Covenant Logistics Group, Inc. Class A

Excuse me, everyone. We now have all of our speakers in conference. Please be aware that each of your lines is in a listen-only mode. At the conclusion of today's presentation, we will open the floor for questions. At that time, instructions will be given as to the procedure to follow if you would like to ask a question. I would now like to turn today's conference over to Richard Cripps. Sir, you may begin.

Hey, thank you, Samantha. Good morning to everybody. Welcome to our first quarter conference call. Joining me on the call this morning are David Parker, Joey Hogan, and Paul Bunn here, and John Tweed from another location. This conference call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risk and uncertainty that could cause from those contemplated by the forward-looking statements. Please review our disclosures and filing for the SEC, including without limitation the risk factor section in our most recent Form 10-K and our current year Form 8-K. We undertake no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances. As a reminder, a copy of our prepared comments and additional financial information is available on our website at covenanttransport.com.

In the summary, the key highlights of the report were, our holiday versus truckload sales revenue, including fuel, decreased 1% to $77 million, primarily to a 5.8% or 80 tractors average operating fee reduction.

Partially offset by a 5.1% increase in the number of tractors. in the 2020 period as compared to the 2019 period. First, a few years ago, average shipping revenue per total mile was down 7.3 cents, or 3.7%. Average mile per tractor was up 9.1%. The main factors impacting the increased utilization were a 710 basis point increase in the percentage of our highway services fleet comprised of team-driven tractors and an improved average seated tractor percentage, as only 3.1% of our highway services tractor fleet lacked drivers compared with 7.7% during the prior year quarter. Our dedicated truckload segments revenue, excluding fuel, decreased 2.5% to $69.9 million, due primarily to a 3.1% or 53 tractors average operating fleet reduction, partially offset by a 0.6% increase in average freight revenue per tractor in the 20 period as compared to the 2019 period. A year ago, average freight revenue per total mile was down 2.9 cents, or 1.6%, while average miles per tractor was up 2.2%. Combined truckload savings and operating costs per mile net of surcharge revenue increased just 0.4 cents compared to the year-ago period. This was attributable to higher non-driver wages, group health, workers' comp, and casualty insurance claims costs, basically offset by lower maintenance and repair, unloading, recruiting, net fuel, and capital costs. Our managed freight segment operating revenue decreased 4% versus a year ago quarter to $42.7 million. This decrease was driven by a 10.4% decrease in freight brokerage operating revenue to $21.8 million, partially offset by a 3.7% increase in the combined operating revenues of TMS and Warehouse. Managed freight operating income was $1.6 million for an operating ratio of 96.2%. Our factory and segment net fee revenue increased 48.2% versus the year-ago quarter to $2.7 million. Factory and segment operating income was $2.2 million compared with $1.5 million in the prior year quarter. The increase in net fee revenue and operating income is the result of new customers as well as growth of prior existing customers. We recognize a $700,000 pre-tax loss from our 49% equity investment in Intel compared with pre-tax income of $3 million in the first quarter of 2019. Ongoing weakness in the truck sales and leasing markets has contributed to these results. The average age of our tractor fleet continues to be young at 1.8 years as of the end of the quarter, down from 2.3 years a year ago. During the first quarter, we took delivery of about 250 new tractors and 65 new trailers, while disposing of approximately 375 used tractors and 190 used trailers. We reduced our operational fleet size by 74 tractors, or 2.4%, to 2,947 tractors by the end of March, from our reported operational fleet size of 3,021 tractors at the end of December. By the end of 2020, the size of our operational tractor fleet is expected to be down 12% to 14% compared to the end of 2019, allowing us to maximize the utilization of our operational fleet, including cooling out lower-performing freight where some shippers are not willing to sufficiently compensate us during the immediate term before freight demand returns and truckload oversupply is corrected. Between December 31, 2019 and March 31, 2020, total indebtedness net of cash increased by $32.2 million to $336.8 million. This sequential increase to net indebtedness included cash payments during the first quarter of 2020, totaling $17.5 million for the repurchase of over 1.4 million shares of our common stock prior to the suspension of our stock repurchase plan in late March. and a $24.2 million increase in net funds employed in our factoring business to $106.6 million at March 31, 2020. Total indebtedness net as cash decreased by $16.9 million for the month to $319.9 million at April 30, 2020. At March 31, 2020, we had cash and cash equivalents totaling $39.7 million, as well as available borrowing capacity of $35.6 million under our asset-based revolving credit disorder, for a total of $75.3 million in liquidity. The sole financial covenant under our ABL facility is a fixed charge coverage ratio that is tested only when available borrowing capacity is below a certain threshold. Based on availability as of March 31, 2020, no testing was required, and we do not expect testing to be required in the foreseeable future. Liquidity increased $9.7 million per month to $85 million at April 3rd, 2020. The main positives in the first quarter were, one, a realignment of our executive structure and organizing our talent to most effectively design and execute our strategic initiatives. Two, completion and initiation of certain elements of our plan to reduce our total capital employed while reducing leverage and prioritizing our higher margin and less volatile core service offerings. Three, cost control planning and ongoing execution to provide significant cost savings as we move through the fiscal year. Four, the swift and effective response to COVID-19 by our teammates. Five, year-over-year average freight revenue per tractor increases in each of the highway services and dedicated truckload services. Six, combined truckload segment operating costs, net of fuel surcharges, increased just 0.4 cents per mile compared to the first quarter of 2019, even with an excessively adverse insurance and claims expense quarter, partially offset by the $1.7 million gain on the sale of our Orlando firm. And seven, growth and increased profitability from our factoring segment. The main negatives in the quarter were, one, the revenue and related profitability loss, while two of our large dedicated automotive customers shut down operations in mid-March related to COVID-19 precautionary measures and are just now slowly stepping up production this week. The pass-through, too, the pass-through loss from our investment in tail, and three, net indebtedness increasing $32.2 million from the end of 2019 to March 31st as we made the decision to repurchase $17.5 million of our common stock and to grow our factory segment to the end. We are encouraged by the initial positive results of our strategic plan execution and structural advancements. As an improved business mix and our cost control efforts offset the impact of a challenging volume and pricing environment enabled. However, we expect volatility from month to month over the remainder of the year due to external factors as well as gains and losses associated with our internal initiatives and changes in our revenue and cost structure. Accordingly, our prior outlook for 2020 is no longer applicable, and we do not expect to provide earnings or similar expectations for the foreseeable future. In the near term, we are well-equipped, well-prepared to support our partner customers as their productivity, the economy, and business levels return normal. Over the long term, we believe the influential structural improvements and strategic initiatives we are executing will strengthen our position in the U.S. logistics industry. de-risk our leverage profile, and concentrate our less cyclical business model on more sustainable, higher margin sectors where we can add considerably greater value to our partner customers and for all of our stakeholders. Thank you for your time, and we will now open up the call for any questions.

