Q3 2020 Covenant Logistics Group Inc Earnings Call
[music].
We now have all of our speakers in conference. Please be aware that each of your line is in a listen only mode.
Switching of today's presentation, we will open up the floor for questions.
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 the conference over to Paul Dunn. Please go ahead.
Like you show.
Welcome to the total logistics group third quarter conference call.
This call will contain forward looking statements within the meaning of the private Securities Litigation Reform Act Nazi not.
Forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated by the forward looking.
Right.
Well, usually our disclosures and bones, it's each city, including without limitation, our respect for section in our most recent form 10-K and our.
Once again the key.
We undertake no obligation to publicly update or revise any of these forward looking statements to reflect subsequent events or circumstances.
A copy of our prepared comments and additional financial information.
Our web site <unk>.
Other transports.
Yes, that's true.
I'm joined this morning by our chairman and CEO, Doug Parker Co Presidents, John Sweet and Joe We hope.
In summary, the key highlights of the quarter.
We experienced significant sequential improvement in revenue adjusted cost of.
And capital efficiency.
Holding from significant progress in implementing our strategic point.
Well the industry wide factors, including a bounce back in economic activity.
Worry restocking and ongoing shortage of qualified professional truck.
The freight environment for the quarter improved sequentially June.
Robin better than ever.
I wish the September being robust from a supply and demand perspective.
The ability to attract and retain drivers became progressively harder June three.
<unk>.
We downsize our fleet about Sanfer sales.
Versus the average tractor count in the second quarter.
18% versus the prior year quarter in an effort to focus on freight where we can earn an acceptable return and related capital employed.
We exited the factoring business by the state.
Factoring assets.
Transaction that generated 108 million in cash.
Yeah.
We used the proceeds from the sales to see or foresee this portfolio sales portion of that's a metric tractors.
Pay off 131 million in debt and reduce our leverage to levels not seen in over 10 years.
The third quarter of 2020 was the second best of any third quarter in the past 15 years only behind the third quarter of 20 I think.
[noise] Tony.
Results for the quarter to quarter, so to several non-GAAP adjustments.
Net positive impact of eight cents per share related to the screen.
Quarter items, plus the ongoing <unk> for sure.
Cash intangible amortization.
Our expedited segment's revenue, excluding fuel surcharges decreased 8%.
Primarily related to a 22% decrease of 270 trackers and average operating fleet compared to the 20 not bakery.
Versus the year ago period average freight revenue for total mile was down.
Sales were 7%.
Average miles per tractor were up 28%, resulting in an 18% increase in average freight revenue per tractor per week.
The significant fluctuations in the operating profile or the result.
A change in mix still more focused expedited model using a higher percentage of team driven tractors and.
And eliminating the majority of the CIO reiterated fleet and related costs.
Expedite its adjusted operating ratio for the quarter was at 92.
Our dedicated truckload segments revenue, excluding fuel surcharges decreased 15% to 63.3 million.
Due primarily to a 15% or 2% tractor.
Right.
No action compared to the 20 nothing peers.
Versus the year ago period dedicated average freight revenue increased.
Increased sales or 5%.
Average miles per tractor were down.
The fluctuations operating profile or the result of focusing on dedicated freight that has a better long term operating profile.
Dedicated adjusted operating ratio for the quarter was at 94.
Excluding the impact of the truck overweight as third quarter adjustment total operating expenses decreased 22 cents, a mile or 12% compared to the year ago period for our truckload operations.
This decrease was literacy direct result of our strategic plan initiatives of downsizing, our terminal network and sold probably short term cost reductions to improve liquidity in response to covert not saying an additional miles per tractor that more effectively spread fixed costs.
Our managed freight segment operating revenues increased 43% versus the year ago quarter to 47.6 million.
This increase was driven by 64% increase in our freight brokerage operating revenue of 39.4 million, partially offset by a 12% decrease in offering where the revenue of our Tms platform as a result of the ongoing cove it impacts on any large test.
The Grayson Blake fortress, primarily spot project, sorry, sorry, they should remain strong as long as capacity is constrained.
Managed freight adjusted operating ratio for the quarter was a 95.
Our warehousing segment's operating revenue increased 13% versus the year ago quarter to 13.6 million.
Adjusted operating income for the segment increased 9% to 1.7.
Both operating revenue and adjusted operating income increased as a result of the new business startup that began in the third quarter of 2012.
Warehouses adjusted operating ratio was 88.
Finally, we recognized a 1.2 million pretax income from our 49% equity method investment in transport enterprise wasted compared with pre tax income of 2.1 in the third quarter of nothing.
