USA Truck Inc (USAK) 2021 Q2 法說會逐字稿

Good morning, and welcome to the USA Truck Second Quarter 2021 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Mike Stephens, Senior Vice President of Finance, Strategy and Investor Relations. Please go ahead.

Thank you, Shamali. Good morning, and welcome to USAT Capacity Solutions Second Quarter Earnings Conference Call. Joining us this morning from the company are James Reed, President and CEO; and Zach King, Senior Vice President and CFO. We thank you for joining us today.

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

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

I'll now turn the time over to James.

Great. Thanks, Mike, and good morning, everyone. For the fourth consecutive quarter, USA Truck's results represent a record quarter in the history of the company. Our team delivered the best Q2 adjusted operating income and adjusted earnings per share in our history and the highest revenue quarter in the history of USA Truck.

I want to emphasize that last point. Q2 of 2021 represents the single highest revenue quarter in the history of USA Truck since its founding 38 years ago. When we first brought this team together back in 2017, we laid out a self-help story that focused on improved asset business performance continued success in our logistics segment and a rebuilding of a leadership team and culture that could deliver value to shareholders. We told our investors that we would focus on price and our network that we would improve seated truck percentages and that we would improve utilization, all while growing a logistics franchise with market competitive operating ratios, and we have done just that.

We've also been consistent in our story that we would improve operating ratio of 200 to 300 basis points annually for 3 to 5 years, and that's exactly what we have done and are doing. Our performance and trajectory match almost precisely what we thought they would. This is by no means a victory lap. We have a long way to go to deliver the results shareholders, and we expect -- but we come to you this morning believing we will produce even better results in coming quarters, and with a renewed resolve to ensure that these record-setting results are appropriately recognized in the equity markets. What we will share today is the story of a company that has outperformed the market in terms of price performance, a company that continues to improve profit margins each quarter and one that has $1.92 in trailing 12 months adjusted earnings per share and a balance sheet with liquidity and leverage metrics and healthy conditions that we expect will enable future growth.

Today, we will offer updates on the market dynamics and segment performance in the quarter, our progress in our self-help transformational initiatives; and finally, on the outlook. Additionally, we will, for the first time, provide some forward guidance based on our team's recent strategy work, wherein we considered the strategic road map for the company through 2024.

I'll now turn the time over to Zach to discuss the financial results.

Thank you, James. If you please turn with me to Slide #3, we'll do a brief review of our financial results. Consolidated quarterly operating revenues came in at $170 million which represents 37.4% increase year-over-year, and as James mentioned, an all-time quarterly record. Consolidated adjusted operating ratio for the quarter was 95.3%, down from 98.6% in the prior year. This was primarily driven by improvements in our base revenue per loaded mile in our Trucking segment, driven by our network optimization initiative and market uplift and increases in low count revenue per load in our USAT Logistics segment. Our adjusted earnings per diluted share was $0.50.

Turning to Slide 4. Trucking operating revenue before intersegment eliminations increased $16.7 million or 18.9% to $105.4 million. Base revenues, excluding fuel, were up 15.9% to $93.3 million compared to $80.5 million for the second quarter of 2020. Our Trucking segment generated $3.4 million in adjusted operating income and 96.4% adjusted operating ratio. The primary driver of these results was $0.444 increase in base revenue per loaded mile when compared to the second quarter of 2020.

Utilization increased 29 miles per truck per week or approximately 1.9% from the second quarter of 2020. These rate and utilization outcomes positively affected base revenue per available tractor per week, which increased $732 or 24.4% year-over-year. Our deadhead percentage for the second quarter of 2021 improved by 190 basis points year-over-year. The average available tractor count for the second quarter of 2021 was $1,922, which is a 6.8% decrease when compared to the second quarter of 2020, however, represents 1.5% increase from the first quarter of 2021.

Turning to Slide 6. We'll review the results of our USAT Logistics segment. Revenue before intersegment eliminations increased $40 million from the second quarter of 2020 or 103.3% to $78.7 million. Our Logistics segment generated $3.9 million in adjusted operating income and had 94.7% adjusted operating ratio. Gross margin dollars increased $5 million to $9.7 million in the quarter. Gross margin percentage for the second quarter of 2021 was 12.4% versus 12.2% for the comparable quarter in 2020. Low count increased approximately -- increased to approximately 37,000 loads during the second quarter from 33,000 loads in the second quarter of last year, an increase of 11.2% and an increase of 12.2% or approximately 4,000 loads sequentially.

If you'll turn with me to Slide 7, we'll highlight some key balance sheet and liquidity measures. As of June 30, 2021, total debt and finance lease liabilities were $138 million, net debt was $136.1 million, and our net debt to adjusted EBITDA for the trailing 12 months ended was 2x, down from 2.3x in Q1. This represents a net debt decrease of $9.5 million from Q1 2021 and 0.3 turn improvement in our leverage ratio. The company had approximately $87 million available to borrow under its credit facility as of June 30, 2021.

