US Xpress Enterprises Inc (USX) 2018 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the U.S. Xpress second quarter 2018 earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the call over to Mr. Brian Baubach, Senior Vice President, Corporate Finance. Please go ahead, sir.

Thank you, operator, and good afternoon, everyone. We appreciate your participation today in our second-quarter 2018 earnings call. With me here today are Eric Fuller, President and Chief Executive Officer, and Eric Peterson, Chief Financial Officer.

As a reminder, a replay of this call will be available on the investors section of our website through August 9, 2018. We have also posted supplemental slides to accompany today's discussion on our website at investor. USXpress.com.

Before we begin, let me remind everyone that this call may contain certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include remarks about future expectations, beliefs, estimates, plans and prospects. Such statements are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by such statements.

Such risks and other factors are set forth in our final prospectus dated June 13, 2018 and our other filings with the Securities and Exchange Commission. We do not undertake any duty to update such forward-looking statements.

Additionally, during today's call, we will discuss certain non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with US GAAP. A reconciliation of these non-GAAP measures to the most comparable GAAP measures can be found in our earnings release. At this point, I will turn the call over to Eric Fuller.

Thank you, Brian. Good afternoon, everyone. Before I get started, I would like to take a moment to thank all of those people who helped us through our initial public offering, which culminated in our first day of trading on the New York Stock Exchange on June 14, but was the result of many months of effort.

The hard work of our employees and advisors and the loyal support of our customers and partners contributed to the success of our offering and as a result, we were able to raise approximately $250 million in net proceeds for the Company. This capital injection allowed us to reduce our leverage and is expected to provide additional flexibility to pursue our strategy of driving operational improvement and margin expansion.

I'd like to start today's call by providing a brief overview of our strategy for those investors who were not able to hear our story on the IPO roadshow, and then briefly review the highlights of our second-quarter performance and our market outlook. Eric Peterson will then discuss our second-quarter financial results in more detail before opening the call for your questions.

We are the fifth-largest asset-based truckload carrier in a market of 500,000 carriers. This is a market where scale matters and our size provides clear competitive advantages. While we operate in 48 states, our focus is on the eastern half of the country, which represents an attractive market with solid population growth.

Additionally, we have a robust infrastructure base, which we believe will support our growth over time. We operate in two reportable segments, Truckload and Brokerage. Within Truckload, we have two business divisions, which are over the road and dedicated. Our over the road division operates on shorter-term contracts, which are on average a year in length without volume or capacity guarantees.

Our over the road division benefits from the current supply/demand imbalance and resultant price volatility, which provides upside in a rising rate environment. Our dedicated division operates on longer-term contracts, which are typically three to five years in duration and have committed rates, lanes and volumes.

Our customer renewal rates in the dedicated division have historically exceeded 95%, which provides solid visibility and helps them manage through cycles. Given the market today, our focus is on growing our over the road division unless we can earn a 15% to 20% margin on new dedicated contracts. Overall in our Truckload segment, we strategically manage our spot rate exposure to approximately 10% of capacity through cycles. We believe this is a prudent and sustainable strategy.

Turning to Brokerage, this segment allows us to increase freight selectivity for our assets while also providing more capacity for our customers. This is a data-driven and margin-focused process, which is intended to maximize margins throughout our portfolio.

Of note, the Brokerage segment requires little CapEx and has high returns on capital. Our customers are largely blue-chip Fortune 500 companies who have been with U.S. Xpress for a long period of time. In fact, eight of our 10 largest customers have been with us more than 15 years. Additionally, eight of our top 10 customers also use all three of our service offerings.

While we do have a high concentration in the retail sector, we are weighted towards discount retailers and consumer product companies who historically have been more insulated from economic cycles.

That is a basic overview of U.S. Xpress and our business. To understand how we expect to drive value for our shareholders, it is important to understand the Company's history and culture in order to appreciate the dramatic changes that are being implemented that we believe will continue to improve our operations and profitability.

U.S. Xpress was founded in 1985 and had an entrepreneurial culture that was focused on revenue growth. The Company completed 28 acquisitions and was the fastest trucking company to achieve $1 billion in revenue. Between 2000 and 2015, the Company averaged an operating ratio of 98% as management tried, but was unsuccessful in growing the Company to consistent profitability.

