USA Truck Inc (USAK) 2018 Q4 法說會逐字稿

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

I would now like to turn the conference over to Chad Lane. Please go ahead, sir.

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 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 statements. 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, Chad. We want to thank everyone for joining us to call today, and we appreciate your interest in and support of our company. As you may have noted, in the fourth quarter, we issued a press release announcing a rebranding initiative for our company. From a marketing and sales perspective, we will utilize the new name, USA Key Capacity Solutions. However, from a legal entity perspective, we are still USA Truck. On this call, we will use these terms interchangeably. 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 sixth consecutive quarter of consolidated profitability. We are encouraged by the dedication and hard work exhibited by our entire team this quarter, in spite of its challenges.

If you'll please turn with me to Slide #3 for a review of our financial results. Consolidated operating revenues came in at $141.1 million for the quarter, which represents a 14.5% increase year-over-year. Net income was $5.3 million. Consolidated adjusted operating ratio for the quarter was 92.8%, which represents an improvement of 220 basis points year-over-year.

The fourth quarter of 2018 generated the highest quarterly adjusted earnings per diluted share in our company's history at $0.68.

The full year 2018 adjusted earnings per diluted share of $1.56 was the third highest in company history. This is also only the second time in 12 years we have posted positive adjusted EPS in all 4 quarters. This is a trend we intend to build upon.

Turning to Slide #4, you will note that our Trucking segment generated $7.4 million of operating income in the fourth of 2018. This represents a $3.9 million improvement year-over-year.

Our adjusted operating ratio for the quarter was 91.1%, an improvement of 410 basis points year-over-year. It was the best OR for Trucking since the second quarter of 2006.

Base revenue per available tractor per week increased $30 or 0.9% year-over-year for the fourth quarter. The year-over-year increase in revenue per truck per week, our most critical measure, is a continuation of our methodical network and yield management initiatives. Base revenue per loaded mile increased $0.255 or 12.1% when compared to the fourth quarter of 2017. Loaded miles per available tractor per week decreased 162 miles or 10% year-over-year, while deadhead percentage for the fourth quarter of 2018 increased 170 basis points year-over-year. The dilution in our utilization in deadhead metrics was related to the inclusion of the Davis Transfer acquisition, the year-over-year growth in our dedicated operations and our participation in seasonal surge business. However, in spite of being dilutive to these metrics, each of these business opportunities were accretive to our financial performance.

Our average available unseated tractor percentage for the fourth quarter of 2018 was 6.3%, which increased approximately 370 basis points year-over-year. This was largely a function of the influx of new tractors, resulting from the OEM delays we have referenced on previous calls. At this point, we have taken delivery of almost all the 2019 model year tractors we had ordered. This catch up of new equipment, combined with the challenging driver recruiting market, were the key contributing factors to our unseated tractor percentage.

Our average tractor age is now 2.7 years as of year-end 2018, versus a peak of 3.3 years earlier in the year. The average available tractor count for the fourth quarter of 2018 was 1,883, which is a 15.6% increase when compared to the fourth quarter 2017 average of 16.29%. This is largely a function of the Davis acquisition.

Turning to Slide 5, we will review the results of our USAT Logistics segment. Operating revenue increased 9.3% or $3.7 million year-over-year to $43.2 million for the fourth quarter of 2018. However, operating income was $1.3 million, a decrease of $0.7 million or 35% year-over-year.

Adjusted operating ratio was 96.7% in the fourth quarter of 2018 compared to 94.6% for the comparable 2017 period. Both revenue and costs continue to rise, resulting in margin compression in our logistics business. We remain focused on providing quality service, while striving to manage cost.

Gross margin dollars decreased 8% or $600,000 year-over-year to $6.5 million for the fourth quarter 2018. This was a byproduct of compression on gross margin percent, slightly offset by increased volumes, as previously discussed. Gross margin percentage for the fourth quarter of 2018 decreased to 15% from 17.9% when compared to the same quarter in 2017, due to excess capacity in the market driving down average revenue per load. Revenue per load decreased 2.9% or $47 per load year-over-year.

If you'll turn with me to Slide #6, we will highlight some key balance sheet and liquidity measures. As of December 31, 2018, total debt and capital lease obligations was $160.5 million. Total net debt net of cash was $159.9 million and total stockholders' equity was $80.5 million. Net debt to adjusted EBITDA for the trailing 12 months ended December 31, 2018 was 2.7x, using actual USAT and pro forma financial information from our Davis acquisition. The company had approximately $50.8 million available to borrow under its credit facility as of December 31, 2018, up from $44.3 million at the Davis acquisition closing on October 18, 2018.

As previously announced, on January 31, 2019, we entered into an amended and restated credit facility. At a high level, this is the renewal of our current credit facility with Bank of America entered into in February of 2015. Some of the most important updated terms include: an increased facility size to $225 million with a $75 million accordion; an improved pricing grid; a maturity extension from February 2020 to January 2024; financial and other covenants consistent with our current facility; and improvements in various baskets and thresholds throughout the document due to improved company performance.

Now I'll turn the call over to James for a discussion of the business and go-forward strategy.

