USA Truck Inc (USAK) 2020 Q2 法說會逐字稿

Good day, and welcome to the USA Truck's Second 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. Please go ahead.

Thank you, Sarah, and 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, including non-GAAP financial measures as outlined and described in the tables in our earnings press release.

I'll now turn the time over to Zach.

Thank you, Mike. We want to thank everyone for joining us on the call today, and we appreciate your interest in and support of USA Truck.

We hope you all had an opportunity to review our earnings release from last night. As we stated in the second quarter, the second quarter was unlike any quarter we have experienced as a management team. The coronavirus pandemic pressured our nonessential customers, which make up approximately 20% of our active trucking customer base, causing many to stop shipping altogether or significantly reduce shipments. This caused us to move trucks into the spot market, which has been at a 4-year low. The move caused a decrease in utilization, rate and base revenue per tractor per week. In Logistics, we were able to increase load count 16% year-over-year and 23% sequentially to help offset the rate pressure in the marketplace.

If you'll please turn with me to Slide #3, we'll do a brief review of our financial results. Consolidated operating revenues came in at $123.7 million for the quarter, which represents a 7.4% decrease year-over-year. Base revenue was down 2.8%, which excludes fuel. Consolidated adjusted operating ratio for the quarter was 98.6%, up from 98% in the prior year, primarily driven by weaker freight environment due to the COVID-19 pandemic, which affected both of our operating segments. Our adjusted loss per diluted share was $0.06.

Turning to Slide #4. Trucking operating revenue before intersegment eliminations decreased $7.8 million or 8.1% to $88.6 million. Base revenue, excluding fuel, was down 3.5% to $80.5 million compared to $83.4 million for the second quarter of 2019. Our Trucking segment generated adjusted operating income of $1.7 million, an increase of 47% year-over-year. As a result, our Trucking segment second quarter 2020 adjusted operating ratio was 97.8%, an improvement of 80 points year-over-year and 370 basis points sequentially. Trucking base revenue per loaded mile decreased from $2.14 to $2.02 or 5.7%, and utilization decreased 76 miles per truck per week or 4.9% from the second quarter of 2019, largely due to network interruptions caused by nonessential customers' freight volumes. These rate and utilization outcomes negatively affected base revenue per available tractor per week, which decreased $347 or 10.4% year-over-year for the second quarter.

Our debt head percentage for the second quarter of 2020 improved by 10 basis points from the first quarter. Our average available unseated tractor count percentage was 5.8%, a 60 basis point increase from the second quarter of 2019. The average available tractor count for the first quarter of 2020 was 2,063, which is a 7.7% increase when compared to the second quarter of 2019. This truck count growth was due to additions of owner operators.

Turning to Slide #6. We'll review the results of our USAT Logistics segment. Revenue before intersegment eliminations decreased $0.8 million from the second quarter of 2019 or 2.1% to $38.7 million. Our Logistics segment generated $172,000 adjusted operating loss and had 100.5% operating ratio. Gross margin dollars decreased $1.8 million to $4.7 million. Gross margin percentage for the first quarter of 2020 was 12.2% versus 16.5% for the comparable quarter of 2019. Load count increased to 33,400 loads during the second quarter of 2020 from the 27,200 loads in the first quarter, an increase of 22.8%, an increase by 15.9% or approximately 4,500 loads year-over-year. The primary drivers of these results were a decrease in revenue per load of approximately 15.6% and only an 11% decrease in purchased transportation costs per load when compared to the robust brokerage market experienced in the second quarter of 2019. This market environment drove our margin per load to $141 per load from $227 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 June 30, 2020, total debt and lease liabilities were $189.5 million, and stockholders' equity was $75.5 million. Net debt was $189.4 million, and our net debt to adjusted EBITDAR for the trailing 12 months ended was 4.1x, down from 4.2x as of Q1. This represents a net debt decrease of $6.8 million from Q1 2020 and a 10 basis point improvement in our leverage ratio. The company had approximately $38 million available to borrow under its credit facility as of June 30, 2020.

The continued impact and uncertainty caused by the COVID-19 pandemic on our customers, employees and communities has caused us to continue to focus on minimizing cash outflows. We continue to expect minimal CapEx in the near term. However, during July, we did enter into an agreement to lease 189 new tractors and disposed of certain high-cost tractors during the back half of 2020. We expect this agreement to allow us the opportunity to reduce our average tractor age and improve our maintenance and fuel costs while controlling our cash outflows near term.

One other item of note is our 2020 second quarter tax rate. For the second quarter of 2020, our effective tax rate was 211.4% as compared to 99.5% in the second quarter of '19. Our tax rate was primarily affected by close to breakeven operating loss for the quarter, coupled with permanent differences, the most significant of which is the effect of the partially nondeductible per diem pay structure for our drivers. When our pretax income approaches breakeven, the fixed portion of tax expense related to the permanent differences begin to skew tax expense by making it less variable when compared to pretax income.

With that, I'll now turn the call over to James for a discussion of the business and current initiatives.

Great. Thanks, Zach, and good morning to everyone. And as we have in quarters past, we will offer in-depth updates today on dynamics and segment performance in the quarter, an update on our progress in our self-help transformational initiatives and how we see things going forward. But before we begin, let me give a brief update on our COVID-19 response and what we're doing to be a better corporate citizen, given our heightened sensitivity, awareness and concern about issues of equality in the world.

