USA Truck Inc (USAK) 2020 Q3 法說會逐字稿

Good morning, and welcome to the USA Truck Third Quarter 2020 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 Finance, Strategy and Investor Relations. Please go ahead.

Thank you, Grant. Good morning, and welcome to USAT Capacity Solutions Third 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 Zack.

Thank you, Mike. We want to thank everyone for joining us on the call today and appreciate your interest in and support of USA Truck. We hope you all had an opportunity to review our earnings release from last night. As we stated in the release, the third quarter was the tale of 2 freight markets. The first half of the quarter was much like the second quarter where the market placed downward pressure on price and volume and required us to transition more trucks to the depressed spot market. However, around the middle of August, we experienced a tightening of capacity, which abruptly strengthened customer demand. We believe this shift was the result of approximately 1.3 million people in the Trucking industry still unemployed when compared to the 500,000 receiving unemployment benefits at this time last year. This was according to the Bureau of Labor statistics. When coupled with limited supply of new driving professionals entering the workforce due to COVID-19 concerns and truck driving school closures, it created capacity constraints. These constraints positively impacted both of our segments, increasing our base revenue per load and mile in Trucking and our revenue per load in USAT Logistics that made it more difficult to recruit qualified driving professionals and increased costs when securing third-party capacity.

If you'll please turn with me to Slide #3, we'll do a brief review of our financial results. Consolidated quarterly operating revenues came in at $141.8 million, which represents an 8.3% increase year-over-year. Base revenue was up 14.5%, excluding fuel. Consolidated adjusted operating ratio for the quarter was 96.4%, down from 99.7% in the prior year, primarily driven by improvements in our base revenue per mile in our Trucking segment and increases in revenue per load in our USAT Logistics segment, while controlling our cost structure. Our adjusted earnings per diluted share was $0.29.

Turning to Slide 4. Trucking operating revenue before intersegment eliminations increased $3.8 million or 4.1% to $97.4 million. Base revenues, excluding fuel, were up 10.1% to $89.5 million compared to $81.3 million for the third quarter of 2019. Our Trucking segment generated $3.8 million in adjusted operating income and a 95.8% adjusted operating ratio, which is the third -- the best third quarter Trucking adjusted operating ratio in over a decade. The primary driver of these results was a $0.19 increase in base revenue per loaded mile when compared to the third quarter of 2019. The utilization also increased 14 miles per truck or approximately 1% from the third quarter of 2019 related to our continued regionalization strategy. These rate utilization outcomes positively affected base revenue per available trucker per week, which increased $318 or 10.1% year-over-year. Our deadhead percentage for the third quarter of 2020 improved by 70 basis points from the second quarter. The average available truck count for the third quarter of 2020 was 1,969, which is a 1.1% decrease when compared to the third quarter of 2019. This truck count decrease is the result of continuing to moderate our fleet to improve asset utilization and profitability.

Turning to Slide 6. We will review the results of our USAT Logistics segment. Revenue before intersegment eliminations increased $12.7 million from the third quarter of 2019 or 32.2% to $52.1 million. Our Logistics segment generated $1 million in adjusted operating income and had a 98% adjusted operating ratio. Gross margin dollars increased $1.1 million to $5.9 million in the quarter. Gross margin percentage for the third quarter of 2020 was 11.3% versus 12.2% for the comparable quarter in 2019. Load count decreased to 32,100 loads during the third quarter from the 33,400 loads in the second quarter, a decrease of 3.7%, but increased by 4% or approximately 1,200 loads year-over-year. This market environment drove our margin per load up to $183 per load from $156 per load year-over-year.

If you'll turn with me to Slide #7, we'll highlight some key balance sheet and liquidity measures. As of September 30, 2020, total debt and lease liabilities were $182 million, and stockholders' equity was $78.2 million. Net debt was $180.8 million, and our net debt to adjusted EBITDAR for the trailing 12 months was 3.5x, down from the 4.1x in the second quarter. This decrease is the result of a net debt decrease of $8.6 million from the second quarter of 2020 and a $5.4 million improvement in our trailing 12-month EBITDAR. The company had approximately $47.6 million available to borrow under its credit facility as of September 30, 2020. As discussed in prior quarters, we continue to expect minimal CapEx through the end of 2020. However, as discussed on our last call, during July, we did enter into an agreement to release 189 new tractors and disposed of certain high cost tractors during the back half of 2020. To date, we have received approximately half of the total tractor order and expect the remainder of those tractors to be delivered throughout the remainder of the fourth quarter.

With that, I'll now turn the call over to James.