Thank you. At this time, we will open the floor for questions. If you would like to ask a question, please press the star key followed by the one key on your touchtone phones now. Questions will be taken in the order in which they are received. If at any time you would like to remove yourself from the questioning queue, just press star two. Again, to ask a question, please press star one at this time. Our first question will come from Jason Seidel with Allen.

Hey Jason, what's going on? Hey, good morning guys. So I wanted to focus a little bit on your automotive business because you tend to have, I think, a little more exposure than most people do. Number one, what percentage of your automotive business is in your dedicated side and what are you seeing and hearing from some of them in terms of, we all know they're ramping up, but how are they going to come back? What percentage of the business should we expect in the month of May and in the month of June compared to what you had before?

Hey, Jason. It's David.

Hey, Devin.

To give you an idea, it is in our contract logistics side of the dedicated. You know, we've had some of that business for 25 years. The contracts are not as solid as what I like and what we're doing on our existing dedicated business. But, again, we've had it for 25 years, and we've treated each other very good for that amount of time. There's no doubt that it has been hit hard. We had about 300 trucks, a little bit over 300 trucks. So kind of a 10%, 12% kind of number of total. And it went down to zero. And so what we are hearing so far is that they basically... started back this week. One Nissan doesn't start back until next week. But GM started back this week. And their projections are basically 25% add-ons each and every week up for the next month. And expected by the middle of June to be at 100% level. So it's kind of this week 25%. And then our other one is with BMW, and we expect it to get up to about 75% over the next month. And, you know, their thoughts are that it's probably just going to hang there. I don't know that it's going to get – it's going to take them a lot longer to get to the 75 – I mean, to the 100% level. So, anyway, those are in, and Nissan's expecting – And those are our three major ones. And Nissan is expected to start back next week, but there's a little bit more cloudier of expectations.

