Covenant Logistics Group, Inc. Class A

Excuse me, everyone. We now have our speakers in conference. Please be aware that each of your line is in a listen-only mode. At the conclusion of today's presentation, we will open the floor for questions, and at that time, instructions will be given. I would now like to turn the conference over to Paul Bunn. Sir, please go ahead.

Hey, thank you, Katie. Welcome to the Covenant Logistics Group fourth quarter conference call. As a reminder, this 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 uncertainties, and actual results could differ materially from those contemplated in the forward-looking statements. Please review our disclosures and filings with the SEC, including without limitation the risk factor section and our most recent Form 10-K and 10-Qs. We undertake no obligation to publicly update or revise any forward-looking statements for subsequent events or circumstances that may occur. A copy of our prepared comments and additional financial information is available on our website at CovenantTransport.com on the Investors tab. I am joined this morning by our Chairman and CEO, David Parker, and Co-Presidents John Tweed and Joey Hogan. In summary, the key highlights for the corridor were the strong freight market continued across all segments and markets of our business, attributable to expanding economic activity, inventory restocking, and ongoing shortage of qualified professional truck drivers. Against this backdrop, our strategic plan showed significant progress, resulting in better adjusted margins, improved capital efficiency, and a deleveraged balance sheet that affords significant flexibility going forward. Our revenue is approximately the same on a fleet that is nearly 18% smaller than the same quarter last year. We have paid down over $200 million in debt and lease obligations versus December 31, 2020, and $51 million since the end of our third quarter. The ability to attract and retrain drivers was very difficult, as any market in recent history, and COVID complicated driver availability due to downtime of drivers and our shop technicians. Our mix was impacted in terms of revenue and profit as a result of shifting our Freight to our managed freight segment, when expedited and dedicated, did not have a driver available. Our 49% equity investment in transport and enterprise leasing returned to its historical profitability levels, generating a pre-tax income in-tax contribution of $3 million, compared to a loss of $500,000 in the 2019 quarter. And we reported a $44 million non-cash charge in relation to discontinued factoring operations that could become a cash item in future periods. This is nearly our entire exposure of the $45 million indemnification obligation. Together with other adjustments related to our restructuring, the total adjustments were $47.8 million for the quarter. Turning to more detailed results, notable financial results for the quarter included our expedited truckload segments revenue, excluding fuel surcharge, decreased by 13.9%, primarily related to a 27.5% decrease in our average operating fleet compared to the 2019 period. Versus the year-ago period, average freight revenue per total mile was down 10 cents, or 5.1%, while average miles per tractor was up 25.2%, resulting in an 18.8% increase in average freight revenue per tractor. The significant fluctuations in the operating profile are the result of First, a change in the mix to a more focused expedited model using a higher percentage of team-driven tractors and eliminating the majority of our solo refrigerated fleet and related costs in the second quarter of 2020. Expedited's adjusted operating ratio for the quarter was 91.2. Our dedicated truckloaded segment's revenue, excluding full fuel surcharge, decreased 14.2% to $62 million, due primarily to a 10.5% average operating fleet reduction compared to the 2019 period. Another key driver of the reduction was utilization. Compared to the fourth quarter of 2019, total miles per unit declined 10.2% as a result of driver shortages in 2020. This miss in utilization was partially offset by a 13 cent or 6.9% increase in rate per mile. Dedicated's adjusting operating ratio for the quarter was 99.9%. As Joey will explain in detail, this is really a tale of two cities, as half of our dedicated fleet operated in acceptable margins and the other half operated under contracts that need to be replaced or repriced. Excluding the impact of the truckload-related fourth quarter adjustments, total operating expenses decreased 13 cents per mile compared to the year-ago period. This decrease is a direct result of our strategic plan initiatives of downsizing our terminal network and solo driver fleet, short-term cost reductions to improve liquidity in response to COVID-19, and additional miles per tractor that more effectively spread our fixed cost. Our managed freight segment's operating revenue increased 51.3% versus the year-ago quarter to $64.9 million. This significant improvement in revenue is primarily attributable to the robust freight market, executing various spot rate opportunities, cost structure improvements that were implemented as part of our strategic plan, and handling overflow freight from both expedited and dedicated truckload operations when they did not have a driver available. Managed freight's adjusted operating ratio for the quarter was 91.5. Our warehousing segment's operating revenue increased 25.8% versus the year-ago quarter to $14.6 million, primarily as a result of new customer business that began operation in the third quarter of 2020. Adjusted operating income for the segment decreased 3.9% to $1.5 million from the prior year quarter. Warehousing's adjusted operating ratio for the quarter was 89.6%. The decline in the adjusted operating ratio is primarily due to labor inefficiencies that spiked in the fourth quarter as a result of the COVID-19 pandemic. At this time, I will turn the call over to Joey to recap a few additional items. Thank you, Paul.

