Q4 2020 Covenant Logistics Group Inc Earnings Call
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 Button. Sir. Please go ahead.
And thank you Katie and 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 and I think 95.
Forward looking statements are subject to risks and uncertainties and actual results could differ materially from those contemplated on the forward looking statements. Please review, our disclosures and filings with the SEC, including without limitation the risk sector risk factor section and our most recent form 10-K and P T.
10 Qs.
We undertake no obligation to publicly update or revise any forward looking statements or subsequent events for subsequent events or circumstances that may occur.
A copy of our prepared comments and additional financial information is available on our website and covenant transport Dot com on the investors tab and I'm joined this morning by our chairman and CEO, David Parker and co presidents, John Sweet and Joey Hogan.
In summary, the key highlights for the quarter were the <unk>.
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 extra tejas play and showed significant progress, resulting in better adjusted margins improved capital.
Efficiency, and and Deleveraged balance sheets and afford significant flexibility going forward.
Our revenue was approximately the same on a fleet that is nearly 18% smaller than the same quarter last year.
We have paid down over 200 million and debt and lease obligations versus December 31, 2020, and 51 million since the end of our third quarter.
The ability to attract and retain drivers was very difficult as any market in recent history, and COVID-19 complicated driver and mental 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 freight to our managed freight segment when I asked but I did a dedicated and not have a driver of value.
Our 49% equity investment in transport and other cross leasing returned to its historically historical profitability levels generating a pretax income truck and tax contribution of 3 million compared to a loss of 500000 into 'twenty.
And we reported a 44 million noncash charge in relation to this continued factoring operations.
Could become a cash out on in future periods. This is nearly our entire exposure of the 45 million indemnification obligations together with other adjustments related to our restructuring. The total adjusted adjustments were $47 8 million for the quarter.
Turning to more detailed results notable financial results for the quarter included our expedited truckload segment's revenue excluding fuel surcharge decreased by 13, 9% primarily related to a 27 five per cent decrease and our average operating fleet compared to the 29th Street period.
Versus the year ago period average freight revenue per total mile will stay on 10 cents or $5. One per say on average miles per tractor was up 25.2%, resulting in an 18, 8% increase and average freight revenue per truck.
The significant fluctuations in the operating profile are the result of.
First a change and 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 cost and the second quarter of 'twenty and 'twenty eight.
Expedite its adjusted operating ratio for the quarter was 91 point too.
Our dedicated truckload segment's revenue, excluding fuel surcharge decreased 14, 3% to $62 million due primarily to 10, 5% average operating fleet reduction compared to the 29th in theory.
Another key driver of the reduction was utilization compared to the fourth quarter of 2019 total miles per unit decline pinpoint and 2% that's true.
A result of driver shortages and 'twenty and 'twenty.
This is miss and utilization was partially offset by a 13 cent or six 9% increase and rate per mile.
Dedicated is adjusting operating ratio for the quarter was 99, 9%.
As Joey will discuss book explain in detail. This is really a tale of two cities because half of our dedicated fleet operated and 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 direct result of our strategic plan initiatives of downsizing, our terminal network and solo driver fleet.
Short term cost reductions to improve liquidity and 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 and revenue is primarily attributable to the robust freight market executing various spot rate opportunities cost structure improvements and 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 adjusted operating ratio for the quarter was 91 five.
Our warehousing segments 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 on the third quarter of 'twenty and 'twenty.
Adjusted operating income for the segment decreased three 9% to $1 5 million from the prior year quarter.
And warehouses warehousing as adjusted operating ratio for the quarter was 89.6, the decline and the adjusted operating ratio was primarily labor due to labor inefficiencies.
And the fourth quarter as a result of the COVID-19 pandemic.
At this time and I'll turn the call over to Joey to recap a few additional items.
Paul.
The main positives and the second quarter were a robust freight market across all our service offerings.
Number two a significant reduction.
And our net indebtedness.
Number three a reduction and our fixed cost and better cost absorption, giving.
Increased asset utilization.
Number four tails improvement and earnings five flexibility and customer service provided by the efficient use of our managed freight segment to cover customer needs when expedited and dedicated locked up.
And the main negatives in the quarter were number one and one of the toughest driver recruiting recruitment and retention markets and 20 years.
Number two coverts negative impact on.
Oh and 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 and the third quarter and fourth quarter of 'twenty and 'twenty.
And then number five for the loss contingency accrued related to the T V K indemnification.
Going forward our.
Our focus will continue will be continued execution of our strategic plan.
Which consist of steadily and intentionally grow and 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 cyclical with less seasonal and cyclical exposure and.
Improving legacy contracts and investing in systems technology and people to support the growth that they previously underinvested areas.