Great. Thanks, Zack, and good morning to everyone. I hope as you review the relief that you see what we see. A wonderful back half of the quarter helped by market strength, delivered through the hard work of implementing our self-help improvement plan and a promising start to what looks like a sustained performance improvement for USA Truck. Today, we will offer updates on a few distinct vectors. The first is market dynamics and segment performance in the quarter. Next, we'll discuss an update on our progress in our self-help transformational initiatives. And finally, I'll give some commentary on how we see things going forward.

Before we begin, we want to give a brief update on our COVID-19 response, and what we're doing in the realm of diversity and inclusion as well. Our COVID-19 response has gone quite smoothly. Our well-established contingency planning criteria and governance policies born from our experience in the 500 year flood of 2019 here in the River Valley, have allowed us to continue to run our business seamlessly. The USA Truck team is mostly working remotely still and we have adopted a semester view of on-site work arrangements. Currently, our nonessential functions are working remote through the end of the year. We find it less worrisome and more predictable for our team when it comes to child care and managing outside commitments to be definitive about our plans over a longer horizon and thus, the semester view of things. So our next assessment will be in the spring and we'll update you in our next release as to that.

Our essential and quasi-essential customers made up just under 80% of our freight mix in the quarter, which is down slightly from the second quarter. And so we had some really good performance in the quarter, despite the weak nonessential shipper market. I said this before that while there may be nonessential elements to the economy, they were essential to our network and we'll talk a little bit about that later. We believe that when the nonessential shippers return, and they have started shipping again in the fourth quarter, there will be even more freight to service in the marketplace than there is today and that's a great thing if you're a trucker. Last quarter, we made some pronouncements about our efforts to become even more diverse and even more inclusive in our business. Since then, we've had over 90% of our nondriving team complete unconscious bias training. We recognized Hispanic/American heritage month together, and I took on the role of Chair of the American Trucking Association's Diversity Working Group. We are taking diversity and inclusion at USA Truck very seriously and you should all expect to hear even more from us in the future.

Now moving to dynamics and segment performance in the quarter. The third quarter this year came in like a lamb and went out like a lion. As Zach noted earlier, the current market didn't even really get started until the middle of August. And at that point, we saw demand strengthen significantly. Capacity constraints exacerbated, allowing us to benefit from both the healthy freight market and an enhanced business with many initiatives ready to leverage the opportunity. We believe today's market will be strong for at least several quarters because of structural industry changes that are not quickly resolved. Inventory levels are relatively low, especially retail inventories, which are near all-time lows. Driver availability remains a challenge for all the reasons Zach noted and there does not appear to be a rush of capacity into the marketplace. Additionally, there have been 5 hurricanes that made U.S. land fall this year, 4 in the quarter, causing nearly $30 billion in damage. We hope and pray for the safety and quick recovery of the people and communities affected, but also realized that there was a time in the not-too-distant past that hurricanes had a profound impact on supply chains. I'm certain that these hurricanes only further broaden any shortcomings and Trucking supply that already existed.

So to recap, there is a significant 2-dimensional market in play, both supply and demand dynamics, supporting a strong Trucking market and the key economic drivers of this dynamic are not quickly resolved. What a great time for our operationally improving business to intersect with the opportunity.

Our Trucking segment made meaningful progress in the quarter by delivering the best third quarter OR we've seen in over a decade. It is clear to us that our regionalization efforts have truly taken hold as the model has seeded more and more local control of the operations to the regional leaders, we have found that they make better, more profitable and more consistent decisions than our previously centralized model could accomplish. Truly, it's a case of think globally, act locally, as our strategy is working to improve profits even beyond the market. The signpost of this progress are all in the normal indicators we like to look at in Trucking. Base revenue per available tractor was up 10.1% year-over-year and 15.2% sequentially. Base rate per loaded mile was up 9.1% year-over-year and 13.4% sequentially. Loaded miles per available tractor were up slightly, but have risen even further in the fourth quarter. So far, our utilization in the fourth quarter is up over 5% when compared to September, which was the highest utilization month in the third quarter. And finally, deadhead percentage improved by 110 basis points year-over-year and 70 basis points sequentially.