In 2007, U.S. Xpress went private and renewed their focus on improving profitability, which proved challenging. As a result, the hard decision was made in 2015 to change the management, which is when Eric and I entered into our current positions. Our clear mandate was to implement a complete overhaul of the Company's strategy and operations in order to improve execution and profitability. To achieve our goal, we needed to change the culture and bring in the expertise necessary to drive our transformation.

To accomplish this, we replaced 61 of our top 94 executives and senior managers with internal promotions of high achieving individuals, as well as external hires of talented management from across our industry. We have created an execution-oriented culture where we outline weekly goals and metrics to be achieved, which for 2018 is called Win the Week.

We then review our execution, understand what went well and what did not and then outline those goals and metrics to be achieved in the next week. We are changing the culture of the Company to results-oriented data-driven mindset and are seeing execution improve.

We also began managing the business by core metrics with a focus on rate, truck count, utilization and cost. We have designed and implemented sustainable initiatives with the goal of improving these core metrics and ultimately our adjusted operating ratio, which has lagged our publicly traded industry peers by more than 700 basis points over time.

The first initiative that we implemented in 2015 was focused on improving our asset optimization by redesigning our fleet renewal and maintenance programs with the goal of improving reliability, minimizing downtime and reducing maintenance costs on older tractors in our fleet.

These initiatives were designed to improve the quality of our assets by purchasing, maintaining and trading our tractors in a way that was designed to optimize their lifecycles. We also significantly increased the percentage of maintenance performed in-house to improve repair times, reduce downtime and minimize future maintenance issues. The result of this initiative can be seen as our average maintenance cost per mile has decreased as our average age increased.

Late in 2015, we began to optimize our asset utilization by focusing on the return on our fixed cost assets first. We accomplished this by breaking down barriers and by analyzing our total Truckload and Brokerage freight demand through the development of proprietary optimization software focused on yields.

Through having these segments begin to operate as one company, we have not only increased freight selectivity for our assets; we have also significantly increased our Brokerage volumes, which provides even more solutions for our customers. Taken together, we believe these initiatives have contributed to sustainable adjusted operating ratio improvement over the last several years. More importantly, we believe there is significant room for further improvement as our recently launched initiatives focus on load planning and fleet management produce additional results.

We started our load planning initiative in our over the road division in September 2017 and experienced over a 5% utilization improvement in the first week. As utilization improves, so does our drivers' pay, which has contributed to our driver turnover declining. We believe results of this initiative can be seen in our second-quarter results where utilization in our over the road division rose 5.8% over the prior-year quarter and we expect further utilization improvements.

We also initiated a pilot program for fleet management in October of last year, which has now been rolled out to our entire over the road fleet as of last week. This new structure is designed to proactively solve potential challenges that our drivers will face, which we believe will minimize their frustration and improve utilization. We believe this initiative will continue to drive improvement in driver retention.

As you can see, this is an exciting time at U.S. Xpress as we execute our strategies that we expect will deliver sustainable financial improvement over time. We are encouraged to see the success of our ongoing initiatives in our second-quarter results where we delivered an adjusted operating ratio of 93.4%, which is a 510 basis point improvement over the prior year's quarter and the best operating ratio that we have achieved since 1998.

That said, I believe we can do better and I am not satisfied with our results. We will continue to focus on implementing and executing our initiatives that we expect will continue to drive sustainable improved performance over time. Overall, we remain optimistic as market conditions remain strong. Of note, we experienced improving rates and volumes through the second quarter and we do not believe there is a catalyst over the near term which would impact current trends.

That said, we continue to see an erosion of professional driver availability. As a result, we are continuing to focus on our driver-centric initiatives to both retain the professional drivers who have chosen to partner with us and to attract new professional drivers to our team. We believe this focus allowed us to offset the difficult conditions, which have created a significant professional driver supply challenge for the broader industry, as we have slightly increased our tractor count during the second quarter of 2018 through an 11% reduction in our driver turnover percentage.

The environment in the third quarter of 2018 continues to be strong from a rate and volume perspective and we are currently anticipating that rates will continue to increase on a sequential basis in both our over the road and dedicated divisions.

Now I would like to turn to our segment level highlights. Our Truckload segment, which is comprised of our over the road and dedicated divisions, achieved a second-quarter adjusted operating ratio of 92.7% or a 540 basis point improvement over the prior-year quarter. We continue to see momentum in the market for our over the road and dedicated divisions and we believe the demand we saw in the second quarter shows room for further expansion.