Approximately one half of our dedicated fleet operates under contracts that generate and sufficient returns and require replacement.
Or renegotiation.
Freight environment and our new business pipeline are both currently robust, which we believe will support our commercial plant.
While this will take time, we believe our existing pipeline will reduce ongoing sequential progress during 2021.
Going into 'twenty, one we are facing cost increases from the end of our short term COVID-19 programs and increased wages and higher insurance and claims expense.
Effective January 4th of 'twenty, one we implemented the largest play increase and the company's 35 year history for our expedite a driving force effort to increase our team count to targeted levels.
In addition, we have replaced our former and 9 million in excess of 1 million layer of auto liability insurance with a new 7 million and excess 3 million policy that we're on for February. The first 21 through March 31 of 2024.
While the combination of increased retention and premiums is forecasted to increase our insurance and claims cost eliminating the GAAP and coverage create and the third quarter of 'twenty and 'twenty that resulted in a self insured retention layer of $10 million per client has been a focus here at and minimized our forward looking.
And it.
Additionally, yesterday, we announced a share repurchase program, which affords us significant flexibility to allocate capital towards the expected most favorable results for our shareholders.
Our stock is traded around book value for the last several months and we leave flexibility, resulting from the adult reduction in debt over the last nine months may create an opportunity or has created an opportunity for us to invest and our sales.
Given doing so there's less just struck the less disruptive than an acquisition or alternative use of cash flow now.
Now I'll turn it over to John for a few comments.
Thank you Joey.
I want to take just a few minutes and dress my transition into a consulting role later this year and first of all I think I have to point out there and believe it or not we're two and a half years from now.
Sale of land air and a covenant.
Integration has gone phenomenally well.
On a.
And nominal job and taken advantage of the strength of both organizations to create the highest amount of buy from the company and.
And then stock helpers.
Also I want to point out that one on things.
Brought me to this decision was the fact that the team has.
A long way and 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 10 months ahead of plan and it's due to the fact that we've got a phenomenal team and they work well together, there and forest 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 here with both our earnings as well as our balance sheet. So.
The other piece of this is really given where I'm at and life and if you turn the clock back to 2019 net entertained sell on accompanied and cabinet. There's some things that are boxes that havent been checked and my career that I'd like to get some opportunity to do so my wife reminds me of that.
And quite frankly part of it is about this season and 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.
And I'm not necessarily looking for it and doing a whole lot more than that.
So my and my goal is to continue to support and <unk>.
Governance, where the command and amount of time I can't say enough.
About the blessing of this team and we've been left with to lead this company into the future and I'm excited about having the opportunity of being part of helping that team and anyway, I, possibly can and whether it be with building customer relationships continuing to fine tune, our management and F P and how you process.
Being the voice of accountability and Joey says, sometimes maybe the direct voice.
It is and I distracted.
Directed to lie on right.
But and just overall, helping the organization and stay focused on items like cost utilization overhead and price.
Price.
So I'm looking forward to that I'm grateful to this team for being at a point on I.
And I don't mind, and saying if you go back and look before David and I discuss this and that and this year I went and made a big investment and the stockpile and Windows open and so I I did that so that not only use the stockholders, but it's phenomenal team and we've been able to put together would see my confidence and being able to make this.
And but also having my money invested and their prosperity.
So that's I'm looking forward to it and I have all the confidence and the world and this group of people and I'm on with your support them any way I can.
Moving on to the five days a week.
And this is David I appreciate everything that John has done and it's been a great app.
And it did a great partner and this has been a great friend and debt and he's done he's done a fabulous job and you know that.
And this consulting role was not wind up pick up the phone and say and I want it could sell this ROE is gonna be John is going to be and a couple of days a week and.
And assisting in helping and areas and in particular on what we bought from land there it would take them or the the you know the the warehousing and the dedicated and you know the TMA us and those areas, that's where we're going to absolutely gonna be brainstorming with John and they continue to but there is no doubt that.
John is going to be hanging around with it yeah and one thing you know so.
This management process and this focus on Stefano I know al was mentioning a.
A number of things around rates and those types of things, but you know our goal is to take this management process and build an organization that's going to be more consistent and it's out there.
Put it on income through multiple cycles, and that's something I really enjoy so yeah I'll be here a lot of time and in August September and when we're doing and budget building plants from the next year.
And also through the force of your health and the customer relationships.
And so I'm looking forward to that and I'm grateful to have the time and different David Joey Paul and the rest of the team and.
And maybe the opportunity still be involved but be able to take some time.
Thank you John.
So kt will they go on to open it up for questions. Thank.
Thank you Sir if you would like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our Clinton and again. Please press star one to ask a question, we'll pause for just a moment to allow everyone the opportunity to signal for questions.
Yeah.