Now, out of that 280 to 300 trucks that were running that, We did replace some of the freight on those trucks through some broker freight and some other customer freight and then some of the freight that picked up with the cause of the COVID, the grocery and paper goods and all that kind of stuff. So it wasn't... zero revenue on those trucks during the middle of March when the plant shut down. But it was quite a scramble at the end of March because the timing of the plant closures were a little quicker than we had been told. They were looking at it week out, two weeks out, when they all of a sudden on one night decided, no, we're going to go ahead and close that. And so that took some scramble in the last two weeks of March, but April used some of those trucks and some of them got furloughed, etc.,

Right, now that makes sense. But the way, I guess, the way maybe I'm asking how we should look at it is, as that comes back, that's going to help, obviously, your profitability, because you guys were, let's say, breaking in April, even though you replaced some of that business. I'm assuming some of it might have been at not the best rates in the world in the spot market. Plus, there was a scramble, I'm sure, that cost you guys a little bit, too, in getting trucks out in service. So... As they come back, that should help the profitability numbers that you guys saw in terms of being breakeven in April as we move to the outlook for, let's say, June. Is that fair to say? Yes. Okay, perfect. The next question, I want to focus a little bit on your cost that you have that you guys outlined a little bit. Maybe you could start going over. So how many of these costs should we consider permanently out of your cost structure going forward, and how many are more just variable reacting to the marketplace.

This is Joey. I think we've got a very hefty target that the leadership team is working towards as we adjust the fleet size. Yes, on cost side. So we are by the metrics that we're we're targeting, we're about a little more than halfway towards the goal. And so what I would say is measuring our productivity impact week to week related to the virus situation, pre- and post-virus startup. I think we've done a pretty good job of bridging most of that variable profit miss with the current cost savings that we've been able to put on the books. So, but we're not done. And so I think regardless of how fast things ramp up, slow or fast things ramp up, we're going to keep the pedal down on, let's call it streamlining the organization. And so we need a little bit more time, but we're comfortable really sharing details of that. But we've got some hefty targets. Now, as it relates to your main question, how much is permanent versus short-term, Other than that, that we've been able to get thus far, I would say, actually, I don't have a really good number. There's a couple, I mean, for example, we suspended our 401k match for our employees. They all know it. That's a pretty meaningful number on a year-to-year basis, and it's immediate. Well, our goal is to turn that back on when we feel good about that because I think being competitive in the market place is important. So that's one. that, for example, is temporary. It's not permanent and long-term. Most of the things that are on the books that we're working on are permanent in nature. For example, we started this process coming out a year of rationalizing our fixed infrastructure. It's public that we sold our Orlando terminal. It's also public there's another large one for sale. It's public. It's on the market. People can go look at it. I'm trying to We hope to close that soon, very, very soon. So in addition to those two, we made the decision, as it's also public, to close our Texarkana facility. So that's in process. We're in the process of transitioning some of those positions, eliminating some of those positions, and so that's a large operation there. Those three, in essence, are permanent, and they're significant, the impacts of those three. And so that's an example of some permanent savings that are big. So we're doing a good job of keeping the revenue that we want to keep because some of the freight, some of the solar trucks for Holland and the Texarkana operation, we don't want to keep, frankly. It's just not profitable. If we do a job keeping freight that we want to keep, you know, I can take the cost out. We'll make it better. So there's a lot there. You know, the restructuring on the list, there's close to 200 non-driving positions that are involved in either voluntary or involuntary shutdown or layoffs, if you will. It's permanent in nature. So that's big. That's big also. So Those are some examples of the fixed cost items. You know, the executives took salary deductions. So that's temporary. It depends on your look on that. Temporary deductions. Oh, Sam just brought in a good one. We had quite a bit of equipment that was carried over from 2019, tractors and trailers. So that works as well. Fleet, that's reductions in capital costs. It was rough kind of getting started this year, but that's going to happen quite a bit. It's already kind of looking in the months of April and what should happen in the month of May. We're starting to really see that start to show up in the income statement. So between the headcount reductions, the terminal rationalization, and then the equipment plan, it's a significant number of all of those. And there's several more, isn't Well, on the equipment side, a lot of that tradebacks and proceeds from that came in the month of April and early May. We had gotten it a decent way along by the end of March 31st, but there was a lot of that that really got out of the system in April.

Okay. So when I think about your P&L going forward, we're going to see a lot of the impacts, obviously, in salaries and wages with some of the reductions. But I'm assuming as well it's going to go into operations and maintenance is probably going to go lower too and maybe just general supplies.