Bill continues to rebound from a key customer bankruptcy that occurred in the fourth quarter of 29.
At this time I'll turn the call over to Joey Hogan to recap a few additional items.
Thank you Paul.
Positives in the second and the third quarter, a worry robust freight market across all of our service offerings number to a significant reduction in our net indebtedness number three a significant reduction in fixed cost and better cost absorption given an increased asset utilization.
Number four sales sequential improvement in earnings.
And lastly, subsequent to the end of the quarter, we were able to close a five year extension.
On our asset based revolving credit facility was favorable terms no fees and retaining flexibility that the current facility provides.
The main negatives in the quarter.
We're one well, it's one of the toughest driver recruitment and retention markets in over 20 years.
Number two there were several large prior period insurance claims eroding the limits of our non extra one policy, creating both the charge to write off the remaining premiums recorded as a prepaid asset and a potential forward looking exposure and volatility.
Over three less excess capacity for capitalization in the spot market.
And then number four the amended agreement related to the disposition of Refactoring segment, resulting in a returning a portion of the consideration and.
And taking on additional risk concerned the portfolio Bassett so.
We've not recorded any reserve for potential claims under the risk sharing mechanism to date and future amounts will be recognized when the requirements of gap.
For recording claims are satisfied.
As we look to the fourth quarter were focusing on delivering superior service to our customers and what is expected to be a very robust peak shipping season with limited trucking capacity.
Similar to the third quarter, a reduced fleet size and more focused and committed model provides unlimited capacity to flex up and take advantage of the peak spot markets. The same extent we have in prior years. However.
We do expect fourth quarter volumes and pricing to be favorable to support sequential margin improvement.
[noise] and 2021 and beyond our focus will be continued execution of our strategic plan, which consists of steadily and intentionally growing the percentage of our business generated by dedicated managed freight and our warehousing segments.
Reducing unnecessary overhead and.
They were true and 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 investing in systems and technology and people to support the growth of these relatively under invested areas.
As we undertake this multiyear effort I would like to remind investors that our goal is to improve our earnings and returns in a matter.
In a manner that is sustainable and less susceptible to upward and downward market forces.
The gradual improvements we expect will be all sit at time by short term forces for example.
2021, we expect underlying progress on efficiency and cost control.
Improved contract pricing and improve safety.
These benefits are expected to be offset to some extent by the return of certain cost pressures.
Overtime, we expect to exit the plant a stronger and more profitable more predictable business, what's the opportunity for significant and sustained value creation.
Thank you for your time and now Shelby will open up the call for questions.
At this time, we will open up the floor for questions.
I would like to ask a question. Please press the star key followed by the one key on your Touchtone phone now I've always count on the phone line indicates when your line is open. Please state your name before posing your question questions will be taken in the order in which they are received if at any time, you would like to remove yourself.
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Starting.
Again I ask a question please press star one.
Well take our first question caller. Please go ahead.
Hey, Hey, guys. Good good morning, and congratulations on a great quarter.
Thanks to that.
I don't know who wants to take this one.
Yeah.
Oh, that's out there, but as we start to think about.
You know the great momentum in the business going into <unk>.
2021, you know Weve heard others talk about double digit rate increases and you know I think its important maybe to kind of walk through <unk>.
You know your business as we go forward into 2020 one's going to be different than I think people have historically thought about covenant in the past.
Dedicated which probably hasn't.
How are you.
Are you guys thinking about the potential.
Contractual rate increases across your business in 2021 can you kind of help us think about that.
Hey, Jack this is Joe we yeah, I'm going to kind of do it on this call what it did last call kind of direct traffic I've been teased so I'll, let John take that one so John once you go ahead.
Thank you Joe and good morning, Jack [noise].
So a couple of things I would say on the expedited side, which is where most of our transactional commodity type businesses.
We're working very hard to get the best right. We can get and also trade off some of that right for sustainability and consistency and commitment of our customers through the entire cycle, but as we see it right now we're looking at rates in that part of our business being up in a range of six diapers.
<unk>.
And then on the contract side, we're looking at three to six and I think it's important for you to recognize unlike the commodity side of our business, where those rights change quickly and you'll probably see a lot of that in the fourth quarter. Most of the contract side, we'll realize itself in the first.
Here because we go through this budgeting process to identify one what has happened to the cost in that operation and what do we need to do pricing wise to keep us in our profit margin than we modeled.
Modeled the business and the beginning of the contract.
Okay. Johnson, just got that clear when you say the commodity side of the business.
More of the expedited fees.
Yes.