Thank you. Our first question comes from Jason Seidl with Cowen.
Thank you operator, and good morning, gentlemen.
A little bit on the dedicated side I think the comment was made.
And 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 and 'twenty, one 'twenty 'twenty, one and that'd be helpful.
And so Jed John's going on out true Okay a.
A couple of things first of all.
And we've got about 1600 trucks running and what we call dedicated to debt.
I would also point to the fact that about 300 and those trucks we transition from.
One account to another and 'twenty and 'twenty.
And that's part of the mix that you're seeing and 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 try alerts compared to last year and we've got more trucks, where the fuel was a pass through so that's affecting how you look at your per mile and those but about three.
800 trucks were transition 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 didn't know and what we were going to be where we are today and we probably would've been a little more aggressive but we are in a position as we go into 'twenty and 'twenty two to materially change the pricing on those agreements and it's still at the stability of those cut.
Customers are committed to a three to five years, sorry, if we go through another cycle will be enjoying the decisions. We made our goal in 'twenty and 'twenty, one is to transition and another 300 to 350 trucks and.
And where we are looking for business not only it will give us a good return on capital, but also give us here's a 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 will run trucks around.
Three appropriate price, while demand is really high where we're talking to those customers were weak and engineered solutions and get them to commit a revenue stream on those assets for three to five years.
And and and as you move East 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 on the pricing side, yes.
So the waterfall.
Paul Yeah, the ones from last year are four to five per cent.
The ones going forward none.
You know, Jason when automotive shutdown and we had about 300 trucks running and automotive flat March April may and you know and as the automotive shutdown not knowing that there's going to be one wafer and six months or a year Theres no doubt and we took about a bunch of trucks, two or 300 trucks and base of special deals with.
Folks that we can't go back and talk to them until the second quarter this year to move on.
On dedicated and so that's one of the issues. So the other thing you saw and fourth quarter round dedicated shakes and it was the fact that and.
And anticipating moving some trucks in 'twenty and 'twenty, one and one of the other things that we're doing is hiring what we call flex drivers to put and the trucks driving for those accounts that we know we're gonna be exiting so that when we move those to a new customer that driver and will go with us because they're required to.
And that afflict status instead of just having a driver then we've hired for that truck that when we go away from that account because of where they live or what are 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 'twenty and 'twenty, one and then as we get those.
Trucks placed at the right customer over about a 90 day period, we put up more permanent driver and that truck and the and the salary cost per operation of that truck will start to pick up more fish and Jason and that's part of why you saw about a five cent per mile increase and driver pay per mile on the dedicated fleet, which was about half.
And of the.
The deterioration of or from Q3 to Q4 and.
And because those folks drivers are our highest cost driver and the dedicated operations to John's point that once.
And once those drive once the new business gets ceded the fleets drivers will then move over and do it again and on another account and so its helping us to be more responsive to that new customer we have having the trucks they eat it up and running replacing the incumbent if there is one and get the adjacent and another state and all of that to think through is that.
And both on the expedited and on the dedicated side I mean, we all know that freight management is not gonna operated and 91 O R.
There is no doubt about that but on the there was on both of those buckets, we went out to the market and grab trucks and grabbed trucks on the dedicated and sad because we didn't have the drivers and so we had a gopro fail at a market rate and you can do the math, you know where charge and the dedicated rate at a market rate just to make sure that we're fulfilling the obligation on book.
Dedicated and expedited so theres some of that margin our freight management that they got rewarded for which is great that came out on the profits of the X without a dedicated but we've also been able to take some dedicated accounts that didnt make sense for our assets and might become on that.
That's right arm and a customer of our solutions group that's right like so we think it's gonna be a real land forces was yep.
Okay. I appreciate those responses mother question here when you when you look at your trouble seating on the fleet how 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 Yeah.
And finally with the answer I mean, that's on me.
And on some of them on last word and make a lot more.
I mean its.
Yeah.
And if drivers is unlike I've seen and 30 years I've been on 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 and stuff and that's gonna GAAP and you know the thickness is taken on and impact on our population from the standpoint of.
On Monday, I was talking with our Sunoco group and we've got 10 drivers out and we're sick. So we're having to find ways to fill a lot of trucks.
Wish I knew that number here and there's one data point that I think could at least illustrates the point I know on our expedited fleet throughout the let's call it.
The the.
Second third fourth early part of the fourth quarter, our student Ah Hi.
Higher switches import for expedited segment, let's call it half of our hires our students ish have our experienced driver set that was cut in half and that's just because the school capacity.
And with limited greatly as far as how maybe that could get in a classroom. How many they can put on a truck with a training school it really slow down for everybody and not just us and so that ended up impacting our our system as far as the driver availability and our students that very significantly now are.