The main positives in the second quarter were a robust freight market across all our service offerings. Number two, a significant reduction in our net indebtedness. Number three, reduction in our fixed costs and better cost absorption, giving increased asset utilization. Number four, tells improvement in earnings. Five, flexibility in customer service provided by the efficient use of our managed freight segment to cover customer needs when expedited and dedicated like to drive. The main negatives in the quarter were, number one, one of the toughest driver recruiting recruitment and retention markets in 20 years. Number two, COVID's negative impact on driver availability. Three, less excess capacity for capitalization on the spot market. Number four, the increase in casualty insurance costs versus both the prior year and prior quarter, resulting from several severe accidents in the third quarter and fourth quarter of 2020. And then number five, the loss contingency accrued related to the TBK indemnification. Going forward, Our focus will be the continued execution of our strategic plan, which consists of steadily and intentionally growing the percentage of our business generated by our dedicated managed freight and warehousing segments, reducing unnecessary overhead, improving our safety, service, and productivity. This will be a gradual process of diversifying our customer base with less seasonal and cyclical exposure. improving legacy contracts, and investing in systems, technology, and people to support the growth of these previously underinvested areas. Approximately one-half of our dedicated fleet operates under contracts that generate insufficient returns and require replacement or renegotiation. Freight environment and our new business pipeline are both currently robust, which we believe will support our commercial plan. While this will take time, We believe our existing pipeline will reduce ongoing sequential progress during 2021. Going into 21, we are facing cost increases from the end of our short-term COVID-19 programs, increased wages, and higher insurance and claims expense. Effective January 4th of 21, we implemented the largest pay increase in the company's 35-year history for our expedited driving force and effort to increase our team count to targeted levels. In addition, we have replaced our former $9 million and excess of $1 million layer of auto liability insurance with a new $7 million and excess of $3 million policy that were run from February 1 to 21 through March 31 of 2024. While the combination of the increased retention and premiums is forecasted to increase our insurance and claims costs, eliminating the gap in coverage created in the third quarter of 2020 that resulted in a self-insured retention layer of $10 million per claim has been a focus here to minimize our forward-looking volatility. Additionally, yesterday, we announced a share repurchase program, which affords us significant flexibility to allocate capital toward the expected most favorable results for our shareholders. Our stock has traded around book value for the last several months, and we believe the flexibility resulting from the reduction in debt over the last nine months may create an opportunity or has created an opportunity for us to invest in our sales, given doing so is less disruptive than an acquisition or alternative use of cash flow. Now I'll turn it over to John for a few comments.

Thank you, Joey. I want to take just a few minutes and address my transition into a consultant role later this year. First of all, I think I have to point out that, believe it or not, we're two and a half years from the sale of land here to covenant integration has gone phenomenally well we've done a phenomenal job at taking advantage of the strengths of both organizations to create the highest amount of value for the company and its stockholders also i want to point out that one of the things that brought me to this decision was the fact that the team has come a long way in a short period of time. If you look at the plan we laid out almost a year ago, I would tell you we're about eight to ten months ahead of plan, and it's due to the fact that we've got a phenomenal team that work well together. They're embracing this management process and system that we put into place, and it's creating phenomenal results, as you can see, where we ended up at the end of the year with both our earnings as well as our balance sheet. So, The other piece of this is really given where I'm at in life, and if you turn the clock back to 2018, the reason that we entertained selling the company to Covenant, there's some boxes that haven't been checked in my career that I'd like to get some opportunity to do so. My wife reminds me of that daily. And quite frankly, part of it's about this season in my life. There are some elements of the job that I really enjoy spending time with and some that I feel like I've done. And I'm not necessarily looking forward to doing a whole lot more of that. So my goal is to continue to support Covenant with a committed amount of time. I can't say enough about the blessing of this team that we've been left with. to lead this company into the future. And I'm excited about having the opportunity of being a part of helping that team in any way I possibly can, whether it be with building customer relationships, continuing to fine-tune our management and FP&A process, being the voice of accountability. As Joyce says sometimes, maybe the direct voice. It is. Maybe it's directed too loud, right? But the And just overall helping the organization stay focused on items like cost, utilization, overhead, and pricing. So I'm looking forward to that. I'm grateful to this team for being at a point. I don't mind saying if you go back and look before David and I discussed this, and this year I made a big investment in the stock while the window was open. I did that so that not only you, the stockholders, but this phenomenal team that we've been able to put together would see my confidence in being able to make this decision, but also having my money invested in their prosperity. So I'm looking forward to it. I have all the confidence in the world in this group of people, and I'm going to be here to support them any way I can. It's not going to do it five days a week.

And this, David, I appreciate everything that John has done. It's been a great experience. partner in this. He's been a great friend in this, and he's done a fabulous job. This consulting role is not one of picking up the phone and saying, I want to consult. This role is going to be, John's going to be in a couple of days a week and assisting and helping in areas, and in particular, on what we bought from Landair. In particular, the warehousing and the dedicated and the TMS and those areas is where we're absolutely going to be brainstorming with John and continue to. But there is no doubt that John's going to be hanging around with us.

Yeah, one other thing, you know, so this management process and this focus on stability, I know Paul was mentioning a number of things around rates and those types of things. But, you know, our goal was to take this management process and build an organization that's going to be more consistent in its output. of income through multiple cycles, and that's something I really enjoy. So, yeah, I'll be here a lot of time in August, September when we're doing budgets and building plans for the next year, but also through the course of the year helping with customer relationships and anything else I can assist with. So I'm looking forward to that, and I'm grateful to have the time. And for David and Joey and Paul and the rest of the team allowing me the opportunity to still be involved but be able to take some time for the family.

Thank you, John. So, Katie, we're going to open it up for questions now.

Thank you, sir. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star 1 to ask a question. We'll pause for just a moment to allow everyone the opportunity to signal for questions. Thank you. Our first question comes from Jason Seidel with Cohen.

Thank you, operator. Good morning, gentlemen. I wanted to touch a little bit on the dedicated side. I think the comment was made that about half the contracts are operating under insufficient terms. Is that purely price or what other terms that are in there that need to be changed going forward? And then if you could remind us what percentage of your contracts roll over on a quarterly basis in 2021, that would be helpful.

So, John's going to answer that.

So, Jason, a couple of things. First of all, we've got about 1,600 trucks running in what we call dedicated today. I would also point to the fact that about 300 of those trucks, we transitioned from one account to another in 2020. And that's part of the mix that you're seeing in some of the KPIs like yield and those type of things. We've got a lot of trucks today that we're operating that don't have trailers compared to last year. And we've got more trucks where the fuel is passed through. So that's affecting how you look at yield per mile of those. But about 300 trucks were transitioned through the pandemic, which we're very proud of. And the other thing I would add to that is we did cut some deals for the first year of those trucks operations that if we'd have known we were going to be where we are today, we probably would have been a little more aggressive. But we are in a position as we go into 2022 to materially change the pricing on those agreements and still have the stability of those customers are committed to three to five years. So if we go through another cycle, we'll be enjoying the decisions we made. Our goal in 2021 is to transition another 300 to 350 trucks. And we are looking for business not only that will give us a good return on capital, but also give us years of stability through a down cycle. So when you look at what our strategy is around dedicated, we're not just going out and saying, hey, customer, We'll run trucks round trip for a big price while demand's really high. We're talking to those customers where we can engineer solutions and get them to commit a revenue stream on those assets for three to five years.