Looking at the remaining months of 2021, we expect $30 million to $40 million in net CapEx for the remainder of the year. However, acquiring new revenue equipment has been challenging due to the widely reported OEM supply chain issues. And while we expect to receive new equipment in the third and fourth quarter, there may be delays. This could negatively impact our operating costs as our equipment ages.

With that, I'll turn the call back over to James to offer more insight on the quarter and our outlook.

Great. Thanks, Zach. The quarter was remarkably level loaded this year. We had steady demand from our customer base that was seasonally consistent, but at elevated levels. EDI turndowns declined throughout the quarter, but that was by design as we implemented new bids for a number of our largest customers, and that included intentional pruning of lanes we simply didn't need in our optimized network. So those demand signals disappeared on purpose and by design, while the market at large remained robust across the rest of our customer base.

In fact, pricing activity remains strong. As a simple illustration, we recently implemented contract awarded freight from 2 of our top 5 customers that we expect to lift our contract rate another $0.08 a mile overall or 3% above the Q2 results, and that's just 2 customers. We expect the contract rate environment to remain strong through the end of the year and into 2022.

On the supply side, noteworthy secular trends include the availability of drivers and the replacement tractors from OEMs. Driver recruitment remains a significant challenge as high-quality frequent home time jobs are in high demand, and the costuming drivers into the workforce is accelerating is competition for the best of the best titans. I will address some of our mitigation efforts and results later in the Trucking segment results.

Tractor availability from the OEMs continues to be a significant headwind. We have not received any tractors year-to-date. And while we expect to receive tractors in the third quarter, we are prepared if they continue to be delayed. The challenges associated with this are clear, older fleets are more costly to maintain and have negative effects on driver retention. So we are finding ways to mitigate these concerns through additional driver outreach, expanding national over-the-road repair partnerships to enable faster and more readily available repairs and driving more awareness and inspection points through internal campaigns to ensure preventable repairs are recognized before they become real issues. We believe the market will remain strong well into 2022 due to structural industry-wide capacity challenges that are not quickly resolved. Inventory levels remain low, driver availability remains a challenge and there is no relief in sight in terms of new driver capacity into the marketplace.

Add to this, the impact of the worldwide chip shortage that Zach just mentioned, on new truck deliveries, and we think we have a sustained healthy transportation market for a while.

Now moving to the Trucking segment. The self-help progress in the Trucking segment continues to gain momentum. As Zach noted, many of the core underlying metrics like rate per loaded mile, revenue per truck and empty mile percentage continue to improve this quarter, and that was manifested in the segment adjusted operating ratio improvement of 143 basis points year-over-year.

I would like to update everyone on some key accomplishments and progress from the quarter in the Trucking segment. The first is network improvement. Our 22% rate per loaded mile increase year-over-year benefited from a strong market rate environment, while exceeding peer averages due to structural and fundamental design elements of our network that we have discussed this morning and in prior calls.

We highlighted last quarter that we have shifted our weekly cadence in pricing to one of pruning and lifting the lowest yielding freight in a disciplined and cadenced approach. We consistently manage our freight basket on a weekly basis that ensures we only haul freight we desire in our newly optimized network. The way we think about our evolved network over the last several years is that we began by optimizing the freight we had. And now we are architecting the freight we desire. This has been a very effective approach that has improved lane density approximately 10% more year-over-year and has increased freight yield over that same time period.

Somewhat surprising to me, we have actually seen a marginal decrease in our brokered freight over the last 3 quarters as a result of this approach. At the same time, we have seen 67% increase in the amount of our freight that is hauled in our Tier 1 highest-yielding terminal to terminal lanes. In simple terms, we are managing the poorest yielding freight out of our network. We're getting more of the highest yielding freight in our Tier 1 lanes, and we are expanding density. These are all great things. We are leveraging the robust environment to architect a network that will stand the test of time and the inevitability of market cyclicality.

Next, I want to talk about driver retention. Our driver retention was fantastic again in the quarter, better than industry averages and over 4,000 basis points better than last year year-to-date. It may be the most noteworthy accomplishment we have had in the context of the current marketplace. As we noted last quarter, this is the result of a team that is communicating better, creating driver jobs that lead to happier and higher-performing teams. And as a result, our retention measures have outperformed the industry. It is true that we are experiencing a historically challenging recruiting environment, and that's why we see our retention performance as a competitive advantage. While others are struggling with retention, ours has improved to all-time best levels of performance. Our approach is multifaceted. Our culture is permeating our actions. We have taken specific actions in soliciting and acting on employee feedback using innovative technology solutions. We've done meaningful and consistent driver outreach, and we have been able to create driver jobs that are desirable and inherently result in better retention.