Great. Thanks, Jason. As everyone can imagine, we're very proud of our team putting up the best EPS result in our company's history, and the best trucking OR in nearly 13 years. It was a great quarter by most measures. In our Logistics business, while experiencing some expected margin compression, posted revenue growth yet again. What a difference a couple of years make. We outlined the plan when we started this journey together in mid-2017 that we expected to see 300 to 400 basis points of adjusted trucking OR improvements annually for the next several years. 2018 resulted in a 730 basis point adjusted trucking OR improvement over 2017. So we feel like we're ahead of our plan, but we want more.

Our exceptional story is one influenced by our capable management team, but the real notables in the equation are our drivers, our fleet management team, our logistics team, our technicians and our driver support teams. The unsung heroes of USA Truck are all those people who've endured, what I've come to call, the lost decade. These folks lived through multiple leadership teams, multiple business cycles and strategies and never-ending changes in direction. I want to personally thank every one of our teams who believed in our current team enough to execute the strategy that we outlined together. Our message has not changed in the last couple of years. This is a commoditized market. There is no reason USA Truck cannot compete. We are focused on a turnaround that moves results more toward our peers' over time, through appropriate pricing, consistent seating of trucks and putting more and more revenue on our trucks and through our logistics regional offices. All this has to be done, while being absolutely hawkish on costs. USA Truck has proven to be and remains a self-help story. The market has helped but these are not market-only improvements. They are permanent changes in execution and strategy.

Before we get into our segment discussion, I want to address the market dynamics. The fourth quarter started strong and that carried through November and while we heard concern about a softer market in December, our data just doesn't reflect that. December was seasonally soft, but historically, in line with expectations. Revenues by month in each segment were up year-over-year, and while the Logistics business did see dropping spot pricing, please recall that we are not highly dependent on the spot market. The first quarter of this year started off seasonally slower than expected, but the last half of January was strong. So much so that in the last week of January, we saw a load count in demand nearly back to pre-holiday levels. These recent trends cause us to feel encouraged by the current state of the market. Add in the consumer confidence, while down a bit, is still at historically high levels, unemployment is at the lowest point in my lifetime and GDP indications, while muted versus recent results, are still expected to exceed both the 10- and 20-year averages in the U.S. and we think we have a pretty good market.

Let's briefly now recap our Trucking results. As Jason noted on Slide 4, our revenue per tractor per week was up $30 year-over-year. That could feel underwhelming until one considers that our Trucking segment includes the Davis Transfer business and our dedicated business, both of which have lower revenue per tractor profiles, but better cost structures that contributed positively to the consolidated results. Also, keep in mind that the $30 year-over-year improvement in revenue per tractor per week was achieved on 10% less utilization or loaded miles per truck per week. This was a strategic decision towards a more profitable model. Higher revenues on lower miles, and thus lower costs, translates to higher profits.

Base rate per loaded mile continued to increase on a pace that reflects the market and our own story, up 12.1% versus the fourth quarter 2017 and 10.8% sequentially. 2018 ended up on a rate per loaded mile basis, 17.5%, and was up over 20% in 3 of the 4 quarters in the year. This was our first order of business in our turnaround, and the team has made great progress on this front.

Unseated tractors remain a difficult part of the business, as we certainly have not solved the driver-recruiting challenges. However, we are confident in the continued retention and recruitment measures we are taking to fill the trucks. Our marketing strategy has now been in place for just 2 quarters. Our driver referral programs are gaining momentum, and our training fleets have been growing. All of these things will contribute to improved results as we execute on them. I might add parenthetically that as Jason mentioned in his comments about getting a little bit behind the eight ball, our new truck deliveries in 2018 were also a headwind for us that we don't foresee in the near future.

We made progress in reducing our average age of fleet to 2.7 years in the quarter, reflecting our great execution in working through some of the truck issues we had discussed last year and last quarter. Our procurement, maintenance and industry partners made this happen, and while our maintenance costs have not yet moved to where they need to be, we expect progress on that front in 2019, as we begin to see the full benefit of the new trucks in our fleet and the lower average age of fleet. Our fleet grew 15.6% year-over-year to 1,883 available trucks in the quarter. The addition of Davis to the results was clearly the most impactful contributor to this growth.

Speaking of Davis, we're pleased with the progress in the business. Financially, Davis exceeded our expectations in the quarter, even as they completed the required audit of their historical financials and dealt with the normal growing pains associated with any level of integration. As a reminder, Davis will remain branded as Davis Transfer, has retained its leadership, customers and drivers, and is only being integrated in the sense that there are back-office and cost synergies that will serve to enhance the business without changing it. We bought them for a reason and are committed to our own version of the trucker's Hippocratic oath to do no harm to the business. We are excited to see what Todd and the team can accomplish, when they get to just run their business without the distraction of normal integration activities that had to be done.

Finally, the area where we made the most progress in the quarter is in our service performance. While we don't disclose our exact service numbers externally, we improved in the quarter by roughly 10%. Q4 is understandably the toughest quarter to deliver service in, and we made remarkable progress in this most critical area, and our customers took notice. As we look at bid awards completed and set to be implemented in the first quarter, on average, our bid awards are up well over 20% in volume and continue to reflect upward moves and contracted rates in the range of 5% to 7%. Our network redesigned is now in the second year and these critical wins with our customers will allow us to further densify the network, positively affect our overall rate per loaded mile and provide better network solutions to our drivers. This is an opportunity to upgrade and diversify our network.