Okay.
I'm thinking about absolutely. So the contract side will include our dedicated our warehousing operations and our contract freight management businesses, we called Tms Okay. Okay.
Makes sense.
I guess, just kind of looking at that.
I thought you had a pretty interesting.
You know nobody in the press release, where you said that you know gene.
<unk> said.
<unk> costs.
<unk>.
Uh huh.
It was due to the actions that you guys have taken to structurally improve the profitability of the enterprise to me that that's a that's a significant amount of.
<unk> costs that you've taken out on a per share basis. If you want to extrapolate that so I mean, when we combine that with.
Yeah, you know obviously, we know we've got some cost coming back into the business next year, but when we think about the rate that you did you'll be able to.
The business I I mean, you guys got the 2021 can you help us frame up how we should be thinking about that.
Extra broadly not asking for specific guidance, but it just feels like you've got costs you know.
No in your favor plus range in your favor what else should we be thinking about.
Yeah, Jack let me start them have pitched, Paul Yeah, and you know this year is it's been a challenge for everybody for a for a lot of reasons you know I think.
One of the things when you know the economy was shut down on March the what was it 16 extinct. Thanks, David I just got that day. So much. So March 16th you know none of us that on its own this phone how long how deep how wide the.
Yes.
You know situation was going to be so we all responded in various ways I think as we think about that cost headwind that we mentioned in the release as well as Paul talked about.
Some people quote turns things back on faster or slower than others. We made the decision to just hold up because we're going through a transformation also we felt it was important.
Got to things that we committed to that we're we're gonna be deemed temporary to kind of sustain us through this year. So we've got commitments from our leadership team to do that and so I think as we have moved through the second half and surveyed the situation economically socially where we are in our transformation all the decisions we've made yes.
We do see that coming back we knew it was going to come back. It's just with it and so I think that's important I don't see it as a negative I see it is that it's kind of a some adjustments that we made to weather an unknown storm up time.
And so some people turn it back on the third quarter were choosing to turn a lot of it back on kind of some time first quarter second quarter. So that its culture around kind of what Paul Stone. That's called once you take the cost question. Yeah. So so just a couple things that I'll kinda talk a little bit about eating.
And then maybe even later in a little bit about Q4, because we mentioned that and you can kind of use Q3 is your benchmark or you're starting spot.
We do expect.
A little bit O our improvement in the fourth quarter from the third quarter a lot of it's coming from right, but we're going to have to start giving back to drop by so the freight environment and I'm sure. We'll talk about it at some point the friend of ours is very good thus far in October. So we expect Q4 to be better than Q3 not materially.
Better than Q3.
As we look into next year, if you can't take Q3, and let me take the the rate increases John talked about and then the driver pay here's what we know John said the contract rights will come sooner. The expedited Reits are you going to come later in the year I think we'll have to give the driver pay before we give the.
Get the rate increases on the expedited side of the business and then if you kind of take that $15 billion, you know that we put out there.
<unk> share of five cents a mile. That's it that's a pretty big number and a and so you.
We haven't really balanced outcome of the gating across next year, but I think with cost increases come in before right.
And as Joey said all of those costs come in back in the first quarter that some people either didnt cut off costs.
Yes.
They kind of just whether through it and some people have already cut the cost back home ours are coming in Q1.
Oh, Laura will go backwards and 2021 from the third quarter of a 2020.
We're going to do everything we can do to get as much right and cut as much you know continue to push on overhead and cost containment. We've got a good list of things, but but I think it's safe to say, we think the award will deteriorate some into next year from a adjusted EBITDA or you're seeing in Q3.
Okay.
So Jack I think that somebody to Pauls.
A statement.
We are working hard to not have that happen some of the other things that can impact that is a startup of new businesses.
As our.
Non expedited so dedicated warehouse freight.
And freight management business, there is startup costs on that side of new business and so you know on the truck piece of that will grow that is its drivers are available we liked the dedicated space and so that that will see you know on the warehousing and freight management side there is startup.
Cost it so as we push to grow those.
Yes, the market is favorable from a pricing standpoint.
But there are some there are some costs as we grow that business. So our goal will be to improve our margin, but as we see it today you know I think that building a it's just a consistent model.
I think it's extremely important assets and so we're we're taking a measured approach as we as we move into next year, but it's possible that our wars Pos it could deteriorate a little bit, but we're working hard not for that to happen.
Well take our next question caller. Please go ahead.
Hello.
Caller. Your line is live please ask your question. It's it's Jason Seidl from Cowen How are you guys Hey, Jason. Thank you, but I wanted to just think about a total fleet growth next year in some of your different business lines.
