USA Truck, Inc.

Good morning and welcome to the USA Truck First Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star one on your telephone keypad. To withdraw your question, please press star two. Please note this event is being recorded. I would now like to turn the conference over to Mike Stevens, Senior Vice President of Finance, Strategy, and Investor Relations. Please go ahead.

Thank you, Jenny. Good morning, and welcome to USAT Capacity Solutions' first quarter earnings conference call. Joining us this morning from the company are James Reed, President and CEO, and Zach Gein, Executive Vice President and CFO. Thank you for joining us today. In order to help you To 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 risk. For a more complete discussion of factors that could affect the company's future results, please refer to the forward-looking statement section of the company's earnings press release and the company's most recent SEC public filings. In order to provide you more meaningful comparisons, certain information discussed on the conference call could include non-GAAP financial measures, as outlined and described in the tables in our earnings press release. I'll now turn the time over to James.

Great. Good morning, everyone, and thanks, Mike. The first quarter performance at USA Truck represents the seventh consecutive quarter record-setting results. Our team delivered the best Q1 adjusted operating income and adjusted earnings per share in our company history and the highest revenue quarter in the history of USA Truck. The first quarter was also our fourth consecutive record-setting revenue quarter. We have been consistent in our messaging and approach. This was a business in need of an operational and financial overhaul, and we have delivered that. Our task was to bring consistent industry-level results with more consistency and predictability over time. USA Truck now has among the highest performing businesses in the sector, with a trailing 12-month return on invested capital of 14.1% and a trailing 12-month adjusted earnings per share of $3.93. The approach has never changed as we took specific measures to de-risk and bring resilience to the business that we feel will endure through all cycles. We re-engineered the network to optimize for profitability. We grew our dedicated and quasi-dedicated portfolio to just under 40% for the trucking segment, as this is a less volatile, more cycle-resistant, and predictably profitable business. We have always stayed focused on contract rate. We use the spot market very sparingly. In fact, over the last eight quarters, our average percent of spot market freight is less than 6%, and in the first quarter, it was approximately 7%. And significantly, we have shifted our revenue in asset light and non-asset businesses to approximately 65% of the business, or nearly two-thirds of our revenue. This creates higher returns on capital and a more consistent margin construct, especially in our owner-operator business, which makes up 27% of the trucking segment. Each of these constructs reduce the inherent risk of downward pressure on financial results. No doubt, we've had a great run of results over the last several years. And yet, despite a slightly cooling market, we still expect 2022 to be our best year ever for results. Our internal models and current view of the market have us putting up a 2022 result that both raises our latest trailing 12-month results and obviously results in the best year ever for USA Trucks. USA Truck continues to post record profits. We now have $3.93 in trailing 12 months adjusted earnings per share and see upside to that this year with current market conditions. We understand the sensitivities of our model to potential downside pricing pressure, and even if we assume rate reductions, barring any other unforeseen catastrophe that may beset the company or industry, we still see trough earnings above $2.50 a share. We believe in the market's over the long term as arbiters of value and expect proper consideration of trough earnings and actual results will soon be recognized. We intend to just keep improving earnings and controlling what we can in the meantime. Our balance sheet is strong and improving, and our liquidity and leverage metrics position us well for future growth. Today, we will offer updates on the market dynamics, segment performance of the quarter, and finally, on the outlook. I'll now turn the time over to Zach to discuss the financial results.