In our over the road division, our average revenue per tractor per week increased 19.8% year-over-year. Results were primarily driven by a 13.3% increase in our average revenue per loaded mile and a 5.8% increase in our revenue miles per tractor per week.

Turning to our dedicated division, during the quarter, we experienced a decrease in our revenue miles per tractor per week of 9.8%, which served to decrease our average revenue per tractor per week by 2.4% in the second quarter of 2018. This was partially offset by an 8.2% increase in our average revenue per loaded mile. The reduction in our utilization was primarily the result of certain accounts' shipping patterns that performed differently than expected, which impacted utilization, driver hiring and retention and was due in part to mix changes in the portfolio.

We negotiated rate increases on these accounts to compensate us for lower-than-expected utilization. As of July 28, these increases are in effect, which we expect will increase the dedicated overall average revenue per loaded mile by approximately 3.5%.

In our Brokerage segment, revenues increased 56.2% to $58.4 million in the second quarter of 2018 as compared to $37.4 million in the second quarter of 2017. We saw our gross margin percentage increase to 12.2% in the second quarter of 2018 as compared to 10.9% in the second quarter of 2017.

The growth that we experienced this quarter was largely the result of a 21.4% increase in our load count, higher revenue on a per-load basis and to a lesser extent higher fuel prices. I would now like to turn the call over to Eric Peterson for a review of our financial results.

Thank you, Eric, and good afternoon. Before I move on to our financial update for the second quarter of 2018, I would like to discuss earnings per share for the quarter. As part of the IPO, we reorganized our corporate structure to eliminate a legacy holding company that owned 100% of the shares of U.S. Xpress Enterprises.

Subsequent to this reorganization, U.S. Xpress Enterprises issued new shares. As a result of the exchange of shares and the reorganization and the issuance of additional shares following the reorganization, our earnings per share for the quarter is not a meaningful number to discuss as the weighted average share count is not indicative of future periods. Our diluted shares as of June 30, 2018 were approximately 48.5 million.

Moving on to our financial results, as Eric discussed, we are excited about the prospect of realizing the benefits of our initiatives and believe there is significant opportunity ahead for continued profitability improvement. I'm going to spend the next few minutes summarizing our results for the quarter and will focus on the core metrics we use to evaluate and monitor our progress.

For the second quarter of 2018, total revenue increased by $79.4 million to $449.8 million primarily as a result of an 11.4% increase in our average revenue per loaded mile, a 56.2% increase in our Brokerage revenues to $58.4 million and a $15.1 million increase in our fuel surcharge as compared to the second quarter of 2017. Excluding the impact of fuel surcharge revenue, revenue increased $64.3 million, or 19% to $402.8 million as compared to the prior-year quarter.

Operating income for the second quarter of 2018 was $20 million, which compares favorably to the $2.7 million achieved in the second quarter of 2017. Excluding one-time costs related to the Company's IPO that was completed in June of 2018, second-quarter adjusted operating income was $26.5 million. On an adjusted basis, second-quarter 2018 net income was $11.3 million compared to a net loss of $7 million in the second quarter of 2017. We are committed to continuing initiatives that we believe will strengthen our balance sheet and reduce our leverage ratio to position us for future opportunities.

Turning to our leverage, as a result of the proceeds received from our IPO, net debt decreased by more than $230 million, which will reduce our annualized cash interest expense by approximately $30 million. Given our refinancing in June, combined with our decrease in leverage, we expect consolidated interest expense in the third quarter of 2018 to be approximately $5 million.

The effective tax rate year-to-date for 2018 is not a meaningful percentage as a result of interest expense associated with our legacy capital structure and one-time costs related to the transaction. We anticipate the 2018 effective tax rate to be between 27% and 29%.

To conclude, we are pleased with the financial results we achieved over the last four quarters and are optimistic as we look to the future. On the revenue side, as the year progresses, we expect both rate and volumes to continue to increase. On the expense side, our costs are generally in line with our expectations and we continue to believe we have a significant opportunity to reduce our insurance expense over the next several quarters related to our recent installation of event recorders throughout the fleet.

As the year unfolds, we expect to see our rate increases outpace cost inflation as we continue to improve our margins. This outlook is based on where we are in the implementation of our internal initiatives and current broader market conditions.

Before we open up the call for questions, I'm going to turn the call back to Eric for his final thoughts.

Thank you, Eric. And thank you, everyone, for joining our initial earnings call. What I hope you take away is that we are optimistic on our operational outlook and we believe we are on track for the most profitable year in our organization's history.