Then talk a little bit about your capex levels, which are really really low I guess, probably lower than we at least would've thought for 21 is.
Just going to be like is there going to be a big catch up in 22, how should we think about that.
Yeah, I think Jason I kind of alluded to just briefly our plans for next year in the fleet is to hold it you we've been to a huge amount of change this year as Paul said, 18% almost 20% of the fleet versus same time period year ago.
It's been has been taken out that's been huge Ah we close some facilities we've.
We've reduced the fleet significantly yeah, we've made some really tough decisions not only because of the kinda to a buyer situation, but also for all business and so we <unk>. The enterprise has been a through a tremendous amount of change so right now.
We're planning on holding the fleet wed like to grow our dedicated piece of that again, if our ceded ness or you know if our unseated trucks are in a good position a we're not intending to grow just to grow sake. So.
So if you look on the truck side of the portfolio expedited is moving rapidly and is doing a good job.
We we got out of the solo Reefer business that was kinda housed in that what we used to call hollaway services. So today that franchises I think is in a good spot I think the margins are going to continue to prove but it's not been targeted for additional capital. So if we can hold it.
Keep done seated in us in a good spot we're happy with that on the dedicated side right time right place right opportunity. Good that's good to see that nets, you might see us grow that a little bit next year.
Okay. So your core cafe specifically.
As you know we put in the release $35 million to $45 million net capex.
It is a low capex and then we should have a lot of free cash flow next year or.
The.
Hey, down bad or whatever.
Next year after that we're back on about a maintenance capex cycle, so you're not going to see a boomerang together why I think some of this is the result of move in more into dedicated and all of our dedicated shorter length of haul dedicated so we are getting more time out of the trucks and up and so this this year for the year, we're going to take advantage of that so well.
So next year, and then back to kind of maintenance capex levels after that.
Okay, that's great that's great.
Great color.
Johnson can I add something you're worried I mean worse.
Worse.
The next three years, our goal is not to grow our fleet at all.
Well, we're going to be working on is rationalize equally across business, it's more profitable and more consistent through multi cycles of the of the business. So if you look at the trucks and sales.
Well, we're we're pretty much planning on staying at the numbers were at.
And then growing our warehousing and freight management business to get our revenue growth Dan.
And then also improving the revenue streams that are across those assets, we own today, but one of the things you're going to hear US talk about I think it goes back to an earlier question to speak to our 2021 earnings is we're transforming our entire model. So that we're placing more of our growth emphasis on those other assets.
Asset like parts of our business is that we're going to go through a little transition while we do that so I think I just wanted to add that.
Well I want to I want to stay a little bit on sort of cash flow and everything else. I mean, obviously your your balance sheet has changed a lot here over the last six months or so.
How should we look at leverage ratio and we're sort of that comfort level I'm, assuming you don't mistake did that to zero.
Yeah, I mean, I think around one makes us really comfortable I agree what he has zero debt. These low interest rates, probably does that make the most sense you might see us dip below one ER and then you know go back up strategically and so but with the cash flow coming off next.
Last year, I think you'll see leverage actually continue to go down in the fourth quarter of this year I think that comfort level for us is probably between one and one and a half long term, but you're going to see it down below that in the short okay.
That's good color to last question one to follow up a little bit on your or commentary. When you were saying that you might dip a little bit below you were talking about sort of that adjusted.
Truckload opper operating ratio between your three segments I'm, assuming and I was assuming that was the commentary for the back half of the 21 not for the full year.
No I think it would be what would you say dip below.
And probably won't get worse, yes, exactly I think that I think that it will but the truckload businesses could could get a little worse next year I think the warehousing business will stay about the same and.
And then the managed freight really depends on what the spot market does help I capacity.
Right, but this was oh, the cost coming back, albeit in the truckload side of business right. But this was the commentary for the back half of you going out the front half of your obviously you had some pretty hefty.
Have to you have to be ours. There that you that you put up in 2020, So I'm sorry, I didn't look at it you are going to you're going to have pretty good improvement on a full year basis.
Yes, yes, I just wanted to clarify the gentleman. Thank you for the time as always.
Thanks, Jason.
Well take our next question caller. Please go ahead.
[laughter].
Yeah, So we've already gentlemen.
Hello, who is it.
Okay.
David Ross from Stifel.
Hey, how are you. Thank you.
Oh, Hey, good [noise].
[noise] wanted just follow up again on the cost pressures it because I'm, having a hard time understanding.
Why.
Margins can't improve year over year.