I want to address driver recruitment for the first time. Driver recruitment has been a challenge. We signaled in our last earnings call that we would be instituting a driver pay increase, and we did that in May. The combination of higher paying dedicated accounts, the recently implemented driver pay increase and creating driver jobs that have higher pay characteristics, things like shuttle jobs, regional work, local jobs and higher-paying dedicated roles have resulted in year-over-year driver wage increases of 14.7%.

I want to be clear, some of that's about mix, some of that's about the pay increase, about half. We have leveraged this better pay and benefit profile to boost our recruiting efforts, and it has really paid off. June of 2021 saw the highest number of new drivers attending a driver orientation in 3 years. And even as recently as this morning, we had the lowest number of unseated trucks that we've had since the first quarter. We view that surge of drivers as an investment in the quarter that is now beginning to bear fruit in the third quarter.

Other things we are doing to combat the challenging driver environment include: one, we operationalized our truck leasing company in the quarter. And while it's just starting up, we have redeployed over 20 trucks into an owner-operator lease configuration that we consider an early great success. We currently have over 100 owner-operator independent contractors awaiting access to this program. And two, my second point, we also recently entered a relationship to a lease program that leases trucks to a U.S.-based operator who employs B-1 Visa drivers. This is just in startup now, but will ramp through the third quarter, and we expect to create additional available driver capacity through this relationship.

I now want to talk about technology. USA Truck received an award in the quarter as the 2020 Transportation Innovator of the Year from CCJ Magazine. The award recognized the practical use of technology in creating an internal company driver load board, whereby company drivers, owner operators and power-only independent contractor providers all have access to and the ability to self dispatch. This technology, called Driver Connect, encourages drivers to drive your plan and has played a critical role in creating a digital fleet of drivers with low turnover and high productivity.

As great as that example is, it is illustrative of a broader philosophy that we will use technology as a means to an end in addressing long-standing business challenges in innovative ways. We similarly introduced new network optimization software in our fleet in the quarter. We recently converted to a new real-time capacity availability mapping system, and we have also worked for the start-up in creating optimized load acceptance, optimizing customer commitments and creating real-time visibility to load preferences based on yield and profitability.

These innovations are real and tangible, and we expect that they will further enhance our execution and profit profile. The bottom line is that delivering freight safely with high levels of service remains our core business. We strive to use technology as an enabler that creates differentiation, but we are not a technology incubator. We are a transportation company that uses technology to enhance our competitive positioning.

And finally, on the Trucking segment, I want to talk about dedicated briefly. We have noted in the last couple of quarters, the challenging start-up environment, especially in hiring drivers in the dedicated business. While our dedicated truck count remained flat from Q1 to Q2, this fleet size still reflects about 13% increase year-over-year. And most importantly, we have moved beyond the start-up phase, and we expect this business to grow throughout the year and do so at an OR level in the low 90s.

Let's move now to the Logistics segment. The Logistics segment continues its mark as a high throughput revenue and margin engine. The first quarter was the highest revenue quarter in the history of the segment until the second quarter, which set another record and grew 15.2% sequentially. Our Logistics business is a significant contributor to our business and now makes up 38% of base revenues. And this quarter accounted for 56% of consolidated adjusted operating income. This business will continue to grow rapidly as we see emerging opportunity in the logistics space have a highly capable and efficient engine through which to drive that business and see our segment performance as a best-in-class organization with best-in-class results.

Zach already highlighted the key performance indicators in this segment in his prepared remarks. But I would like to add some emphasis to a few noteworthy efficiency gains that continued throughout the quarter. The first is load count and volume. Our load count continues to be strong. Q2 volumes were up 12.2% sequentially and 11.2% year-over-year. This is critically important in any market condition. If margin compression is real and it may be long term, having the throughput to harvest profits is critically important.

The second is that USAT Logistics revenue per employee is up another 92% year-over-year. We continue to emphasize this because it is simply astounding. The last 12 months year-over-year growth by quarter have been starting in Q3 of 2020 up 79.8%, up 136.3%, up 96.5% and now up 92.4%.

The next point we have not discussed before, that's margin dollars per employee. But this is another staggering statistic. Our logistics team produced over $100,000 in gross margin dollars per employee in the quarter for the second time in our history. This represents a $54,000 increase per employee year-over-year or 108% improvement year-over-year. And finally, USAT Logistics loads per employee is up 5.2% year-over-year.

Going back to Q2 of 2019, our logistics load count per employee is up over 66%. Our people, processes and tools are all getting better and better each quarter. The logistics story is straightforward. Higher revenue per load is being pushed by the market at large, but the team continues to set records in terms of revenue, load count and margin per employee. Even with the high throughput of volume, the team found a way to expand margins year-over-year. That's a winning formula that we expect to see over and over again in the coming quarters and years.