Our COVID-19 response has gone well, and, as we outlined last quarter, we have well-established contingency planning criteria and governance policies borne from our experience in the 500-year flood of 2019 that allowed us to continue to run our business seamlessly. Recently, we made a significant change in our protocol as we began taking temperatures of essential employees as they enter the workplace and review CDC-provided questions to evaluate fitness for work. We continue to have the vast majority of our nonworking -- our nondriving workforce working from home, and the technology and business cadence tools we have in place have allowed us to do so effectively. Sadly, we have experienced some illness, and 1 driver and 1 non-driver have lost their lives in the pandemic. Our thoughts and prayers are with them and all who are affected by this pandemic around the world.

As Zach outlined in his comments, from a business perspective, about 80% of our customer freight is from what we call essential and quasi-essential customers. We have been able to survive through the COVID crisis and believe we are well positioned to thrive as we gain even more momentum with those customers have made adjustments to our network to reflect the short term and possibly permanent loss of nonessential business and as our business cadence strengthens through this cycle. I want to take this opportunity to thank truckers everywhere for their continued perseverance and diligence in keeping America's freight moving and supply chains open. These men and women have all the same concerns and worries as the rest of us, and yet they get up every day and do what only they can do. Our heroes drive trucks, and we are proud of them.

We've also recommitted to being a more thoughtful, more aware and more engaged community and creating equality in the workplace. As we have reached out to trusted advisers and mentors, thought leaders in this space, and have worked with our Board, we have engaged in a concerted way. We're working with our internal diversity council to heighten awareness internally. We will continue to recruit diverse candidates in our new college graduate program, as we always have. We are focusing on developing diverse talent into leadership roles. We began recruiting at more diverse universities, including HBCUs, and we are working with the Board to emphasize diversity in leadership. We're also partnering within our community to provide pro bono access to technology and business advice from our team. We believe the best way to advance equality is through our actions, and we are and will be active in making a difference.

So first, I'd like to talk about the dynamics in the quarter and segment performance. Given the uncertainty in the world, we have expected the second quarter to be more or less level with the first in terms of financial performance. We were able to improve on that performance through a lot of grit, commitment to our self-help plan and execution on key initiatives. Broadly, we were able to keep volumes steady in the business throughout the quarter. Our customers and segment diversification efforts, first begun 2 years ago, have provided some insulation through the uncertainty of the economy and beginnings of a cyclical upside.

We are far from certainty about what the evolution of the virus will be, how that will affect the economy and how the upcoming elections will manifest in our business. However, as we noted last quarter, our deep understanding of our customer makeup and their relative strength in this environment has given us confidence that we are well positioned to execute and take advantage of a turning cycle. We still expect to continue our strong track record of generating positive EBITDA through the cycle and are moving forward decisively.

When we last met, we had come off a strong April, and we're beginning to experience a softer May. And we shared that at the time. It was a sign of things to come. While volumes remain relatively balanced through the quarter, industry-wide capacity availability drove May spot prices to near-historic lows. When this happens, customers withhold some of their committed freight, take it to the spot marker. And then asset carriers with committed freight fight to preserve as much committed freight at committed prices as possible. I intentionally used the word, committed, there a lot to make a point.

The alternative, when this freight is not tendered, is to play in the spot market at lower rates. Not a good situation for profit. And yet that's what we had to do in the quarter. We have one 6-week period in April and May, where our asset business relied on nearly 20% spot freight in an unfavorable rate environment just to keep our trucks moving and producing variable contribution.

On the logistics side, this same environment can result in margin expansion in as much as committed customer freight can now be met at a lower spot purchase transportation price, except the customers longingly observe market dynamics and lament the perceived lost cost savings, so they, too, go to the spot market, which we also experienced in the quarter. As spot rates have rebounded nicely, logistics customers now want to lean into their committed bid award freight at the exact time we'd rather be in the spot market. It's fluid and dynamic, and we're getting much better at balancing through the cycles.

I'd like now to talk about the Trucking segment. We want to make 2 points abundantly clear to anyone who's listening or reading this commentary: point number one, our Trucking segment is making substantial progress; and, number two, we have made significant investments in our own self-help prescription throughout the cycle, and we expect that those investments will yet yield performance gains going forward.

The USA Trucking segment improved sequential adjusted OR performance, as Zach said, by 370 basis points sequentially and year-over-year improved adjusted OR 80 basis points at a time fraught with economic uncertainty. We achieved that result despite the uncertainty. We saw revenue per tractor down mostly attributable to rate changes year-over-year. We had challenges in driver retention recruitment related to the broader economic environment. We saw tractor productivity slip due in large part to COVID-related network disruptions and slightly higher empty miles. These are all areas that we are working to improve. Despite those headwinds, we made meaningful progress, as evidenced by the results. So 97.8% adjusted OR in Trucking is the best we've had since the end of the last cycle back in Q1 of '19. And yet with rates and utilization depressed versus that comparable, how are we doing it?

Recall, as we have discussed previously, that we expected to have some short-term challenges in our transition to a regionalized operation. The network effect COVID-19 added to those challenges, as all of us in the industry had nonessential customers who are absolutely critical components to our respective networks, stopped shipping freight. But we made many preparations in advance that were necessary to improve our results despite the headwind.