Operating taxes and licenses, that line, property tax facilities associated with facilities when we're actually able to sell them. Obviously depreciation with the equipment side, the interest expense as it relates to the equipment as well as the as we close the sale of these facilities. So you should be able to see it in probably four big areas, salaries and wages, operating taxes and licenses, depreciation. A little bit of communications, that line, as you roll out telematics and things of that nature relative to the equipment, an interest expense. And then we're doing a lot of work on safety as well. There's a new initiative related to that. And It does appear that the first quarter was an excessive number, so that should be back down to whatever the new normal is. We did note that we are adding about $500,000 a quarter for additional premium expense and to take on some more exposure in this hard insurance market.

Yep, that makes sense. How should we think about DNA for the full year?

Yeah, I mean, the second quarter is going to be difficult to peg with various things going on, changing out equipment and those type things. But I'd say after the second quarter, you're going to see that number continue to decrease a bit. So on a normalized basis, you know, going forward, I think that's going to be definitely below what it was in the first quarter by the time we get done it. Okay, that makes sense. Final question for you guys. The first quarter did include the gain on sale of Orlando of $1.7 million, but taking that out and then backing that out, whatever happened in the second quarter with all the properties Joey was talking about, I think it's significantly below that number going forward.

Okay. Let me ask a final question. I'll turn it over to somebody else. You mentioned you obviously had to move some of the trucks to the brokerage side of the business. What percent of the trucks went to brokers this quarter versus the prior year?

Well, it's not necessarily going to our brokerage, but to the spot market, the increase from what we generally do, we call it 3%, was probably closer to 8%, 9%. Again, end of March and end in April. Kind of tripled. Yeah. When do you see that come down?

We're starting to see it come down. Yeah, as we speak, it's starting to come down.

Okay, good. So contract freight is coming back on, automotive freight will help that, et cetera, et cetera.

That's good news. Well, listen, gentlemen, I appreciate the time, as always, and just tell everyone out there in the covenant world that we appreciate We appreciate the men and women out there in the front lines delivering the freight every day. You take care. Thank you.

Thank you. Our next question will come from Jack Atkins with Stevens.

Hey. Hey, Jack. Hey, good morning. Good morning, guys. And just want to say to John, Joey, Paul, and Richard, congratulations, everybody, on the new roles. You know, it certainly sounds pretty encouraging to hear you guys talk about breakeven in April. And, you know, I guess as we sort of think forward over the course of the next several months and into the back half of the year, I know you're not giving guidance, but, you know, the opportunity is really here with the cost you're taking out to really drive the company back to some sustainable levels of profitability. And I just think that's just very encouraging to hear.

Yeah, we are encouraged about it, Jack. The process has been on for two and a half years, and some of it was when the pandemic hit. I don't want to use the word force. I mean, you know, we've been dealing with the Texarkana for quite a few years, and we would, as we all know on this call, we would get it, have a good year, and then we'd have a bad year, a good year, and a bad year, and When it went to depression in March, it was just time. It was time to say it's over. So, look, that's good, and it is. It's going to take us to places that we have never been, but we've been on this journey for about two and a half years from the contract logistics side of the business to the extraditory. And that's where we're getting to more quickly.

Well, that's great. That's great. So I guess let me switch gears here for a moment and maybe, you know, David, I'd love to get your thoughts on sort of what's happening in the market. You know, you referenced demand trend stabilizing in May. It feels like underlying volumes have kind of picked up after bottoming in early – excuse me, mid-April. You know, what are you sort of seeing and expecting, you know, in the market as we sort of move forward here in the next couple of months? You know, would you anticipate some attrition in the market, maybe to help balance out supply-demand? And, you know, what are you seeing on the contract rate renewal side right now, just given the difference between spot and contract right now?