Last quarter, we mentioned the deployment of API pricing in this segment, essentially a touch-free call response pricing mechanism that gets freight priced, tenders offered and accepted in freight moving without human interaction. We continue to develop and deploy this unique capability and will continue to do so in coming quarters.

I'd like to now shift to talking about the outlook. The business environment remains healthy in both segments of our business. Our trucking team is improving core operations, optimizing the freight network and steadily improving financial performance over time, and our logistics business is leveraging a high service, high throughput model and a healthy pricing environment to create, what we believe is one of the, very best logistics businesses in North America. The toughest headwind remains finding qualified drivers to join our team, but our retention has gone from being a perennial weakness to an undeniable strength.

Pricing is healthy and customers are more interested than ever in finding innovative solutions that address their cost headwinds while allowing us to optimize our network. It feels like the most constructive environment we've seen in the almost 5 years that I have been here.

Now referring to Slide 8. We'll just update everyone on our 2021 touchstones that were introduced a couple of quarters ago. The first is trucking segment OR. I already discussed this in detail. We are on track and ahead of plan on this measure. The next is logistics load count growth. Our target is 10% annualized profitable load count growth with an internal goal that exceeds that. We continue to expand our API pricing capability as discussed, we are ahead of our commitment in terms of load count growth.

Next is dedicated growth of 10% truck count growth or more. Dedicated is up 15% year-over-year in the quarter -- or excuse me, year-to-date with a robust pipeline and several opportunities in near contract phase. We expect this success to continue and accelerate.

And finally, employer of choice. We expect to improve our driver turnover by 10% or more in the year. Our second quarter results and year-to-date results, turnover is under 80%, which is significantly outperforming this goal. So I'd like for the first time to offer a strategic update. We haven't done this before.

During the second quarter, the leadership team undertook a comprehensive review of the company's business strategy with the output being a very thoughtful, analytically robust and well-vetted path forward. We considered 16 separate strategic business alternatives in analyzing the market and the competitive landscape against our organizational strengths and capabilities. The evaluation of alternatives was multifaceted and led to 3 specific strategic priorities going forward.

The first is to expand and densify our asset business east of I-35. USA Truck expects to remain a significant and important asset provider in the network areas we already serve. By further densifying our network, we will continue to leverage existing cost infrastructure, recruiting presence and customer relationships, improve our yield on freight through an optimized and architected network and expand our dedicated and terminal network. We expect this to result in an asset-based business that performs between 90 and 92 operating ratio in the next 3 years.

The second point is that we will double the logistics business. We believe our team has created one of the best logistics businesses in North America and that by doubling logistics revenues while maintaining an industry competitive OR structure, we can add significant earnings growth with modest corresponding capital investment. This is a high ROIC investment stream, and we expect the logistics business to grow to $400 million in top line revenues over the same time period.

And third is to reduce the asset fleet age. Some of the best operators in the space run fleets that are about 6 months newer than ours. Our analysis was just proved why. There is a meaningful operating income impact from a younger fleet, and we expect to bring our average age of fleet to 2 years over the course of our next trade cycle and during this window.

The combined effect of the strategic thrust outlined above is an organization with top line revenues of just over $1 billion, a blended OR of 93% to 94% and an EPS of $4.25 to $4.50 by the end of 2024.

USA Truck has returned our leverage levels to just below 2x. We have improved liquidity to near $87 million. We have delivered profitable results in 12 of the last 16 quarters. We have delivered record quarterly EPS results in the last 4 consecutive quarters, and we have 12 months trailing adjusted EPS of $1.92, the highest of all time. And yet, the stock remains in a trading ban and multiple VAT to us at least, seems to suggest that the market sees these results as unsustainable and unlikely to improve further.

As one would expect, we disagree. We believe USA Truck is meaningfully undervalued. And we will continue to take actions that affirm the confidence of those who share our view and demonstrate to others that the changes we've made are -- made and are making are meaningful and enduring. In addition to the comprehensive exercise undertaken in the second quarter, we created a permanent committee of our Board of Directors focused on business strategy. This committee replaced and now incorporates technology strategy as well as all facets of business strategy and its translation into value creation.

And finally, we embarked this quarter on a targeted investor outreach to tell our story and expand our shareholder base among managers who may have been unaware of USA Truck on account of our size or historical performance. We're delighted with the reaction we received to date, and many from that outreach are on the call with us here today.

So with that, Shamali, I'll turn it over to you to assemble the list of questions. Thank you.

(Operator Instructions) Our first question is from Jason Seidl with Cowen and Company.

I want to drill down a little bit more on your API no-touch initiatives. You said that was ahead of schedule. Could you let us know sort of like what percentage of the business is being done by that? And maybe give us some hard number of targets as we look through the next 3 years.

Yes. It's a great question. Jason, I'm going to kind of dodge giving you a specific answer on the percentage of the business. I will say this, 2 of our largest customers are using it in a subset of their business. I think in our next review, we'll get -- our next quarterly results, we'll get back to you with more specificity around that.