Thank you, James. If you'll please turn with me to slide number three, we'll do a brief review of our financial results. Base quarterly revenue, which excludes fuel surcharge, was up 22.3%. Consolidated quarterly operating revenues came in at 201.1 million, which represents a 26.9% increase year over year. Consolidated adjusted operating ratio for the quarter was an 89.2%, down from 95.6% in the prior year, primarily driven by improvements in base revenue per mile in our trucking segment, as a direct result of our continued network optimization efforts and market uplift. The full year maturation of our dedicated business unit growth and increases in revenue per load and load count in our USAT logistics segment. The results of these initiatives generated adjusted earnings per diluted share of $1.48 and $27.4 million in adjusted EBITDA for the first quarter. This brings our trailing 12-month adjusted EPS to $3.93 and adjusted EBITDA to $86.5 million. Turning to slide number four, trucking operating revenue before intersegment eliminations increased 13 million or 12.6% to 116.1 million. Base revenues excluding fuel were up 7.6% to 99.9 million compared to 92.8 million for the first quarter of 2021. Our trucking segment generated 13 million in adjusted operating income and an 87% adjusted operating ratio. The primary driver of these results was a $0.42 increase in base revenue per loaded mile when compared to the first quarter of 2021 and the full year maturation of new dedicated contracts within our dedicated business unit. Utilization decreased 65 miles per truck per week, or approximately 4.2% from the first quarter of 2021. This decrease is a result of decreased utilization in our owner operator fleet, which represents approximately 30% of our available tractor fleet, and our network optimization strategy, that optimizes for operating profit and revenue per tractor over miles and other variables. In addition, a transition to a higher percentage of dedicated business within our trucking segment has also impacted our utilization. These rate and utilization outcomes positively affected base revenue per available tractor per week, which increased $451 or 11.8% year over year for the first quarter. The average available tractor count for the first quarter of 2022 was 1,821, which is a 3.8 percent decrease when compared to the first quarter of 2021. Turning to slide number six, we'll review the results of our USAT logistics segment. Revenue before intersegment eliminations increased 20.9 million from the first quarter of 21, or 42.5 percent, to 97.4 million. Our logistics segment generated 6.1 million in adjusted operating income and had a 93.2 percent adjusted operating ratio. Gross margin dollars increased 5.1 million to 13.3 million in the quarter. Load count increased to approximately 41,300 loads during the first quarter of 2022 from the 33,100 loads in the first quarter of 2021, an increase of 24.8% and an increase of 2.5% or approximately 1,000 loads sequentially. This increased our margin per load to $321 from $249 in the first quarter of 21. Turning to slide number seven, we'll discuss our key balance sheet and liquidity measures. As of March 31st, 2022, total debt and finance lease liabilities were $161.1 million. Net debt was $149.1 million, and our net debt to adjusted EBITDA for the trailing 12 months ended was 1.7 times, down from 1.8 times in Q4 of 21. This represents a net debt increase of $10.8 million from Q4 of 21 and a 0.1 turn improvement in our leverage ratio. As we announced in our fourth quarter earnings call and subsequent 10K, we entered into a $131 million asset-backed credit agreement on January 31st, 2022, along with a series of fixed-rate term loans. This new structure provides a more predictable equipment valuation and increased borrowing capacity, as well as equipment financing arrangements that secure low-cost fixed interest rates over time. This new structure provides full availability under our credit facility as of March 31st, 2022, and liquidity of 142 million. Looking at the remaining months of 2022, we expect 45 to 55 million of net CapEx for the remainder of the year. While procuring tractors and trailers remains uncertain, we have seen consistent deliveries through the first quarter and expect to receive the remainder of our orders throughout the year. We have also seen elevated used equipment pricing, which is resulting in increased gains and proceeds for the period offsetting a significant portion of the capex incurred on the delivery of new equipment. With that, I'll now turn the call back over to James to offer more insight into the quarter and our outlook.

