We look at our service on a daily basis. We are committed as an organization to improve that every single day. And we always see room to improve the service to make it better. And that's something we're focused on right now. To be perfectly candid, we don't disclose our specific service numbers but it's improved in some lanes and frankly, as the network is coming on, it's gotten worse in a couple of lanes. I'd say net-net, it really hasn't changed much. Our expectation is that it will improve as a natural byproduct of having a denser, more thoughtful network. And we're just really appreciative of our customers because some of our customers have, as I said, seen better service and some have seen worse service. But they understand that this is a 2-year network redesign, and we're 1 year into that network redesign. And so we've got a really supportive group of customers that understand that it's a process. And we appreciate their patience. At the same time, it's a pretty commoditized business. You better be good enough or you'll be looking for new customers, or they'll be looking for new solutions.

Excellent. Last question, just on the used truck market. How has it been developing this year? And what are you seeing for trade?

Yes. So I mean, obviously, it's better this year than it was in prior recent memory. But I would say by no means is would I characterize it as a robust used truck market. I think we've tried to be very methodical and disciplined about making sure that our depreciation schedules are aligned with where the market's at so that we're not finding ourselves in tough spots. And we've got a team that does a really good job, and I need to give them credit, a really good job of finding venues for these trucks. And where we can -- sometimes, we'll turn them back to manufacturers in a trade, but a lot of times they're able to find places to sell them and make some money for us. And so again, it's something that it's not a great market but it's good enough that our team with some hard work is able to take advantage of.

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

Couple of questions on Davis and then a couple other questions. Could you give me a rough idea of what the miles per truck per week in the Davis network might look like relative to your network, given that you mentioned it kind of almost operates like a dedicated network?

Yes. So we're not ready -- well, first of all, this is James, Jeff. I think, I may have met you once, but I want to welcome you to the call. Thank you for being here. So we haven't disclosed that yet. It's something that will be folded into our trucking operations in the future and so you're not likely to get a lot of color on it. I'd say it's relatively similar. Given, however, that it is highly dedicated in nature, it's a little bit lower than our core truckload business but very similar to our existing dedicated. And we've talked about that repeatedly. We view those as an integrated and copacetic business. You got to have a good over-the-road business to supplement your dedicated business and vice versa. And so that's why we combine them and keep them combined. So kind of intentionally a little bit cloudy there. But I'd say it's about normal for what we would expect given the profile.

Yes. And so if your question was specifically around utilization, as James alluded to and has talked about in previous calls, utilization in dedicated is oftentimes a little lower. But your rate for mile is higher. And as you know, and you and I have talked a lot, Jeff, about revenue per truck per week is really our focal area. And so when you think about it in that -- in those terms, it's very similar to our business.

Yes, I'm getting about $3,770, $3,800 revenue per truck per week for Davis. Does that sound ballpark?

Yes, so we're not prepared to give specific numbers like that at this point. And now is that -- are you -- is that including fuel all in or is that ex-fuel?

It's all in.

Yes. So I mean, that's probably relatively in line with where our company average is at. And given our commentary about it being similar vis-à-vis you can kind of infer what you will there.

Okay. Yes. No, no. That's helpful. And just in terms of modeling. Also where do you anticipate fourth quarter share count to finish, given that there was some equity issued with this deal?

So I think we should be in the, I would say, probably 8.2 million to 8.3 million share range because you've got some that were issued, but then you've got forfeitures and things like that as well. So I think that's probably a safe assumption, 8.2 million to 8.3 million.

Okay. And then the revenue per truck per week across the business looks fantastic in terms of the increases. Maybe ask it in a different way, we talk about changes going on in the spot market, we talk about contract rates still rising. What increase are you signing new contracts at today? Because there's been a lot of speculation by people in the market, "Oh, the spot rate is slowing, we're not getting big rate increases from customers anymore." I don't know if I buy into that, but I'm curious, what are you seeing in terms of where your new contracts are signing in terms of rate increase?

So I'm really glad you asked that question because it gives me a chance to talk about a couple of things that I think people don't quite understand. Part of it is realize that our bid cycle has been relatively similar quarter-by-quarter. So you're new on our coverage, but we've said this the last couple of quarters. In 2018, our bid activity has been 25% in each quarter, Q1, Q2, Q3, Q4. And so there is a part of next year's kind of first half that's already embedded in the quotes that we've put into place in the second half of the year. And so if you're looking at what we've reported, 20% year-over-year increases for now 3 consecutive quarters, a big portion of that 20% should already baked in your model for the first half of next year. So you can do your own math. But if that's the case, the first half sets up pretty nicely. That said, I think your question really was around the current bid activity. It's really early. There's a bunch of bids that are in play right now for Q4. So I'm not dodging you. I just don't even know the answer, but I will tell you that I expect that to be in kind of that 5% to 10% range year-over-year.

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

I had a couple of questions. Maybe just following up a little bit on the freight question. There's been a lot of talk in a sense that freight hasn't been quite as robust this fall as people might have thought and just wondering what you're seeing. Are you still turning down loads? And if so, what's sort of turndown count are you running now versus where it might have been in the spring or earlier in the year? And then my second question is, James, you've talked about how it's a couple of year process to change out the network. If -- about how much of the network would you change out, still remains to be changed out, if you will, to get it to where you want it? So presumably, you've made some changes already but if you had your druthers and you had a good market next year, you change more of it out. So are you looking to change 10% more, 20% more? Just trying to get a feel for how much remains to be changed out, if you could.

