Management from USA Truck (NASDAQ: USAK) provided upbeat commentary on their Friday conference call with analysts. They expect to build further on the third-quarter result, the company’s first profit after four straight quarterly losses, during the fourth quarter.
The Van Buren, Arkansas-based truckload (TL) carrier on Thursday reported adjusted net income of $2.6 million, or 29 cents per share, besting analysts’ predictions for a 6-cents-per-share profit.
Utilization and price improvements show in results
The company has been focused on transitioning into a regional TL operation and increasing asset utilization even if it means operating fewer trucks. During the third quarter, the carrier reported a 1% year-over-year increase in loaded miles per truck with empty miles declining 110 basis points to 12.4%. Fleet utilization improved sequentially in each month of the quarter, with October’s results “substantially better than September,” commented President and CEO James Reed on the call.
The improvement is expected to continue through the seasonal strength of peak season, meaning the company’s fourth-quarter results will likely be higher than its third. Management believes there is another 5%-plus upside in truck utilization that can be realized in the near term.
The carrier has increased revenue per truck by $300 since the fourth quarter of 2019, closing in on the year-end 2020 target that includes a total of $450 in initiatives.
Improved pricing is also fueling the earnings improvement. Revenue per loaded mile increased 9% year-over-year to $2.29. That rate has already moved higher through the first month of the fourth quarter. Management said they didn’t take an “across-the-board” approach to rates, instead approaching each account with the goal of seeking long-term structural and sustainable rate increases.
More than 75% of the carrier’s freight has already been repriced higher, creating very favorable year-over-year comparisons heading into the first half of 2021.
A modest improvement in TL revenue, up 4% year-over-year, was amplified by rate increases and cost actions, which resulted in a 95.8% adjusted operating ratio (OR). The result was 410 basis points better than the 2019 third quarter and 200 basis points better than the second quarter.
Expenses as a percentage of revenue improved on every line with only purchased transportation seeing an increase, up 290 basis points year-over-year, representative of the tight capacity environment and the company’s reliance on third-party owner operators.
Management expects to gain another couple hundred basis points of OR improvement in 2021, reaching parity with the average of its competitors in 2022. They don’t believe the OR will climb above the 95% threshold again, barring an unforeseen event. “I think the days of three-digit ORs in this business are gone forever,” Reed added.
Logistics revenue increased 32% year-over-year to $52 million. Loads grew 4% with revenue per load jumping 27%. Gross margin fell 90 basis points to 11.3% on higher purchased transportation expense. The division reported nearly $1 million in adjusted operating income in the quarter.
Leverage comes down but no fleet growth yet
USA Truck ended the quarter with $181 million in net debt and lease liabilities. Debt leverage – net debt-to-earnings before interest, taxes, depreciation, amortization and rent (EBITDAR) – improved from 4.1x at the end of the second quarter to 3.5x. The company had $48 million available to borrow under its credit facility at the end of the period.
The desired target debt leverage is 2.5x to 3x, but management said they “reserve the right to be opportunistic,” referring to potentially making an acquisition.
The carrier is targeting 2021 net capital expenditures (capex) to be mostly replacement in nature, which averages $40 million to $50 million on a net basis annually. A sub-92% OR would need to be achieved before the company attempts to grow the fleet. The dedicated segment operates at a low-90% OR and the carrier will continue to move trucks from the over-the-road fleet into dedicated operations.
“USA Truck’s best days are ahead and coming quickly,” Reed said.
Shares of USAK are up 1% in midday trading compared to the S&P 500, which is down more than 1%.