Great. Thanks, Zach. The quarter dynamics were seasonally about average on a historical basis. We used an arithmetic moving average model to understand the seasonality of our low tender demand signals. In January and February, we're strong on a seasonal basis. with March slightly below normal seasonal trends. Pricing remains strong on a historical basis, even as we do see declines in spot pricing that has been widely reported. And yet, our base rate per loaded mile was the highest in our history and remains strong. Supply side issues have persisted regarding the availability of drivers and tractors from OEMs. It remains historically difficult to recruit drivers as our cost per hire, while down 2.7% quarter over quarter is still near all-time highs. Each of the OEMs have imposed bill of material cost increases or surcharges, some reaching over $10,000. Trailer costs are up almost 50% in the last three years, and insurance premiums remain near all-time highs as well. These structural factors affect the entire industry, even among private fleets, and thus this cost pressure ultimately supports sustained price strength relative to past cycles. Despite continued OEM delays, we have received 186 trucks year-to-date and expect to receive 344 more by the end of the year. So that puts us in a good spot from an age of fleet standpoint with average age of our trucks at 2.6 years exiting the quarter with expectations that we will be just above two years by the end of this year. I'd like to now talk about the segment. In our trucking segment, we had an outstanding quarter. We delivered sequential and year-over-year improvements in financial results that demonstrate the exact trajectory we have expected over the last five years. We think it's important that the investment community understand the dynamics in this segment and how it has changed over the years. This is not the business people might assume it is. USA Trucks' trucking business is not the traditional asset-based business of the past. We have intentionally and methodically diversified and de-risked the segment through thoughtful shifts in our asset allocation between traditional irregular out trucking, dedicated and quasi-dedicated growth, and our asset-light owner-operator business. I'd like to talk about the dedicated business unit first. This business makes up just under 40% of our trucking segment revenues. It produces recurring OR in the mid 80s on balance over time, and is currently performing even better than that. We delivered low 80s OR performance in the first quarter. The core dedicated business has been on a historic pair, up 38% year over year in terms of revenue growth. The beauty of this business, particularly in moderated markets, is that it actually performs best in these market conditions. As we reported before, in an exuberant market with rapid expansion, this business incurred startup costs that masked the true underlining economics of the investment. Now that the majority of startup costs have been incurred, our infrastructure, equipment, and people are in place, and we can sustain these results for the foreseeable future, even if the broader market softens. Add to the underlying stability and consistency of the dedicated business that we have nearly 200 trucks of dedicated business sold and committed to. We just need to seat the trucks and have the assets. This gives us great flexibility amid market uncertainty and immediate opportunities to further grow the business within our existing footprint. We have the fungibility to move underperforming assets into this relatively more predictable business. And thus, we are actively identifying assets in our traditional truckload business to move over to this more profitable, more consistent, and better insulated business unit as a risk mitigation and profit maximization strategy in shifting markets. Now let me add some detail on owner-operators. An important element of our tactics in executing a more asset-light business model has been our shift to more and more owner-operators. These independent contractors are phenomenal business partners who supply us with predictable, reliable capacity to meet our customers' needs. The financial profile of this business in the context of USA Truck's trucking segment is quite remarkable too. They make up 27% of our trucking segment available trucks, consistently provide around a 90 OR in all market conditions, and become more predictable and reliable in softening markets. The reason this business is so financially predictable is that we pay this group on a percentage basis of revenues, meaning they receive a fixed percentage of the contracted rate on a load, and that model persists in all market conditions. Think about that. When the market strengthens as it has over the last couple of years, this group makes about a 90 OR for the company at elevated rates, and in a down market, they would also deliver a 90 OR. Now, we acknowledge that a 90 OR on a lower revenue number is a lower number, but it is predictable and provides an excellent return on capital for the company in all market conditions. Additionally, this group is more incented to grow in softening markets. Typically, owner-operators move to the relative safety of large carriers like USA Trucks with access to robust contract freight, established market relationships, and lower price volatility when compared to what they would encounter in the spot market. For this reason, we expect more opportunities with our owner-operator fleet as cycles migrate from all-time highs. And finally, I want to discuss traditional company-owned over-the-road fleet. This fleet, excluding the owner-operators, makes up just under 40% of the segment. In fact, the dedicated business is actually a larger percentage of the segment now than the company-owned truckload tractors are. Historically, this has been the focus of investors, and yet it is a proportionately smaller facet of our business than ever. This doesn't mean we don't focus on it. We do, but we need to calibrate the impacts of the market and the performance of this business in a broader context. We continue to improve the network. We are focused on reducing the age USA Truck because they've done so well in a historic rate market, or to the fact that they simply cannot get a truck. On the first point, we have always seen owner-operators migrate to our fleets in more moderated markets, and we have already seen that occurring over the last couple of weeks. And on the latter point of finding a truck, we believe our strategy has led to some great optionality around this. Overall, with respect to fleet size, we have, by virtue of reducing our trade cycle from five to four years, many more trucks coming out of the fleet a year earlier than in the past and with many fewer miles. We have the option, therefore, of either selling those trucks for gains, keeping them in our company fleet, which is not our strategy right now, or converting these trucks via our leasing company or an outside lessor to owner-operator available trucks. The likely path will be a combination of all three, and market dynamics will have a great influence on what we choose to do. But we can audible real-time based on market conditions. With over 400 owner-operators on our wait list and a network built to accommodate them, we expect modest growth in fleet size over the coming quarters and will certainly keep everyone updated on how we choose to navigate this great opportunity. Finally, the truckload business itself has the most exposure in our portfolio to market moves in the sense that freight softens or declining contract rates have the most direct impact here. And thus, While this group delivered a sub-90 OR in the quarter, we would expect it to perform in a high 80s to mid-90s OR range, depending on where we are in the freight cycle. Let's now talk about our logistics segment. Logistics had a record quarter in revenue, margin, and profit. This business is a significant contributor to our company and now makes up 50.5% of base revenues, and this quarter accounted for 31.9% of consolidated adjusted operating income. If we were to exclude gains on sale of assets, this business would have accounted for 48% of consolidated adjusted operating income. This business alone adds significant value and worth to our company that we continue to believe is absent in the market's evaluation of our performance. One of the things we like about logistics is that the margins are reasonably predictable across market conditions. And so, being able to crank significant volume through