Furthermore, we have had four consecutive quarters of year-over-year improvements in our adjusted operating ratio and we believe, absent a change in the macroeconomic conditions, we will continue to see year-over-year quarterly adjusted operating ratio improvement for the next six quarters.

With that, I'd like to ask the operator to open up the line for any questions. Operator?

(Operator Instructions). Brad Delco, Stephens.

Hey, good afternoon, Eric and Eric. Eric, on the dedicated comments you made, you made a comment that, based upon the July adjustments, you would see an upward revision of, what, 3.5% on rate. Is that a sequential comment? Is that in addition to sort of the 8.2% improvement you just posted in 2Q? What exactly did you mean there?

Yes, that's sequential from where we are currently at. So that was an increase to the dedicated rate per mile.

So sequentially, we should expect dedicated rates up 3.5% just based on this one contract?

Yes.

Can you go into any more detail on the type of customer? Is this a refrigerated contract, is this dry van?

We had a couple of customers, but we had a couple of larger customers and a couple of larger accounts. So it was a big portion of our overall dedicated portfolio.

Okay. And then to your comment about showing adjusted OR improvement for the next six quarters, can you provide a little bit more detail on what sort of encompasses that outlook? Is it kind of mid-single digit pricing next year? Is it kind of greater improvement on the insurance and claims -- what is really the drivers of that outlook?

Yes, I think there's two pieces. One I think we believe that the rate improvement environment that we will see over the next six quarters will outrun the cost inflation that we should see over the next six quarters. So you just take that in a vacuum and we believe that we will see improvement in our OR.

I also think that we are focused around our initiatives and continue to drive results as it relates to utilization and some small marginal increase in truck count and we are also focused around costs. As Eric mentioned, we've got the event recorders that we believe will start to see an improvement in our insurance numbers over the next couple of years.

So we think that we are well-positioned, but I think that the market itself is very strong, that we will continue to see positive results.

Okay, maybe if I could just kind of add one more question to this. I understand kind of the cultural change within the organization, but if you had to forgo fleet growth and in fact, if you continue to see year-over-year declines in your fleet in the for-hire segment, are you willing to accept that in order to hit those margin improvement targets that you've just laid out?

Yes, I think if that's the case, I think that we are seeing enough increase in rate and more trajectory in rate to far outrun any kind of degradation in our truck count. But I would tell you that we are obviously focused around driver retention. We had an 11% improvement in this last quarter and we think we can continue to drive improvement in our driver turnover over the next couple of quarters.

So really our intention is -- I'm not going to sit here and tell you we are going to see big outsized growth, but I think we can see some small marginal growth over the next couple of quarters.

And that was in reference to fleet?

To fleet, yes, to truck count.

Okay, great. Well, congrats, guys, on the successful IPO and I will get back in queue.

Ravi Shanker, Morgan Stanley.

Thanks. Great for the first call, guys. Just a couple of questions here. First, on driver wages, you've said that you are focusing more on W-2s rather than driver wage rates, but just given what's happening to kind of market tightness and pricing out there, do you think you can kind of keep up that strategy or kind of do you think you will have to come in here with a wage boost fairly soon?

Sure. Yes, Ravi, I think, obviously, and I know we have talked about this, is the way we look at driver wages is in two buckets. You have dedicated, which we believe we can be made whole for any increases that we have to give our drivers in the dedicated segment and on over the road is obviously where you have a little bit more exposure.

If you look at our over the road drivers, again, they have received a 15% increase in their weekly take-home this year versus last year. So we think that's a significant increase and we think that we can continue to, at least over the near term, we can stay fairly disciplined in our having to increase wages.

I think, obviously, we are not going to sit here and tell you that at some point we aren't going to have to increase wages in our over the road division, but we feel fairly comfortable with where the market is today that we can keep things consistent.

That's helpful. On the supply side, just before we jumped on this call, we got I think the highest Class 8 truck order number in history. I know that there are more opinions than trucks out there on this topic, but would love to hear your thoughts on supply coming into the market and where you think those trucks are going and whether you are concerned at all about the potential of incoming supply?

Sure. I still think if you look at what we see in the market both in -- just in the competitive landscape, but then also in our Brokerage division, we are not seeing additional capacity come into the market. And I really truly believe in going through what we see in our recruiting department that this is the most difficult environment that I've ever seen from a driver hiring perspective.