In terms of long-term targets, I think it's realistic to assume that this will be kind of the new normal going forward. So we've got one of our largest customers that we've been in long discussions with about accomplishing this. One of the things that I like to say is there are rules in commoditized markets, and one of the rules is the customer makes the rules. One of the challenges about API is each customer has their view of the right way to execute this.

So it's kind of difficult to throw out a specific target, but I can tell you over a long nonspecific time frame. I think just like EDI, most of the transactional business is going to move to this. And I apologize for such a vague answer. I try to give you better specifics most of the time. But I will come back next quarter with more particulars around what percentage of the business is there, if that's all right.

Well, I'll make sure I hold you to it next quarter. How's that?

Absolutely.

So let me turn back to the asset-based business. This is a market that's been probably the best trucking market I've seen in quite a while, the most difficult driver environment I've seen in 3 decades. But if you look at the businesses out there dedicated across the board seems to be doing worse than people's over-the-road business just because of where the spot pricing has been. Is this the time to maybe gear up your dedicated a little bit more as you look out, assuming the tide will be turning? So when you look at your nonasset base plan or your asset-based plans, do you think you should focus a little bit more on the dedicated side, at least in the near term?

We are really focused on dedicated. So if you go back to our 2017 Investor Day -- 2017? 2019, excuse me, our 2019 Investor Day, we mentioned in there and nothing's changed that we expect our asset business to be 50% dedicated and 50% asset over the strategic time horizon that we talked about. So we're pushing it extremely hard. You, by asking your question, already no one acknowledged, but I'll say for the other listeners, dedicated provides a safety net and down market. It does limit your upside as you alluded to, but we think it is absolutely the right way to structure our asset business going forward.

So if I conveyed that we weren't focused on that, that was unintended and wrong. We are squarely focused on growing the dedicated business. There are better opportunities now than ever to get dedicated business. Our pipeline is really robust. We did see in the quarter Q1 to Q2 that our truck levels stayed pretty level. We had mentioned in past quarters about some of the start-up woes that we and others have faced.

We're largely past the start-up phase on most of those, and we are starting to harvest some pretty good levels of profitability there. So everything you said is spot on and reflects our current business thinking. Zach, do you want to add anything to that?

No, no, I agree. Yes, I mean -- and just to kind of add on to the start-up, it's -- we had a lot of accounts come online in the fourth quarter last year, first quarter of this year, and that start-up while we had those trucks in the plan, and like you made mention, I think, with your previous question, the driver market is so tough right now. So those start-ups, they just keep -- you kind of get further and further behind as they're trying to hire those drivers.

Okay. That's good color, guys. One more question here, and then I'll turn it over to somebody else. James, you alluded to that it's your opinion that USA Truck is extremely undervalued by the market. Obviously, I would concur based upon my price target for your stock. However, you're not the only one out there. There are several carriers that I think that are getting ignored. Is this a time to be trying to get more aggressive with your free cash flow and maybe repurchase some shares?

Yes, that's a really interesting question. So I'm going to take the opportunity to maybe go a little far afield of your question. I'll start by first answering it about repurchasing shares. We did a share repurchase. It actually predates me. We bought about $40 million of shares. I guess that would be in 2015 and '16. And one of the inherent challenges at USA Truck is the relatively kind of low trading liquidity and float that we have in these shares. We only have 9 million shares outstanding. And we tend to focus, frankly, much more on the market -- improving the market cap of this company than we do focusing on shares specifically. That said, it's a really natural question to ask. And this strategic -- the strategy committee of our Board, while it is not their charter to look at -- specifically at that or other, call it, strategic alternatives, it is within the scope of their consideration.

So we talked about those things all the time with the board. We don't have any impending share buyback to announce this morning or anything like that. But it's an important consideration of responsible managers everywhere. And our Board, our committee, our management team looks at that and other available alternatives.

Your commentary on our perspective about undervaluation. I mean, almost by any measure that you look at, this company's value is just not being reflected in the current market cap. We're trading at a multiple that's half the industry average multiple. If you were to take the logistics business alone with $10 million of trailing 12 op income, that business as a stand-alone enterprise is worth more of the entire market capitalization of the company. Then say you've got $58 million remaining of -- because we've got $69 million in trailing 12 EBITDA. You've got $58 million that's attributable roughly to the asset business. We're getting no value consideration for that, so we think on an EBITDA multiple, on an enterprise value, on an EPS multiple, like any way we look at it, this number has got to be higher.

So you're right, we're looking at all ways to extract value for our shareholders because, ultimately, that's our job. And if I sound a little protective right now, I am. I mean beyond our employee safety, my number one job is -- management team's number one job is to create shareholder value. And we're kind of bowing up a little bit. We're going to fight for our shareholders to ensure that they get the value reflected in their investment.