Last earnings call, we discussed initiatives that we are working on. This quarter, our results reflect our progress. I want to talk about some of those things specific to Trucking. Regionalization has affected all of our key operating metrics. Through our efforts to regionalize, we have recognized higher utilization, better deadhead miles, lower maintenance costs and significantly higher driver retention rates. Utilization or loaded miles per tractor was up only slightly in the quarter, but the loaded miles per available tractor, as I mentioned earlier, began to rise late in the quarter as we found a regional cadence and improved utilization by slip seating and shuttling our swapping freight. Essentially, since we had a hard time finding and seating teams due to the pandemic concerns, we found ways to get team like utilization from our assets while preserving solo jobs. Since the quarter closed, our loaded miles per available truck is up more than 5%, as I mentioned earlier. Maintenance costs are tough to discern due to the mix and tractor ages from year-to-year, however, a cohort analysis by tractor age across multiple years found that our average CPM is down 6% since launching our regionalized maintenance. This shows up in the form of lower overall cost year-to-date and year-over-year total costs that are about level. But we see the best to come as our tire programs, our in-house maintenance programs and our latest terminal opening in Waxahachie, Texas becomes fully operational. Intersegment collaboration between our logistics business and our Trucking segment reached an all-time high in the quarter. One might even say that the expected synergy between the 2 segments, that so many companies aspire to, actually is occurring here at USA truck. It is in large part a credit to the leaders of the 2 segments that they have figured out how to flex, collaborate and engage customers in a way that the business truly benefits. During the quarter, there were weeks where the Trucking segment's top 10 customer list included USAT Logistics, our other operating segment. For the quarter, we averaged just 5% of our business in the spot market at large, but we were able to access the spot environment through a collaboration with our logistics team, whereby logistics customer freight moved on USA Truck assets. It made up 9% of the truckload business, excluding Davis and dedicated. This created a wonderful margin upside while supporting customer commitments in our logistics space, it truly was a win-win.

Another aspect I want to hit on is pricing discipline. It is perhaps the most impactful, most lasting and most important thing we did in the quarter, we deployed and executed our pricing discipline. This is part of our cadence that came as a direct learning from 2019. We learned in 2019 that we want to bid and win freight abundantly, and we counted on, as we said then, the prisoner's dilemma in the sense that it is always best to have more freight and negotiate, either up or down, than not to have enough freight to begin with. We bid aggressively in the last bid cycle to win freight and continue to do so today. That gave us a strong freight base from which to work. I want to be very clear about this. We did not institute across-the-board price increases. However, we increased our rigor of benchmarking pricing by lane and revisited areas where price, market and capacity imbalances warranted surgical customer conversations. We had collaborative and constructive conversations with our customers and saw our contractual rate per loaded mile, which is a measure we use internally that excludes any sort of accessorial, it increased by 9% in the quarter. For the first time in my career, some of these increases were preemptively instituted by large customers themselves, but most were directly the result of our engagement with our customers. It was tedious and time consuming, but we believe it will accrue our benefit to the fourth quarter and beyond.

The next point in the Trucking segment is driver retention. Driver retention improved nearly 20% year-over-year in the quarter and 50% in September alone. So much of our success is a result of our rhythm of the business, our cadence finally taking hold. Daily reviews that drivers at risk of leaving, daily outbound calls to drivers who have applied to competitors and marketing our own features and benefits to existing drivers have been key to our improvement in driver retention. Additionally, the management team now does unsolicited outbound calling the drivers on a monthly basis and the relationships forged by regular regional terminal interactions cannot be overstated. Our plan is coming together.

And I would be remiss if I didn't mention Davis Transfer and dedicated. They both continue their consistent cadence March as they have in prior quarters. Our dedicated OR did slip a little bit, but remains accretive to the business as we have been engaged in multiple start-ups this year, especially in the dollar store category. Dedicated truck count is up another 20% year-over-year and is a great growth engine. If we can only find the drivers to see these trucks, we have over 100 additional contracted trucks that we are working actively to see. The Davis business, in particular, has been a steady low 90s OR business through the trough of the cycle, and we are now expecting even better performance as the fourth quarter is the first of several quarters we expect to have the full benefit of a healthy cycle. Davis is our best evidence of what is possible in a truly regionalized model and we continue to model our regionalization efforts after Davis.

And finally, technology. We completed what we call our back to basics TMS project in the quarter that literally took operators working in 6 or more screens simultaneously to 2. Besides improving the workflow and the work experience, we simply have happier operators, and we believe finally getting our technology from a legacy platform 4 years ago to our current version released last year to finally optimize delivery this quarter is contributing to our much improved results.

I'd next like to talk about our Logistics segment. The Logistics segment revenue engine that we've been discussing the last couple of quarters had a chance to hit its stride in the quarter. Gross margin dollars grew 21.9% year-over-year and 24.8% sequentially. While gross margin percentage was down both year-over-year and sequentially, owing to the increasingly competitive market, the revenue per load was up considerably by 27.2% year-over-year and 39.6% sequentially. Operating income with a high throughput load count, slightly lower margin on a higher revenue per load translated into $984,000 in adjusted operating income in the segment or 303% higher than last year.

Some of the things I'd like to talk about with Logistics. First, revenue per load. We intimated in our Q2 2020 release that revenue per load in our logistics business was the lowest it had been in over a decade. As the market, we described at that time, gained momentum and accelerated through the quarter, we saw average revenue per load accelerate back to more normal levels.