Moving to USAT Logistics. The team was able to grow another 9.3% year-over-year in the fourth quarter. But in so doing reduced margin percentage and margin dollars, the imperative and logistics was to grow in 2018, and our approach was to accept some margin compression, while growing load count enough to be accretive in -- on a gross margin dollars basis. We did not grow our load count enough in the quarter to accomplish our purposes, when comparing to the unusually strong market that we experienced in the fourth quarter of 2017 for comparison.

However, on a full year basis, USAT Logistics revenue was up 29% in 2018 and top line revenue nearly eclipsed all-time highs in annual revenues for the segment. Logistics is on a revenue upswing as we're finding many opportunities to provide capacity solutions to customers. We've grown the team 22% year-over-year, and our sales and logistics leadership teams are aligned on landing even more opportunities. This business is critical to our long-term success as our customers value the opportunity to have access to an asset provider via a brokerage solution that can meet their broader needs. Even though the business has remained approximately 35% of revenues for 2 years now, it remains our intent to grow this segment. And that's why we continue to make investments in people and technology that lead to longer-term growth in this segment.

USAT Logistics will continue to maintain roughly 50% of its business as contract base -- based, minimizing excessive exposure to the spot market volatility. We believe this leads to more sustainable and predictable results over time.

Moving now to Slide 7. What we're showing is the list of over 2019 company objectives. These are intentionally directional, but all backed up with a number of very specific initiatives to accomplish the objective. While we won't share all of our initiatives, there are a few that we would like to update everyone on throughout the year. You should notice that these initiatives are much less survival mode in nature than in the past and more forward-looking as the business now is on a slightly better footing than it was when we started this process in 2017. USA Truck will continue to improve our safety. Our collisions per million miles has improved 20% in the last 2 years as our technology investments, our management focus and most importantly, the commitment of our team has been on improving this critical measure. We expect to improve at least another 5% on a crash -- collisions per million miles throughout the year. This is a tough goal to compare between carriers because of the many qualifiers and liberties people take in their reporting, but by our own measure, we expect improvements.

As we noted earlier, service has truly become a differentiator for us. We don't really believe that service leads to long-term sustained pricing differentiation in a highly commoditized market, but we do believe that the best service providers retain volumes most effectively in downturns and downturns will come. And so our goal of being in the top 1/3 of our top 10 customer scorecards gives us something to shoot for. Right now, we cleared that bar on half of our top 10 customers.

Technology investments have been a focus in the last 18 months. A large contributor to our momentum in Logistics has been attributable to the team driving a common TMS across the finish line, so that 95% of our transactions occur in one system. Our executive team recently spent 2 days in a technology strategy session to help calibrate our future endeavors on this front. But before we do anything disruptive or transformative, we have to update our trucking TMS, implement a more sustainable telematics solution and began optimizing our freight planning. These are all things our well-run competitors do today and translate to relatively quick opportunities as we execute on them. Everything we do for not -- excuse me, everything we do is for not, if it does not translate commercially and profitably. So to that end, we will continue to grow our Logistics business as a percent of total revenue. It's been fairly consistent in the last couple of years at around 35%, as I said earlier, and revenue per truck should improve to be more in line with industry norms. On the cost reduction front, we utilize a strategic partner named Arete to assist us in identifying, implementing and realizing many of these cost-saving initiatives. In calendar year 2018, they helped us implement annualized cost savings of $2.4 million, and we are targeting $3 million to $4 million in 2019.

Finally, USA Truck has struggled with talent acquisition and retention in the past. And while we have worked diligently to hire the best, train our teams on core business and process discipline and execution, we still want more for our people. To that end, we have started a leadership academy program to invest in our people with the goal of growing some of our best future leaders in house. Although I don't intend to talk too much about the details of this initiative in future quarters, I will say, we should expect the future leaders of USA Truck to come from within as we continue to make investments on this front.

We've now delivered 6 consecutive quarters of profitability by doing exactly what we said we would do. Our team remains focused on our priorities of competitive pricing, seating trucks and putting revenue on those assets, while growing our logistics share of the market. We have outlined in the past that we have many opportunities to improve our cost structure and execution by eliminating structural deficiencies. Our operations recently shifted to a more regionally focused design that allows us to better cater to the needs of our drivers, service freight more consistently and address our issues related to driver domiciles outside our network. We have historically had issues with the lack of sufficient maintenance locations within our network as well. The addition of Davis directly addressed that in Southeast, and we're making great progress on further expanding our facility footprint in 2019.

Next, our past equipment management processes resulted in a high average fleet age, expensive replacement cycles, higher maintenance costs and dissatisfied drivers. We have addressed this issue head on and due to disciplined fleet investments over the past year, we now have a 2.7-year-old age of fleet. And we expect the cost reductions, especially on the maintenance front, to follow. Each of these actions will help us reduce unnecessary operational-related waste, while supporting our improving network with all the corresponding results that come from that effort. The future is bright at USA Truck. We remain committed to our commercial improvement and feel we have unique opportunities to improve our cost execution with the investments we've made over the last 2 years. Our team views this as -- views this opportunity as a unique chance to return this company to sustained profitability and make a difference through our shareholders, coworkers, communities and industry partners. A self-help story in a commodity-like business is the best kind. All we have to do now is continue to execute. And we think we're off to a pretty good start.