And as you move these 300 to 350 trucks over, how far below market do you think these things are right now?

How far below? Are you talking about on the pricing?

Yeah, on the pricing side, yes.

So the ones from last year are 4% to 5%. The ones going forward, none.

You know, Jason, when automotive shut down, we had about 300 trucks running in automotive last March, April, May. And as the automotive shut down, not knowing if it was going to be one week or six months or a year, there's no doubt that we took about a bunch of trucks, 200 or 300 trucks. and made some special deals with folks that we can't go back and talk to them until the second quarter this year on Dedicated. And so that's one of the issues.

So the other thing you saw in fourth quarter around Dedicated, Jason, was the fact that in anticipating moving some trucks in 2021, one of the other things that we're doing is hiring what we call flex drivers to put in the trucks driving for those accounts that we know we're going to be exiting so that when we – move those to a new customer the driver will go with us because they're required to being in that flex status instead of just having a driver that we've hired for that truck that when we go away from that account because of where they live or what their their job description is they won't move with the truck so it'll give us a more seamless transition from one account to the other through 2021 and then as we get those trucks placed at the right customer over about a 90-day period we'll put a more permanent driver in that truck, and the salary cost per operation of that truck will start to become more efficient.

And, Jason, that's part of why you saw about a $0.05 per mile increase in driver pay per mile on the dedicated fleet, which was about half of the deterioration in OR from Q3 to Q4. And because those flex drivers are our highest cost driver in the dedicated operations, to John's point, Once the new business gets seated, the flex drivers will then move over and do it again on another account.

And it's helping us to be more responsive to that new customer with having the truck seated up and running, replacing the incumbent if there is one, and get the results.

And, Jason, another statement on that to think through is that both on the expedited and on the dedicated side, I mean, we all know that freight management is not going to operate at a 9810R. There is no doubt about that. I mean, on both those buckets, we went out to the market and grabbed trucks and grabbed trucks on the dedicated side because we didn't have the drivers. And so we had to go fulfill at a market rate. And you can do the math. You know, we're charging the dedicated rate at a market rate just to make sure that we're fulfilling the obligation on both dedicated and expedited. So there's some of that margin of freight management there. that they got rewarded for, which is great, that came out of the profits of the expedited dedicated.

But we've also been able to take some dedicated accounts that didn't make sense for our assets, and they've become a permanent customer of our solutions group, which we think is going to be a real win for us as well.

Okay, I appreciate those responses. My other question here, when you look at, your trouble seeding the fleet. How much of it do you think is driver availability, and how much of it would you sort of put on COVID right now?

Wow. If I knew the answer to that, I'd probably be doing some of my last work and make a lot more money. I mean, the availability of drivers is unlike I've seen in the 30 years I've been in this business. And part of that, Jason, is I can tell you a different story depending on the geographic area. So it's just tough all over for different reasons. But the more we pay people to stay home, the tougher that's going to get. And, you know, the sickness has taken an impact on our population from the standpoint of, you know, Monday I was talking with our Sunoco group, and we had 10 drivers out that were sick. So we're having to find ways to fill those trucks. So I wish I knew that number.

Here's one data point that I think could at least illustrate the point. I know on our expedited fleet throughout the, let's call it the second, third, fourth, early part of the fourth quarter, our student hires, which is important for expedited segment, let's call it half of our hires are half are experienced drivers. That was cut in half because the school capacity was limited greatly as far as how many they could get in the classroom, how many they could put on the truck with the trainer at the school. It really slowed down for everybody, not just us. And so that ended up impacting our system as far as the driver availability on our student side very significantly. Now, our team has worked extremely hard to add additional capacity on the student side through additional relationships that's cost money, frankly, to get that count back up to where it needs to be. More schools probably costing us a little bit more money, but we are seeing the results of that starting to pay off in our expedited fleet, which in this market we think is very important and is in a market that, if you will, we can pass on. some of that on, you know, to our customers because, again, at the end of the day, freight's got to move. They've got to have a driver to get it done. So that's one data point that I know. It's real. It impacted our expedited side pretty significantly, but we have recovered through cost as well as adding additional relationships.

Well, gentlemen, thank you for the responses, and as always, thank you for the time. Be safe out there. Thank you, Jason.

Thank you. Our next question comes from Jack Atkins with Stevens Inc.

Hey, guys. Good morning. Thank you for the time. So, you know, I guess, David, this one's for you, but I'd love to hear, you know, John or Joey's thoughts on this as well. But, you know, with all these limitations around capacity out there, you know, as tough as it is to find drivers, that's got to be good for rates. So can we maybe kind of talk about, if we go back three months, ago, you know, David, you know, you were kind of talking about six to eight percent type rate increases on the expedited side, you know, three to four percent type rate increases on the dedicated side. You know, has anything changed, you know, in terms of your rate outlook for 2021, just based on how the market's developing early this year?