Next is gross margin percentage. The weaker gross margin profile of freight reflected ongoing compression between purchase transportation and revenue per load. As noted previously, we pivoted to use our company assets to fulfill a portion of this freight to our mutual benefit between the segments.

Next, load count and volume. We continued the trend that we've seen over the last several quarters and putting up near record highs. While load count was down sequentially from all-time record highs, it was still up 4% year-over-year. As we did last quarter, we want to share what we believe are some amazing results from our team. One, USAT Logistics revenue per employee is up 90% year-over-year. I almost feel like I should reread that bullet. It's up 90% year-over-year. And in August, we saw base revenue per employee over $200,000 in a month for the first time in our history. Second, USAT Logistics load per employee is up 41% year-over-year. And finally, third, August and September were the 2 highest revenue months in the history of the Logistics business at USA Truck. If you'll recall last quarter, I went into an old manufacturing finance analyst mode, where we kind of predicted that minor shifts and upward revenue per load would allow our Logistics business to flex its muscles. Well, it happened. We proposed a hypothetical that would get us to $1 million in net margin, and in the third quarter, we delivered adjusted operating income of $984,000. We were so close to that hypothetical, but it came true.

Let's recap. Logistics based revenue grew in the quarter and had the 2 highest revenue months in the history of the business, while margins were down and revenue per load rebounded, while improving revenue and load per employee efficiency improved 90% and 41%, respectively. Just as we did last quarter, we improved execution and lowered costs significantly, both year-over-year and sequentially in a tough margin environment. That fiscal discipline led to a profit rebound that we see as just beginning.

Each quarter, we like to give an update on our progress on our transformational self-help initiatives. I'll be brief about our ongoing initiative updates as I've hit on most of them already in my prior remarks. Ours is the original self-help story in the truckload space. We have been consistent in addressing our self-help initiatives since 2017. We are more enthused about our prospects for change now than at any time in the last several years. We have done a ton. We have managed the age of our fleet. We completed the acquisition of Davis. We closed down high cost facilities. We managed headcount aggressively, regionalize the business, lowered maintenance costs, expanded our dedicated business and supercharge our logistics business. We believe this company is well positioned to leverage these improvements in whatever market we face. While the trajectory of a recovery is unknowable, we expect when nonessential shippers come back, and they will, freight will inevitably improve further. Capacity has come out of the market and the challenges to that are not short-term fixes. We truly are in the midst of a dual threat supply-side and demand-side resurgence and we have worked tirelessly to be able to take advantage of it. These factors are all positive for USA Truck. We remain focused on ways to increase utilization, improve revenue per available tractor and drive profitable logistics load count growth. The initiatives we outlined in prior quarters are moving ahead and bearing fruit.

First initiative is increasing utilization on an existing fleet. As we reported, utilization moved ahead in the quarter marginally and is up over 5% more per available truck thus far in the fourth quarter.

Second, it's increasing our team presence in utilization. This is an interesting one. We made an intentional pivot here in light of the pandemic. It was very difficult to see team operators in light of the pandemic. So we focused last quarter instead on the slip seat and shuttle arrangement as a direct response to market challenges and it is really driving results.

Next is network optimization. All the footwork we did to optimize our network profitability model, the implementation of a cadence and disciplined review process and refining market opportunities and the rigor of approaching customers has paid off. 9% base rate improvement in the quarter is remarkable and reflective of our focus and commitment to getting the network right. Next was growing the dedicated business. What a difference a quarter makes. We had warned of a slowing pipeline last quarter and that has completely flipped. Customers want dedicated capacity more than ever, and we have over 100 confirmed trucks in the immediate contracted pipeline. We just need to seat them. We remain ahead of schedule on this critical initiative.

The next initiative is driving retention. Driver retention went through a downward slide in the second quarter, but that completely reversed in the third quarter. We have put intense focus as a management team on interacting with, marketing to and working with our drivers to retain as many as possible and we're being very successful at that. And finally, driving profitable Logistics load count. We covered this comprehensively earlier. We're just so proud of what this team has accomplished. We are well ahead of schedule on this one as well.