Team has worked extremely hard to add additional capacity on the students side through.
Additional relationships that cost money.
And to get that count.
Up to where it needs to be more schools, probably cost us a little bit more money, but we are seeing the the results of that starting to pay off and I and our expedited fleet, which and this market. We think is very important and theres and a market that.
If we were if you will we can pass on.
Some of that on to our customers because again at the end of the day if rates got to move.
And I have driver to get it done and so that's one data point that I know, it's real and that 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 and be safe out there.
Thank you Jason.
Thank you. Our next question comes from Jack Atkins with Stephens, Inc.
Hey, guys. Good morning, Thank you for the time.
Hello.
And 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 and limitations around capacity out there.
It's tough and it is to find drivers debt that's got to be good for rates. So can we can we maybe kind of talk about if we go back three months ago.
You know David you were kind of talking about 6% to 8% type rate increases on the expedited side, you know, 3% to 4% and type rate increases on the dedicated side.
Anything changed.
You know in terms of your rate outlook for 'twenty 'twenty, one 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 where 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 and until about the second quarter. Jack as you know we've got as I think about we usually.
Call. It top three it's really tough for major accounts are a second quarter event for us and most of those three out of those top four of chaos or two out of those top four accounts took rate decreases last year and and all four of them will get very nice increases this year.
So it's really a second quarters. The second thing as I look here is that.
It's critical to make sure that we're looking at examine their revenue per truck per week.
Up very very dramatically and utilization is up very strongly.
But there are just so many moving parts. So when you look at six to eight per se and it might get a six 8% today, absolutely. We are even out of some of the major customers and even though they won't go into effect until the second quarter.
But theres also when you look at decreasing the on the highway services, our expedited side of it and the second quarter last year I mean, there's 450 less trucks and then there was 12 months ago and a lot of those were running and the solo operation and.
And 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 it's up dramatically and I think that again, it will start showing itself and the second quarter, because here's kind of the way in which I'm looking on the on the right side is that as we all know.
We did and event and 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 one and it's been just such a tremendous blessing and what about the fact of what we've done on the that that Ah Theres a lot of things that are going on right, but the plan is working.
And as we did that and the second quarter and then as I look at the third quarter, you got a glimpse of it and the third quarter with outstanding.
Good quarter, and then we saw another good quarter and the fourth and the fourth quarter and we got a lot of runway that is there and.
Other thing on the expedited side it goes on to the bucket because 99 per cent of the dedicated debt, we classify as dedicated adult so low and actually if theres any dedicated debt that is running under dedicated it goes over to the expedited side and that has also grown very nicely.
And and we got it.
Yeah, I'm sorry, the team the teams go on the debt all day expedited stat excuse me the team side, if there's any dedicated team that goes on the expedited <unk>.
And that has grown very nicely and.
And well I mean, we got dedicated trusts that are producing over $9000 a week of revenue on those trucks. So you can you know you can just do your own math and that's what the rights and watched the bow on how a lot of miles at a lower rate per mile and the things are operating and the and the low Eighty's Oh are from that standpoint, and we'll bring all that on.
And that we can and actually we got another deal that's getting ready to start with another 50 of those kind of kind of Trump. So there's a lot on mix that is going on and so the thing I'm looking at it directly the revenue per truck per week and.
And and the second quarter, you'll start getting a feel for you know what it really means and all of these trucks that have been taken out and the solo operation is the Bachelor rated and the length of haul has increased and.
And I hope I helped you there a little bit Jack Yeah, David No doubt about it I mean, there's mhm you've transformed the business over the last you know 12, 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 the market is so tight and.
And it's gotta be supportive of what you're trying to do on the rate side and I know, there's a lot and makes issues. There. So okay that makes sense I mean, we kind of think about you know.
Yeah, you know the.
The balance sheet and cash flow from for a moment and you know.
And all the kind of bring you into the conversation from it and how are you thinking about.
Free cash flow this year and going back to the prepared comments. The stock is trading just above tangible book just you've just about.
Book value.
And that new $40 million buyback, how should we think about the plans around that given given where the stock's trading and you're not getting credit for you know from there.
Changes you've made in this business.
So let me start with you know absent.
Any cash that goes out the door for the T V K indemnification or the share repurchase we're probably going to spin off 50 plus million dollars of free cash flow. This year. So you start with around $100 million of net indebtedness and and you know I think.
That number is probably $50 million to $60 million of free cash flow. So absent those two events you you'd be down and that you know 30 and $40 million of net debt.
At range.
We don't know the timing of anything relative to the TDK and diversification the trough and covenant and are working hard every day to minimize that but as you know discussed we put the accrual for GAAP accounting purposes, but for argument's sake, let's assume we have to fully fund the $40 million for the.