And I think maybe if there is people out there that are speculating and trying to drive some truck count growth, I think they are going to find it's going to be very difficult to find drivers. So I see those orders, but I'm still of the opinion that people have to find drivers in order to seat those trucks and I think that's going to be very difficult.

Great, thank you.

Scott Group, Wolfe Research.

Hey, thanks. Afternoon, guys. So on the over the road side, 6% improvement in utilization, 13% revenue per loaded mile. How are you thinking about those two metrics in the back half of the year? Can it get better than that, decelerate, how are you thinking about those metrics back half?

I think on the over the road, I think we will continue to see some sequential improvement. We still have some contract business that will be increased over this next quarter. And so we think we will be through the bid cycle completed by going into the fourth. But we think we will still continue to see some sequential improvement in that over the road rate for the next couple quarters.

And then how about on the utilization side?

On utilization, we are continuing to see some improvement. If you look at the big initiatives we have in operations around fleet management, customer service and load planning, most of those are still fairly early innings. And if you look at the load planning initiative, which is probably the one that is driving the most utilization improvement, we still think we are probably in the sixth inning from recognizing that full impact.

So I still think we have a ways to go. We are still doing some IT changes. We are automating a few things. So as we continue to drive improvement, we will see our utilization get better over the next couple of quarters.

Okay. And then, Eric, if the plan is right and we get six more quarters of margin improvement, what do you think is a good realistic target for that Truckload operating ratio to finish at the end of 2019 or to average for 2019?

Scott, I don't want to get into speculating on where we can be, but I think we are very comfortable on year-over-year comps for the next six quarters that we can beat those comps and stay fairly consistent in that type of improvement in our operations.

Okay. And then just real quick, Eric, you said end of the quarter the share count was 48.5 million. Is that the right share count to use for the third-quarter average or any -- if you can just clarify which is the right share count to use going forward.

Yes, I think you can take that as a baseline and the way the dilution works, since the transaction happened at the end of the second quarter, that that could jog up by approximately 1 million shares, so add 1 million to the number I quoted and I don't anticipate there will be many changes other than that. But that will get you the number.

Okay, so 49.5 million, perfect. Thank you, guys.

Ken Hoexter, Merrill Lynch.

Hey, great. I just want to revisit -- your average tractor is down a bit larger at the over the road down 7% and kind of review that shift to dedicated. Was that due to the inability to get drivers, but your dedicated being up 16%? So I just want to understand if the customers were I guess so bad or needed realignment, why were you adding then the capacity over the dedicated side?

Sure. Ken, if you look at the overall sell cycle for dedicated, in a lot of cases, you are talking six to nine months. And so in a lot of cases, the business that we started in the second quarter was actually sold late last year or maybe very early this year before our shift in focus to over the road and our shift and our expectations from a margin perspective.

So on a go-forward basis -- and if you look at first quarter to second quarter, I think you see sequentially it was fairly small growth, but I think on a go-forward basis that growth is probably not going to be as robust as you saw it this last quarter in large part because, like I said, this sell cycle was so long that a lot of that business was sold previously.

So you're saying that the dedicated sequential growth on tractor, so going from 2,600 to 2,700, you are saying that was -- because that was -- I'm confused by the six to [nine months]. So it was sold last year, but when was this customer deterioration or you said multiple customer deterioration that needed to shift around the fleet?

In regards to utilization?

Yes.

Yes. So that really occurred starting in late first quarter, early second quarter we started to see a degradation and partially in part because of how things were sold versus how they actually operated. And that's fairly typical in dedicated as you will find that certain things may not run as expected and so then you have to go back to the customer to make adjustments. And we just saw it on a larger scale this quarter and so that was the reason we had to go back to try to increase the rates to make up for that shortfall in utilization.

Okay. And those adjustments you can -- you've -- I mean you talk about multiyear contracts on the dedicated side. If it's not aligned with what you were sold, you can go back in and adjust those contracts it sounds like you were doing through the quarter. Is that rate increase of the 3.5% sequential, would that get your margins back to where it would have before these contract adjustments?

Not necessarily. I think we still have a little bit of ways to go and there's still some negotiations with a few different customers on some changes in how they are operating. And so those negotiations are still happening, but the 3.5% went into our dedicated rate per mile and that is already effective in our numbers on a go-forward basis.