So our outlook. As I went back and looked at our commentary in the second quarter, I was just amazed at the absolute difference a quarter can make. We are seeing more than double the EDI turndowns we were seeing just 3 months ago. We have strong dedicated demand and interest unlike 3 months ago. Our Logistics business looks great with tight margins, but super productive people, in a rising revenue per load environment and pricing trends are strong. Customers are rewarding the best service providers with access to high-paying freight and the capacity crunch truly look structural and appears to have some legs for the next several quarters. Combine all of that together with our self-help initiatives and we have the perfect recipe for progress. One of our favorite metrics to look at internally is a comparison of our Trucking OR with our public industry competitors Trucking OR. Since our team began this journey in 2017, we compare everything to 2016 as a starting point. And since that starting point, we have closed over half the gap with the competitors in that time period, and we estimate to have made up another 100 bps and closing the gap in 2020 so far and we think the fourth quarter looks even more promising. The third quarter of 2020 was the third best quarter performance from a Trucking OR standpoint that we have had in over a decade. That's amazing. If in February, at the beginning of the COVID crisis, someone had told us we would have had that kind of historic performance, I'm fairly certain we would have taken -- we all would have taken it. And as we look ahead, we only see things improving, owing partly to the market dynamics, but mostly to our team's tireless and relentless commitment to making this one of the best transportation stories in the industry. USA Truck's best days are ahead and coming quickly.

So with that, Grant, I'd like to turn it back over to you to queue us up for Q&A.

(Operator Instructions) Our first question will come from Jeff Kauffman with Loop Capital Markets.

Congratulations, everybody. Just a terrific quarter.

Thanks, Jeff.

Thank you, Jeff.

So I want to do a little algebra here because I can't seem to equate the rev per mile in truckload. So if I take your revenues up about 4%, your fleet was down 1%. So add that, so that's 5%. Your miles per truck was up a little less than 1%. So that's 6%, and it implies to me that your rev per mile should have been up about 6% in the quarter. And then your documents, you were saying up about 10%. So what am I missing in the algebra there? I take fleet times miles per truck, times rev per mile, that should equal revenues.

Fleet times, mile times, revs per truck?

Rev per mile?

Rev per mile. So Zach and his team are digging into that. I mean, I'll just talk a little bit philosophically. I think the one piece that you may not fully appreciate is mix, although that should come out in the segment analysis. So we'll run some numbers here, but our fleet size shrunk, which I don't think we talked much about. Our miles was up marginally. Our revenue per tractor was up owing partly through the utilization, but also to the rate increase. The rate number, you said it was 4%. I think we reported that it was up 9.1%. So that may be...

Well, I did ask about 6%, right? Because you reported revenues up 4%, your fleet was down 1% and your miles per truck was up about 1%. So net net, that's about 6%, I guess. So I'm just trying to figure out where the Algebra breaks down. I figure it's mix, but I'm just trying to understand that.

Yes. So let us get back to you on that one, Jeff. I'm not sure where the 4% number is coming from. I had in my head, it was 9.1%. I think that's even what the earnings release said.

In the earnings release, we reported a 228.8 versus 209.7.

All right. So that's my error then. Okay. And then I want to think about 2021 and the forward outlook. And it's hard to bank on the idea that this environment stays from a demand standpoint, but the capacity is certainly tight, right? So the rates should be up for a while, and you're going to be repricing for the next couple of quarters. You said you started to take some trucks in the second half. Every truckload carrier I'm looking at is still -- the fleet numbers are down in the third quarter. What do you think just given the outlook right now, CapEx looks like in 2021 relative to where you are in 2020? And what do you need to see in terms of either OR level of confidence before you decide, okay, it's time to start growing the fleet again?

So let us kind of answer that question in reverse. So I'll kind of talk about the broader issues, and Zach can talk about what the capital outlook looks like. I don't know that we're ready to give a number, but we can kind of be in the ballpark. So our intent, first of all, and taking 189 trucks in the back half of this year, we are not growing the fleet. In fact, our fleet is going to be down in the truckload fleet by about 100 trucks. We did that intentionally and on purpose. And that is owing really to a performance discipline that you alluded to in your question when you asked, well, at what point do you decide to grow? We really believe, Jeff, that we don't get permission to grow until we execute well. And so when I refer to that internal metric where we look at our Trucking OR compared to our competitor's Trucking OR, we're still about 500 bps away from the average. And so from my perspective, this business for us to really get serious about a growth mindset, needs to be performing in that kind of 88% to 92% OR space. So we're really focused over the next couple of years, refining the model, getting it profitable, paying down debt. And then when we have what we consider to be acceptable performance results, then we'll start to grow it.

With that, Zach can kind of give you some ideas about what that means for 2021.

Yes. As we look at 2021, we know we have a certain number of trucks that are coming up based on our trade cycle of 5 years. So there is going to be a certain amount that we're going to have to take just to help control, to get better fuel efficiency, better maintenance cost per mile to drive to that 88%, 92% OR that James outlined. So as we look forward, we do expect there to be some CapEx next year. And by CapEx, I mean, we're going to take delivery of trucks, but we're going to take out an equal -- probably an equal amount, we just have to complete that analysis. But as we look forward, there is a variety of ways to structure that, as you know, with -- it may not be cash, it may be leased, so there may not be cash coming out, but more to come on that.