Yeah. You asked four or five questions there, so hopefully I can get them all answered there. You know, Starting off, as every trucker you talk to, this is my 47th year in trucking, believe it or not. I know I don't look that old. But 47 years in trucking, and April was the worst operating environment I've ever had. But everybody can say that's true for them as well. just a horrible, horrible environment the last of March and all of April. But this month, in the month of May so far, you started, you assisted, assisted starting to build from a standpoint that it's like, the best way to describe it is that I've worked hard, and I know I've got an account over here. It's going to be $2 billion of new business. I know that. We've had every conference call there is. We know they're getting ready to give me the 100 loads a week, and it's going to be $2 billion of business. And we signed a contract. We've done everything. We've had operational meetings with their transportation department, and you're waiting on them to call you. And they were starting tomorrow. And that's really where it's at there is that we now got most of our customers are at least having discussions and talks. And they've gone from I have no idea what that is and when we're going to be back in business to they're starting to come up with plans, whether it's the General Motors example that I gave you there or the retail companies that, because at the end of the day, if you weren't Target, Lowe's, Zone Depot, and Walmart, They were about the only retail people that were working. The rest of the retail that we got up on the board in this room, the rest of the retails just went to sleep for a long time. Some of them got broke. That said, they have contacted us. And they're starting to come up, hey, you know, we think it's going to be the last week of May or the first week of June. That is happening across the board. And so I definitely think that something is starting to build. And I agree that we know that capacity has left the marketplace and will continue to leave the marketplace. And we know it's five tank truck orders. Y'all see those numbers. So whether it is in June or whether it is in October or December, we're getting ready. The industry is getting ready to have a very good time. And I think there's going to be a 2018 reflection whenever that happens. And I think that it's going to last for a year or two, for a long period of time. This insurance is going to get worse before it gets better. I mean, just this pandemic in itself are some crazy numbers that have gone out just as we renewed ours on April 1. And so there is just a lot of stuff that is happening there. But we are starting to sense, again, those conversations with customers, and we're starting to sense it now. Our brokerage is down, the brokerage being the spot market. that we go, you heard me say earlier, it's up from two and a half to eight and a half, so triple, basically. And we just stayed there for a while longer for the month of April. And now that number is back down to 4% kind of number, to give you an idea. So we've cut that in half. It'll be cut in half again, hopefully in the next month. And so the stock market will continue to get better for us. And so as I look at the regions out there today, the West Coast has been very tight, very tight. I mean, you're seeing the boats come in. The boats are flying in. The boats are coming in and the planes are flying in. And so California has been, and that just happened in the last two weeks, I was just getting an idea. It's been very strong. The produce season out of California is very strong. And so that part's exciting. And then I would say the southeast, predominantly because we are in the produce season out of Florida today, that will last about another month. But we have seen a tightening in the southeast. California are the two major regions of the country. And then we're bringing on some new business in all parts of the country. Not, again, it's building. So it ain't there yet. But we're seeing... We're seeing some fruits that are starting to pop out of the tree, Jack.

Well, David, that's great. That's really great to hear, and I really appreciate that answer. Last question for me, and I'll turn it over. But, you know, the stock is trading at, you know, 0.6, 0.7 times tangible book value. You know, your peers are at one and a half or more. You know, most are between two and three. that would imply that there's some need to impair assets or something needs to happen there from an asset-affair perspective. But, Richard, from what you're saying, it doesn't sound like that's the case, but I just want to know what is the stock seeming to miss from a book value perspective? Just any sort of color there because there's just this big discrepancy there versus where you historically have traded.

So kind of going back to where we were at 1231 to 331, tangible book value went from 1507 to 1505 per basic share. Because we took it down, 1.4 million shares took out when we bought those back. And in the second quarter, we've got to look at some things. I'll say it that way. You know, with excess equipment, with us downsizing the fleet, whether the used truck market is. You know, we've just got to evaluate that and see if there is any equipment impairment. There probably is a bit. You know, whatever that is, you know, 10, 20, whatever it is, it's a number. We have some other things that will offset that more than likely. We've got the real estate, for example. We're getting offers on that. that probably aren't quite to book value. And so there's a possible or probable impairment there that moves for sale. But we're going to have gains on other properties. So there's puts and takes in all of that where I really don't think tangible book value is going to decrease much, if at all, by the end of the second quarter. But there's so many moving parts, I wouldn't guarantee one way or the other of that.

Right, but it doesn't sound like – I was just going to say, but it doesn't sound like there's – it just doesn't sound like there's any big change coming. And going forward, if you're a break-even in April in the middle of a pandemic, that's all very constructive.

Yeah, we feel good about our future, as good as we have in a long time.

So if that's true, there shouldn't be any losses that would impair those values. Okay. Okay. Well, that's what I wanted to just get to because I think it's really – I just wanted to follow up on that. Okay. Thanks very much for the time, guys. Thank you.

Thank you. Our next question will come from David Ross with Stiefel.

Hey, David. Good morning, gentlemen. I am. I had a long introduction through the – machine voice. I'm with you guys now. It said I have ascended to the podium, whatever that means. John Tweed, I got a question for you. Welcome to the call. Uh, you know, in your new role, what do you see as opportunities in your initial look, um, you know, in, in, in being a covenant for a while or part of the covenant team, um, What are your initial thoughts on what needs to change? What's easy, low-hanging fruit to improve?

Hey, Dave, Joey and I are going to have to answer that. The reason for it is because John's mobile location, he wasn't able to go through the main process, and so we got on a cell phone and he can't even hear us. Okay.

I thought you were making him wear a mask or something.

I know.