Okay. And then the Brokerage side, just on the accelerated growth rate you highlighted on the 56%, your gross margin you highlighted increased year-over-year, decreased sequentially. Is that just typical on a seasonal basis on a sequential downtick or is that something just with the accelerated rates impacts the gross margin sequentially?

Yes, I don't really think that's significant. I think if you saw just a little bit maybe higher costs relative to source and capacity and we found it, especially in the latter half of the second quarter, a little bit more difficult to find capacity and so that price -- that squeezed down the margins a little bit.

Okay, wonderful. And just a wrapup question on the share count. Thanks, Eric Peterson, for that on the forward look on shares. Just understanding what happened in the second quarter though, is that before the reorg, the 14.5 million shift, so the reorg didn't happen until the end of the quarter and that's why it's not 33 million, which would have been kind of the outstanding shares before the IPO?

Yes, I think usually -- and that's a good question. Usually when a company goes public, the holding company is what goes public, so you would do everything on a retrospective basis for the quarter and your shares would make sense after there was a split.

What happened with us is we actually had a holding company that had all the shares of U.S. Xpress and that company was eliminated so to do that all the shares in U.S. Xpress essentially went to zero and then new shares were reissued. So that 14 million -- it just doesn't make any sense to talk about earnings per share when there are going to be approximately 49.5 million in the third quarter.

Okay, perfect. Thanks for the clarification. Appreciate the time.

Okay, Ken, and just to add a little more, kind of how I look at it is if you say that we have $700,000 in operating income and you have an effective tax rate, I will split the difference, of 28% then approximately $700,000 of operating income would approximate $0.01 per share.

All right. Thanks.

David Ross, Stifel.

Yes, good afternoon, gentlemen. So just want to first ask about seasonality in the business. You know, given the shift might have gone on with some of the dedicated customers, recently the fact that you are being reintroduced here to the public space. Is it a normal stepdown materially in the back half in terms of OR from the front half? And is there any big difference between third quarter and fourth quarter OR specifically on the Truckload side that's the biggest driver?

Yes, I mean I think if you look at the first and second quarter, you typically see sequential improvement and then you typically see sequential improvement through the entire year, so from first to fourth, and we anticipate that being kind of the norm.

And then can you talk about your customers' commentary as you help them plan for the holiday shipping season? What are they telling you about demand and peak and is it supposed to be much different than it was a year ago, starting sooner, ending later, any commentary there?

Sure. David, my feel on the market is it's not necessarily that we are seeing a big increase in demand relative to peak, but we are seeing a lot of concern from the customers about supply and we started having conversations much earlier than what we would typically have about locking in capacity for peak season. And those conversations even happened early summer and so we feel like the customers have some real concerns about being able to source capacity. I think as you look into that peak season, we believe that there will be an increase in demand as we get closer to peak season, but I think peak season is going to be very strong and robust.

Last question on the driver side, even though tractor count might be falling in over the road a little bit, the independent [tractors] are doing quite well. You have nearly doubled your owner operators over the past year. Can you talk a little bit about why you've been able to do that and should that growth continue?

Sure. We rolled out a lease program in late summer of last year and we kind of rolled it out from kind of a dry start. So we didn't really have a -- we had a small lease program but we came in with a different lease program and that really got traction and we were able to see the type of growth that we've seen over the last couple of quarters because of putting in a new plan.

We anticipate seeing some -- a little bit more increases in that count over the next couple of quarters. We are shifting some owner operators and lease drivers into our dedicated accounts because we think that having a decent mix of both company drivers and owner operators in some of these dedicated accounts actually helps to balance out the account better from a cost perspective. And so we are looking probably as you see growth over the next couple of quarters in owner operators, it is going to be probably in larger amounts in our dedicated division.

So those owner operators, are they mostly coming from U.S. Xpress trucks and the lease program's converting them into owner operators? Or are they coming from outside the Company?

Almost entirely outside. We are converting some, but for the most part, we are trying to limit that conversion and we are bringing in drivers from the outside to go into the lease program.

That's great. Thank you very much.

Brian Ossenbeck, JPMorgan.

Hey, good afternoon. Thanks for taking the question. So Eric Peterson, I just wanted to ask about the lease versus own decision on buying new tractors. You said you are going to the purchase market 100% right now. What are some of the economic considerations of one versus the other? I know we've got even more accelerated tax depreciation than you had before, but if you could just walk through some of the considerations and if you think that's roughly 2/3, 1/3 mix will change over time.