Our next question is from Jack Atkins with Stephens.

So I guess maybe first, if we could go back to the driver recruitment and retention. I think you guys are the only public truckload carrier this quarter that actually was able to maintain and in fact slightly grow fleet count sequentially. So huge kudos on that and that underscores, James, what you were saying in your prepared comments.

But the fleet is still -- in terms of seated tractors down year-over-year. And I'm just sort of curious, when you think about the drag that's perhaps creating on the overall profitability and the efficiency of the business just from like a scale perspective, is there a way to maybe walk through that? Because I would imagine that, obviously, the business is performing extremely well, but if you were probably operating with a number of trucks you would hope to operate with, you'd be generating quite a bit more from an operating income perspective. Could you maybe walk us through that, if you don't mind?

Yes. I'm not sure that it's a big walk-through. I'll tell you the way that we look at it, Jack. And there were a couple of things in the quarter you alluded to. So the first one is we did add trucks. And the way that we've done that materially is through our owner-operator program. As I talk to other CEOs in the industry, both private and public, they're pretty amazed at what our team has been able to do in the owner-operator space. And frankly, I am too, generally think of owner-operators is, at some level, mercenary-like and that they'll chase the highest freight and they leave companies in times of feast and return in times of famine.

And we were really quiet for probably a year when we were working on this driver load board that I mentioned in the call, but we got it really humming. And now that we're receiving awards, and we're starting to talk about it publicly, I'm not going to hide from it anymore. The secret to our success is that we have a really awesome platform that makes it easy to do business with us, and we attract and retain owner-operators probably better than anybody right now. So that's one element of that.

The other element is -- and we won't hide from this at all. Through the quarter, we really struggled with our unseated truck count. Now when I say that, we didn't struggle like what I've seen other people publishing or other people talking about. But our unseated truck count was 30 or 40 trucks above our target throughout the entire quarter. And we've estimated that, that cost us just under 50 miles a truck on the entire fleet as a metric.

So you take those 50-ish miles, multiply times the rate and the number of trucks, you can get a real sense of what the impact was. It's a couple of million bucks. So we were doing that math this morning. We think we could have improved our OR by seeding those trucks by about another 1.1 OR points. And that's just my rough math, and I'll make sure Zach double checks that.

But -- so there's a full kind of turn of OR there wrapped up in that. I didn't have it actually written in my prepared comments, but I slipped it in, in my prepared comments, which was this morning, our unseated truck count has dropped considerably, and that's because of the awesome June recruiting month we had.

So when we saw the unseated truck count rising exiting Q1, we took immediate evasive action to increase our owner-operator program to increase our spending on recruiting advertisement to bolster our recruiting resources in-house, and we made the pay change that we talked about. And that really bore fruit in June, where we had more drivers in our orientation classes than at any time in the last 3 years.

And so -- sorry for the long-winded answer, but it's a couple of million bucks. And we -- I have to tell you, and you know, you know this drill well, we went round and round about disposition these trucks and take it as gain on sale, which many of our competitors did in the quarter. And we just feel like our long-term prospects depend on us growing, and we are very hesitant and reticent to do that. And so we instead invested in mitigating that, which we feel like as of this morning, we've done very successfully.

Now Zach's probably going to want to add a lot of what I said. Do you want to add anything to that?

No, no. I would agree with most of what you said. I mean -- and when we look at especially the trucks and having those unseated trucks throughout the quarter, we did talk about, like you said at the end, what do we do with those trucks? Do we sell them? Do we push them over into a leasing company and try to lease them, which we did? About 20 trucks, as James mentioned earlier, to utilize some of those assets. But with the struggles in the current market to obtain new equipment, we really didn't want to let go of our old equipment. We need that to operate. So I think we're starting to see some of that fruit now as our unseated truck count is starting to come down through July.

Okay. Okay. That's very, very helpful, and I appreciate all that color. So I guess as we look forward here then, I've got a shorter-term question and a longer-term question. On the shorter-term side, how would you expect seated truck count to trend? It sounds like higher, but how would you -- if you could maybe help us put some brackets around that as we go into the third quarter versus the second quarter?

And with the rate work you're talking about, James, with some of the larger customers that have now been implemented, is it right to maybe think about operating ratio improving in the trucking business in the third quarter versus the second quarter?

Great questions. So on the first point, I would say we expect truck count -- we're hedging here. We're going to under promise and over deliver. But I would say we expect it to be up marginally in the quarter, maybe 1% to 2%. We are very confident in seeding those trucks, which our recruiting team has done an awesome job of. We also are -- have -- I mentioned in the call over a 100 owner operators waiting in line to get into our owner operator program. As Zach just mentioned, however, the lack of availability of assets in the marketplace makes that a real challenge. That's why we want to hedge that number a little bit.