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

(Operator Instructions) And the first question comes from David Ross with Stifel.

So I wanted to, I guess, start off just talking a little bit about the trucking business and the trends. Yield does not equal price and you commented that the contractual renewals are coming in kind of that 5% to 7% range. But if we're thinking about the next few quarters, post Davis here, is that kind of 12% revenue per loaded mile and a 10% drop in utilization a good thing to think about in the next few quarters as we go out?

Yes. So I'll give my thoughts, and then Jason will give the right answer. We haven't typically gotten into a discussion really about yields. I would say that what we saw in the quarter was a little exceptional in terms of what we expect on the rate front going into 2019. We do expect it to be a little more muted, for sure, than it was in 2018. As it result -- as it relates to yields, I'm hesitant, Dave, to give too much direction about that because we just think there's a massive opportunity there. We've talked about some of the waste that exists in our business. And it's really about utilizing our assets better to get more revenue on those. And so I don't think it would be extraordinary to deliver that kind of yield improvement in 2019. But it's going to take a combination of our improved utilization efforts with -- combined with the rate improvements. I don't mean to dodge your question, it's just not something that we feel comfortable giving a lot of direction on. But maybe even more nebulous is to say, we look at what our industry competitors are doing and we think the bar is pretty high and we have a long way as to go to get there and so, Jason would...

Yes. No, I think you've summarized it well. I think different people talk about yield in different ways. If you're talking about yield from a rate perspective, Dave, I think James, throughout kind of that 5% to 7%, but let's not -- that's on new business that we're entering into, but let's not lose sight of the fact that last year, we had 20-plus percent rate increases in the first 3 quarters and 12% in the fourth quarter. So some of that inherently is going to carry through into 2019 on top of what we're getting on new business. So that's one aspect on the rate side. But in terms of what we really focus on, which is revenue per truck per week, which is what James was kind of addressing, we have some work to do on the utilization front and not to use it as an excuse, but it was a hindrance in the fourth quarter when we had all these new trucks coming in. It did create a little bit of a utilization headwind for us, which I don't expect to recur in future periods because we've got -- we've worked with the OEMs to kind of streamline that process so we don't get a lot of trucks in November and December, like we ended up taking this last year.

And that makes sense. And was there anything peculiar about the fourth quarter from a seasonality perspective on the margin? Some companies just have a much better fourth quarter than the other 3 quarters due to their customer exposure. Is that the case at USA Truck? Or is this something that you see is more sustainable going forward from a seasonality standpoint? Obviously, first quarter is not going to be as good as fourth quarter, but is it...

Yes. So we actually said this a year ago when we participated in, what we call it, kind of the retail surge in the fourth quarter. That's something that USA Truck had not done historically. And so I really appreciate the question because it gave us a chance to reiterate that we did that again in 2018. And 2017 results were dramatically better than 2016. We said that, that would be part of our ongoing strategy. We executed on that again and still got another 12.1% increase in our rate. And so I think on a seasonal basis, as you compare Q4s to Q4s, the last 2 Q4s are pretty typical is I think what you should expect from us seasonally going forward.

Yes, both in terms of the change between Q3 and Q4 as well as the Q4 to Q1 slowdown that you referred to.

Correct.

And then you've talked about being ahead of plan, which is always good to hear and where you want to be so that it's not all for not, right? But when you look at '19 and '20, is that 300 to 400 basis point annual OR improvement still the cadence that you're shooting for? Or as a result of being ahead of plan, is that a smaller number that you're looking for?

Yes. As you talk about our Trucking business, I mean we're here to talk about Q4, but its helpful perspective to look at it on an annualized basis. Our Trucking business is still running at a 96 OR for the year. And so we still see some opportunities there. But not to kick the can down the road, but just a little teaser, I'll ask you to tune in for my closing comments because I'm going to address that specifically -- well, generically, but with some specific direction.

Okay. Great. And I guess last question, just any comments on the used truck market? Any changes there?

Yes. Go ahead, Jason.

Yes, I would just say, so real quick, as a follow-up to what James said. So to be clear, we're not backing off our 300 to 400 target, but keep in mind, we set that target a year ago. So we've exceeded that, and we're still holding ourselves accountable. But the goal -- when we were doing that math, we were at 100 and 102 OR in our trucking operation. So we said 300 to 400, over a 3-year period, is going to get you down to the low 90s. We're still targeting during that 3-year horizon to get into the low 90s. The trajectory and how quickly we get there and how much is in each period, more to come. But James will talk a little bit about that in the closing remarks as we talked about our strategy going forward. But now directly addressing your question about the used truck market, yes, I mean, we made a strategic decision early in 2017-- 2018 to hold onto some trucks longer than we had initially anticipated keeping them. Now that was dilutive from a maintenance expense perspective, but the reason we did it was because we wanted to try to minimize any losses on the sale of that equipment. And that worked out for us. And in the third and fourth quarter, that strategy paid dividends as we saw that we were able to get out of those trucks, break-even or even with gains. So yes, I think it's safe to say from where we were in Q1, Q2, where the used truck market was in the Q1 and Q2 versus where it was back half of the year, it was definitely improved. Now is it as strong and robust as it was, I would say, 2 years ago? No. But it's better than it was in the first half of last year.