Yes. Absolutely. So very -- your first question, very astute. The third quarter from a volume standpoint, turndowns, we don't disclose our turndown number. But turndowns were down in the quarter. There's no doubt about that. We watch it every day. It affects our ability to move freight between the 2 businesses. And so it was an area of concern going into September. Candidly, about halfway through September, it went crazy. It picked up considerably on the load volume. Interestingly, going into October, it slowed down again. And then the last couple of weeks have been really strong. So that's kind of what the turndown environment has flipped twice in the last 8 weeks. So it's been a really interesting environment on that front. In terms of our network, we are 1 year into a 2-year process. It would be easy to say we're 50% of the way there, but I think we're probably more like 60% to 70% of the way there. We think there is some additional structural changes that we can make. And I'm really guessing here, it's not a real number, Barry. But my gut says there's probably kind of a 30% remaining kind of heavy lifting left to do on our overall network redesign. And then I would just point out that year-over-year, it's a little bit like putting together a moving puzzle where the pieces are changing. Our customers bid and rebid their freight each year and each of the transportation companies bid and rebid their freight each year. And so I would expect kind of a 10% to 15% of the networks constantly turning over year after year after year. So long answer, but I think we're maybe 60% to 70% of the way there on a structural kind of rebuilding of the network. And then we expect kind of 10% to 15% to move around on us year after year after year. But that's I'd say pretty normal for most of our competitors.

Yes. Barry, the one thing I would add to that is James was alluding to our network, the way we've defined it and the way we want it with our customers. But the second piece to that, which takes a little longer, candidly, is then aligning our driver domicile with that freight network. And that one, I would say, we are in early innings of that effort. And this driver wage increase that we just rolled out combined with this acquisition of Davis are all things that are designed -- strategic initiatives that we have designed to address that and help us move the needle on that front over the next year or 2.

Great. If could just throw in one more quick one. You talked about the terminal as being one of the attractions of Davis and wanting to do a little bit more with the terminal network. Without leading the witness geographically and tipping your hand, but about how many more terminals would you like to have? And would you see most of that being inorganic through acquisition or do you think you'd build some de novo?

Yes. Great questions. And just allow me to clarify the Davis situation a little bit. So we have locations now in Carnesville, Georgia; Valdosta, Georgia; and Lakeland, Florida. And I wouldn't characterize those as terminals at USA Truck's suddenly going to take advantage of, but we are going to take advantage of them as opportunities to move drivers in and out in terms of locations where they can park tractors and trailers and start to get some maintenance energy. So I just want to point that out. In terms of additional facilities, I mean, we've said this previously. We have been looking for facilities all year this year and candidly, have come up a little short. We now think we need about 2 more in the near future, and we are looking at those as organic opportunities for now. Opportunistically, if other things come up, and we're in the right situation from a balance sheet standpoint, there could be a strategic acquisition that has the right terminal network. But I'll just tell you as we're looking at our capital and we're looking at the low levels -- as they may be, low levels of integration with Davis, I just don't see that being our highest priority. It's much more likely to be an organic process.

Yes.

Our next question is a follow-up from Brad Delco of Stephens.

James, you kind of mentioned again the goal of improving margins at a 300 basis points clip into the future sort of independent of the market. Is that a corporate target or was that just trucking, I forgot?

That's just trucking. So we expect -- I would say 300 to 400, Jason, makes me say 300. But it's trucking. I mean, we have -- we had a great quarter, but it's still a 97 OR. We have opportunities to leverage our network more efficiently. I spoke in the call about the opportunities to reduce cost. And one of the challenges we have with our driver domicile and our -- kind of pursuant to Barry's earlier question, the location of our facilities is we incur a disproportionate amount of out-of-route miles. These are unpaid, undispatched miles because we're sending drivers home. Our competitors don't do that. I'm not going to tell you a specific number, but I'm going to tell you it's a significant opportunity to improve the OR to and beyond the target levels that we've told you about. So we've got a really clear line of sight about how to do this. And now we are just starting down that path, and we feel really good about the trajectory we have been on and the path that it's going to take to get to the next level. I don't want to be overly optimistic here, but we just solid execution will lead to the results that we have told you about.

And Brad, we've tried to be very methodical, right? And we said what we're going to do and then we're doing it. Now we're telling you what our next plans are. It started with the network. It started with getting the right freight in the right markets and saying no to the right freight, and getting rates where they needed to be, right? That opened up opportunities for us in dedicated. Now we're focusing on getting drivers aligned with that, all of which are going to have very positive effects. And so we're just trying to stair step our way through this. And go after the biggest, low-hanging fruit out there and then move on to the next one.

Okay. Good. I appreciate the further color there because I know you guys mentioned part of seeing the improvement in cost per mile was getting more miles, and I understand that dynamic. But if you're saying you can drive improvement, independent of what kind of freight market we're in, if we're going to a weaker freight market, it sounds like your ability to improve cost will be dependent on miles and that may be challenging in a more difficult freight market. So I just wanted to understand that dynamic and I think you explained it.

Yes, well, we did say that earlier on the CPM basis. But I just want to caution you, just I gave 4 examples in the call. The one example that I'm talking about here of reducing out-of-route miles, for example, that improves your cost structure even if there is no change in miles because we're paying out variable cost on miles that aren't showing up in the metrics. So I just want everybody to be aware of various things we can do, Brad, even in a down market. That should accomplish the things we've talked about. And we think those 4 points I mentioned in the call will do just that.

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. As we shared before our model this year, USA is back. And we believe this quarter's results and the acquisition of Davis Transfer lend to even further support that this is truer now than ever. Thanks again for joining us and following our story. Jason and I will be at ATA in Austin next week; New York, the first week of November. And I will be hosting a driver at the NASDAQ for Veterans Day. Watch for the USA Truck Navy tractor on 42nd Street in Times Square on Veterans Day. We hope to see many of you at these upcoming events. Thanks for your support.

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