Yeah, there's no doubt that it's been a very strong, it's a strong market. And, you know, as I look at things on ours is to make sure that we're, there's so many moving parts that you're really not going to see The results of what the numbers are going to be, in my mind, until about the second quarter, Jack, as you know, we've got, as I think of it, we usually call it top three. It's really top four major accounts or a second quarter event for us, and most of those three out of those top four accounts or two out of those top four accounts took rate decreases last year, and all four of them will get very nice increases this year. So it's really a second quarter. The second thing as I look here is that it's critical to make sure that we're looking and examining the revenue per truck per week. I mean, it's up very, very dramatically. I mean, utilization is up very strongly, but there's just so many moving parts. So when you look at 6% to 8%, am I getting 6% to 8% today? Absolutely, we are, even out of some of the major customers, even though they won't go into effect until the second quarter. But there's also, when you look at decreasing on the highway services or expedited side of it in the second quarter last year, I mean, there's 450 less trucks than there was 12 months ago, and a lot of those were running in the solo operation at a lower length of haul and a higher rate per mile. And so, you know, all of that is part of the mix. So the thing to look at is the revenue per truck, and it's up dramatically. And I think that Again, it will start showing itself in the second quarter. Because here's kind of the way in which I'm looking on the rate side is that, as we all know, we did an event in the second quarter that just revolutionized our company and put our company on the path of which we are on today and we will continue on. And it's been just such a tremendous blessing, evident by the fact of what we've done on the net side. there's a lot of things that are going on right, but the plan is working. And as we did that in the second quarter, and then as I look at the third quarter, you got a glimpse of it in the third quarter with outstanding, you know, a good quarter. And then we saw another good quarter in the fourth quarter, and we got a lot of runway that is there. Another thing on the expedited side, it goes under the bucket because 99% of the dedicated teams that we classify as dedicated is also low. And actually, if there's any dedicated that is running under dedicated, it goes over to the expedited side. And that has also grown very nicely. And, I mean, we got... Team. Yeah, I'm sorry. The team's going on the expedited side. Excuse me. The team side, if there's any dedicated team that goes on the expedited, of which that has grown very nicely. And... We've got dedicated trucks that are producing over $9,000 a week of revenue on those trucks. So you can just do your own math. It says what's the rates and what's the miles, a high lot of miles and a lower rate per mile, and the things are operating in the low 80s OR from that standpoint. And we'll bring all that on that we can. And actually, we've got another deal that's getting ready to start with another 50 of those kind of trucks. So there's a lot of mix that is going on. And so the thing I'm looking at is strictly the revenue per truck per week, and in the second quarter, you'll start getting a sense for, you know, what it really means as all these trucks have been taken out and the solo operation has evaporated and the lithohol has increased. And, you know, I hope I helped you there a little bit, Jack.

Yeah, David, no doubt about it. I mean, you've transformed the business over the last 12-plus months, and I think we're going to really start seeing that as we move through this year. But just trying to get a feel for, you know, the market is so tight, and, you know, it's got to be supportive of what you're trying to do on the rate side. And I know there's a lot of mixed issues there. So, okay, that makes sense. I mean, when we kind of think about, you know – You know, the balance sheet and cash flow for a moment. You know, Paul, to kind of bring you into the conversation for a minute, how are you thinking about free cash flow this year? And, you know, going back to the prepared comments, the stock is trading just above book value. You know, that new $40 million buyback, how should we think about the plans around that, given where the stock's trading and you're not getting credit for, you know, for the changes you've made to this business?

Yeah, so let me start with, you know, absent any cash that goes out the door for the TBK indemnification or the share repurchase, we're probably going to spend off $50-plus million of free cash flow this year. So you start with around $100 million of net indebtedness, and that's I think that number is probably $50 to $60 million of free cash flow. So absent those two events, you'd be down in that $30, $40 million of net debt range. We don't know the timing of anything relative to the TBK indemnification. Triumph and Covenant are working hard every day to minimize that. But as discussed, we put the accrual up for GAAP accounting purposes. But for argument's sake, let's assume we have to fully fund the $40 million for the triumph indemnification, you're still only sitting at $75, $80 million of debt at the end of the year, which then leads into kind of the share repurchase you talked about. We're not bothered at all by trying to fully fulfill the $40 million share repurchase. It's a serious repurchase, the largest repurchase that I believe Covenant has ever announced. And so the market will dictate how much of that gets filled versus how much of it doesn't. We're fine to fill the full $40 million depending on how the stock trades. So that's kind of where we're at. Even with that, you're still sitting at probably just a hair over one times leverage at that point.

Yeah, absolutely. It's a totally different place from a balance sheet perspective. So that's great to hear. Maybe last question for me is just on tractor count and fleet as we think about this year. Relative to the fourth quarter levels, can you maybe update us on the progress you've been able to make in terms of seeding tractors in January given the driver wage increase that's gone through? How should we think about fleet count in general over the balance of this year relative to year-end levels?

Let me start on fleet count. I think for the balance of the year, I think you just assume a flat fleet count. You may see it tick up just a hair, as John was talking about in a minute, as we go to replacing some dedicated accounts and using flex drivers to do it. You know, we may have to flex up on a few fleets before a few of the dedicated fleets we're exiting come back down in the end of the second quarter. So I wouldn't be surprised at the end of the first quarter to see the truck count grow a little bit, but not a lot. For the balance of the year, though, I think you're going to see a fleet count that's roundabout what you saw at the end of the fourth quarter. We announced the largest driver pay increase on expedited that the company has ever had. I will tell you it has been successful thus far in seeding teams. We're hopeful and prayerful that that continues, both in terms of new entrants coming into the company and stymieing some turnovers. I'll let John kind of speak to the details. Dedicated, especially in a couple of geographic markets, it is really hard to keep trucks seated right now. And in summary, I would tell you some of the things you're seeing around getting trucks seated and shop issues around downed trucks around the country from the fourth quarter are persistent into the early part of the first quarter.