We have the foresight to reduce head count in the fourth quarter of 2019 and the first quarter of this year that provided us much needed cost relief. Reducing head count nearly 10% was a hard call to make, but the right one. We have the courage to close our Van Buren, Arkansas maintenance facility. It is co-located with our headquarters and is where our company was founded. Closing that facility required robust analysis, dependence on data-driven decision-making and the courage to follow the math in the interest of all stakeholders. Our team had the wisdom to grow and expand our asset-light owner operator program as a mean and way to enable revenue stability as we implemented our regional model. This allowed us to grow our paid miles even as network dislocation from COVID affected productivity on company assets. And we have the insight to make investments in capital, people and processes to improve our safety performance to a level that provides us a financial advantage due to our top tier safety performance.

We made a decision a couple of years ago to add in-cab recorders that faced outward and inward. Beyond the significant financial investment, that one decision probably hurts our retention and turnover stats, but the results are tough to argue. Our collisions per million mile and our DOT collisions per million mile are down approximately 40% over the last 4 years. And the financial benefit of those decisions are beginning to accrue to the results. And while all of those decisions and the execution of those key initiatives have been important to our trucking business improving, they are just the beginning. We'd like to remind everyone in the investments we have already made thus far in making this a company that will deliver competitive results in markets environments of all shapes and sizes.

Even as the market cycle has been against the industry over the last couple of years, we have taken this opportunity to improve the underlying execution engine that makes up USA Truck. We have not been resting in a down market. We have been anxiously engaged in improving the core of the business. Some of the things that we've done. Regionalization. We have made the transition to a regionalized fleet, then the result of those decisions are expected to be better driver retention, improve utilization and productivity, lower maintenance costs and even better safety results. We've also invested in regional maintenance facilities. We announced last quarter that we would have all 4 of our new regional centers open for business, and we have accomplished that. Just this month, we secured and have begun staffing up our Waxahachie, Texas terminal. We now have 8 regional maintenance facilities where we know we have the best chance to cost effectively maintain, inspect and manage our fleet.

We made the purchase of Davis Transfer. This significant investment expanding our southeast regional footprint has paid dividends in the form of increased presence, exposure to quasi-dedicated business with long-term trusted partners and financial results that meet our expectations for Davis and are aspirational for the rest of USA Truck. This business has been a steady low 90s OR business even through the trough of the cycle, and we are now leaning into the Davis leadership team to teach the rest of USA Truck to do likewise. Davis is our best evidence of what is possible in a truly regionalized model, which is why we are moving to the regionalized model as quickly as possible.

We've made technology investments. We made a big investment last year in transitioning to the latest and most modern TMS available for our business. We are now stripping out our TMS of unnecessary intermediate application layers that were implemented here over 10 years ago, and we expect doing so to increase throughput by decreasing transaction times, and that will be completed this quarter.

We've also talked in the past about our dedicated expansion. Our dedicated truck count has grown 26% year-over-year and is up nearly 40% since the beginning of 2019. If we count Davis and our dedicated and quasi-dedicated trucks, we are approaching 1/3 of our Trucking business in this space. As each of these businesses continue to perform well, we feel compelled to pursue this as a key strategic vector.

Finally, a significant investment that Zach mentioned earlier was consummated just last week when we closed the deal with a major truck OEM to replace an incremental 189 tractors in our fleet this year. We worked a construct to replace these tractors without incurring additional CapEx while minimally impacting liquidity and our debt ratio and reducing our maintenance and fuel costs on the fleet. This deal is exciting to us and is expected to be completed by mid Q4, but will have positive impacts on this year's performance, especially from a maintenance and fuel cost standpoint. We expect this investment will reduce our average age of fleet by 4 months at the -- by the end of the year, bringing us below 30-month average age of our fleet.

Let's now shift to talking about our Logistics segment. It is no secret that the Logistics segment has been a challenge the last several quarters, and this has not been a unique experience to USAT Logistics. It's been industry-wide. We believe the increasing transparency in the marketplace and freer flow of information to market participants has changed the environment and the windows for harvesting gains. When spot rates dropped in May, customers fled to the spot market. And in June and July, spot market pricing has flipped to the high end. Those same customers tried to enforce bid commitments that they themselves were all too willing to abandon in May. It's tricky.

As we said last quarter, our goal in Logistics remains to create an environment where margin and volume are adequate to cover our fixed costs in the short term while providing the basis for profitable growth in the future. The formula in Logistics is quite simple. Revenue per load times gross margin percentage times load count or volume equals profits or losses as the case may be. We think it's important to address these inputs to help investors and the street, understand exactly what the moving pieces are and our assessment of each.

First, revenue per load. The second quarter of 2020 revenue per load in our Logistics business was the lowest it's been in over a decade. Candidly, we went back and looked as far back as we have records. We can't find a time that the revenue per load was lower than in Q2 of 2020. The reason for the extremely low market-driven revenue per load is twofold. One, capacity. The excess capacity that contributed to a challenging 2019 also bled into 2020 contract pricing. And two, fuel costs. Fuel's a significant aspect of nearly all brokered freight and is down 30% sequentially and 44% year-over-year. When revenue per load is down, margin dollars go down. A percentage of a smaller number is a smaller number.