Trough indemnification, you're you're still only sitting at 70 $580 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 I'm. It's a it's a serious repurchase the largest repurchase.
And that I that I believe covenant as ever announced and so you know the market will dictate how much of that gets filled versus how much of it doesn't we're fine to feel the full $40 million Hum dependent on how the stock trades. So okay.
And that's kind of working on even with that you're still sitting at a probably just a hair over one times leverage at that point, yeah, absolutely. It's a totally different place from a balance sheet perspective.
Good that's great to hear.
Maybe last question from me is just on on a tractor count and fleet and as we think about this year you know relative to the fourth quarter levels can you maybe update us on the progress you've been able to make in terms of ceding tractors, you know a J.
<unk> given the driver wage increase that's gone through and you know how should we think about fleet count and general over the balance of this year relative to year end levels. Yeah. Let me, let me start on fleet Count I think for the balance of the year on things you just assume a flat fleet count you you might see it tick up just a hair as John was talking about in a minute and as we go to replace and some.
Dedicated accounts and use and flex drivers to do it we may have to flex up on a few fleets before a few of the dedicated fleets, we're exiting a comeback down and the end of the second quarter. So I wouldn't be surprised at the end of the first quarter to say the truck count growth a little bit, but not a lot for the balance of the year, though I think youre going to say it.
Do you count that as you know round about what you saw at the end of the at the end of the fourth quarter.
You know, we announced the largest driver pay increase on expedited Ah that the company has ever had I will tell you. It has been successful thus far and seeding teams where we are.
And we're hopeful and peripheral that that continues.
And both in terms of of new entrants are coming into the company and Stymieing some turnover.
Sure I'll, let John kind of speak to the details are dedicated especially on a couple of geographic markets, but it is really hard to keep trucks seeded right now and and you know and summary, I would tell you some of the things you're seeing around getting trucks seated and shop issues around down trucks around the country.
Oh from the fourth quarter, our persistent into the early part of the first quarter, but so when I came back from new year holiday I've started acting like a child round. Two facts. One is we had a lot of unsafe to trucks and a lot of trucks and the shop that were down and cost and this 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 and we've worked that down to about.
Okay.
So I think we're making good progress there.
We are committed to becoming.
The place for a driver who want to work and we continue to refine our recruiting.
Campaign around.
Building density of drivers and certain geographic pockets and for those drivers being able to offer them whatever job fits the needs of their lives based on the season there and.
And we're starting to see as we get on end of January and we're starting to see productivity from them and so if.
If you debate and Chattanooga are 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 and hot topics or a little more difficult and we're still trying to figure out exactly what's the strategy to saving.
And those trucks, but for all and all were much better shape than we were.
We're at the end of December or when we started out here this year.
All right.
And I'd add to that Jack has as Paul said.
You know it's both on the recruit the pay increase on the expedited side has impacted both the recruiting side and the retention side and so the net net of those since early December our team counts up.
They're very very nicely and so we're excited on a let's say what the number is yet, but well wait till the end of the quarter, but it's it's we're excited about where where that is right now.
Okay. That's helpful. Thanks for the time guys.
Thanks, Joe.
Thank you. Our next question comes from Scott Group with Wolfe Research.
Hey, Thanks, good morning, guys.
Hey, Scott Hey, Scott, if we wanted to take the driver pay increase.
And so some of those COVID-19 costs.
Okay.
Exactly.
And it all up.
Adjusted that.
And when you balance and how good the pricing environment is gonna be and with some of these costs, what's a realistic level and improve.
Right.
On the trucking and sizes here.
Yeah.
You know Scott I think you're going to see.
Yeah.
I think you're going to see margins and 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 our margin and that's.
But closer to kind of where we were and you know Q.
Q3, Q4 average and on my out as opposed to kind of what you saw for Q4.
So on so I think we will continue to get better in 'twenty and 'twenty, one and net revenue increases will outpace the cost increases on a full year basis.
Thank you.
Okay.
Q3 Q4.
And.
We are on.
And what you think you can do that and and full year 'twenty one.
And it looks like for you.
In Q1.
Okay your phone with you.
And it's really horrible Scott.
Is it any better and one.
Is this any better.
Well it'll go you're about every three third third word we can't hear but did you say first quarter by quarter and did you say I ask.
No.
For the year.
And if you look at.
Similar to the third and fourth quarter. So what was that at 94.
And about a nice, but I don't want and World War.
Yeah, I think on the trucking side, that's in our rates and a reasonable range really depending on the outcome of getting trucks seated and and where price where pricing shakes out and and insurance claims for the year.
Okay.
Hopefully better than what you guys were kind of communicated a quarter ago.
And that just the pricing environment has gotten a lot better.
Right.