So when I came back from the New Year holiday, I started acting like a child around two facts. One is we had a lot of unseated trucks and a lot of trucks in the shop that were down and were costing us revenue. Those numbers, those two numbers alone on the first day of the year represented about 16% of our fleet. And this morning when I came in, we've worked that down to about 9%. So I think we're making good progress there. We are committed to becoming... the place for a driver to want to work. And we continue to refine our recruiting campaign around building density of drivers in certain geographic pockets and for those drivers being able to offer them whatever job fits the needs of their life based on the season they're in. And we're starting to see, as we get on into January, we're starting to see productivity from that. So if you'd have been in Chattanooga or Greenville, The first two weeks of January, you would have heard me yelling a lot about revenue and concerns, but as we got through last week and we're getting into this week, our daily revenue numbers are starting to show us recovering. We do have a couple of pockets, some driver jobs that, you know, high touch or a little more difficult, that we're still trying to figure out exactly what's the strategy to feeding those trucks, but for all in all, we're much better shaped than we were at the end of December or when we started out to here this year.

I'd add to that, Jack. As Paul said, the pay increase on the expedited side has impacted both the recruiting side and the retention side. The net of those since early December, our team counts up very, very, very nicely. We're excited. I don't want to say what the number is yet, but We'll wait until the end of the quarter, but we're excited about where that is right now.

Okay. That's helpful. Thanks for the time, guys. Thanks, Jack. Thanks, Jack.

Thank you. Our next question comes from Scott Group with Wolf Research.

Hey, thanks. Morning, guys. Hey, Scott. Hey, Scott. If we were to take the driver pay increase, the insurance, some of those COVID costs coming back, Is there a way, when you add it all up, how much cost is that? And then when you balance how good the pricing environment is going to be with some of these costs, what's a realistic level of margin improvement on the trucking side this year?

You know, Scott, I think you're going to see margins improve. As you know, we don't give guidance, but I think the The rate increases are definitely going to outpace the driver pay increases and other cost inflation items we talked about before. I think you're probably closer to a margin that's about closer to kind of where we were in Q3, Q4, averaging them out, as opposed to kind of what you saw for Q4. So I think we will continue to get better. in 2021 and that the revenue increases will outpace the cost increases on a full year basis.

Do you think you could do a, give or take, if I take an average of Q3, Q4, would you do like a 94 OR on the trucking side? Do you think you could do that in full year 21?

I was going to say Q3. In Q1? Okay, your phone was cut off.

Yeah, your phone is really horrible, Scott.

Is this any better, guys?

A little.

About every third word we can't hear. But did you say first quarter? What quarter did you ask?

No, I care more about the year. I was just saying, if you look at, you're seeing similar to the third and fourth quarter. So, what was that, a 94-0-R?

About a 94-0-R. Okay. Yeah, I think on the trucking side, it's in a reasonable range, really, depending on the outcome of getting trucks seated and where pricing shakes out and insurance claims for the year.

Okay. So that's meaningfully better than I think what you guys were trying to communicate a quarter ago. Is that just the pricing environment's gotten a lot better?

The pricing environment, yes, Scott, is a lot better. The pricing environment is very good. It was a lot better than where we were back in October when we visited.

It's really about the pipeline and what we're anticipating the change in the mix of our dedicated business looking like between now and June. I mean, our dedicated pipeline is very robust to the point that we're not only getting a good rate, we're being able to get some real good commitments on the contract terms. and the time so that if the cycle does turn, we've got some good cash flow. Yeah, I would agree. So that would be what I'd be speaking to. You know, the expedited business and our freight management business and our warehousing business today is hitting off all cylinders. And if we can continue to grow our team count, that's just going to get better. Scott, where the real opportunity is is transitioning these 300 trucks that, quite frankly, are the least performing vehicles

legacy business that we have. So, Scott, I think you heard John and Joey just speak to the revenue side, and we've got more visibility. I would say the other thing that's changed is we've got more visibility into costs. I mean, you saw where we firmed up our insurance deal for our primary layer. We didn't know what that looked like the last time we spent time with you. We didn't know what our driver pay increases were going to look like the last time we talked to you. We've got more visibility into that. And then some of the items... where we expected costs to come back. You know, a big one was group insurance because of the pandemic. We saw a lot of that cost go ahead and come back in the fourth quarter. So we've kind of gotten a feel, you know, kind of got a little more solid footing on what we think our cost structure is going to look like. And so maybe what you're hearing is we've got a little more visibility into revenue and a little more visibility into cost. And so, yeah, we're probably incrementally more positive than we were. at the end of the third quarter looking into 2021?

Yeah, I think the pipeline is probably, if you say freight, freight was good in October, really good. It's really good today. I think pricing was really good in October, and it's really good today. I think the visibility on the cost side that Paul mentioned has been significant as far as our picture. I think the one piece that has moved meaningfully is the pipeline. It's not that it wasn't good in October. I mean, it is firmed up and is really strong across all the segments right now. So that, that, that would be the piece that I would look to and where you'll see evidence is either in pricing or utilization or new awards, uh, things of that nature. So, and hopefully those are those that affect drivers, um, As David's already mentioned, it should show itself in the revenue per truck as we move into the late first quarter, into the second quarter. But the pipeline is very robust across all the segments right now.

And it's not just demand, it's partnerships. That's right. Which is what we were concerned about in the third quarter. We knew there would be a lot of demand. We just didn't know if there would be a lot of partners out there looking for a good service provider.

Scott, do we have any questions? No, that was helpful. Thank you, guys. All right. Thanks, Scott.

Thank you. Our next question comes from David Ross with Spifle.

Yes. Good morning, gentlemen.

Good morning, David.

Let's start with a couple of clarification questions. First, on the insurance, you talked about having the $10 million deductible. Was that just for a brief period of time as you didn't have that nine in excess of one covered, and now that you've got seven in excess of three, your deductible basically went from $1 million to $10 million back to $3 million?

Yes. It went to $10 million in August and affected February 1. It's going to go back to three, and before that it was one. So, yeah, we kind of had a – you're correct.

Okay, and then during that five, six months of exposure, how many accidents pierced that $3 million to $10 million layer? Did you have any in that range?