In terms of trucking OR, I would absolutely expect to see an improvement in the third quarter. I'm not going to go out and tell you how far I think it's going to go, but there's some big opportunities there. And we kind of -- our prepared comments were kind of sounded, I think, like a little bit of high 5 and a chest bumping in the hallways. But I'll tell you, Jack, we did not play significantly in the spot market in the second quarter. And I've said this for a couple of years on these calls. We just haven't historically been as nimble as some of our competitors to get in and out of the spot market. We now with our new network tools, with our really awesome operating team that's now been in place for a couple of years and with the consistency of performance, they're going to go play strategically in that space to bolster us even further. So I absolutely would expect Q3 to be better than Q2.

Okay. Okay. that's great to hear. And I guess maybe a longer-term fleet question. And James, I really appreciate the strategic update, and I know everyone on the call there that you guys provided in the prepared comments. When you think about -- you made the comments around expanding the asset base, especially east of I-35 and adding density there. What is the underlying assumption around fleet over the course of the next 3 years to sort of get to those targets? Can you maybe bracket that as we think about it?

Yes, for sure. So I'm really willing to get into this in detail because I think you can figure this out on your own from the slides and from the comments. So if we're going to grow this logistics business to $400 million, that then tells you, you got $600 million asset business. If you make some kind of conservative historical CAGR assumptions about rate, you'll then be able to back into what we think the truck count needs to do to get to that number. And it's modest. I'm just going to tell you flat out. Our plan includes growing about 100 trucks a year over that time horizon.

So it's not a lot. This is -- we're not shooting at unicorns and rainbows here. This is a pretty straightforward plan that we think is readily attainable. Now that said, and this is just in the spirit of being fully transparent, we -- it's hard to get trucks right now, and it's harder to get drivers. And so if that's the case, we may have to do that inorganically. We don't have anything in the pipeline. We're not -- we don't have money burning a hole in our pocket. But just as a practical consideration, our plan does depend on growth. And if we can't get it organically, we may look outside for some opportunities.

And then just one clarification about that growth. We expect about 60% of that tractor growth to be company trucks and about 40% of it would be in the owner-operator space. But we've had great success in the owner-operator space. All of this stuff is subject to change. And because we've now put it out there, we're going to come back to each quarter and update you on our progress and any nuances that may occur as the market evolves.

Okay. Okay. That's helpful. Maybe a couple of more questions, and I'll turn it over. Maybe a cash flow question for you, Zach. You guys have done a great job generating free cash flow this year. You've reduced debt by quite a bit. I know there are some puts and takes in terms of CapEx and sort of when equipment is going to become available for you to take. But could you maybe give us some thoughts based on your current CapEx plans for the year? Let's assume that those play out as you think they will, how are you thinking about cash flow and debt reduction over the balance of 2021?

Yes. So assuming if we can get tractors in the third and fourth quarter, which we think we will be able to, we probably anticipate debt to slightly tick up a little bit through the back half. But we do have some trucks coming off lease, and we're going to continue to pay down debt, but we do anticipate debt to increase over the back half of the year slightly.

Okay. Okay. Got you. That's helpful color. And I guess last question. Back to -- just kind of maybe talking about the logistics segment for a moment. James, could you address the power-only offering that you guys have? I know it's -- other carriers talk about it quite a bit. You guys have that as well and get a lot of airtime from us on the conference calls. But I think that's a really interesting strategic growth avenue for you guys. And we just -- especially with your enhanced technology platform there within USAT, would just love to kind of get a little more color in the public forum around what you guys are doing from a power-only offering perspective?

Yes. Thanks for asking. So we have several hundred trucks in the power-only space. Just to describe for people what that is, power-only is an outside third-party independent contractor operating under their own authority, Hall's USA truck trailers with freight that we've contracted with customers. We've been doing it for the better part of a decade. We're really good at it.

And as you mentioned, we gave them last year access to this load board that we've discussed earlier. So just further enhances their free agency and their ability to choose for themselves what they will and will Hall. It's great because it provides choice to the independent. It's great for us because it provides some capacity expansion. Historically -- and we did this at my prior employer as well.

Historically, it can be a challenge in times like now because when price is high, they go to the open market and get whatever they can. By having a load board that's easy to do business with, it effectively becomes a proxy for the spot market, too. So we can put some high-paying freight out there, and they haul it at essentially a guaranteed percentage of the revenue. That, as I said, is relatively close to spot market pricing, and they're able to turn the freight quickly and reliably.

It's a really great business for us. It's a business that we intend to expand further. We didn't talk a lot on this call about trailers, but trailers are almost as difficult to get as trucks right now, although we did get a couple of hundred trailers in the quarter. So that's the nature of the business. We have a great team that's phenomenal at it and has been able to sustain that truck count through 2021.