Obviously to Jason's question, you're not going to do 100 award in the first and second quarter next year. So those are out the window, but.
You you've got almost a year to work through contract pricing and talk to customers and if your costs are going up.
Tight capacity environment I'm not sure why you wouldn't be able to raise price enough.
To get the margins higher because you're still not.
Really earning the cost of capital and getting to that 90 or that you want.
Yeah, Hey, Dave This is Paul here on a full year basis next year, there's no doubt that or will improve.
I think what we're trying to get out there is that.
You can't you can't just annualize what we did in Q3 of this year because of costs that are going to come you know weve talked about the costs are going to come back you know plus right minus driver pay and we'll just have to see where all that nets out as we go into next year, but full year next year 2021 earnings will be higher than 24th and.
Or will be better. It's just the run rates that we were on in Q3, but I think where the question is if.
The costs are going to come back or we're going to have to get enough right to more than offset that.
Yeah [noise].
I would just invite you to push the rate to be able to do that [laughter] you get an extra 2%. That's a <unk> you an extra 200 basis points on the margin.
And then as Joey said, we're going to we're going to try our darndest I think the most to more contracted business. You know some of those are multiyear deals and its can we move the contract rights as fast and as much and with that being a higher percentage of the business now than then the expedited.
No I think that's the million dollar question.
Yeah, I mean, the good news on dedicated contracts of driver pay is the main pressure you can usually negotiate negotiate those individually too.
Recover the increase driver pay costs and not impact the margin.
But on the comment around a little in the way of sequential or improvement.
Now historically, you do have material alarm from Threeq to Fourq you.
Is it not the case this year just because.
And some people have said we've been operating at peak already for several months. So you know the surge in expediting or peak type business has already happened in Threeq you until you get that benefit now and it's not a step function change in Fourq you.
I think a couple of things I think unseated Miss its can we get those drivers in the seats that to operate the full number of trucks that we have wanted to we're already turned out about as many miles per truck as you can turn and so there's really not much left in the tank from a utilization standpoint, you know I'll give you a data point I was.
Looking back at it but if I.
Average the rate increase from Q3 to Q4, and 2015 and 26 thing. It was 25 cents a mile on a total mile basis last year was three cents a mile and so I think is a couple of I don't think the right part will be anything like it used to be when we made a lot of money.
Q4, what Q4 was just you know our biggest quarter.
And we're going to have to add some driver pay and we don't have as much capacity to throw it a <unk> because of the growth in the contract and so.
Again, we think Q4 is going to be better than Q3, but you know I don't think it's work, we're not wrong, it's not going to be materially better.
And then last question just on the expedited side.
Yeah.
I think the comment was made that X.
Expedited is going to take the longest to see increases maybe to the back half of next year.
I'm curious as to why that is because I would expect that expedited freight is the most important freight in the place where you would.
Be able to get price the easiest because that's that's capacity it is absolutely necessary.
Yeah, It's David.
Major thing that you've got there for your members on the expedited side most of those contracts that that have lived with us for years and years and years going from 15 to 20 years. Most of those do not I don't expect you remember this is the most up don't happen until the May June timeframe.
And so in the second quarter late second quarter, even before that starts happening and those are the large major customers that you know that we do business with from all the expedited side.
The World and so you know we just got a large portion of our freight our business that doesn't come up for a bit liberal decreased the rights until late second quarter.
The other freight so two things the other freight that we've got it's Korea is increasing very nicely as we speak and any new business that comes down is increasing nicely, but freight it. So robot that we're trying to take care of the accounts that have been with us forever and not take total.
<unk> advantage of the market that may disappear because the day that our whole goal. Our whole goal is they get the volatility out of the out of our business model that you all have seen for years and years and years is when it's great. We do great. When it's Paul we don't do it well and we are starting to we're starting to show the size.
Eliminated that and up and that's part of it is that the expedited side. It's there it's that that portion of the business, but years ago. It was 75% of the bid that and today Joey expedited he Uh huh.
5% is a bit so you're seeing that so right now its peak. So therefore were going to you know we're going to do whatever you. All remember 70, 80 cents a share because its peak.
That is not going to be but at the same time, we're not going to go back, saying boy I hope I make money in the first quarter were eliminating that side of it so you're going to start to see you know more of that volatility LIBOR and consistency coming back, but I would say, though David that work.
We are probably 50% to this plan you had said that we started out with the board four years ago now it's ever going down that path. The first piece of business. We got on the Threepl with Delta Airlines, that's what we're talking about in the in the bottle here you know we know that.