And the next question comes from Jason Seidl with Cowen and Company.

I want to kick off talking a little bit about 1Q and how we should look at it. When I look at your last two first quarters in the trucking business, you didn't post a profit. I'm assuming, given the trends that we've been seeing from you in the nice progression that you've shown that 1Q '19 should be a profitable quarter for the trucking business?

Yes. So you're trying to get me to share things that I don't want to disclose here, Jason. The answer is yes. I mean our internal plan, which we never disclose our internal plan, but I was a directionally, what, yes, so but it's to be profitable in the Trucking business. I mean that's clearly the next hurdle for us to clear. I mean as I said a moment ago, Trucking OR is 96.1% for the year. There's just a lot of room for improvement there. So I -- kind of pursuant to the question received from Dave earlier, we -- and Jason did a great job clarifying this. We still think there's 300 to 400 basis points to go for a couple of years down there. And so -- yes, I mean Q1 started off really slow for a couple of weeks and then the last few weeks, and even as recently as yesterday's business and this morning's revenue trend have made a pretty roaring come back. So we're pretty bullish on it.

That's me knocking on wood there. Some questions just in terms of with some of the trends we saw in the fourth quarter with Davis, obviously, there was a lot of moving parts in 4Q. How should we think about the following 2 items from the modeling purposes, your total miles now with Davis in and also the deadhead? Because I'm assuming some of that just increased because you acquired Davis, and everything was new and you might be smoothing that out as we go on the next couple of quarters.

Yes. So I'll let Jason hit on the total miles vector. I mean miles are going to go up from an overall standpoint over time, obviously, because we've added a significant number of trucks pursuant to that acquisition. Deadhead, I'll just say a couple of things. Remember from the announcement, what we did say publicly about Davis, it's a quasi-dedicated business. And as a result, both businesses often will run deadhead, but it will be paid deadhead miles. And so we -- we're going to incur higher deadhead in a more dedicated business, but I promise you, it's a more profitable way to run the business. And so I don't know what you'd say about total miles, Jason?

Yes, I think just a reminder, when you look at the fourth quarter, what's included in our reported numbers is just October 18 through December 31, so that's one thing I just want to remind everyone about, the stub period. So you don't even have a full quarter effect in those numbers. But obviously, fourth quarter is seasonally stronger than the rest -- than Q1 would be. So you want to factor that in as well. But yes, James touched on it. The Davis model is a lean cost structure with low -- candidly lower utilization, slightly higher deadhead and pretty good rates, but the net financial return is very accretive to our business model. And so again, the team down the Davis is going to continue to work hard to drive more miles, lower deadhead and there are some synergies that we will be able to realize between our 2 businesses to help minimize some of that unnecessary deadhead, and we're working on those and communicate on those. But those are things that we'll realize over time. And candidly, that's just icing on the cake as it relates to this acquisition for us.

That's good color. I want to jump back on the truck market, for example. So you said you basically have taken delivery of all the OEM tie-up trucks that you had last year. Does that mean that you're going to have more for sale in 2019? Or did you dispose of those before year-end?

Yes. So we got rid of -- we either got rid of them or had them getting ready to be sold right at the end of the year. So there are some -- where we're sitting today, most of them are gone. I would tell you that, keep in mind though that USA Truck had kind of underinvested for a couple of years and so last year was kind of a big investment year, but now we've got to get on a regular cadence. And so we're going to be bringing in 300 to 350 more trucks this year, starting here in the first quarter. And so we will be continuing to get rid of the old trucks and bring in the new ones.

And Jason was a little vague about this earlier in the call, but I want everybody to understand that our operating model is to receive those trucks, preferably in the first half, certainly in the first 3 quarters of the year. It is not our operating norm going forward to be receiving masses of trucks in the fourth quarter. That was unusual, and we're going to do everything we can to prevent that. Early signs from the OEMs, by the way, are no problem. They are meeting their delivery schedules right now even as we are only a month and a week into the year. But they are hitting delivery schedules as planned. So that's very promising compared to what we experienced last year.

Good to hear that. Last one, and I'll turn it over to somebody else. Are there opportunities out there like Davis for USA Truck?

So I'll take that one. Yes, I mean, obviously, I think we kind of signaled to the market what our intentions are with the Davis acquisition. Again, just as I said to Dave, I don't want to kind of diminish my closing comments. But we're planning -- let me address that a little bit in my closing comments. We're going to clarify our market position over the next couple of months, and we're going to do that in a form that makes sense for everybody, but we're not going to do it on this call.

And the next question comes from Scott Schoenhaus with Stephens.

It's Brad Delco, in for Scott. So I wanted to follow-up. I know you guys had talked about ways to leverage the Davis acquisition. And I think you sort of tied in some comments about where your freight was versus where your drivers were domiciled. I was just curious, if there has been any change in that or any updates on how do you think that could impact to your P&L in '19? Or is that too soon to start seeing some of the impact?