the business, think the supermarket model, becomes the highest priority in an installation against retreating markets. We continue to grow rapidly in this segment where we consistently deliver best-in-class results. Other than record profits, margins, and revenues in the quarter, our greatest accomplishment was the addition of over 40 more people year over year in a legendarily tough employment market. We expect this team and these results to continue to grow. I'll now update listeners on some metrics we've become accustomed to sharing. The first is load count volume. Our load count continues to be strong. Q1 volumes were up 2.5% sequentially and 24.8% year-over-year. This is critically important in any market condition. We now produce the throughput to harvest profits in all markets. The next is USAT logistics revenue per employee. It's actually down 1% year-over-year. We are ramping our many new associates into this organization and expect their revenue productivity to accelerate. A risk, of course, is as market rates decline, it does get harder and harder to post revenues, and so volume is our primary leading indicator in this space, and we expect to see gains there. The next metric is margin dollars per employee. It represents another staggering statistic. Our logistics team produced over $102,000 in gross margin dollars per employee in the quarter. This represents an $11,000 increase per employee year over year, or 12% improvement year over year. And finally, our USAT logistic loads per employee is actually down 13.3% year over year. This is a function of our growth. With head count up over 40% and load count up just under 25%, we know that the key to our growth will be getting our new associates ramped up and productive as quickly as possible. This will be a key measure to watch going forward. As spot market pricing has abated from its highs, this business is quite well positioned to expand margins in the portion of our portfolio that is contract-based. Where we have contracts in place and now lower and sometimes decreasing capacity costs, we see margin expansion opportunities. That makes up about 50% of this business. The remainder is transactional and thus requires the kinds of efficiencies we have discussed to continue to improve, and we expect they will. The logistics story is straightforward. The team continues to set records in terms of revenue, low count, margin, and profits. We're quite bullish on the prospects of that continuing. Now let me say something about the outlook. The outlook for USA Truck is very good. As I noted earlier, we expect 2022 to be a record year for earnings. We don't live in a vacuum. We see and hear all the market changes that everyone else sees. Load tenders have softened generally. Tender rejections are down market-wide and at USA Truck. Spot rates have softened considerably. And it's likely that contract rates will see some downward pressure in the coming months. Noting all of that, our performance year-to-date is far ahead of last year. April year-over-year is at least as good and maybe even slightly better than last year. And remember, 2021 was a record year. And we have not seen any downward move in our contract rates. As previously discussed, we have successfully restructured our network and de-risked and rebalanced our portfolios. We've created a business that insulates against downside risk through a growing dedicated business, more emphasis on asset light owner operator business, and a non-asset logistics business that on its own is near a top 50 broker by revenues in this country. Our non-asset and asset light revenues are now 65.6% of revenues, and we have never relied on the spot market for our business improvement. We were right around 7% of our freight derived from the spot market in the quarter. While some companies are retreating to the safe harbor of contractual rates away from the exposure of spot rates, we never left the safety of the harbor and therefore are much less exposed to market moves on pricing. USA Truck has been transformed. We think context is missing in the marketplace. Despite the moves off all-time highs in the freight market, by almost any measure, this market is still one of the best markets of all time. Widely read measures of loads per truck, rate performance, and indices measuring sentiment and capacity variability all mostly indicate a historically strong market. In our estimation, this is still the second or third best market of all time. The toughest headwind remains finding qualified drivers, and a close second is the lack of readily available new tractors. These factors will continue to provide a ballast to downward concerns. There aren't enough drivers or enough trucks, in our view, to warrant the comments from the balcony. And if things do reach the fever pitch pronouncements, it's still an enormous market where we are gaining share, improving our reputation, and out-executing our prior sales. Finally, I want to give a brief strategic update. Last quarter, we introduced that we would update observers on our progress towards our strategic objectives. Recall that it is our goal to be over a billion dollars in revenue between $4.25 and $4.50 in EPS with a low 90s trucking OR and doubling the size of logistics by the end of 2024. We are happy to report that we are ahead of schedule on each of those outcomes. Our three specific strategic priorities to achieve these outcomes are as follows. One, expand and densify our asset business east of I-35. By virtue of our continued revenue and profit expansion, all of which occurred within our defined footprint, we are marching forward ahead of our plan. There may be a time in the future where we expand to other markets and modalities, but that time is not now. We believe densification is a winning formula in this business, and we intend to continue to densify east of I-35 until such point that the next best opportunity is elsewhere. We're nowhere close to that right now. Two, double the logistics business. Our goal is to grow this business to $400 million of top line revenue by the end of 2024. There's a chance that happens by the end of 2022. By almost any measure, we are two years ahead of schedule on this vector. We expect great things from this business. And three, reduce the asset fleet age. This is the one area we are behind schedule. Our average age of fleet is 2.6 years with a goal to get to two. We believe we will be very close to back on plan in this metric by the end of 2022. As we consider this strategic plan in the context of our recent results, we expect to see corresponding value creation for shareholders. We truly appreciate those who have invested with us and stayed committed to the stock. In our opinion, USA Truck remains one of the best stories in this space. USA Truck has returned our leverage levels to below two times. We've improved liquidity with a full, unencumbered credit facility at our disposal. We have delivered profitable results in 16 of the last 20 quarters, We've delivered record quarterly EPS results in the last seven consecutive quarters, and we have 12 months trailing adjusted EPS at $3.93, the highest of all time, with a 14.1% trailing 12 return on invested capital. With these earnings, the stock has been trading just under two times EBITDA plus debt, less than four times last trailing 12 months earnings, and less than six times trough earnings estimates. All we can do is remain vigilant and committed to the idea that earnings drive value over the long term and continue to put up record results. On a comparable multiple alone or even on an EBITDA multiple, USA Truck's market value is substantially undervalued by any measure. The logistics segment is now over half of company revenues and our overall asset light and non-asset business account for nearly two-thirds of revenues. It is our belief that a demonstrably higher multiple valuation is warranted. We cannot and are not sitting idly by. Our board will continue to work with management to evaluate means to return value to shareholders. We are keenly aware of our responsibilities and alternatives and confident that we will solve this Gordian knot evaluation in the discharge of our responsibilities. It is a great time at USA Truck. We have had yet another quarter of record results. We believe 2022 will be a record year for earnings. We have restructured, rebalanced, and de-risked our portfolio, and we have a solid balance sheet that affords us some near and long-term strategic flexibility. With that, I'll now turn the call back over to Jenny for Q&A. Thanks.

Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on a speakerphone to provide optimum sound quality. Please hold while we poll for questions. Thank you. Your first question is coming from Elliot Alper. Please announce your affiliation and pose your question.

Great. Thank you, guys, and I appreciate the detailed prepared remarks. I guess starting off on the trucking side, so clearly pricing is holding up nicely. We'd be curious to hear your thoughts on kind of what happened in the spot market, and then if you could talk about any recent conversations you had about repricing with customers in April and and as well as the percent of repricing in the first quarter. Thanks.

Yeah, thanks, Elliot. But you've got to think about what that means. That gives us an opportunity to turn some of that freight into contract freight longer term. So we see that as a net positive on the logistics side. On the asset side, it's almost a non-factor for us because we just simply don't play that much in that space. In terms of repricing, there's some really interesting dynamics that I think people need to consider. Are you guys still there? Can you still hear us? Yep. Sorry, I just got a text that said they lost us. On the pricing side, there are a couple dynamics I'd like to kind of, you know, elaborate on. The first one is, yeah, admittedly, we do have some of our customers who have come to the table and expanded their bid process to additional rounds, which is usually an indicator that they're searching for some lower long-term prices. But on balance, our... Our contract price hasn't moved at all. April was and has been extremely strong with virtually no movement in our contract pricing. And as kind of that pig in the python or rat through the snake, however you want to say it, works its way from a pricing standpoint through the bid cycle, even the largest customers don't implement their bids until the middle or end of July. And so... Whatever downward contract pricing, which I will say has been very limited, whatever does go into effect would be later in the year. That's point number one. Point number two, other than additional rounds of bids, we've seen no material change from the number of customers asking for bids. So in past cycles, you know, you see people kind of sprinting to the front of the line, trying to move their bid behavior to a time when they think they can take advantage of the market. And we just haven't seen that yet. We don't see that occurring. I hope that answered your question.

Yeah, no, definitely. So I guess on the dedicated side, How quickly can you grow that percentage revenue within the trucking segment? Is this something that takes some time to ramp? I believe you said it was about 40% of the segment in the first quarter.

Yeah, exactly. So one of the comments I made in the prepared remarks is we literally have 200 trucks where we have contracts and commitments with customers, and we just don't have drivers in those trucks. And so we are going right now through a fungibility exercise to identify – any underperforming company assets on the traditional truck load side that we can move over. The trucks are 100% fungible. The humans aren't always. So it becomes an exercise of can you match a driver that's currently driving OTR into a dedicated truck, or can you find somebody that's looking for a job that wants, you know, the more desirable features of that job, their home more frequently, it's more consistent work, you know, it's more predictable, et cetera. So... I wouldn't say it's a flash in the pan, but I also wouldn't say it's a stretch to say we can get there in a quarter, quarter and a half. Zach, did you want to add anything there?

No, that's what I was going to just expand on, but you hit it. Yeah, the trucks are fungible, and we can move those around between the business units. The people aspect is a little bit more strategic.

Okay, great. And then you mentioned some owner-operators coming on to the USA Truck Network. Is this purely... just the dynamics of the spot market?

I don't think purely. Thanks for asking that, by the way. I should have put something in my prepared remarks. We took some kind of specific thoughtful cogent actions, I don't know, maybe four or five weeks ago. We increased the amount of fuel discount that we share with drivers, with owner-operators, I should say. We actually put a safety bonus on them because, you know, even though they own their own trucks and they're liable for damage to their own trucks, we we are super serious about improving our safety record. And so we put a bonus in place for them that allows them to, you know, earn some additional compensation or pay, I should say, not compensation, but pay for their performance. And then, you know, the challenge, as I mentioned, is it's been very, very difficult for them to get trucks. And I think that's what's missing in some of the public commentary that people are making. It's still really hard to get trucks. And so with the paucity of trucks and the challenges in getting drivers, those are two limits to a cycle change that we haven't seen simultaneously in the past. And in fact, and we don't want to hide from the data, if you look at the BLS data, there was about five months where there were increasing drivers coming into the marketplace. But in the March report, which I've heard no one talk about this, number of truck drivers actually went down in the BLS data. That's point number one. Point number two, the number of drivers working in the industry in the SIC code is still well below where it was pre-pandemic levels. So I just think people are missing some of the broader factors. And those all play into what's going on with the owner-operator. So we enhanced our program. We do see spot market pricing falling off, which naturally, you know, when you squeeze that balloon, they flee to the relative safety of large carriers like us And we actually have some trucks coming off a year earlier than they ordinarily would that allows us to put them into our lease program, and we think we can go fill some of that backlog. So we think we're in a really good spot.

Great. Thank you, guys. Thanks, Elliot.

Thank you. Your next question is coming from Jack Atkins of Stevens. Jack, please pose your question.

Okay, great. Good morning, and thanks for taking my questions, and great quarter, guys.

Thanks, Jack.

So, James, I guess if we could maybe kind of start with the logistics business. I appreciated a number of things that you said in your prepared comments, but within logistics in particular, you guys have just done a great job improving the profitability there and growing the top line. I would just kind of be curious if you would help us for a minute kind of think about that business today and sort of how it's changed relative to the last down cycle where, you know, we saw the operating ratio, you know, approach 100, you know. So there was some cyclicality in that business in the past. You know, do you think things have changed there where you can avoid that type of cyclicality? I mean, I know that it's going to see some margin pressure at some point. But do you think, you know, I guess I'm just curious if you could maybe talk about how that business has changed cycle-wise trough to potentially the next cycle trough?