Issues there. Thank God, it's bounced off the bottom and starting to come back, but then we bought the land their purchase they got us into all the you know the dedicated into warehousing T. I might add that we grow old that side of it and so as I look at it I look at that piece of the business.
That being a bad.
All this virus this entire year and really started the two years that we don't get that business has been within about two operating report Oh, our poet every quarter I mean, it's been very consistent since.
Since we've owned that business, then we're growing that business.
Very nicely and I'm very happy with that but it's coming out of the highway service, it's coming out of the refrigerator that we had and so anyway. The volatility is not going to be as bad as they used to be that you're not going to help zero in the first quarter and earnings the latest in the fourth quarter, because we got 15.
Trups that though to peak.
That help you.
It does it does thank you very much for the color I appreciate it.
Okay.
Again, if you would like to ask a question. Please press star one.
Well take our next question caller. Please go ahead.
[noise], Hi, Scott Scott Group from Walter you.
Thank you.
I guess I wanted to just go back to this point of volatility because I guess I don't know that I understand it we in the first and second quarter. When it was tough we were losing money. It got good in the third quarter. We had you know one of your best third quarters ever it it feels like there's still the same volatility that there's always been and so.
I'm I'm guess I'm I'm not sure why that wouldn't continue in the fourth quarter I.
I must be missing something.
I think Scott one of the things to do.
Just keep in mind I kind of mentioned it in and.
Prepared comments, but Oh were 500 trucks has been taken out of sleep screen first half in the second half a we've sold.
Three facilities between the first half and second half.
And so weve Unfortunately laid off.
A portion of our non driving if you will workforce, we've added in certain areas, but in total our non driving workforce is down quite a bit and so we've done a lot of things from the model. In addition to other cost savings I mean, there's been a lot of work done on a pure cost side and that's about 22 cents a mile.
Reduction in cost adjusted that Paul mentioned in his comments it so.
You're right Great question from a standpoint of [laughter] looks extremely volatile we don't want to work on the cost side and we've tried to identify and transparently say, but how long minute five cents. So that is probably going to come back that were temporary in nature. So call. It 17, if you will but a ton of cost capital Uh huh.
Then as you guys come out of the we had a lot of carryover fleet on trucks and trailers from 20 from 19 into 20 that we've been able to dispose off I'm a we've done a lot. So quotes cost interest expense has been reduced significantly and I think that what is going to continue to drop as Paul mentioned so I.
I wouldn't necessarily it's kind of like two things that were pointing to is the revenue there. The transformation of the model is impacting revenue volatility number one but also a lot of the work we've done on the restructuring side transformation is another word that people are using transformation side has been significant.
Since March and so where are you I think we're we're early on the ball game on on getting this this plan move down the path and so I agree with you Scott, but the proof will be in the pudding and but we're early in the ball game, but it kind of just if you take a 10000 foot.
But you're right.
We've got less than half the debt we had at March 31, We've got exited you know you always had a bunch of terminals in a solo reefer business, where we were losing money.
And and so I think a lot of that stuff will structurally help us.
Weve kept the consistent stuff kept the good margin stuff got rid a lot of calls gotten rid of a lot of capital.
Wouldn't keep tweaking it I mean, it it should be more consistent now well be as tight as we want it I did you on it.
Well, we'll wait and see but it but it will be more consistent and all those changes we just talked about terminals.
People excess equipment.
Exiting the solo Reefer business, all that's been done since April one.
So I don't think weve afforded us the chance.
Let's see the consistency, but I would say every day, we come in here trying to find ways to improve margin cut costs.
Reduce capital and prove our return on invested capital and overtime.
I think you're going to see the results.
And so if we're early in the ball game and we've done a lot of stuff since April I guess why are we just talking about 15 million of cost coming back and not incur.
Incremental costs that werent apparent in the third quarter that could still come out.
Meaning have you done all is every mean that everything that you're talking about about the the restructuring that you're worried that you're doing here did we see the full impact of that in the third quarter or is there still more to go there.
Here's what I'll say you solve that you saw the impact of the low hanging fruit and some of that was hard decisions, but but it was rather low hanging fruit to get there, but we have a list that we are actively working of projects that will continue to take cost out of the business and reduce overhead.
I think we'll see in 2021, how successful we are continuing to strip those out but Paul Paul mentioned.
You know the driver.
The driver.
Market. So there's some cost there's there's five cents a mile on some temporary cost reductions that are coming back here.
Starting in January we disclosed around a range around what those were the driver market situations. It's like we said, it's it's the worst we've seen in 20 years and.