Second, gross margin percentage. As we disclosed, our margin percentage in the quarter dropped to 12.2%. Margins get squeezed when there is a market mismatch between pricing, which is still too low, and capacity availability, which is also too low. Said differently, carriers are charging higher rates while customers continue to dig in on low pricing. This is all coming to a head soon as rates are beginning to rise a spot pricing pushing expectations higher, and as capacity comes back into the marketplace, thus, driving supply higher and costs lower. We do believe that capacity stayed on the sidelines of government incentives, and, that when the artificial buoy effect of subsidy goes away, that some modicum of balance will return to the marketplace.

And that finally leads us to load count or volume as our third variable. This is the area we most control in the equation. A thorough review of our numbers will lead the observant reader to some amazing insights. First, USAT Logistics revenue per employee is up 33% year-over-year despite the low revenue and low-margin market that we just described. Second, USAT Logistics loads per employee is up 51% year-over-year. Again, despite the environment, this efficiency drives transactional costs down and improves our ability to compete in the marketplace. And third, our volume production in the quarter were the 3 highest months of volume production in our history and, add those together and the team, just delivered the highest load count/volume quarter in the history of the company in a tough environment.

Why does any of that matter? Well, I'm an old manufacturing finance analyst by trade, and we always looked at results in terms of rate versus volume effect, and we do that same analysis here. All else being equal, if our volumes remain strong, if margin percentage remains low, but the average rate and revenue per load rise on a rising spot market and inevitably higher fuel costs, it bodes well for our well-tuned revenue engine. For example, if revenue per load rose even to 2019's relatively depressed levels, it would still be an additional $200 per load more than the market bears today. At those levels, the Logistics business swings nearly another $1 million in net margin per quarter, not to mention any upside in margin percentages that usually occur in the cycle.

Let's just recap that. Logistics-based revenue actually grew in the quarter while margins and revenue per load were down, while improving revenue and load per employee efficiency improved 33% and 51%, respectively. And we forgot to mention, they did all this while lowering head count 28.5% year-over-year. Just as we did last quarter, we improved execution and lowered costs significantly, both year-over-year and sequentially in a tough margin environment. And we believe that fiscal and operational fitness will bode well for that business in an improving cycle.

I'd like to now shift gears to talking about our transformational self-help initiatives. So that's the update so far on the dynamics of the quarter.

We've been consistent in addressing our self-help initiatives in past quarters, and I'll try to be more brief today, but it's fair to say that we are more enthused about our prospects for change now than at any time in the last 3.5 years. As we said last quarter and earlier in this call, we have managed the age of our fleet. We completed the acquisition of Davis. We closed down high-cost facilities. We managed head count aggressively. We've regionalized the business. We've lowered maintenance costs, and we've expanded our dedicated business. And we've lowered the cost per transaction in Logistics.

The first initiative that we talk about, and this is on Slide 8, I believe, is increasing utilization on the existing fleet. As we reported, utilization was a minor setback in the quarter. But as our regionalization and governance of standard work is taking hold, we are already seeing utilization per available tractor and revenue per tractor performance through July that's above and beyond our Q2 performance already. It's early but promising.

The second thing, and as we said, we've increased our team presence in utilization. It's a slow burn as it requires intense coordination with our network design, and it's been a challenge to get people to want to team in a COVID environment. But we've seen some big moves in our revenue per tractor in this space, and we're continuing to be encouraged on that vector.

Next is network optimization. I'm really not giving as much time to this as we should, but in the face of COVID, we refined our network model, optimizing both truck level performance and network yield, and deployed both of those in the last 6 weeks. We did a hard pivot, given the changes in the nonessential freight. We believe that this is contributing to our improved utilization and segment dynamics already in the third quarter. Again, it's just July, and COVID remains a concern and a source of uncertainty, but we are optimistic about the trend.

We've already talked in detail about growing the dedicated business and driving Logistics load count, so I'm going to skip over those 2 and go to the final initiative, which is driver retention. It's gotten a lot harder of late. We've been much more disciplined in our execution of the regional strategy, and that has some fallout. When you have higher expectations, people don't like that. They leave. But we've recently gone to some more real-time and virtual onboarding options. We've instituted some regular feedback loops using anonymous tech space surveying methods, and we expect the full deployment of regionalization to improve our results on this vector as well. So we're excited.

Now pivoting to the outlook. At best, I think we would say the outlook is fuzzy. While we shared much about market dynamics in our prior commentary on this call, I think the way our chief commercial officer described the market is fitting. It's like we're on a winding road for the first time, and it's foggy. Rates are up so far in July, about 5% sequentially. Volumes are very steady and quite strong. EDI rejections, a sign of market health, are over 1,000 a day for us, while in 2019 through Q1 of '20, we hovered around a couple of dozen a day. Compared to a normal July, our EDI rejections were up 80%.

Productivity's improving over our reported results from the prior quarter. Nonessential shippers are still MIA. And while we maintain our commercial relationships with them, we are planning for life with their freight at currently depressed levels.

We're bullish over the long term and cautious in the near term. If July's trends continue, and this is the turn of the cycle, then it will be very good for all truckers. We just have the recent experience of 2019, which was much worse than any of the prognosticators predicted in 2020, which none of the prognosticators could have predicted. So much depends on the country's continuing practical and economic response to the pandemic.