None pierced the $3 million to $10 million layer. You'll see our insurance cost was higher in the fourth quarter. I mean, it ran 18 cents a mile, and truckers can't make good money at 18 cents a mile insurance. We did have a couple accidents that pierced the excess of $1 million. where we didn't have any coverage. So there were a couple that were above the one but less than the three in that intervening period. But we also didn't have the premiums there in that period because we wrote those off at the end of Q3. So it was probably about a wash. But we're looking forward to having some more solid coverage to minimize volatility in the next few days.

And then on the TFS sale, I know there's been a lot of puts and takes on that as you're trying to get it done. How should we think about that $45 million indemnification or holdback? Is it effectively going to be a $63 million sale price rather than $108 million? Or what's your view of how much?

I think that's a fair way to look at it. Yeah, I don't think you'll see anything else coming forward out of that. You know, the full potential was 45, and I think we put up 44.2. And so, like we said earlier, we're working with Triumph to minimize the exposure on that number. But where we stand today, the estimate on it was 44. Okay.

And then on dedicated, a lot of demand for dedicated right now, given the capacity issues. It's got about 1,600 trucks running in dedicated. You just said about half are acceptable and half are not. That's about 800 trucks running. It's probably a 110 OR. But you said that the pricing is only 4% to 5% below market. Help me square that because it sounds like pricing is 15% to 20% below market or the costs are just way too high.

Well, of those 800 trucks you're referencing, I don't know if it's quite that many. Remember, part of those, we cut deals. As we mentioned, it's a transition business. But the other part of it is the business where we're looking to transition over the next six months. So I think, you know, that's kind of what we're up against. And there is some cost that's really high in that the drivers we put in those 300 or 400 trucks we're going to try to move out this year, we've got flex drivers in, which, you know, are about $150, $200 a week more expensive than if they had a permanent driver in them.

Yeah, Dave, when you're comparing your, you know, The math you just did, you're bouncing off the fourth quarter number, which did have a little bit of that excess insurance in there for some larger claims, and it did have this flex driver deal John talked about in there. If you look back to Q3, it ran a 94 OR, and so I think when you do your math, kind of averaging them out or using something in the mid-90s as opposed to the high 90s, taking out some anomalies in the fourth quarter, that that number of trucks and, you know, 5% under market, I think it gets closer to reconcile.

So once you get through this period of adjusting the contracts past 2Q and changing out some of the business, say you look at the 2022 or 2023, what's the targeted OR for the dedicated segment?

I would say given the number of trucks we're operating today where we don't provide trailers or fuel, it's probably going to be in that 90 area. Okay. Thank you. The return on invested capital is really good at a 90. But, you know, like I said, we're not investing in the fuel. We don't have the trailer for this.

Yeah, we said, to refresh kind of the last quarter's call, we went through a little discussion about that. Long-term, dedicated, you know, the high mark is a 92. On the expedited side, the high mark is an 86. So that's what we're pushing both of the asset divisions to. And that's where we're heading. We're confident we've got a good plan to get there. A lot of it is the average situation, but that's where we're heading.

90 would be terrific. Thank you.

Thank you. Again, as a reminder, please press star 1 if you would like to join the questioning queue. Our next question comes from Roger Bradenburg with Private Investor.

Hey, good morning. Just wanted to congratulate you on being able to pay down so much debt for the last little several years. And my question is basically on cash flow. Going forward, it's really exciting to see the share repurchase program that you've put in place. But going forward, I just want to ask about your methodology about your cash flow. Is there a certain amount of leverage that you feel comfortable with? that you're probably going to maintain and going forward in the next year or more, what do you expect to be able to use your excess cash flow for?

Thank you. Yeah. So, Roger, thanks for the question. A couple things. In the next year, I would say the excess cash flow would probably be used for some combination of the share repurchase and any of the indemnification payment that's due to triumph. After that, it will probably be to continue to delever or potentially look at acquisitions, when and if they made sense and were accretive to the business. From a leverage standpoint, we probably target staying below one and a half, but two is probably where we don't want to get below or get above.

Yeah, I think, Roger, what you would see, what we did with our land air acquisition, is you may see it tick over that two or up to it or around it, possibly up, but our target will be to get it back down below that two, heading it back down to that one and a half kind of long-term target as quick as we can.

Okay, great. Thank you. Okay. Thank you.

Thank you. Our next question comes from Nick Farwell with Arbor Group.

David, I'm curious what your expedited rate increase was in January. Can you give us an approximation of what that number was?

You know, we've averaged, to give you an idea, the big four, again, don't happen, Nick, until second quarter. And we are at about a 7% increase. If you were to just go down – and look at all the other ones that have been done since August. That's including since August, September, October, and we're actually going back in for another round on those that make us average 6.7%. So you got five that were done in September before you really saw what was going on in the marketplace, and we will go and we're speaking to those customers again But the big four are such a large portion of the business, a big portion of the business, over 50% of the business. So what you get out of those is going to be very nice. And we already know that those numbers have got an A-plus kind of number on them. We feel confident two of the four are done, and we're negotiating with the other ones as we speak, and we feel like that we will get there. We don't have it done yet. It's a second-quarter event before it does, so if that gives you any idea.

Yeah. Would you expect an additional – who knows because the economy is fragile at best, but would you expect another dedicated price increase either this spring, maybe late – early spring, late spring, given what you're seeing in the market today?

Yeah, we've really done the way in which we're doing the dedicated side. And, again, there's a couple of moving parts there, and that is ones that need to be addressed as we speak, those 300 trucks or so that need to be addressed, and we will be addressing them, period, as we speak in the next – anyway, that's happening. And then you've got about another – 300 trucks on top of that were ones that, when the automotive shut down in April, you know, that we just went. We just went to the customers, and we gave them, you know, long-term contracts, but we can talk rates after a year, and that year doesn't happen until the second quarter that we'll be able to go into those customers and ask to make those rights. But we were very grateful in April when they were saying, here it is, and we were sitting there saying – Is it in the black? If I'm in the black, I'm happy. And that's where we were as automotive was shutting down. And so there's 600 of the trucks. The rest of them are ones that we talk about on a yearly basis. And what we give on that is not to take advantage of the marketplace. It is the long-term contracts that we get with those customers on three-, four-, five-year contract agreements that allows us to go through ups and downs of the cycle. And so that's the way in which the dedicated – yeah, John.