Yeah, he'll be full force on the next call with us. But I know that John is very excited about... what he sees there on the contract logistics side of the business. I would narrow it down to a couple of things. You know, we've been growing that, not including the acquisition of land there two years ago, but just on the covenant side. You know, we've been growing that dedicated side there in 18 to 19, if you remember, about 900 bucks. And we have a lot of growth that is in that side of the business. And then we acquired... the land there business that gave us more dedicated and it gave us more warehousing and PMS opportunities and we continue to grow in those areas very nicely and we want to for the next few years we'll continue to grow in those areas. What he's been working on for the last one year has been taking the contract Dedicated with contracts. You heard me earlier talk about, even though we've had something automotive for 25 years, the contracts are not as solid as what me and you would like, even though the relationship is good and proven that they won't take you to nothing. But he's been working on some of those contracts to make sure that the contracts will definitely be ones that are pure, true, dedicated. And so out of that, say, 900 trucks that he was given under his new role, there's probably about up to 300 of those. Now, we've already dealt with about 100, 120, or 30 of those, but there's probably about 300 of those that is more loose than what it should be, evident during this pandemic as some of them, rightfully so. But instead of saying, can you help me take... 10 trucks out of a fleet of 50, we've had too many, say 100 of them, that were more, hey, my contract allows me to get out. The contract just was not as tight as what any of us would want it to be, and there were too many outs. John has been working on that, and even if it means, from my standpoint, we're almost there now. It's almost there today, and that is take it as low as it needs to go so that when we come out of this mess, the industry and us, we have our company operating in the right verticals, expediting contract logistics, which is dedicated warehousing, TMS, and expediting. And so that is exactly what he has zeroed in on making sure that it's accomplished. And I would say that he still has a little bit to go, but he's made a great head start. Do you agree with that, Joey? Yeah. So I'm speaking for him, but I'm still confident that's what he was telling you.

Okay. And just to make sure I heard correctly, when you talked about the fleet size, the expectation is it's going to be down, at year end 12 to 14% versus 1231.19. So that means somewhere in the 2600, 2650 range. Is that accurate on the tractor count? Yes, that's correct. And those trucks that are being taken out, is that coming out of over the road, team dedicated from contracts that don't pay? How do you think about where those trucks are leaving?

Yeah, it's a little, Dave, mainly solo on the OTR side or what we call highway services side. No team's actually trying to grow our teams right now a little bit. And then some of those businesses that David mentioned on the dedicated side, it's not quite what we want, either contractually or the customer's giving us the truck side. And so I think that it's in both. I think highway is going to sort out to around 1,100-ish trucks, dedicated around 1,500-ish trucks, including owner-operators. And so 2,600, you know, we're probably going to get there a lot sooner at the end of the year. And so we're aggressively trying to adjust that now.

And so we're, our equipment plan is of course huge. And, you know, fuel's been, I guess, somewhat kind as an operating cost, although you guys have fuel surcharges move up and down. Would you say fuel has been net good or net bad for margins over the past few months?

It's been net good through March and April. I think it catches back up to itself starting now, meaning that even though the cost of fuel is lower, our surcharges are also lower. And that works out to be not necessarily beneficial as the cost of fuel goes down. It's kind of sometimes it can help. We're at that place right now where I think it might turn a little bit, but it's still going to remain a good number for us for a while.

Yeah, there's been so much. Yeah, and the broker rate, there's a lot of pluses and minuses of that today.

Yeah, and the broker rate that we had the higher percentage all the way through April and saw that start going down, that revenue all shows up as it's freight revenue rather than fuel surcharge revenue because basically it's included in the freight revenue number on a personal-allow basis. And so as that moves back to contract freight, I guess you could see the fuel surcharge rate improve a little bit, but that would just come out of the freight rate a little bit.

And then last question just on TEL. Do you expect that to stay a headwind all year in terms of – losing money, or do you expect them to get break-even at some point?

Yeah, it'll be a hit-win in the third quarter for sure. And fourth quarter, we should be much better versus a year ago. But they're just... Because of the large client we disclosed back at year end, we're just working through some excess inventory as we speak. So starting, you know, it's moving, but it's just moving slow. The base business is still very good. You know, it's a complete leasing business. Write-offs from bed debts have been very, very small. Our lease purchase business is doing well. know the equipment purchase and sell side that's that's more opportunistic and that can go up and down the market so we're not trying to overreact the you know the company's in good shape and we're trying to put uh equipment to work both on the trailer trailer leasing business is still really good uh and it's slow but it's still okay it's just putting the excess truck inventory to work we're just trying to be smart i think things They'll say, good job. Imagine that. Just imagine this big boat anchor's got to just call the SS inventory. And I think I'm confident we won't be all the way out of it by the fourth quarter, but to your question, the comparison a year ago should start looking much better by the fourth quarter.