Broadly and longer term, we think it's prudent to address how and if all the heavy lifting we've applied to the business has had any effect whatsoever. We were asked not long ago by a market observer if we are better positioned entering this phase of the transportation cycle than we were before. The answer is an unequivocal yes. It's easily demonstrated through a simple rate analysis. Recall the demonstration we made earlier of rate versus volume. That example was the Logistics example, while the same applies in the Trucking business.

So let's do some math. Take the second quarter 2019 rate per loaded mile as a point of comparison. It was $2.14 a mile. If the Trucking segment had the same rate in the second quarter of '20 that was experienced in the second quarter of 2019, then the adjusted OR for the Trucking segment would have been in the low 90s this quarter. When compared with the second quarter of 2019, the Trucking segment that quarter OR -- adjusted OR was actually 98.6%. That approximate difference of 500 bps is a clear indicator of where we are. And where we are is very close to be able -- to being able to demonstrate that all the investments, the move to regionalization, the technology, the terminals and everything else we discussed here today has been more than worth it. We believe we are on the verge of industry competitive ORs just as has been our thesis all along. It's very exciting. We hope the overview of the quarter, the update on our self-help transformation and the perspective on the outlook in the market has been helpful.

The market is better than the last nearly 2 years and strengthening both from a price and demand standpoint. We believe we have made the right investments in people, capital, process and technology to be well positioned to leverage the same in proving out that USA Truck can be a market competitive service provider and an investment with appropriate returns.

So with that, Sarah, let's open it up to the audience for questions. Thank you.

(Operator Instructions) Our first question comes from Jack Atkins with Stephens.

So I guess, James, let me go back to your comments around the rate environment in July. I thought that was pretty encouraging. Your comment that rates are up 5% sequentially, I'm assuming that's a loaded mile comment. And is that versus the average rate in the second quarter?

Yes.

And I guess, just kind of more broadly, now that there's some increased rate momentum in favor of asset carriers here over the last couple of months, is there an opportunity for you to maybe reprice some of the freight that may be some lower-yielding freight that you had to take over the course of the last year, just given sort of where the freight market has been? And how should we think about the impacts that could have to the third quarter more broadly?

Yes, great questions. Before I answer that, I don't mean to be too complimentary, but thank you for your piece last night. It was clear that you really read the details, and your observation on the tax rate was right on point in understanding our sequential improvement. So thank you for that. With respect to the rate environment, July is up 5% versus the Q2 average. So that's exactly right, the way you said that. In terms of repricing, I kind of casually touched on our network efforts. We really undertook an intense review of our network because we had to make a real-time pivot based on the loss of many of these nonessential shippers. We have no idea when or if they'll come back. I mean we talk to them, and they're hopeful, but we'll see. And in doing that, we absolutely did what you said, and we've identified some opportunities. And so just in really practical terms, what we're doing on a weekly basis is going back to the bottom 10% of our yielding freight, and we're raising prices. We're doing it relatively across the board. We have some strategic customer relationships where what we really care about is kind of the profitability on the round in through and out of that market. But yes, we are absolutely undertaking that right now, and it's something that we do as part of our regular cadence.

And then in terms of impacts on the quarter, I mean, I didn't say this in my comments, but I'll say it now in this question. We've been very conservative in our own internal estimates. And we -- obviously, we don't share our internal estimates. We just feel like we got so burned in '19 and so burned in the first part of '20 that we're reticent and hesitant to do anything risky. That said, if the market continues like July, I mean, you can kind of do your own math. You take the bottom 10% and assume that they're going to be up to average, I mean, obviously, you don't know the distribution of our pricing, that will be helpful. And I'd just encourage you to run that through. And as you and Mike talk about your model, he'll probably give you a little bit of feedback, but I'd probably be most comfortable just pausing there. I hope that answers your question.

No, it does. It does, James. And I guess, for my follow-up question, I want to go back to your comment on the driver market. And you mentioned turnover was a little bit of a challenge as you're sort of making these structural changes to the business. But I guess, more broadly, what are you seeing in terms of the availability to go out and find drivers? What are you expecting from a driver wage perspective in the second half of the year as the driver market and the freight market tightens? And how should we think about how all that impacts your fleet growth over the balance of the year? Sorry for the multiple-part question.

No, no. It's really good. So a couple of things. In terms of driver wage, we do have a little bit of wage increase built into our internal plan, but that all is market-related. So we've said this publicly before. I'll say it again. Our -- we study the competitive pay surveys monthly, our goal is to be in the bottom of the top third payers. So we have very competitive pay, and we will be subject to market trends like everybody else on that vector. But we're not planning any big moves. Thankfully, we have some awesome customers, who understand that dynamic, and we would work with customers to defray and offset that. And they've always been very good about that.

Kind of the question behind your question is we've intentionally -- and I touched on this in my comments, intentionally increased our dependence on owner-operators. It's an asset-light play that has a relatively fixed margin on it. But as the spot market improves, those guys are more and more of a flight risk. And so we're doing things like implementing fuel programs with them, implementing service discount programs with them, purchasing discounts with them, recruiting guys that have multiple trucks in their fleets instead of just 1 truck to kind of increase the stickiness of the business. We've said this, I think, before, but if not, we'll say it now. We've got a program where they can -- we pay differentiated pay for people that have safety features like forward collision mitigation in those trucks, and we have differentiated pay for guys that voluntarily sign up for an in-cab recorder solution. So we're doing some innovative things to mitigate and offset that risk.