Yes. And I'd just say, Jeff, that -- so everybody -- just so everybody is clear, our replacement cycle is a 5-year trade cycle. How many trucks we have. You can do the math. I'll just tell you. A normal year would be us replacing about 350-ish trucks. And -- but to Zack's very good point, and he's right, we don't intend to grow the fleet. It will just be replacement capital. And then, of course, there are some trailers. If you think about -- our trailer ratio is pretty normal for the industry. You can kind of back into your same -- your own number there. But I'll just tell you, I mean, this number is going to be -- our normal replacement net of trade credit is $40 million to $50 million a year.

Okay. That's a good way to think about it. Final question. So the balance sheet leverage is coming down because the EBITDAR is going up, and you're paying down a little bit of debt. Same kind of thought process. Before you would engage in acquisitions, take advantage of market opportunities, is there a place you want the balance sheet? Or is there a place you want that ratio? Obviously, for the right acquisition, you'd stretch even if you weren't there, but just kind of as a way for me to think about appetite for acquisitions. Is there a place you want to see that debt-to-EBITDA number or just total balance sheet debt before you'd say, okay, strategic acquisitions move up in the pecking order?

Yes. So we've mentioned before that we'd like that leverage ratio to stay in that 2.5 to 3x. We think that for a company our size, that's an appropriate amount of leverage given the shares we have outstanding. So to answer your question, I would say, we feel pretty good about closer to 2.5 to 3x when we start looking for other uses of that debt.

Now we reserve the right, though, to be opportunistic.

Right.

Understood. Well, congratulations. It's great to see execution, and you guys kind of moving the ball down the field. So congratulations to you and your team.

Our next question will come from Jason Seidl with Cowen.

I wanted to focus a little bit on the near term and then I'll go longer-term after that. You talked -- you sort of hinted that, hey, 4Q is going to be better than 3Q. Wanted to sort of look at it as on a per mile basis and also on a utilization basis? Because utilization is clearly ticking up. You're having a lot of success going more local. How should we think about that? Or maybe you can give us some numbers for the first, let's call it, whatever we are, 18, 19 days in October.

Yes. So our average rate per mile so far in the quarter is -- I really don't want to get boxed in, but I will tell you, it's higher, obviously, than it was in the fourth quarter -- or the third quarter, excuse me. I think it would be helpful if I can reframe your question a little bit, Jason, to go back and just tell you more about what the quarter looked like. So we said pretty clearly that it really developed in the middle of August. We made some money in August, but the lion's share of our quarter was made in September, and October looks even better than September. And so as we look ahead, we've got this fantastic operating engine that is growing miles really for the first time in 3 years, and that's just owing to the great operators that we have, and the cadence of the business that they have adopted. It's really kind of the secret sauce. So there is this -- I'd expect 5-plus percent upside in utilization on the trucks. And then in terms of rate, I would tell you that it looks like a normal Q4 surge. And so whatever that means in your model is kind of how I think about it. I'm sorry to be so nebulous, but we have 8.5 billion shares, I don't want to...

That's the thing. I mean, right, it moves around a lot. So when you say 5-plus percent, you're talking sequentially?

Yes.

Okay. Perfect. Can you maybe -- another way to ask this and maybe to give everyone on the call here a better idea of how the quarter went. Do you have a month-by-month numbers of your utilization and your rate per loaded mile?

We do have that, but we're not going to share it. I appreciate you trying, but I will -- it's really interesting. Our utilization went up every month in the quarter. So if you go back and look at our past results, I mean, it's really quite fascinating. And we admire many of the best operators in this space, and we try to emulate them as much as we can, and that's part of why we've gone to this regional model. It's just -- it works, right? And I've said before, somebody asked you, why do you use Belichick's playbook. The right answer is because he wins. And we're using their playbook because they win, and we think it's the right thing to do. But what you learn in that is, it's a commoditized business and everybody's subject pretty much to the same kind of wins in the marketplace. And so what becomes the secret, if you will, is the cadence. And so we've got -- our operators are looking at the bottom third performers every single day and coming up with gap closing actions with those drivers on a daily basis. And if you go to the front line, they're keenly aware of that and locked into it and managing that process. Same thing on driver retention, same thing on customer service. And so as you get into this daily drumbeat of accountability around the core metrics, we've seen this pretty -- to us, it looked like a pretty drastic turn, and it's -- there is a little bit of a sigh of relief that the things that we thought were the right things to do are in fact the right things to do. So just to summarize, it got better every month in the quarter, and October is substantially better than September in terms of miles on the trucks, yes.