Yeah, no, it's a great question and observation, Jack. And it also is indicative of the thought process we took to get where we are. And let me tell you what I mean by that. We were pretty irritated in the second half of 2019 in the first quarter of 2020 when that business essentially turned negative. And we did a bunch of backward testing analysis to figure out what we could have done to avoid that outcome. And the bottom line is we needed more throughput in the business. We needed more fixed cost coverage with volume and velocity through the business. And we realized, and we've never shared this publicly, and I'm not going to share it now, but we realized kind of the critical mass that we needed to put through the engine to never face that situation again. And so all the metrics we talked about with regard to employee productivity, throughput, just absolute volume, We think we're in a great spot. You know, 2019 was historically low. If you look over time, kind of the average revenue per load in the history of history is around $1,800. And if you go back and look at our stats, we got down into the $1,100 in 2019 and early 2020. First of all, we don't see that happening again. It was a historical aberration. and a statistical aberration. But secondly, if it were to happen again, we don't see our OR going anywhere near 100 because we now have plenty of throughput to sustain a threat. And you could go forward, test that in your models, and you'd reach the same conclusion. Jack, anything you want to add?

No, and just in 2019 and early 2020, when we saw those 100 ORs in that segment, I mean, that was at a crucial time of the industry, too. The industry was changing in 18, right? You have the democracy of freight or whatever you want to call it. There were some entrants into the marketplace that truly changed the dynamic of the industry. We got caught early on a little bit on our heels, and that's what we've worked on for the past 18 months. We're really 24 months now is getting back to a position to where we compete in that marketplace and we can compete profitably.

And I'll just add to that, Jack, you know, the democratization and the digital freight brokerage, it did really change people's perspective. But we've settled in very nicely and have a wonderful model. And so as I shared that we were off a little bit in our overall productivity metrics, you know, it's still great. But our leadership team understands they have to get these new employees up to speed quickly because they If it softens, you get into the risk of not being able to cover your fixed costs. But we just don't see that right now as a risk. And frankly, we can flex our cost structure there quite easily. So we're in a fundamentally different space because of the volume throughput and productivity that we have. I hope that helps answer your question.

It absolutely does. And thank you for taking the time to kind of go through that. You know, with regard to the trough earning scenario, and I'm glad you guys put that out there because I think it's super helpful for folks as we sort of think about the valuation, to your point, around the stock. You know, when you sort of are thinking about a trough-like scenario, are you layering on a 2019-type rate recession, or is it something like we saw, you know, back in 08-09? Like, I'm just trying to get a sense for, you know, how deep is the trough that you guys are trying to bake in there?

Yeah, so it's really interesting, you know, and everybody kind of has to do their own analysis to reach their own conclusions. We've made a big deal out of this, and I've even seen this in some of the notes that I think you and others have published. We think because of the rising costs associated with the business, whether it's fuel, drivers, trucks, trailers, insurance, you name it, there's kind of, that raises the floor, right? They just, over time, that's what happens in this industry. But in terms of coming off the highs, I don't think we've looked at it in terms of absolute drops. We see no scenario where rate gets back to where it was in 19. And I don't think anybody that's really thinking that through thinks that. But if you look at it in terms of percentage drops, that's how we've modeled it. And if you look at decreases over history, in all the data we can see post-1980 with publicly available information, we've seen decreases. Two drops of greater than 5%. That's 2019 and 2009. That's it. And so we've modeled in that scenario. We've actually modeled it even deeper than that. But at the scenario we think is going to happen, you know, I shouldn't say it that way. We don't know what's going to happen. The scenario that we think is the worst case, we think our trough earnings are where I stated in the call. If it gets worse than that, we still have, you know, a relatively long profitability ramp that could endure that. So we feel really good about it, even factoring in on a percentage basis, kind of historic drops, which we're not forecasting, by the way.

Okay. No, that's helpful as well. Last question, and I'll turn it over. But You know, James, you referenced there at the end that you and the board are really trying to think about ways to enhance shareholder value and try to solve, I like the term, the Scordian knot around valuation. Could you maybe talk about some of the things that you guys are contemplating? You know, what do you mean when you say that and sort of what form could that potentially take?

Yeah. So, you know, I've said this since the day I became CEO. And everybody learns this in business school. The CEO's job, the board's job, the CFO's job every day is to consider, should we keep doing what we're doing? Should we sell all the assets and give the money back to shareholders? Or should we do some kind of combination, whether it's buying somebody else, being bought by someone, going private, whatever it is? That's not to say that we think about those every single day, but those are the ongoing considerations. I've said that since day one, and we continue to think about that. you know, there's all the obvious arrows in the quiver that boards need to consider, whether it's dividends or buybacks or combinations. And I just, I don't want to be too cryptic, but I just want to say, I mean, if you look at my background and I've really thought about how I want to say this today, I don't want it to sound cocky or arrogant or big headed, but, you know, I come from Intel and Chase and EMC. I've worked for some of the best managed, best governed well-run companies in the world. And I don't think anybody else in transportation can say that. And if you look at our board, we have an embarrassment of riches in terms of the quality of our board and their background experience. All I can say is I promise you that we're not sitting idling by. We are considering all of the arrows in our quiver. We don't have anything to announce, and it wasn't meant to be some veiled message. It's just we're working on figuring out the right way to handle that.