The pricing environment, Yes, Scott is it a lot better.
The pricing environment is very good was it a lot better than where we were back in and.
When we visited.
It's really and not do it it's really about the pipeline and what we're anticipating the change and that makes up our Medicare business looking like between now and cheap debt.
And our dedicated pipeline is very robust and has had the points 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 and we've got some good cash flow I would agree and so.
That would be what average stake and says you know what.
And the expedited business and our freight management business and our warehousing business today is hitting on all cylinders and if we can continue to grow our team came out and that's just kind of get bad or Scott what are the real opportunity is just transitioning NIS 300 trucks. They quite frankly are are the least performing legacy business that we.
So Scott I think you heard John and Joe just speak to the revenue side and and we've got more visibility I would say the other thing. That's changed is we've got more visibility into cost I mean, you saw where we bought we firmed up our insurance. They all for a primary wire we didn't know what that looked like the last time. We spent time with you we didn't know.
And what our driver pay increases we're 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 expect the costs to come back you know a big one was group insurance because of the pandemic. We saw we saw a lot of that cost go ahead and come back in the fourth quarter. So we've kind of gotten a feel.
Got it a little more solid footing on what we think our cost structure is going to look like and so maybe what youre here and as we've got a little more visibility into revenue and a little more visibility on the 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.
It's probably if you if you say freight freight was good and October really good. It's really good today I think pricing was really good and October and it's really good today I think the visibility on the cost side of Paul mentioned, it's been significant as far as our picture I think the one piece that has moved meaningfully as the pipeline and it's not that it wasn't good.
Good and October I mean, it is firmed up and is really strong.
Across all the segments right now so that debt.
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 and things of that nature, So and hopefully those that those that affect drivers.
You know as David has already mentioned it should show itself and 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 its partnerships that's right yeah.
Which is what we were concerned about and the third quarter, we knew there'd be a lot of demand. We just didn't know if there will be a lot of partners out there looking for it.
And I'll return it service provider.
Okay got it and kind of question.
And thank you guys alright, thanks Scott.
Thank you. Our next question comes from David Ross with Stifel.
Yes, good morning, gentlemen.
David.
And that was a couple of clarification questions first on the insurance you talked about having $10 million deductible.
And that just for a brief period of time and you didn't have that nine and in excess of one covered and now that you've got seven and excess of three your deductible basically went from 1 million to 10 million and back to $3 million.
Yes.
Went to 10 million in August and and effective February one and it is.
And I go back to three and before that it was one so yeah, we kind of add on.
And you're correct.
And then during that five six months of exposure, how many accidents peers that are you know $3 million to $10 million layer do you do you have any and that range on.
No no none none pierce the $3 million to $10 million of lawyer we.
We did you'll see our insurance cost was higher and the fourth quarter and then it ran 18th and Smile and you know truckers can't make good money at 18 and cinema insurance. We did have a couple of accidents that pierce the excess of one where we had to where we didn't have any coverage. So there were a couple that were above the one but west and a three.
And that intervening period.
But we also didn't have the premiums there and that period, because we wrote those off at the end of Q3. So it was probably probably about a wash and.
But we're looking forward to having some you know more and more solid coverage to minimize volatility and the next few days.
And then on the <unk> sale I know theres 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 and or a hold back.
Is it effectively going to be a $63 million sale price rather than on $108 million or what's your view and I think.
I think our I.
I think that's a fair way to look at it yeah I don't I don't think you'll see you know anything else coming forward out of that.
Full potential was 45 and like we put.
And up 44.2 and and so if.
Like we said earlier, we're working with trough to 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, you've got about 600 trucks running and dedicated and you said about half are acceptable and half are not that's about 800 trucks running it probably and 110 O R.
And she said that the pricing is only 4% to 5% below market and he can help me square that because it sounds like pricing is 15% to 20% below market, where the costs are just way too high.
Well those 800 trucks, you're referencing I don't know if it's quite fascinating remember part of those we cut deals, especially mansion and it's a transition but the other part of it is the business, where we're looking to transition over the next six months.
And I think you know that.
And that's kind of what we're up against.
And there is some cost it's really hot and that the drivers we put in those three or 400 trucks, we're going to try and move out this year, we've got flex drivers and which you know about.
150, $200 weight and more expensive and then apply on a permanent driver and that day when you're when you're compare on your you know from the math you. Just did you you're bouncing off the fourth quarter number which did have a little bit of that kind of sums without excess insurance and there for some larger claims and it did have this flex driver deal John talked about.
And Meyer if you look back to Q3. It ran at 94 O War and so I think when and when you do your math kind of average and on my out or are using you know something in the mid ninety's as opposed to the hot and <unk> taken out some anomalies in the fourth quarter that.