Yes, I think right now the mix is really changing at 2/3, 1/3 and the way we are trading our equipment right now is we are replacing owned with owned and lease with lease. And we are cycling the equipment out as it approaches 475,000 miles. So the way it is working right now for the balance of the year is the tractors that are reaching the end of their lifecycle, as it pertains to their U.S. Xpress lifecycle, that happens to be owned equipment. And so what we are seeing is for the remainder of the year we will have the replacement equipment will all come on as owned.

If you look about how we think about that going forward, to the extent we need additional tax depreciation to remain a nonfederal cash taxpayer, then we have some dry powder in our equipment with the leased assets that we can always convert over to owned.

Okay, got it. And I think I know the answer to this, but can you just clarify if there are any gains on sale in the quarter and if you expect any in the back half of the year?

Yes, and you will see this on our cash flow statement where it's broken out. We did not have any gains during the quarter.

Okay, and you don't expect any in the back half of the year?

That's correct.

All right. And just last one, can you go into a little bit more detail on the external event recorder? It sounds like it's a multiyear process, but if some of them are already being installed and there's a decent sample set out there from other peers and other industry data, when do you think you would be able to start to see some of the benefits in that?

Sure. So we are almost to full implementation, but if we benchmark with some of our peers, they typically look at a year after full implementation as where they really get the big benefit because a lot of it is behavioral change and training. And so we think we still have a ways to go to change some of the behavior in our driver population and to get people more accustomed to having the event recorders in their tractors.

So we think that over the next couple of quarters as we get more traction on coaching drivers, training drivers, walking them through events and trying to change behavior, we think that we will see our incident rates go down and then obviously your insurance costs will follow suit.

Okay, got it. Last housekeeping one, tax rate for the back half of the year, similar to what we just saw in this quarter?

The tax rate for the quarter, with the numbers being so small and all the one-time transaction costs and legacy interest expense, our expectations are right now for the year to be between 27% and 29%.

Okay. Thanks a lot for the time.

Casey Deak, Wells Fargo.

Thank you. You guys mentioned 11% improvement in driver retention. Just wanted to come back to that a little bit. I remember from the due diligence you had said every 5 percentage point improvement in that would lead to I believe 250 seated tractors. So just want you to, if you can, walk through what we are seeing in the numbers in tractor count and how that relates to an 11% improvement and is that 11 percentage points or an actual percentage?

So that's improvement in the overall driver retention percentage. The 250 was, A, that was on an annual basis, but also it was all things constant and unfortunately, I can tell you all things have not been constant from a hiring perspective. We have seen a lot of pressure in our driver recruiting initiatives. And so being -- and really I think it comes down to the pool of available drivers. We are just seeing less and less qualified experienced drivers in the market and so it's leading to a little bit smaller numbers from an orientation perspective for the second quarter.

Okay. So it's improving, but there is offsets is basically what's --.

There have been some small offsets. I would say still net-net we are better off, but with the recruiting difficulties then it makes it a little bit more difficult to recognize the type of impact that we had previously discussed.

Okay, well -- okay, that is -- that's helpful. So it's a good result to do 11% improvement. Can you talk to what you are seeing kind of in the market, what's driving that improvement, like what's working for you guys, what's not? Maybe what you are changing and how you are attacking that market?

So really it's around all the initiatives that we are focused on in our operations group. If you look at the customer service, the load planning and the fleet manager initiatives, they are all very driver-centric. Obviously, the load planning initiative is around driving improvements in our utilization and that utilization is leading to drivers taking home more pay.

But also the fleet manager initiative I think is going to be the most impactful when it's all said and done because we've now changed how we operate and how we manage our drivers and now we are being much, much, much more proactive and it's leading to a lot less driver frustration.

We just recently in the last week and a half, two weeks, went to a full implementation in our over the road division for this initiative focused around being proactive. And we think that over the next couple of quarters, as our fleet managers get more comfortable operating this way and as drivers understand what we are trying to do and they start to see us operating different and their frustration levels go down, we believe that we will see further improvements in our driver retention.

Great. I will pass it back. Thanks, guys.

It appears we have no additional questions at this time. I will turn it back to Eric Fuller for any concluding comments.

Okay, great. Well, we appreciate everybody attending the call today and we are excited to be a part of this process. So thanks so much.

Thank you, gentlemen. This does conclude today's conference. We appreciate your participation. You may disconnect.