Let me add also, more and more of our dedicated contracts, since we went to a more committed model of dedicated, have driver surcharges or indexes in there. So if we see this driver pay situation go for another round, we will absolutely go back to get the customers to reimburse us for that. So –

I was curious more about the long-haul expedited business. I understand the dedicated because you've addressed that before. I'm just curious about the pricing environment for long-haul.

Yeah, the pricing environment for long-haul, I would say, on the low end is in that 7%, 8%. And what I mean by that is accounts that you're operating at 85 alarms. You know, 7%, 8% is a good number. It's a good number. And so, you know, I think on the low end is that still that seven, eight, you know, last quarter was six to eight, but six to eight, seven to eight, somewhere in there on great accounts have been with me forever. I'm not going to, I'm not going to go up there and say, just because I can get 12 out of them, I'm going to go get a 12. Cause believe me, they don't, you know, a year from now, it may be going negative 12 and we're not going to do that. And so, But for an existing piece of business, that would be a better question, Nick, would be to bring on a new account today, those rates are basically 10% higher than our existing rates.

Would you expect, given the current environment, that you might be able to affect another rate increase on long haul? Yeah. Yeah.

Sometime this spring-ish or so, given the – Most of those are open to, hey, it's time to call.

Especially the ones you raised back in the late summer.

We're doing that now.

I'm curious if someone could comment, if you have any sort of notion about the impact on your inventory replenishment post the holiday, given the dramatic shift from bricks and mortar to online e-commerce. Has that muted what you normally would see as a better retail replenishment cycle?

Oh, wow. That's a great question. You know, what we are seeing out there is there's still a lot of have and have not. As I think about the big box retailers, Their inventory levels, you know, in the last couple of weeks I've been speaking to some of them, their inventory levels are still extremely low. And then it's interesting also, as I'm talking to some of their suppliers, that, you know, some of the large box retailers have gone to this. to their suppliers just-in-time delivery. We have brought on about, John, 60 dedicated trucks. I think in Mississippi and Ohio, we've brought on about 60 dedicated trucks in the last 45 days. We're in the process of bringing them on in the last 45 days strictly because of the service requirements that the big box retailers are making. So you can see a couple of things happening. I'm seeing the big box guys that are saying, I've got very low inventory, and I'm seeing some of their vendors that are increasing inventory levels to be able to make sure they hit on-time performance that the big box guys are now regulating. That's just happened, John, in the last five, six months?

Maybe the last 60 days. Our consumer products companies that we do business with, especially those that we do business with on the warehousing side, We're seeing them build what I would call enormous inventories and products. We're out all over the country finding outside or flex space for companies that are, yeah, their inventories are exploding. So there's something going on between the retailers and the consumer product companies that those finished goods aren't moving right now. So I don't know the answer.

Or they're moving quickly off the shelf. I mean, some of that stuff, PG comments, it's going off the shelf quickly. They just can't replenish it fast enough.

That is correct. But we're also finding it interesting that the big box are making some of the suppliers increase levels of inventory because it's the only way that the suppliers can hit the on-time performance that the big retailers have. or making, because we're growing the warehouse side of our business because of that, and we're growing the dedicated. So I don't know. It's just an interesting deal. But overall, inventory levels are low.

Yeah. And then my last question, Joey, could you just easily break down between dedicated expedited revenues, not operating projects, revenues between dedicated, expedited, and I'll call freight management and warehousing, the third sector, and where they are today and where you might think they would be, you know, as a goal. You commented about OR goals, just that same sort of mindset, that where do you think the revenue mix would be whenever your OR, say, and dedicated achieves the 92 or the 86 on long haul? Just a rough feel.

Yeah, if you go to the four pieces, warehouse and freight management, our goal is to double that business in three years. So that's the goal on those two pieces. And today I have to do the math. Paul, what's that? About $200 million.

Yeah, between both of them today. Today is a percentage. They were 35%, 36% in the fourth quarter, but that was a big spike in managed freight.

So we want to double both of those pieces. I'd say long-term our warehousing business should be sub-92, depending on startup, startup expenses for an account and things of that nature, and then freight management. Frankly, we jerk your arm off for a long-term rate of 95, but 95, 96 on that business. Our dedicated business, we've already said, you've heard John say it targets 90. I've said 92 to 90 at the top end. We are open to growing our dedicated business in total. You heard a lot of weed and feed, we call it, mix changes this year. So you kind of put that in hopper and you say, okay, they might go up a little bit, down a little bit, but Paul has already said they want to keep it flat. But long-term, we're open to growing dedicated, right time, right place, right industry, and kind of that sub-90, 92 OR. So a little capital addition and dedicated, we're fine with. Expedite, on the other hand, our mission long-term is we're trying to hold the fleet. Let's call it around 900 to 1,000 trucks. That's where we're happy. And so... The long term over the next three-ish years is to drive the margin better and really focus on margin, return, industry mix, which is going to be hard to move that because historically the LTLs swallow up a lot of the expedited trucks. But hold that. So no more capital. Really weed and feed inside that book of business. Produce more profits, more consistent if we can. which all of that revolves around the driver product that we're able to put together for the drivers that are willing to team up. So that's kind of the four buckets. Now, the end result of all that, let's say if we achieve all of that, our return on invested capital should be 12% or higher, pretty, I don't want to say easily. That's not easy to get all that average. But we should be north of 12% return on invested capital, around $1 billion. plus or minus a little bit of revenue and producing, you know, very good returns on the OR, EBIT, gross margin, earnings per share level. I'm not going to tell you what that is. In the next couple of years.