Okay. Great. Great. And then one last question for me, and I'll turn it over. On the insurance line, you guys had a really good quarter there, actually, 2 good quarters in a row from an overall insurance expense perspective. I know that underlying premium costs are going up across the industry. Could you maybe help us think about how we should be thinking about that line in the back half of the year maybe more broadly? I know you guys have really had a lot of traction on some of the safety equipment installations. So that's -- I'm sure that's helping, but just how should we be thinking about that line moving forward?

Yes. So I mean you're right on with what you said. So we've had -- over the last 3 years, we've invested heavily in collision mitigation, in-cab recorders, both external, so we can see what's happening outside the truck as well as internal so we can provide coaching to our driving workforce. But overall, I mean, we believe that those investments are starting to pay off, and you're starting to see that in -- reflected in our insurance line. So when you look at our collisions, our collisions are down. As James made -- stated in his comments, collisions are down substantially over the last 4 years. Our frequency is about flat, but our severity is significantly down as it's been for the last couple of years. So we're starting to see those reflected in both our actuarial studies as well as our reserves and our collisions. So...

Yes. And Jack, just as you think about that, with this new truck -- well, with the truck orders that we already had for this year, which were only 65 initially, we get to 100% of our fleet with full-forward collision mitigation. So we think that story only gets better. And then we've got these 189 trucks that we're bringing in, in the back half of this year that are going to replace some existing trucks that already have some collision mitigation on them. For the most part, there a few of those trucks going out that don't. But the technology improves. The interaction, the user interface, the seamlessness of it, the kind of the subtlety and suppleness of it improves over time. So we really think that this is something going forward. And we've talked about this as well publicly in the past, but I just want to reiterate it.

We use an external actuary to review our loss triangles, our loss pick and our loss runs on a monthly, quarterly basis. So they look at it twice a year. And so we're really confident that not only our investments resulting in fewer collisions per million miles and fewer DOT collisions, but we're confident in the financial structure of those. The cost of the collisions that we are having are lower and lower and lower. Our management of the claims is world-class. We are qualified, self-insured. We've got essentially an insurance company that's within our business by virtue of the staff that reports to Zach.

So we -- and I have to say I was a little skeptical early on. When I first came into the business, there was a lot of money to invest in a business that really wasn't doing well. It's proven to be a huge strategic advantage. So I hope that answers your question.

(Operator Instructions) Our next question comes from Jeff Kauffman with Loop Capital Markets.

Well, congratulations, everyone. It's a fantastic quarter in an uncertain environment. Just some follow-up questions to what was just asked. You mentioned that your insurance or your collisions were down, and it's a function of some of the investment you've made in safety equipment, but it was a pretty steep drop sequentially from where we were a quarter ago and almost a $2 million drop in quarterly insurance costs on 8% more per hundred miles driven. Was it more of an anomaly in the quarter, where even if you do have collision avoidance and better safety systems, it was still an unusually low insurance quarter? And how should we think about forward modeling a kind of $4 million in the quarter versus kind of a more normal $6 million to $7 million run rate?

Yes. So I'll let Zach take the second part of that question. I'll hit the first part. You're right. So we look at our actuarial evaluation of our reserves on a regular basis. And there was a portion of that, call it, probably around $0.5 million that was a one-time adjustment. And there was a portion of that, that was just part of the run rate for the quarter, and we recognized it all at once. That second half, you should absolutely expect in your future modeling of that expense line item. And as we go through the end of the year and relook at our loss triangles, we expect that we're going to have an impact on those positively as well. So from a run rate perspective, I'd say the annualized run rate comes down about $2 million. So Zach?

Yes. Yes. So -- go ahead, Jeff.

Go ahead, Zach.

Yes. I would just tack on to what James said. I mean when we do our actuarial studies semi-annually, when you take a look at that, and when you couple that with the investments that we've made, we did receive, like James said, a little bit of a one-time true-up on our actuarial models. But overall, the drop in our loss pick and our projections related to those models, you can kind of model in a couple of million on an annualized run rate.

All right. Just a couple of other detailed follow-ups. Again, following up on what was just asked, revenue per loaded mile up 5% sequentially, that's comparing to the down 6.7% in the quarter. So you would say, while the trend is good, we're still not up on a year-on-year basis so far in July. You would -- the thought is maybe we get there, but, as of now, we're closer to breakeven. Is that a fair way to think about it?

Yes, that's right. I mean we're just talking really round numbers here. So if our rate in the quarter was right around $2, and it's up 5%, you can assume we're kind of in that $2.10 range. And last year, we exited at $2.14 in Q2 of '19. So your observation's exactly right.

Okay. And with the 189 trucks that you're bringing in, I know you said these are mostly replacements, but how should we think about fleet size as we're looking toward the end of the year?

So our fleet overall by the end of the year is going to be down about 100 trucks. So we're cycling out kind of more trucks than we're bringing in. We grew our fleet this year, I'm kind of surprised nobody asked that question, but that was 100% through owner operators. So as you look at the overall fleet, by the end of the year, the truck count will be down about 100 trucks.