And wanted to just look at the dedicated side a little bit and look out a few years. You had mentioned that it slipped a little bit, but you guys were onboarding a bunch of contracts. How should we think about that OR as we go through the coming, let's say, 6 to 9 months?

Yes. I'm really glad that you caught the nuance of what I said. I appreciate that because -- and I appreciate the opportunity to clarify it a little bit. We talked about this publicly, I don't know, 1.5 years ago. We saw a unique opportunity with USA Truck's combined OR, it's such a high number compared to the industry. There were pricing spots in the market where we could go, I don't want to say by business, but priced more aggressively to our competitors and still have an accretive experience to the financials. And you've been with us since that time, so I'm sure you remember that conversation.

So we did that. We went out aggressively to grow that business over the last couple of years, and we got aggressive on price, intentionally kind of sacrificing some OR to grow the business. We also said at that time that, that was a short-term strategy because as the underlying truckload business improved over time, it would become effectively an internal competitor for precious limited capital resources. And as our operators in the truckload space are getting better and better and better ORs, that raises the bar for the dedicated guys. We don't split it out as a segment because it's critical to our Trucking combined segment. So I don't know that I've ever said the OR publicly. It's still operating in a low-ish 90s OR space. But we bought a little bit of business under the premise of the strategy that I just outlined, and now we're tightening that up. We're working with awesome customers who are sensitive to the marketplace pressures and are responding beautifully to it. And we expect it to be accretive for now and into the future. And maybe more importantly, we see it as a stabilizing force and the predictability of our future results so that when the market does go bonkers, which it does at times, you've got to -- you are limited on your upside in dedicated, but you're also protected on the downside. Zach, did I miss anything?

You hit at all.

So James, when we look at the dedicated, I think you said, obviously, there was a bunch of fleet growth within dedicated, but clearly, not on your -- over-the-road side. So how should we look at that going forward? You said you don't have permission to grow just yet, but is dedicated still going to grow and the over-the-road fleet shrink a bit?

Yes, that's exactly how we're thinking about it. So we -- it's kind of our own insurance policy. We don't want to get caught up in the irrational exuberance of the market and just go chase rate, rate, rate with our trucks and find ourselves exposed like we did in 2019. So we're going to grow the dedicated business. And the way we're going to do that is, we're going to divert trucks from our truckload business. And we think, honestly, especially in the first half of the year, it's absolutely the right thing to do. And then we've had -- it's kind of shocking. I'm going to knock on wood here. We've had a lot of success recruiting and keeping owner operators in our business, which as I've talked to peers in the industry and listen to other people, it's a real challenge in this robust rate environment. Sometimes owner operators become mercenaries and go to the market for that short-term opportunity, but our team has just done a great job of creating a programmatic home for these guys. And so the way that we're going to grow truckload is by adding third-party owner operators, and we're doing it well.

Our next question will come from Jack Atkins with Stephens.

Congratulations on a great quarter. So James, and I'm sorry if I missed this, I was kind of jumping between conference calls here. But I think it's interesting as we sort of head into 2021 for you guys. I mean, there is obviously a rate opportunity on one hand, but there is still this opportunity to get the network right, which -- once that's accomplished, it's going to be hugely accretive. So -- and I guess this maybe goes back to an answer to Jason's question earlier. But I mean, as you go into 2021, are you more focused on driving rate? Or are you more focused on using that as an opportunity with all this freight that's sort of being put up for grabs to really finally get the network exactly like you've envisioned over the last couple of years. How are you thinking about that balance between those 2 things?

Look, if this sell-side thing doesn't work out, you should come over and be with us because you're thinking the way we're thinking. What you just said is exactly where our mindset is, and again, thank you for the opportunity to talk about it. Here's what our internal narrative has been, and so I'm going to step back a little bit further into 2020 before I go forward in 2021. So one of the things I talk about a lot is, day 2 in your operations class of your MBA program, everybody learns they have excess capacity in a factory you should be willing to run it at variable plus cost -- variable cost plus. We kind of did that in Q2. I mean, everybody should remember what a tough situation it was, especially early in Q2. We made a decision, we're making money on our truck variable, but we made a decision to keep the trucks running because we wanted to train our operators and trucks to run miles. And so we did that. We also -- as the market turned, there was a really interesting phenomenon kind of in the middle of the third quarter. I look every day at our mix of broker freight and nonbroker freight, and we had a couple of days where we had gone exclusively to customer freight and literally had one or two broker loads on the books. And I kind of went to the business and said, look, guys, this is the time when we should expose ourselves a little bit to the broker business. And so we opened up the valve a little bit to expose ourselves to broker, but to your point, in terms of structurally what we focus on, that's when we really got focused on refining the network. This is an awesome opportunity to get the network that we've always wanted. And so as I said earlier, we went very surgically to customers. We resisted the urge to do across the board rate increases, and we didn't shove it down anybody's throat. We had -- I was really, really impressed with our customers and how collaborative they were in the process. We went to our customers, we worked through it, we were able to raise prices in the quarter and set long-term structural price increases in place that go well into 2021. And so if you think about it as this arc -- and sorry to be so verbose, but it's just a great opportunity to talk about what we did. The arc is, we went and played in the spot market, used that opportunity to reset some of our underlying freight dynamics, we now have been very intentional -- we talk about this internally all the time, of moving back into our contractual relationships to support our customers now at a higher base rate water level because they're the ones that are going to sustain us in Q1 and Q2 of next year. So we feel like we played it, I don't want to say perfectly, but we executed very well in terms of using the opportunity to reset the base and do exactly what you said.