That number of trucks and five per se on under market I think it gets closer to to reconcile.
And once you get through this period of adjusting the contracts are passed <unk> and changing out some of the business.
And so you look at the 2022 or 2023, what's the targeted or for the dedicated segment.
I would say given the number of trucks were operating today, where we don't provide trailers fuel, it's probably going to be and then 19 area.
Okay. Thank you all and never turn on invested capital is really good and adani, but like I say, we don't have we're not investing and the fuel and we don't have to try it on plasma.
Oh, Yeah, we said that's true of fresh and kind of on the last quarter's call. We went through a little discussion about that long term dedicated.
You know the heart and the high Mark is at 92 on the expedited side, the hallmarks and 86. So that's what we're pushing both of the asset divisions too.
So and that's where we're headed where we are.
Confident we've got a good plan to get there a lot of it is that the average situation, but that's where we're headed.
90 would be terrific. Thank you.
Yeah.
Thank you again as a reminder, please press star one if you would like to join the question. Thank you.
Our next question comes from Roger Rottenberg with private Investor.
Hey, good morning, just wanted to congratulate you on.
And on being able to pay down so much debt from the last little several years and so on.
And the question is basically on cash flow and.
Going forward and it's really exciting to see this debt.
The share repurchase program that you are putting in place, but going forward I just wanted to ask about your methodology about your cash flow is there a certain amount of leverage debt you feel comfortable with.
And you, you're probably going to maintain and going forward and the next year or more what do you expect them to be able to use your excess cash flow.
Yeah. So Roger Thanks for the question a couple a couple of things and 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 methods due to trough.
After that it will probably be to continue to delever or potentially look at acquisitions.
Acquisitions, when when and if they made sense and were accretive to the business from a leverage standpoint, we.
And we probably target staying below one and a half a book.
But two is probably where we don't want to get below or get above.
I think Roger which what you would see with what we did with our Atlanta acquisition as you may see it tick over that two or up to at or around it possibly up and our target will be to get it back down below that to head and it back down towards that one and a half kind of a long term target as quick as we can.
Yeah.
Okay, great. Thank you.
Okay. Thank you.
Thank you. Our next question comes from Nick Farwell with Arbor Group.
But David I'm curious what your expedited rate increase was in January can you give us up and approximation.
Of what that number was.
[laughter] you dealt with average day to give you an idea on the big four again don't happen and Nick and tail.
Second quarter.
And.
We are and about a 7% increase if you would just go down and look at all the other ones debt that had been done since August and that's including since August September October and were actually going back and for another round on.
Does that make us average six seven per se and so you got that.
Bob that were done at September before you really saw what was going on and the marketplace and we will go in and and we're speaking to those customers again, but you got the big for such a large portion of the bad debt.
A big portion of the business over 50 per cent of the business. So you know what you what you get out of those it's going to be very not and we already know that those numbers are.
Eight plus kind of number on them.
And we feel confident two of the four are done and we're negotiating with the other with the other ones as we speak and we feel like debt. We will get there. We don't have it done yet it's a second quarter EPS before it does so if that gives you any idea.
Yeah do you would you expect it.
And additional you know who knows because the economy's fragile at best but.
Would you expect another dedicated price increase either this spring.
Maybe late early spring late spring.
And given what you're seeing and the market today.
Yeah, we've 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 it won't that need to be addressed as we speak the war on those 300 trucks or so that need to be addressed and we will be addressing day on period as we speak and it is and the next anyway that path.
And then you've got about another 300 trucks and on top of that were ones that when the automotive shut down and in <unk>.
April you know that we just went and we just went to the customers and we gave them you know long term contracts, but we can talk right after a year and that year. It doesn't happen until the second quarter debt will be able to go into those customers and aspiration to make those right, but we were very grateful and April when they were saying.
Here It is and we were sitting there, saying is it and the black and if I'm in the Black I'm happy and that's where we were and automotive was shutting down and and so there are 600 and the trust. The rest of them are ones that we talk about on and on a yearly basis and and while we have on that is not to take advantage of the market.
It is the long term contracts that we get with those customers on three four or five year contract agreement that allows us to go through ups and downs on the cycle and and so that's the way and whats the dedicated yes, John Let me add also more and more of our dedicated contracts since we went.
To a more committed model a dedicated have driver surcharges or index is 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.
And you.
I was curious more about the long haul expedited business.
And I understand the dedicated because you've addressed that before I'm, just curious about the pricing environment for long haul.
Yeah, it's the price.
And just the environment for long haul I would say on the on the low and is in that seven 8% and and what I mean by that it account that you're operating at 85 of ours.
You know you know seven eight per se its a good number a good number and.
And so I think on the low and is that sales.