Yes, great question, actually. So in my comments -- my prepared comments, I only briefly mentioned that we've undergone a recent change to a more regionalized model here at USA Truck. And so there's a nuance of the way that we've run our business that we have essentially had fleets that ran our entire operating area and literally, Brad, within the last few weeks, we have split up the operating area into discernible regions, and I will call it a domicile-driven region model. And that's kind of - sorry, if I'm getting too detailed. But that was a direct result of the Davis acquisition. So Davis gave us the first kind of de facto southeast regional operation. We then took the rest of our business and split it into regions. One of the questions that we think is pretty obvious, but we think it might be kind of thoughtful when compared to our peers as we've talked to other people that have had acquisitions in their history is we're trying to avoid, what I will call, lane conflict. And so we have gotten together, identified all of our drivers that live in the region that Davis serves so well. We've actually had some cross-pollinization where we've moved some USA Truck drivers. I do not want to give the wrong impression. It's not a lot, but it's more than 10 USA Truck drivers from USA Trucks' network into the Davis network, and they're working now driving trucks in the Davis network because it was a better fit for them. We also have USA Truck drivers who drive in the rest of our network, who live -- who have domiciles in the Davis operating area. And so we've worked with the data, the facts, the profitability measures by lane, by driver, by customer to understand where it makes sense to have those drivers driving the USA Truck fleet versus the Davis fleet. And so -- sorry to be so long winded, but you can tell, I'm pretty excited about this change. We're making sure that we don't have lane conflict where we're competing against ourselves with specific customers on given lanes. So again, really long-winded answer, but a fantastic question. Yes, the Davis acquisition promise of better regionalization has come home to roost. It's working exactly as we had hoped. And yes, I won't give you a number, but I would expect it help our 2019 results, for sure.

Yes. And so, as James alluded to, the goal now is to replicate that in other parts of the country.

So this is another way of me asking what your out-of-route miles are? I guess I still can't get that answered.

Yes. It's a great question that we will never answer. But as we did though -- sorry I don't mean to be so silly, but it's -- last quarter, we alluded to the fact that we have high out-of-route miles compared to our competitors and I can tell you that year-to-date in the first quarter, we've already seen a pretty significant improvement in that measure alone. And it's the direct result of all the factors that I just explained to you. If you start figuring out how much a percent of out-of-route miles mean to a company, we didn't disclose the exact number, but we did say that we were kind of 10% higher than everybody else, given what we think an operating norm is. So it's a real big opportunity for us.

Great. And then Jason, I think we're all trying to figure out the impact of Davis on kind of the blended metrics. And I know you mentioned utilization was negatively impacted by the company taking delivery of equipment. Can you maybe provide us some context? Was it 200 basis points? Do you have any idea of what that did to utilization in the fourth quarter?

Yes, we do. We actually have it broken down between Davis unseated trucks, dedicated growth. We just -- we're just not comfortable providing that level of detail at this time in terms of breaking it out. We can -- I can think through that and see if there's a way for us to give you guys some guidance in terms of how to model that, but given that those aren't segments that we report, it's hard to kind of break that out.

Yes. Nor are they mutually exclusive. Because we manage those assets to the place where they give us the highest return. So we're kind of -- we're swapping the assets all the time between those 3, kind of, internal operating entities. What I think, and this probably doesn't help you with the level of specificity in your modeling that you would like and Jason can work with the sell side to make sure everybody's on the same page here and get this information to the market in a thoughtful and smart way. But Davis, what we said was kind of a mid- to high-80s OR business. And I think we would reiterate that today. So that kind of takes you past all the natural assumptions down to well, if you assume, they got a few hundred -- a couple of hundred trucks, and they operate in the mid-80s, that should be able to help you with your modeling. And again, Jason is right, we don't want to get to that level of specificity, but hopefully, that keeps you on track.

No, that's great. And then maybe last question, Jason for you. In terms of the balance sheet, I think you're at 2.7x debt to EBITDA, where are you comfortable that being after this year? And I would assume best uses of capital invested in the business, but are you focused on deleveraging? I apologize if you guys already discussed this, but I jumped on late.

Yes, no problem. Great question. Yes. So you're right. On a pro forma -- when you include a pro forma financials for Davis, we're at about 2.7x now. We've been saying ever since James and I got here that we're comfortable between 2 and 3x. Obviously, you have to pay attention also though to the market environment, right? And so we felt comfortable levering up a little bit for this acquisition, but as you can see, we already are paying down debt since that acquisition. We believe even with a meaningful investment this year in assets, continuing to replenish our assets that by the end of the year, will be below 2.5x. And that's with a pretty hefty investment in fleet. And so we're comfortable at those levels. Now, if we decided to do -- if we looked at other opportunities and there was something, there was a great Davis-like opportunity out there, we would evaluate it and then we would look at the market factors and forces and make sure -- what we don't want to do is excessively lever up into a downturn just because from my history, having been at Swift and having had lots of leverage in a really rough market, it can create unnecessary strain from an investor and banker's perspective. So we want to be mindful of that, but we also want to be opportunistic. And so if there are good deals to be had out there, we're going to take a hard look at them.

And the next question comes from Jeff Kauffman with Loop Capital Markets.

I just wanted to follow-up a couple of questions here. First of all, modeling truck count, I know the Davis numbers were in for most of the fourth quarter in your average truck count numbers, but full year, year-end truck count's probably a little different.

Yes.

Go ahead give him that, yes.