Okay. But no, that was the implicit question because the fleet was up 8% in the quarter. Okay. Great. Just 2 other details and I'm done. You mentioned a little bit about labor expense and the things you were doing for drivers, but your labor cost was up 12% on miles that were only up about 8% to 9%. You talked about a pay increase being thought about, but kind of what drove that increase in labor costs above mileage? And kind of what's going to stick around? And what was kind of more expense that you ran into in the quarter trying to manage the environment?

Yes. So whenever we look at our -- that total salaries, wages, employee benefits line, I mean, there's a lot of items included in that line. But we've had a little bit of increase in benefit costs. We've had some incentive accruals that may not have been there last year. So there's some other factors that aren't specifically related to drivers that are causing that to trend up just slightly this year.

Okay. And then final question. James, your truck division relative to the other truckers that have reported look terrific this quarter, the Logistics division less so. And I think you addressed some of the positive things going on in your Logistics business. And I thank you for that detail, but at the end of the day, from 10,000 feet, the margins in the Logistics business are not what the rest of the industry is. Is that a function of mix? Is that a function of not charging customers properly? Is that a function of how the business is being managed? How do we fix that?

Well, it's a little bit of a variety of those things. So sometimes, it's apples and oranges, right? So we do a robust quarterly competitive review of our competitors. And we peel out what we can and what we can discern from their cues and from their releases to understand their business. And some of the pure plays aren't really pure plays. They have 3PL and 4PL businesses, which are higher margin, which we don't do. They have warehousing businesses, which we also don't do. We predominantly play in the truckload brokerage space. And when you look at competitors, who play in that same space, we actually compare quite well. Some of our competitors, I mean, there's one close by here that lost $13 million in the quarter. But we're never going to do that. I mean, I probably shouldn't say never, knocking on wood here, but that's not our model. I mean our model is to produce high-volume throughput basically at breakeven levels right now in the environment because you've got some high purchase transportation costs and relatively low customer freight contract pricing, which hurts us.

So I respectfully would kind of disagree on a truckload brokerage level that we're not competitive because I think we're actually better than a lot of the guys at pure play. There's another notable competitor, who we know extremely well, that we believe is fulfilling their brokerage business through an independent contractor model, which has more of an assured profit component to that because they work on a percentage of PC model, and we are growing that business significantly within our brokerage business. So I think a great observation. I would just say it's a little nuanced, but I don't think we're mispriced. We have relatively strong assurances, given our knowledge of the industry and the market that we have good competitive pricing.

And as I've tried to articulate with the example in my prepared comments, look, fuel can only go one direction at this point. That's upward and to the right. And as I said, the base rate per load is the lowest it's ever been in the history of the company. And that's a market dynamic, too. So all else being equal, that business gets back to profitability pretty quick when the market goes back to some form of normalcy, even if that's a low-margin normalcy.

Okay. And congratulations.

Our next question comes from Jason Seidl with Cowen.

James, sorry. I'm jumping off another call here, but wanted to get your sense of sort of demand trends and where we are and how comparable they are to some of the prior years. I just got off the call where one of your U.S. truckload competitors said that they're now overbooked for the first time since almost 2018. So I'd love to hear your thoughts on that.

Yes. We're overbooked every day right now. And you probably didn't hear my prepared comments, Jason. We'll go over those with you later, but, yes, we have over 1,000 EDI rejects a day on average right now. And so it's really a situation where we're sorting through our commitments, we're sorting through our strategic relationships, and, frankly, we're sorting through the highest yield, highest profitability opportunities and prioritizing those. So it's fundamentally shifted, for sure. What we don't know is how the economy is going to respond to, I hate to say this, the elections, and how the broader -- what's going to happen with COVID. I saw some data just this morning. It looks like deaths are dropping again, like maybe we peaked for a second time. So we're really cautious. And we're optimistic in that caution, but we're cautious about that. So yes, whoever said that is right. We're oversold every day right now, and it's a much better situation.

That said, pricing's still not back where it needs to be. It's just -- it's not even close. And so we're repricing the bottom 10% on a weekly basis with expectations to push pricing even higher as capacity comes back into a constrained environment.

And you have a fairly large percentage of your business that reprices in the back half of this year, correct?

Yes. We balance. We said this the last few years. It kind of shifts around. But on average, it's about 50-50, 50% in the front half, 50% in the back half. So as an example, we just implemented the second week of July our bid with our largest customer. And you can guess who that is. We actually disclosed it in our K. But -- so yes, we have about half of our business that reprices in the back half and half in the first half.

Okay. That's excellent color. Any difficulty getting drivers right now? Because we're hearing that, too, from a few people that sort of June was sort of the turning point where driver availability became a little bit tougher. And what are your thoughts on sort of the driver pay outlook for the remainder of the year?

No, that's exactly right. It has gotten tougher. We actually made our own situation a little bit tougher because in a -- we have been doing virtual orientation through Davis Transfer for about 6 months. It's gone really, really well. And so we said, "Hey, July's typically soft, so we're going to do that for USA Truck." Well, guess what? July hasn't been soft. So we've been scrambling to get our trucks back full. And we finally turned the corner this last week, but we had a couple of weeks where it was a real struggle.