Not all we don't see anything right now that says it's going to loosen up and it's going to be good from the capacity standpoint, but from a from a cost standpoint keep what you have got seated. It's you have to move and I think yes, it sets up a.
As Dave said, we were going to get as much of that or more to pay for that because I do believe the market's going to allow us to do that so I think the insurance market. We haven't talked a lot about but I think that there's some potential headwinds or all of our policies renew April the first.
And all of my primary all the way through our excess false general everything work are all.
And so were anticipating based on what we're hearing and seeing in the market.
Yes.
It's going to be easy, it's incredibly difficult for the whole industry. So for a couple of years now and I don't see that changing and and so that's even if our internet and overall profile continues to get better just to stay tight.
Market and so there's another one that we foresee and we're planning on having a meaningful increase so and so those are probably two biggies. Besides the temporary those are two biggies that are putting pressure on the cost side would be driver wages and insurance.
Okay, and then just last one your your comment around the deal or maybe next year being worse than the third quarter run rate what is the actual pricing assumption youre, making within that come in or are you assuming double digit contract rate increases like others are assuming and then.
Maybe David just help us out and if it's typical ban rates are up double digits, what should expedited rates be up next year.
Let me, let me give you the what's in the assumption Scott and I'll, let David tell you that the work that what could be that is low low single digits kind of like John said, you know probably he gave a range of three to six that's probably got three to force you know presented on the dedicated side and that's probably got.
No mid single digits. So you know six or seven and for the expedited Ah that's that's the pricing assumptions in the in the O. or.
[laughter] deterioration from the Q3 run rate again, not all not on an annual basis and and so yes, David can talk through what the what it could be and what you've seen in the past, but you know on both sides of our business whether at the dedicated side or whether that's the expedited side I.
I don't disagree with what you're saying there Scott I think from.
Lets standpoint, the only 10000 foot level that all of us in the industry are doing.
I don't know how anybody can come out and say that 2021, it's going to be double digit increases I'm not there not been a you know a leader in that side of the world keeping up with what the expedited over the years and I'm, not saying that 20 that double digit increases right I hope that it yet, but I think there were all sitting here too.
They are the industry, hoping how's the election go to go what's gonna have to the economy did the buyers get under control, we're going to go into more shut down or we go as they go to heal itself or is this a pair that thing is going to get back to normal.
There is no doubt that there is pressure on the driver situation. That's the reason why weren't feeling better from a start if whatever the economy is going to do dark order, Judy paid 30% fourth quarter, five or six per se yet or those are all good numbers on the economy, but does it drive or does the <unk>.
Motor vehicle get more straightened out do we get the bars into good throw into schools can do more than 15 feet spacing can they doubled the size of the people come in and that's probably what we're seeing over 100000 more drivers drivers. This year that are not in the market well, there's no doubt that that come back.
And so I can only assure you and I think you probably know is that we will be absolutely a twod oh, what pricing is doing in the marketplace, but taking all the expedited side of the business we.
We will be in tune to what it is doing but I'm not there yet to say based upon everything I, just said virus election economy, but I believe it's 10% I'd be lying to you I don't think it is I hope they get there and I may change that tune come January that they have but I'm not there today I'm more in that six to eight.
That number that I feel confident that we can be able to perform that so only only time is going to be able to tail.
Right and if I can just try one more just if we want to go to if we wanted to connect the dots and say, let's just say, we want to be optimistic and say, we get to 10% on price.
Sure Paul but your margin comments be different.
Yes, yes, they did that they would improve.
Yeah.
Well I guess, it's all right.
But the margin would be better than the Q3 run rate.
That's nothing okay, alright, so we shall see okay. Thank you guys. Appreciate the time, thanks, Scott Thanks for your questions.
Well take our next question caller. Please go ahead.
Hey, guys. Its Jack Atkins from Stephens, just wanted to ask a follow up question.
John You know John.
John as you sort of think about you know the opportunities that will then your dedicated business.
Everything we hear from some shippers and from others in the industry is just there's a significant demand for dedicated capacity.
You know or you see that as an opportunity to maybe upgrade your contract mix your revenue mix with a dedicated over the balance of 2021 is that is that a potential source of upside there longer term.
Yeah, I think if you were here I'd hug your name [laughter].
Yeah go ahead.
Yeah.
[laughter] that is exactly the object is you know if you look in so Jack a couple of things. If you look inside what's really going on in our business today. What you can't see is it through Kobe, we lost a tremendous amount of unstable dedicated business people, we didnt have good contracts with Pete.