Yes. Just -- I'll just put this out here so that we've all got the numbers. So as of the end of the year, we were at 1,937 -- is that the December average? Yes, the December average was 1,937. And that would have all of the Davis trucks in there as well. Having to deal with the stub period there that's thrown up that average.

Okay. That was helpful. And then between the unseated truck levels and a lot of the late deliveries, as I think about truck CapEx, you mentioned about 350 more trucks in 2019. How should I think about CapEx '19 relative to CapEx '18 with the number of unseated vehicles out there?

Yes. So we're targeting -- I mean we have some unseated trucks today, but a lot of that has to do with getting drivers in and out of old trucks into new trucks and having received a lot of them in December, which is historically a difficult month to be recruiting drivers. So we're aggressively working to seat those trucks and we're fairly confident that we'll be able to do so but that doesn't change our goal to stay on top of refreshing our fleet. And so we are intending like I said to buy roughly 350 trucks this year. That's for both Davis and USA Truck because we're going to be replenishing the fleet on both sides there. And we're also looking at some trailers and we've got some. James talked a little bit about technology and some of the investments that we're going to be making this year on that front. But we're going to be targeting, depending on which things we end up pulling the trigger on, somewhere between $50 million and $55 million of net CapEx this year.

Okay, which brings me to the telematics question. Whose telematics system are you putting into the fleet? And can you talk about some of the benefits that you're looking to get out of a telematics network across your fleet? And do the telematics plans include the Davis fleet?

Yes, so a really good question. So a couple of ways to answer that: First, let me start with Davis. And I'm not going to turn this into an advertisement for vendors at this point, although I did talk one vendor during the call. But Davis is on an ELD solution that's fantastic and compliant in all those things. USA Truck, and we mentioned this before, is on an ALBR solution, which is -- has until I think it's December 16, 2019, before you have to be fully compliant on ELD. So I want to make sure everybody understands, we're compliant with the ELD regs, fully compliant, and we have been since they went into place and we've been ahead of that for years. That said, we have to make a change this year, either upgrading with our current provider, or looking at another provider. We haven't made that decision yet about exactly who we're going to use. We've gotten done some pilots with both our existing provider and some new providers. I will tell you there is some super cool technologies out there in the form of what I'd call a puck solution that allows you to use an iPad type device and -- or a some kind of tablet device that allows you levels of customization to manage your fleet, to communicate with your fleet, to deliver training that's not available on the current technology. So we're actually in the middle of our second proof-of-concept coming very close to the end of that, and we'll be targeting a final decision on implementation starting in April. So that's kind of as far as I'm willing to go with that question. That's a great question.

Okay. And beyond the ELDs, I mean telematics is a much broader product. Can you talk about some of the benefits that you're looking to accrue as you rollout telematics across the fleet?

Yes. So I'll talk about them very broadly. So in my prepared comments, I mentioned that we had done a 2-day kind of technology strategy off site. My background -- I've been in trucking for 8 years and Jason's been in trucking for 16 years, but prior to that, I was a tech guy. So I think everybody knows my background Intel, EMC, T-Mobile, wamu.com. And so I just think our team brings a level of imagination to the playing field that maybe doesn't exist elsewhere. And so we brought in a professor, who is an expert in artificial intelligence. And we brought in an outside vendor, actually from one of my former employers to talk to us about advanced business analytics. We've got a vision for using the data that's available from those devices to help improve the lives of our drivers, provide them more meaningful feedback and frankly, at the end of the day, I mean, I would say, we're capitalist pigs. I mean, we're here to make money for our shareholders. We think we can run the business more profitably. And so you can start to imagine things like everybody in the industry talks about optimizing their route recommendations to a driver based on essentially they do it on profitability, but have you ever thought about whether individual drivers have individual profit profiles and an individual might be better capable to run a specific route based on their own history using artificial intelligence to predict how they're going to do on a given dispatch. There's stuff like that. It's intentionally vague because we do think we have a little bit secret sauce here, but to be clear, and this is more for our employees that are on the call than for our investors that are on the call, we have to execute on the basics first. We've got an antiquated TMS system that has to be overhauled and that's actually implementing in the next 8 weeks. We have to start optimizing with the technologies that are available. We have to get our telematics deployed. So we have a great imagination about these things, but let's be honest, we're still at 96 OR in our trucking business. We don't have permission to get super creative until we get into kind of market-level performance on those measures. So again an area, I'm super passionate about. I hope Jeff that gives you some color about where our head is and some of the things we're thinking about.

(Operator Instructions) And the next question comes from Barry Haimes with Sage Asset Management.

Just a couple follow-up questions. One is that CapEx, you mentioned the number for '19, $50 million to $55 million, what was it in '18? Just to get the comparison.

Yes. So our target for the year was $40 million to $45 million. We ended up getting some really favorable leasing options and opportunities towards the end of the year that caused us to not end up having to utilize the full extent of that range. But -- and then we had Davis, obviously, that came into the picture too that kind of muddied the waters a little bit. So that -- so you can see at $50 million to $55 million, we are expecting to be slightly higher but that's because of the investment in Davis next year as well.

Got it. And then just to get a feel for the character, how did you end the year in terms of, what percent of the fleet was automatic transmission? How does that compare to the start of the year? And when you take the new deliveries to '19, when you get to the end of '19, where will that metric be? Just again, I don't need an exact number, but just to get the flavor of the progression.