I will say this time last year, we actually had a spike in these trucks. It was an unnatural spike. Some of our -- and I won't name who they are, but some of our friends in industry that may be Hall do household moving or do oilfield projects or things like that, they had no work in Q2 of 2020. And so a bunch of those guys flexed over into our power-only fleet. We were able to help them, they were able to help us. So our truck count came down a little bit year-over-year. But in terms of the trend, it's upward and to the right and it's a really awesome business for us.

(Operator Instructions) Our next question is with Jeff Kauffman with Vertical Research Partners.

Congratulations. Terrific quarter. Couple of questions. When I was looking at your purchase transportation, it looked like it doubled in the Logistics segment, and it looked like it was down about 7% in the Trucking segment. And I know spot rates didn't double. So can you help me understand why it was so much higher in your logistics business? If I just want to look at your load volumes plus, say, what spot rates were up?

As we think about PT, I mean the contract of PT, obviously, in the logistics business, it's frankly, it's the entire cost structure aside from a little bit of fixed cost structure, and that should be up linearly with both rate increases and volume. So we're kind of looking at our data set here real quick.

Yes. And in logistics, it was pretty proportionate to the revenue growth.

Okay.

Yes.

Yes, because your gross margins didn't change a whole lot, but I was just wondering why it was up so much more than I would have thought it would be if I was just looking at the market spot rates.

All right. Well, Jeff, we should probably get with you offline because we're not seeing that our PT was down an asset, as you said in your question. So -- why don't we get with you -- we'll call you right after this and follow-up. And if there's something we need to clarify in the public markets, we will.

All right. Second question, I like the long-term guidance. Can you help me understand kind of what components drive which is about where you are right now, down to that 90% to 92% range. You talked a little bit about the technologies you're implementing and other things like that. But can you break down kind of how we gained 400, 500 basis points over the next 3 years?

Yes, for sure. So if you go back to 1980 and look at the rate profile over time, you expect to see, on average, taking out the vagaries of 2009 and 2019 -- actually not taken them out, they're included in the data set, of about 3% CAGR on rate. We are not assuming that. We are actually modestly lower than that.

So that's one thing we're doing. We also expect some significant improvement in our network. Today, less than 40% of our network freight is moving in what we call Tier 1 lanes. Tier 1 lanes, we've outlined this in prior calls are our terminal-to-terminal move. They are our most efficient, best driver recruiting, best driver retention lanes, also, most importantly, to your question, the highest-yielding lanes.

In addition to that, we expect to reap the full benefits of regionalization. You will recall, we just started regionalization last year. And one of our regions isn't performing very well. And so we see a lot of upside associated with that. Seated truck count should improve along with that, which will help our utilization. You'll remember, historically, we've added some maintenance facilities just recently, and those are beginning to get the full benefit of cost savings there. We expect to add one more maintenance shop per year in the network.

And then, of course, the truck count growth over the next 3 years, there's a compounding value that. We're not going to add any more incremental fixed costs, I shouldn't say any. There's bound to be some. But we'll have very little fixed cost over that time horizon. It's pretty amazing when you factor in just the network savings, the rate environment that we expect, the yield that we expect from the optimized network and then the improved enhancements on utilization, you get there really fast.

Congratulations.

Great. Thanks, Jeff. And we'll follow up with you with your first question. And Mike will probably give you a call.

Yes. I'll call u, Jeff.

And we've reached the end of quarter-and-answer session. I'll now turn the call back over to management for closing remarks.

Great. Thanks, Shamali. Last week, I had the chance to visit Zion National Park and hike in some of the world's most beautiful places. Our family connection there is deep. My wife's grandfather was the stonemason who built the beautiful lodge, and her great uncle was the park's first superintendent.

During that trip, my 16-year-old daughter convinced me to ascend the trail known as Angels Landing, a beautiful, but perilous and highly exposed trail to the top revealed some of the most stunning Vista's known to mankind. As many times as I've been design and despite our familial connection there, this is my first visit to Angels Landing. Trucks like the one we just took share parallels with the business journey we are on here at USA Truck. Not everyone is willing to do what it takes to get the results and sometimes the path is perilous. And most importantly, the fact that I was on a path I had never before attempted, did not mean I was incapable of the journey only that I had never been there before.

USA Truck is at a new milestone in our history, but it is just that, a milestone. It has taken resolved, it has taken commitment has even been perilous at times, but we are capable of this record-setting performance and more. I shared this quote from Ralph Waldo Emerson before. "That which we persist in doing becomes easier for us to do, not that the nature of the thing has changed, but that our power to do is increased."

No doubt, the market is good right now. But our results are the result of people who have experienced a fundamental change that has led to improved business processes, improve decision-making and we believe sustained improvement in results. We believe we have clearly demonstrated that USA Truck has executed our self-help opportunities with many opportunities and results yet to come. There is a clear path to even better results that we ultimately believe should reward all stakeholders and ultimately be reflected in a market value that appropriately rewards results.

Thank you for your time today.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.