So as we look forward to next year, if you look at freight that we've repriced already this year, that has contractual legs into 2021. So that's about 3/4 of our freight. It's already at a 5% increase over where we were in Q3. And I haven't gone back and done the math, but it's going to be against much easier Q1 and Q2 comps. And so we've really done what you said. We saw this as a chance. And I don't want to sound like we're being opportunistic pig. That's not it at all. It just was a responsible thing to do, to work and collaborate with our customers to get to a baseline that they and we are comfortable enough with in the market and to calibrate our network so that it's copasetic for a long time to come. And again, I'm so sorry, but I'm super excited about the opportunity to talk about that. Did I answer your question?

No, you did, and I appreciate the job offer. That's great. That's great. So maybe for my follow-up then, I guess, as we're thinking sort of bigger picture and using this opportunity to really get the network set like, like you guys have a vision now for a while. What would prevent you from -- as we look forward, and I know 2021 is going to be a good year for a lot of different reasons, hopefully, knock on wood, if the economy holds together. But the structural margin vision that you guys have had, mid-90s type OR, would there be any reason why as we sort of look forward prospectively? We shouldn't be able to sort of be running at that level going forward now that the network will finally be in a place where you feel comfortable with? Or will there be more heavy lifting to do in '22 and beyond?

Yes. So the way we've always talked about this, and we were really consistent going back, I don't know, for 2 or 3 years, is we expect to get 200 to 400 bps of improvement every year versus the market. This year, we've only closed that gap by about 100 bps. So we kind of underperformed our own expectations in that regard, but we have made progress versus the market. So as you look ahead -- and I'm not dodging your question, I'm getting to it. As we look ahead, I'd expect -- because we said it would be a 3 to 5-year process, and we kind of -- we don't throw '19 in the first half of '20 out. You can't do that. But they were 18 of the toughest months -- post deregulation Trucking, it was a really tough time. And so I think we're still like in the fourth inning of this thing. And so as you look ahead, I would expect that we close the gap another couple of hundred basis points in 2021. And then as we get into 2022, we should be really talking about our OR being comparable to the market average amongst our peers. That's where we are. And so when you said, "Hey, is this -- should we expect this going forward?" I would say, what we just saw is aspirationally, the bottom of what we should expect. I mean, I would be really disappointed in down cycles if our Trucking OR got above 95 again. Our goal is to balance this thing in kind of that 88 to 92 space through the cycle. I'd give us a little leeway for tough years like '17 and '19 to say maybe we go back to a 95 or 96. But I think the days of 3-digit ORs in this business are gone forever.

(Operator Instructions) At this point, I am showing no more questions. So this will conclude our question-and-answer session. I would like to turn the conference back over to James Reed for any closing remarks

Okay. Thanks, Grant. 2020 has been a year none of us will ever forget. The pandemic, 5 hurricanes, wide-ranging fear, elections and everyone's life turned upside down. I know I never imagined it'd seem like this, and yet, we have no choice, but to do one thing, which is play offense. It's a singular sign that hangs in my office, reminding me every day that the only way forward is to look ahead. Lou Brock, the hall of fame base dealer, who died earlier this year, once said, show me a guy who's afraid to look bad and I'll show you a guy you can beat every time. We've made some steps along the way, but I can tell you quite assuredly that this team has done many things right. We're making a ton of progress. We continue to close the gap with a competitive set, as we have each of the last 4 years, and this just might be the best story in transportation. We're not afraid to look bad, as Mr. Brock said, we're afraid of not realizing our potential. So we work every day like everything depends on it because we know our shareholders, our customers, our communities and our families are counting on us to return this company to its once prominent place among the more profitable ventures in this space, and we're well on the way.

So with that, thank you all for calling in today. We appreciate your willingness to follow our stock and really appreciate all the questions. Have a great day.

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