Excellent. Thank you very much, guys.

Thank you. Again, if you would like to ask a question, you can do so by pressing star one at this time. Our next question will come from Nick Farrell with the Arbor Group.

David, everybody, good morning. I'm a little confused about the timeline for rationalization. I've heard some different, I think, different data points. David, I think you mentioned we're roughly, you're roughly, well, we are since I own the stock, we are roughly two and a half years into this rationalization process, and then you said later, I believe, or someone did, that we're roughly halfway through the process. Am I missing something, or are we not closer to sort of reaching a point where you feel you've pretty much completed, as you describe it, the restructuring of the business?

Yeah, I do believe that you're right. I went to the board three years ago with a plan before we ever bought land there, et cetera, with a plan. And as we all know, on the expedited side, for 34 years we've been here, the expedited side is a great piece of business. And we love it. It's the heritage of the company. And the thing can make a lot of money. But it also operates in about a 10-point range. OR, and we know that. It's an 85 to 95 bucket of, you know, depending upon is it peak season or is it the end of a quarter or is it snowing outside? And we know that it just has a lot of volatility in that. But when you look over the period of having the expedited size, you know, it's made this company a lot of money, and you see it in the balance sheet of what it's done. That said... We've had for quite a few years the solo reaper side of the business, as it's been a thorn in our flesh, running 800, got it to 1,000 trucks, pretty consistent around 800 trucks operating there. And we all know that we've worked very diligently, say, the last five years, on fixing that and we would have a good year and we'd have a bad year and we'd have a good year and a bad year but we just couldn't get the momentum underneath that the expedited side was very very it was consistent in operating in the in the bucket that i just said there uh and so i went to the board three years ago and said you know we are going to fix this and we want to be expedited side, eventually, instead of being 75% of our business, we wanted to be 25. Whether it's 25 or 30, but a lower number than the 75%. Not that we don't love it. It's not that it don't bring a great value to our company. It absolutely does. There's a lot of value in that expedited side. E-commerce, air freight, all that stuff. And so we started down that road three years ago just internally, and then we purchased land there in July of 2018, so two years ago. And then one year ago, we said contract, that is the purchase of land there reduced the exposure tremendously from a percentage standpoint, 75-25, getting there. And it kind of got us into that 50-40 range with that acquisition. And then our goal was to continue to work on the dedicated side. A year ago, we gave John Tweed the dedicated side of what y'all remember as Covenant SRT. We don't call it that today. It's just Covenant. But the Covenant SRT gave him all the dedicated, which is about 900 trucks. He's worked the last year on identifying that, the good, the bad, the ugly, the one that has the good contracts and the one that didn't have the good contracts. And you heard my statements on that today, that maybe 250, 300 trucks out of 900 that were not acceptable. And we've been working on that. We're about halfway through that group of trucks. And then when the pandemic hit, is when we made the final decision that said we're moving on the otr refrigerated solo side and shutting down the texarkana etc that said uh as you know you heard joey and richard talking about okay these trucks are here they're coming down the plane goes from $3,000 to $2,600, we're bringing the trucks in, the used truck market, good, bad, or indifferent, may be an impairment charge on that equipment because it's coming in, period, and we'll deal with whatever we've got to deal with. And then, so we've got two things happening is, A, getting down to the $2,600, which we're close to there now. We're probably $2,750 as we speak. Getting down to $2,600, correcting the rest of the dedicated side of it, And we believe that it ends up being in the 2600, but we're selling this equipment because on top of just the tractors you heard about, there's also 700 reefers. There's also trailers associated with that that we will be looking at selling during the course of this year. So the question is, is impairment, now it's going to be when we know that the value is correct and how we can move it. So does it slip? Is it all in the second? Does it slip into the third? Does it slip into the fourth? But I really believe that once that we all can shake our head on this phone call and say, you know, from a trucking standpoint, The pandemic is basically over with. We will have our company right-sided in the verticals and the equipment that we should be running to get us a start on prosperity.

So to be very simplistic, it sounds to me like your long haul, the traditional long haul over the road, is going, say, 40 to 35. The reefer is going 10 to 5. and perhaps dedicated, as rationalized, leaves dedicated at roughly 60. So 1,500 dedicated, this is a simplistic map, 1,100 long haul, once rationalized by year-end. Is that sort of the... Yes, you got it. Okay.