Okay. All right. That makes a lot of sense. Thanks again for the time, guys. Really appreciate it.

Thank you.

Thank you. Your next question is coming from Rob Shapiro of Singular Research. Rob, please pose your question.

Hi. Have you seen any impact on your client purchases being, you know, being impacted by the inflationary environment as they change the client purchases?

So first of all, Rob, thanks for picking up coverage on us. We appreciate that you've recognized the story and chosen to get in and cover this. In terms of our purchases, I mean, I don't mean to dodge your question. I think what I'll say is this. We did, in preparation for this call, a bunch of bridges on the various operating expense lines of our business, and there is no doubt we are seeing inflationary pressure on our expenses in the business. And so we work with our customers to pass those through as appropriate, but at the end of the day, this is a highly commoditized market, and the rates will flow and be supported by the underlying cost structure that continues to rise. I hope that touches somewhere on your question.

Yeah, that sounds good. And have you seen the client, their behavior change at all, or have they not really changed their behavior?

You mean in terms of the customers?

Yes.

Yes.

Have they slowed down the purchases due to inflationary environment too?

Yeah. So the way that, you know, kind of our business works is, you know, we receive tenders from big shippers. You know, you think of, you know, any top, you know, Fortune 1 to Fortune 500 retailer or wholesale provider or goods producer or manufacturer, those are our customers. And so the way that we see tenders you know, any variability in demand is in the tenders that they give us. And if you look at industry data, industry-wide, tenders have slowed down off of peaks and so have tender rejections, which are also a pretty good indicator of what's going on in the underlying demand cycle. And yet, as we said in our comments, tenders, People need to kind of keep their wits about them. If you look at it in relative terms to past years, like 2018, which was the best year ever before 2021, we're still materially higher in our demand signals than we were in 2018. This is still the second or third best market of all time.

Great. Thank you.

Thank you very much. Your next question is coming from Mike Vermute of Newland Capital. Mike, please ask your question.

Hi, guys. How you doing? Good. How are you, Mike? Hi, Mike. Good. Just want to say phenomenal execution over these past quarters. So can you just give us geographically, I don't know if you hit on this, I might have missed it earlier, what you're seeing and if you're seeing any... I think Mike has just dropped out.

We do have another question coming from Patrick Attard, an investor. Patrick, please ask your question.

Thank you. Good morning and congratulations on a great quarter. I was wondering, have you received any of your Trey Bev vehicles from Nikola yet? And have you been able, and if so, were you able to compare the savings on the fuel on it? And then also, are you considering driverless trucks to alleviate the problem you have with finding truck drivers?

Great questions, Patrick. It's nice to meet you, and thanks for asking them. On the Nikola trucks, we have not received them yet, but we do expect to receive them in the quarter, in second quarter. So we expect to receive them soon. And I actually will be with Nikola next week. And so we're looking to deploy those in some dedicated formats. We're working with the customers And we'll update you on that as soon as that occurs. We're really excited about it. In terms of cost comparisons, one of the things we're doing with them is working on some collaborated TCO modeling, total cost of ownership modeling with them, to make sure we understand fully the questions you've asked. But as soon as we have that data and have some experience, we'll come back and update the investment community on it. On the driverless trucks, it's a really interesting question. I got asked on a panel about four or five years ago, you know, about the inevitability of it. And, you know, I come from technology and I kind of was like, uh, yeah, it's inevitable. It's already here. Um, we have been out and visited with, and I won't name the names, but we visited with a number of the driverless or autonomous truck, uh, manufacturers. I've even ridden in some of the trucks and had the opportunity to interact with them. We've made no commitment with them. We do frankly think there's a time, uh, when that will become inevitable, when it will become part of our fleet. We've always said from a strategy standpoint, because it's a highly commoditized market, we don't have to be on the bleeding edge. We think there's no kind of strategic benefit to being a first mover. So we'll monitor this closely, and we'll follow it and act appropriately. Just in the asking of your question, I just want to clarify one thing. You know, we don't know. I don't think it's an incontrovertible fact that drivers – In fact, we hope that's not the outcome. We think there will be specific applications where it makes the most sense, but you can rest assured that we will be on trend and in the marketplace as appropriate. I hope that answered your question.

Yes, it does. Thank you very much. And I kind of agree with you. It's better to have a driver in a truck because that way you've got better control of what's going on, so to speak, too. So thank you very much.

Thanks a lot. Jenny, I hope we can get Mike Vermitt back.

Yep, he's with us. I have him right now, and I'm going to promote him so he can ask his question. Mike, the floor is yours.