<unk>, we just the relationship and the value prop wasn't up the quality that we were trying to accomplish with our model that we're scaling from land. They are so that is the point I was trying to make earlier is.
We're not going to add a lot of Tronox, we're gonna improve our business and our relationships looking at those that will pay is the margin we need to get the return on capital we've invested and at the same time, we're developing relationships that are sustainable.
So that's exactly what you're going to see in some cases, Jack I'm part of the margin struggle that we're going to go through the first half of 2021 is we cut some deals with some customers didn't cobiz. They are the people that we want to build long term relationships with but we gave them a pricing bright to let US go ahead and get started and it allowed us to try.
In addition trucks from people that we didn't see a future with the people that we think we can build a relationship with and bring our value add product to the table to why the tail appreciate it okay.
Okay, all right that makes sense and maybe my last question just kind of thinking about the warehousing business for a moment you know could you maybe talk about the pipeline for new business wins in that in that particular segment.
Oh, it's big.
Biggest I've seen in quite some time I'm not I can't remember the exact numbers I, probably should have in front of EBITDA last time I looked at our pipeline I think.
Deals that would close in early 2021, it was like 70 million.
And and all that would be it up you know a double digit margin what you're seeing in that segment right now or is that sort of a different mix of business.
Typically the first years not the double digit margin.
It's it's much less than that and then when the engineering takes hold we get our.
Our our part of the bonus that comes from creating additional values would the margin goes up.
Okay, Okay that makes sense I'll turn it back over thanks, Thanks, guys.
Thank you, Yeah, hi, but John would you agree that warehousing Oh at least one start up say one start up of your size is a good target.
No absolutely and I guess.
I thought I said this earlier you know our goal is to double the size of that.
Through 2023, that's right yeah.
So Jack that 70 million number that that's what's in the pipeline and so historically once a year and so one of your it's not 70, but we're going to work hard to that's what we're working on now is a pretty big pipeline on the warehouse.
And to do two years instead of on our history has been what we want to take it to too right.
But double over the next three from what you're seeing today I think that's a that's a fair way to look at it and you kind of kind of spread it ratably.
I think the other thing that I would throw out there about the three year plan is once we get our freight under management. That's the freight that we're managing non going on our trucks.
The 350 to 400 million spot <unk>.
We think that there's going to be a tremendous amount of value and allowing us to engineer solutions with multiple customers at that point to include bringing extra value to our dedicated customers and creating engineered routes for our other trucks that will be more consistent allows to get more drugs.
Hours out of a driver's day.
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And we'll take them.
Go ahead Shelly.
Well take our next question comes.
Caller. Please go ahead.
Yes.
Follow up here, gentlemen, and you're talking about the three year plan and then you mentioned kind of.
The rationalization of the fleet and where do you want to be in there.
I guess and so our target associated with the truckload Division where are you pointing.
Everybody in the organization towards and where should you expect.
Expect to fall out on an average year in a few years.
Just Dave or Scott.
Dave Ross.
Thank you.
[noise] [noise] for expedited our long term vision for expedite is we need to get expedited year in year out to an average of kind of mid eightys low to mid eightys to justify the cost of capital and so you know that's that's a long term target. This were expedited needs to get to a dedicated for a a good return on.
Investor Capital you can run at 92 and have a good return on invested capital the ex that it's running mid Eightys all kinda similar so that's kind of the improvement on expedited get it to the same return on invested capital that a solo at a 92 would be because a lot of that dedicated again has a lot to pull off customers try their best to trigger invested capital is.
Much less on the dedicated side plus your run of trucks longer. So your average invested capital is lower than on the expedited side. So hence the difference in a war kind of targets between the two because primarily dedicated to so.
In our model, so that 92 or better on the dedicated side I would say 85 or better on the expedited side is kind of a long term targets to justify the returns that were looking for.
John do you disagree with that.
No I agree wholeheartedly I'd just add to that if you look at the model today. The expedited it's not that far off it's just the more we can create additional value around some are already back money to bring it all the expedited model he shared with other parts of the growing business that that truthful.
Reveal itself along quite well.
Bill.
Thank you.
And we have no more questions in the queue at this time.
[noise] well Shelby. Thank you for a leading us thanks, everybody for the time on the call. Appreciate your patience Oh say publicly thanks for our financial team. A you know a lot of this disclosure is new for the market as a whole.
Required a lot of work, but we hope it's helpful. It's different.
And so if you have questions. Please let us know and we'll continue to refine the disclosures to get it exactly what's needed, but that's the group's done a good job as a result, a lot of changes in the last six months. So you all have a good day and we'll talk to you next quarter.
Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect.
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