You're exactly correct.

And what do you think, just what's your hunch, what your major verticals will look like going into the, you know, sort of the rationalized model? Just roughly, roughly. Like, will Hunter go from 15 to 5? You know, just what's your hunch?

What was your last statement? I'm sorry. 15 to 5, what did you just say? Automotive. Oh, automotive. Yeah. The thing is... is that automotive will probably stay exactly where it's at. Again, we've had someone for 25 years. We're not running out to grow automotive because we know that it can change, as we all saw it here. But most of the dedicated contracts that we've got, Nick, are dedicated contracts that we are truly their in-house fleet And even if their business goes down, we may lose some, you know, variable expense that is there. But 75% of the expense is covered. And so it's not based upon, you know, you've got to run 2,500 miles a week to get this. It's based upon how many miles they can run. And so there is a variable side of that that you can get hit on, like on any of the dedicated expenses. pieces of business, but more important that I look at on this is that those contracts that we've got that are in place that are probably about 1,200 of that 1,500 that we're talking about there, well, yeah, let's just say 200 or 300 that are not. The rest of them are that we may let the customer, let's say it's another pandemic and the customer came to us dying and hurting, We would, just because it's the correct thing to do as business, say, let's take out 10 or 15 trucks out of your 100. But we're not obligated to do that. You would do it because you're in a pandemic and you need to show, you know, the business face with the customer, but the contract does not demand that you do it. That's where we will be at when this is all said and done in the next, whether it's one, two, three quarters.

Okay, but basically by year end is your expectation, I think. Isn't that right? Yes. Okay, and then I have one other question, and that is are there other terminal, you call it rationalization, but other potential terminals that you'll close, and if so, you don't have to tell me which they are, but do you own them, and is there expected capital beyond Texarkana that might be generated through additional sales of terminals? Yes. that's meaningful. I don't mean a couple hundred thousand, but that is a meaningful cash generation opportunity.

I think, Dick, on the terminal side, we're about done. One should close. It's scheduled to close other than this Friday. It's significant. Not a picture of Canada. It could take us a while to sell a picture of Canada. We've got some surprising interest pretty quickly, so we'll see how that sorts out. But no other terminals, which is really the ones that we think about are Allentown, Pomona, which is L.A., Chattanooga, Nashville, Greenville, Tennessee. You may see us move some leases to buy in one of those locations. I mean, Greenville, for example, we don't own that facility. So we may end up buying that facility, moving it from a lease to a purchase. like capital employees. But that would be to take advantage of lifetime exchange treatment on the sellable stages. Other than facilities, you've got equipment, services, and we're looking at everything to continue to rise out of the balance sheet and get capital employees to go out places. Nick, we've got plenty of other levers that we could pull if we had to, but I don't think we will. have to do anything, but I'm going to put it aside and put the cash back into Congress.

So we're in pretty good shape here. Do I remember correctly that Texarkana came with the reefer business of SRT, is that right? That's correct. Okay. I actually have one quick other question. That is, David, you made some comments about spot pricing, and I'm sure it's quite volatile as you bounce off a bottom, but Is there anything unique in either a vertical, meaning the type of business you're bidding on or you're actually contracting to move, either by vertical or by region or anything that gives you some sense that really April or the end of March, April, may have really represented the nadir in this particular cycle, not knowing we could have a see a 19 crisis again. I realize that's unpredictable, but if that doesn't occur, what's your read of sort of the spot market?

I think that the spot market is starting to climb back up on pricing. I think that it hit unbelievable lows, lows that I have not seen in 20 years. from what carriers are hauling freight for, including that 8% or so that we haul it for. I haven't seen those rates in 20 years. And we are now seeing that, I know that we are, and we're also seeing it in our brokerage company, that the margins are starting to get compressed as the carriers have reached a point that says, I will not haul it for this 20-year-old rate. And those rates are starting to climb, and we will continue to see them climb. As I spoke about, some of these accounts that are saying, I'm worried the next month I'm coming home, you'll continue to see the spot market increase to a sustainable rate that you can cover your costs on a spot rate. Spot market.

Okay. I appreciate it. Thank you, gentlemen, very much. Thanks, Dave.

Thank you. Again, if you would like to ask a question, you can press star 1 at this time. I am not showing any further questions in the queue at this time.

Hey, Samantha. Thank you all for calling in today, and we appreciate your interest in coming, and we'll talk to you again next quarter.

Bye. Thank you.

Goodbye. Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.