Hi, guys. I don't know how I dropped off there. I got two questions for you. One, there's a lot been said that in China right now you have a population locked in that's larger than U.S. population as a whole. Have you seen geographically weakness coming off of the West Coast or any spots that you think that that's a big contributor to what's happening now and that that may reverse dramatically once everything starts to open up there and you start getting the containers moving again?

Yeah, it's a really good question, Mike. I mean, I was looking at some of the reporting this morning. I think there's less than 30 ships in L.A. ports. Actually, as Zach, he's going to go look at it. We have a report that helps us see all the ships that are in the lineup out between China and the port. But frankly, kind of as LA goes, everybody else goes, I tend to joke, at least mathematically, there's really only one head haul market in America in terms of the math, and it's LA. And so there's no doubt that when and if that freight backlog gets dislodged, it's inevitable. that that's going to have an impact on us. What I don't know is if we can look at last year and use that as some kind of predictive template about what it means to us, because I just don't know. Inflation's gone up, and that's not a great thing. Fuel prices are expensive, and people are likely to spend less. But I was just this week at my daughter's soccer game with the president of a bank, And he said, my deposits are at all-time highs. My loans are at all-time lows. People are flush with cash, and they're not, you know, they're just, they have money. I don't know that people care. So I don't know, Mike. There's a supply side. There's a demand side. I'm not sure what the implications are of either of those things, and so we'll just watch it closely. But so far, mostly because our network is, you know, east of I-35, we haven't seen any real changes in our demand, but you know that demand That kind of works its way through the system. So it's probably too early to tell, but I think it's inevitable that if 300 million people get out of house arrest and are able to start producing stuff again, that's got to be good for us.

Well, and if you look at containers coming off the West Coast at later dates, and if that's in the next couple of months coupled with produce coming off the West Coast, the demand and the capacity that's going to shift west versus, you know, operating, you know, where we operate today, it's going to drive prices and demand throughout the country.

And, Mike, we just got the report pulled up, and so I will tell you that it's kind of weird the way the administration chooses to report this and the port chooses to report this. There are less than 30 ships at birth in L.A., but there are still, it looks like, 75 container ships inside 25 miles of L.A. in Long Beach, which is a critical stat. You know, that peaked out at 109 on January 9th. It's currently sitting at 75, which is still well above basically any time in 2019, 2020, and 2021 up until about February, March. My eyes aren't that good. So I would just say, I mean, there's still quite a bit of traffic on the water. And with the coming backlog, like I said, that's got to be good for us.

Right.

Excellent.

And then just to expand on what Jack was talking, you know, it, it is, you know, you run screens and you can't find a company that, you know, trades below three times EBITDA, four times earnings. And I guess it's five and a half times what could be trough earnings, right? It's absurd. And you've gotten zero credit for what you've done out there. What's the capacity, you know, yes, I agree. Something's got to give eventually strategic. Someone comes in, it can't stay cheap like this forever. What's the capacity to buy back stock while we sit here and take advantage of this? Because I've run the number, the accretion dramatic here by buying stock at $15, $16.

Yeah, I mean, you know me. I'm a corporate finance guy by training. It may be one of the best ROI investments available to us right now. And so we don't have a newly authorized buyback from the board at this point. We have not filed a 10b-5-1 or anything like that, but we do have an upcoming board meeting, and I promise you that it will be part of the discussions. Excellent.

Okay, well, keep it up, guys, and eventually we'll get rewarded for this. Thanks, Mike.

Once again, if there are any remaining questions or comments, please press star 1 on your phone at this time. Okay, there appear to be no further questions in the queue. I'll now hand back for closing remarks.

Thanks, Jenny. It seems to me that so much of what we do and see is a matter of perspective. Some of you know that I love to play golf. Mark Twain famously noted that golf is a good walk spoiled. And Hank Aaron recounted his frustration when he noted, it took me 17 years to get 3,000 hits in baseball. It took one afternoon on the golf course. Golf, it turns out, is not for everyone. And in some ways, I think transportation shares some parallels with the game. One can do everything right and get a bad break, and everything wrong and get a lucky one. But in the end, and over the passage of time, the score will always reflect who plays best. And that is why we do what we do. We love the challenge. We own our results. And the only force that could stop our momentum is ourselves. The scorecard should soon reflect that we have played skillfully. USA Truck has played the game extremely well and consistently over the last five years. I am personally grateful for the great privilege it is to lead this company, but even more grateful than I could ever express for the men and women who have committed their careers and interests to the rebuilding of it. We still see opportunities abounding in our future as we execute on our strategy by leveraging our business model and executing each day better than the last. We have an increasingly asset-light model, a wonderful dedicated business, a world-class logistics business, a great balance sheet, very good driver retention, a diversified and intentionally stratified customer base, and great results. In short, we clearly see the opportunity to continue our improvement in financial and operational performance across the enterprise. This is a great story that we expect will continue to improve through all types of markets and that the scorecard will soon reflect our progress. And we think that's pretty exciting for everyone who is in the game with us, including stockholders, associates, customers, suppliers, our families, and our communities. Thanks for your time.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone line at this time and have a wonderful day. Thank you for your participation.