With respect to driver pay, I'll just reiterate what I said a little bit earlier. Our goal is to remain in the bottom of the top third of competitive pay packages, and we'll remain true to that. We have some pay increases built into our internal model, but, I mean, it's safer to just follow the industry. We're not going to be an industry outlier on that front. So as other people start to talk about and see and experience that, and it's reflected in their pay packages, we'll follow suit. But I don't see anything big right now. And just more broadly, I mean, this is a little anecdotal, but the subsidy to not work, I think, is really hurting driver recruitment right now.

Yes, the macro environment. Got you. So you would assume that the top third probably does have to take up pay if you look at it as a whole?

I think pay -- if you look historically, the industry is a function of price. So if customers are willing to move price to where it needs to be. And it's still -- I mean, it's probably $0.15 to $0.20 away from where it needs to be, then we'll do what it takes to secure the workforce.

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

Okay. So I'm just trying to go through some of that quick math you did. So we're close to where we were on a per mile basis, rate-wise, to 2Q 2019, but you stated that we'd have approximately 500 basis points of improvement and, I guess, that's through all these initiatives that we've been going through?

Yes, that's right.

So...

That's right. Yes, go ahead.

No, I'm just looking at it. So if I remember correctly, last 2Q 2019, we were breakeven. We had a couple of charges. So slightly profitable. So if we drop that, knock that off by 500 basis points and pull that forward, we're putting up significant profits quarter-to-quarter as long as rates stay where they are. Or is there something else that I'm missing in there? Are those permanent takeouts that we should see going forward?

Yes, they are. I mean we believe we've made a structural impact to the business. And it's just really easy math. If you substitute $2.14 for $2.01 in the quarter, you get to the number that we would have had. And so we used that example as a specific point to articulate, gosh, the business is different than it was. We've taken out 60 heads. We've taken out significant costs. We've improved the throughput of the business. We've done a lot of -- all those things that we outlined going to regionalization, we really -- Mike, we think we're in a really good spot.

And honestly, I wish I had what I have now a year ago. And that's kind of the point I was trying to make. You're exactly right. We think these are fundamental. They're structural. It's what we've been saying all along, and it's finally kind of coming home to roost. We feel pretty good about it.

Okay. So let me just say this again. So if I -- I'm looking back right now. So we had the 98.7% Q2 of 2019 or 98.5%. Is it wrong to think that rates get back to $2.14 that we're at a 93.5%?

Not Wrong.

Okay. Okay. So I'm just putting it out there. That's roughly $0.45, $0.50 of earnings if we get there. And we -- it's not far -- and that rate per mile, we're not far away from it.

It's not far away. And we've got the challenges, right, on a consolidated basis because you're talking about Trucking right now. We've still got the challenges with Logistics. I mean that market has been a mess for 4 quarters. And so we're working our way through that. But if that goes back to kind of a normalized market, I kind of think as Logistics as a perfect hedge against Trucking and vice versa. It hasn't been that for the last 1.5 years.

Yes. If you look at the change in Logistics, I mean, in the third -- or the second quarter of '19, they were at 96.8% adjusted operating ratio. So we have significant movement to take there to get that back to where we were at Q2 '19.

Got it. So the 500 basis points is in truck that we're talking about?

Correct. Yes. All right.

Showing no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to James Reed for any closing remarks.

Great. Thanks a lot, Sarah. So I was asked this week if I would have a baseball story on the call. Apparently, our call participants like that. So I love baseball for a lot of reasons. It requires diligence, skill unlike almost any other sport, constant and repetitive practice of the most basic skills and the ability to fail a lot in order to win. And what other sport can a person, who failed almost 70% of the time, be worthy of Hall of Fame status? The parallels between life, work and baseball are pretty profound.

The other reason I like baseball is because even small guys can have a lot of success. A couple of our current and former Board members are huge Astros fans. And in honor of them, I'd like you to think about José Altuve. Altuve is the shortest man in Major League Baseball. He listed at 5'6". And I'm telling you, I've stood next to him, and I think 5'6" is a stretch. Altuve was originally turned away from an open tryout in Venezuela because of his size. The scouts actually thought that he has lied about his age, but he sure has proven everyone wrong. He's won the American League MVP in 2017. That same year, he won the Associated Press Male Athlete of the Year award. He won a Gold Glove once for the best fielder and 4 Silver Slugger Awards for the best hitter at his position. And most importantly, he led the Astros to victory in the 2017 World Series. How can you tier against that guy?

Well, USA Truck is the smallest carrier in the public marketplace. We're still large compared to almost anyone outside the public, but I think it's fair to say that we represent the little guys. And in a commoditized market, which inherently provides a level-playing field with the right skill set and tools, even the little guys can be on top of the world. It's a lot like baseball, and we look forward to the continued trajectory that we are on. There are great things to come at USA Truck, and I would be remiss if I didn't thank every one of our coworkers, drivers and driver support alike, for all the incredible work they have done to effect this transformation, to get the company on stronger footing and to allow us to thrive together through this worldwide pandemic. They are truly the best of the best, and I want each of the USAK-ers out there to know that I am proud of all they have done and all they will yet to accomplish. We're looking forward to great things ahead from them. Thank you. Thanks, Sarah.

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