That's good question, Barry. Because as you know, that relates to your ability to recruit new drivers that are entering the industry, who almost all have automatic qualifiers on their CDLs. So at the end of 2017, we are at 74% of our fleet, that was manual transmissions. Every truck that we have bought is an automatic transmission. Every Davis truck is an automatic transmission. So we're at roughly half the fleet now that's automatic transmissions. And by the end of 2019, it would be 3/4 of the fleet. Yes.

Great. And just maybe one question back on the contract pricing and what you are seeing so far. So when you talked -- that's a great metric you talked about, up 20% with some of the core customers, 5% to 7% rate. But as we know, as we went through the first quarter and went through the year last year, the rates got stronger, January to March, March to May and June, let's say. So when you compare that rate you're getting now of 5% to 7%, which I'm presuming is somebody who negotiated earlier last year. And then you compare to that rate per mile, if you will, a similar type lane to somebody who renegotiated in May or June and got a bigger increase, is that rate looking up a little down, a little flattish? If you get the gist of my question, I'm trying to get a flavor of -- because of the 5% to 7% as we go through more months, you would think would go down if rates stayed the same. So just trying to get a flavor for that.

Yes. No, it's a fair question. So I'm going to give another one of my kind of longer answers because there's a lot of color for what you just asked. So the first thing is a point that Jason made. I just want to make sure everybody gets. The rates that were rebid and maybe this answers to your question, Barry, in the third and fourth quarter, we're up 20% and 12%. I mean that's what manifests itself in our performance, right? Q3 was up 20% year-over-year, Q4 was up 12% year-over-year. The -- there, of course, are rate negotiations that are inherent in those quarters. Those rate wins that went in, in those quarters, to your point, they're usually on about a year of use, right? So they rebid those in a year's time. And so there's a lot of carryover effect from that. The other point to make that you kind of nibble at the edges, but our commercial guy, I was talking to the other day, confirmed for me that the bid season is actually accelerated. So a lot of bids are moving forward this year because people have to remember, and I know that you know this, I would say that contract bid awards are slightly more valuable than the paper they're written on because contract awards are not a guarantee to do business, they are more a reflection of the customer's intention about how much of their business they're going to throw your way as a provider. And so as we look at the 5% to 7% number that we gave you, that kind of considers the calculus of the year. We have some pretty strong rates in the first half of the year. We're going to have tougher comps in the back half of the year, but we feel pretty good that 5% to 7% is the number for the full year. And that contemplates the dynamic that you explained.

And the next question is a follow-up from David Ross with Stifel.

Just a quick question related to the refinancing last week. You mentioned that healthy interest expense outlook. Yes, so if you did kind of $1.2 million interest expense in the fourth quarter, should it be a little bit lower as we look at the 2019 quarters?

Yes. so I mean simplistically, we went from -- it was roughly a 25 basis point improvement. So if you're thinking about -- because, obviously, what LIBOR does and what the Fed does is going to affect what interest expense might be, but simplistically, that's the improvement there. When you think about the fourth quarter, there was a lot of things that got muddied up from the Davis transaction as well, so -- but when you're modeling out our debt and what we've got on the balance sheet is debt and you look at what we had previously, you would want to look at that and say there's going to be a 25 basis point improvement going forward. And keep in mind, as we paid down debt in the fourth quarter, we're also going to be -- the goal will be to be paying down debt in the first quarter and throughout the year. So those are things to factor in when you're looking at how you model that.

And were there any changes to covenants with the new agreement?

Only favorable improvements. As you may recall, our -- a lot of people have said that things -- there are a lot of things that former leadership at USA Truck didn't do well over the last 5 to 10 years. Well, I can tell you the one thing they did really well was negotiate this credit agreement back in 2015. They got a great facility with minimal covenants, nice baskets, and our banking syndicate has been very, very good to work with and very supportive. And so we've effectively maintained the same structure with slight improvement to pricing, small changes to some baskets and other things like that, which we've outlined in the 8-K that was published or put out on the first.

As it was the last question, I would like to return the floor to James Reed for any closing comments.

Thanks, Keith. As we shared before, our motto in 2018 was, "USA is Back." For 2019, the slogan will shift to, "Tradition with a New Vision." We're happy to report that our recent performance is ahead of the schedule we committed to you and kind of in line with the questions you guys had. The challenge is that we aren't satisfied with just being average. We want to be best-in-class. And in order to accomplish that, we need to keep executing and improving on our operational and financial results, such that USA Truck continues to move upward and to the right in our future performance. Yes, there are remaining commercial and cost opportunities that will lead to continued, albeit slower paced improvements, but we are not content with this result. It is not a final destination. So we need to update our direction to accomplish our goals. With this in mind, we look forward to hosting an Investor Day in New York City on May 8, 2019. The details of the venue and time will be forthcoming, but we look forward to sharing more of our future vision, expounding on our growth opportunities and giving more insight to our cost and commercial opportunities. We think this is needed, given our accelerated performance vis-à-vis what we previously communicated and now it's time to talk about what's next. Jason and I will be in New York this week, and we'll be in Florida next week for some sell-side conferences. We look forward to seeing you there. And as always, we appreciate the support. Thanks.

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