Right, over the next three years. If you look at the billion-dollar plan, it's $100 million of warehousing, $300 million of freight management, $300 million of dedicated, $300 million of expedite. Yep. And we're getting there pretty quick. Right.

In some cases, quicker than we can. That's right. So what it does, though, is what you're seeing with the announcement that we made around the stop-by-back, that is playing out. Yes, we had a lot of decisions that we made this year to kind of, quote, survive the virus, if you will, because we didn't know. Now, a lot of those decisions were already in play. We were starting, let's call it a terminal rationalization program. But when that hit, we started accelerating those. And so... I think that as you play that out, as John said, it's accelerating and moving quickly. The cash flow production is significant, and the reduction of leverage is meaningful. Or another way to say it, the flexibility around the capital, around the enterprise is significant.

So our billion-dollar model – only requires replacement CapEx.

That's right.

Exactly. Yeah, I agree with that. So we get to a billion in gross revenue with replacement CapEx.

Which means, just in a conceptual sense, you should be generating very substantial amounts of free cash flow.

Yes, sir.

As you identified earlier. Right. Okay. Thank you very much. I appreciate it. Thank you, Nick.

Thank you. Our next question comes from Daniel Moore with Scopus.

Gentlemen, how are we doing? Always good to be in company with Nick Farwell. I'm going to dovetail in on some of the questions he was asking, specifically around cash flow, because it seems to me that's a very important narrative for the company going forward. Love what you guys are doing. I can't remember the last time I heard a story like this and the stock was trading at 8.1 times forward PE. So here's the question I want to ask. $35 to $45 million worth of CapEx. Let's break that down if we could, just so we have a really good understanding what the buckets are this year so we can start building things out from here.

So on the $35 million, Dan, that's pretty much all contractors this year. Um, no trailers. Are you wanting to break it down between expedited and dedicated?

I just like some granularity so we can, we can understand how that money's being spent. So we can, we can start thinking about pre-cash flow going forward. So you're welcome to do it however you'd like, whatever's easiest.

Yeah. So, I mean, it basically, it is all revenue, very, very minimal non-revenue equipment CapEx. So it's pretty much all replacement of, uh, replacement of trucks that are near end of cycle. And I think probably maybe the MFL fine, but what is maintenance capex for our size fleet? Maintenance capex is probably going to run up to $50, $55 million a year.

So this year, as far as the plan is, because of all the huge reduction that we had this year, down 20%, almost 600 trucks, if you go look at where we were at the end of 19. Right. The result of that big rationalization has left us with, and what we chose to dispose of, has left us with another low capex year. So it's, Paul said, 35-ish plus or minus, and that's 20 million-ish under normal maintenance capex for the 2,600 trucks, plus or minus. So you're going to have a capex that's going to grow back up another couple hundred, let's call it 20 million or so, Trailers will be small again in 22 just because, again, where our trailer fleet is because we reduced our trailer fleet significantly also, plus it's a much longer asset. But you move into 22, depending on where your view is on EBITDA, being able to swallow another $20 million, we're confident of that. So you kind of look through the leverage ratio. That's kind of what I would draw people to. And I think Paul said it earlier, even with TBK, even with the buyback, we're going to be at or under one for this year. We're going to be at or under one this year. And so that, as we lead into 22, with the growth that John's mentioned that I talked about of the non-asset-based businesses, as we move, if we continue to grow that, as well as move the margin, and a couple of them are already at those type margins, it gives us a lot of flexibility around what the cash flow picture and leverage picture looks like over the next couple of years.

So if we could maybe just, as a follow-up, transition into the dedicated discussion one more time. We're talking about 1,000 basis points of margin improvement potential. That's what you're targeting, 800 to 1,000. Timing. Now, I know second quarter we're going to see a lot. Third quarter, I would imagine, as much as well. Could you talk to us about, obviously we don't have a good sense of whether or not everything's on a one-year contract, but in terms of your ability to progress, are you going to need two years, 18 months, 12 months? Could we talk just a little bit about glide path on achieving that opportunity set? And that's it. Thanks.

I'm not sure I understand the question.

We said we're at a, let's call it 199-100 OR in the fourth quarter. We have a target to get down to 90-ish, 1,000 points of difference. What do we feel is doable from a margin, from an improvement standpoint, you know, from 100 to a 90? Is it two years to get there? Is it three years to get there? Is it a year to get there? Yeah. I think it's between four and six quarters. So we're confident, Dan, that we're going to make some very meaningful improvement this year.

I think you'll see improvement every quarter, and it takes four to six quarters to get there. And the wild card is simply not concerned about pricing. I am concerned about some of our cost objectives, just because we've got to go do the work, and then the driver environment. One of the things about dedicated is it takes a little bit longer. Our philosophy has always been – figure out what it takes to get the truck seated, then go get the money. And sometimes that just takes a little longer. I mean, it took us, longest I've seen on some of our Northeast operations, it took us eight weeks to figure out the right pay package to keep some of our operations seated. And then we went and confronted the customer with it. So I would say between four and six quarters, we should be in that range.

Right. It strikes me that we are definitely in a structurally impaired driver market, the likes of which is unique. You've got FedEx, UPS, Amazon, which created a huge pull in terms of driver availability away from over the road to milk runs in cities and the like. Obviously, drug and alcohol clearinghouse. and then just schools being shut down. So, yeah, I think you're going to have to flip the script on that. When you talk to dedicated customers, you've got to have the ability to go back in there. But I appreciate the time, gentlemen. Thank you. Have a good day. Thank you, Dan.

Thank you. At this time, I am showing no further questions. I'll now turn it back over to management for closing remarks.

We appreciate everybody's time today. And, Katie, thank you for your assistance. Thanks, everybody.

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