Sales at seven eight and you know last quarter with six day, but six day seven day somewhere in there on great accounts have been with me forever and I'm not going to I'm not going to go up there and say this because I can get 12 out of them I want to go get a 12, because believe me they don't.
On a year from now and it may be going negative 12, and we're not going to do that and so.
But for existing pasted that'd be a better question Nick.
And they could be.
On a new accounts a day those rates are basically 10% higher than our existing rights.
Would you expect given the current environment that you might be able to.
Fact is another rate increase on long haul.
Yeah, sometimes bring ish or so given and I.
Due on on the <unk>, if you've ever and a takeaway the top four debt.
And at 50% net dot.
I'm not going to do that we've been there for 20 years with those kind of as you know we've been there for 20 years with other accounts that we won't go back and ask for another one after we get and negotiated but anything underneath there most of those are open.
It's time to talk especially the ones you rise back and the in the EBITDA.
We're doing that now.
I'm curious if someone could comment and maybe you have any.
Sort of notion about the impact on your read and your inventory replenishment.
Post the holiday.
Given the dramatic shift from bricks and mortar to online and E. Commerce is that muted your what you normally would see as a better retail replenishment cycle.
Oh Wow, that's a great question you know what what we are seeing out there is.
There are still there's still a lot of havent have not and that think about the big box retailers and their inventory levels.
The last couple of weeks I've been speaking to somebody on their inventory levels are still extremely low.
And then it's interesting also as I've talked to some of their suppliers.
And the law.
Orange box retailers have gone on to this to their suppliers just in time delivery and wait.
Brought on we have brought on about John 60 dedicated trucks and make it better.
It would be and.
Ohio, we brought on about 60 dedicated trucks and the last 45 days, where the process a break and the boat and the last 45 day strictly because the service.
This requirement that the big box retailers are making and so you can say a couple of things happening I'd say the big box guys that are say and I've got very low we have been told Ori and on summit there Ben.
Debt or increasing inventories levels to be able to make sure. They hit on type of format that the big box guys are now regularly and that's just that's what John and the last five six months, maybe utilized 60 day, yeah, our consumer products companies that we do business with especially those where we do business with on the warehousing side.
We're seeing them build what I would call an enormous inventories, yeah, and and products on maybe I'm aware.
And all over the country finding outside per flex space for warehouse makes it hard and yeah that inventories were exploding so theres something going on between the retailers and the consumer product companies that those finished goods arent moving yeah right now so I don't I don't know the answer.
And they're moving quickly off the shelf I mean, some of that stuff all day comments its going off the shelf quickly. They just can't replenish it fast enough.
And that is that if that is correct, but what we're also finding and interesting debt.
And the big box are making some of the suppliers increased levels of inventory because it's the only way that the suppliers get hit the one ton per format that the big retailers are making because we're growing the warehouse side of our debt net b call.
All of the bad and we're growing the dedicated so I don't know if it's just the interesting deal, but overall inventories levels are low and yeah.
And then my last question quick Joey could you just easily break down between dedicated expedite revenues not not operating partner revenues between dedicated expedited and I'll call freight management, and warehousing and the third sector and where they are today and where you might think they would be you know as a goal you called me.
And about a war goals just that same sort of mindset that where do you think the revenue mix would be whenever you're O. R. C and dedicated achieved the 92 of the 86 on long haul.
Just a rough field.
Yeah.
Yeah, if you go to the four pieces.
Warehouse and freight management and our target our goal is to double that business and three years.
So they'll go on those two pieces and today I'd have to do the math, Paul its a 200 million from.
Yeah between both of them day to day as a percentage there they were.
35, 36% and the fourth quarter, but that was a big spike maintenance freight. So we want a double both of those pieces up say long term on warehousing business should be sub 92 dependent on startup startup expenses for on account and things of that nature, and then freight management frankly jerky are I'm all for a long term rate and 95.
But you know 90 596 on that business.
Our dedicated.
Our business is we've already said and you've heard John say its targets 90 upset 92 to 90 at the top and we.
We are open to grow and our dedicated business and total you heard a lot of weed and feed we call. It makes changes. This year. So you kind of put that 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 grow and dedicated right time right place right industry.
And kind of that sub 90, and 92 O War, So little capital addition, and dedicated where we're fine with.
Expedite on there the hand.
Our mission and long term as we're trying to hold fleet, let's call. It around 900 to 1000 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 gonna be hard to move that because historically the L. T. L. Swallow up a lot of debt up the expedited trucks, but whole debt. So no more capital are really weed and feed inside that book of business produce more profits are more consistent if we can.
Which all of that revolves around the driver product that we're able to put together for the drivers and are willing to team up.
So that's kind of the four buckets now the end result of all that it lets say if we achieve all of that.
And our return on invested capital should be 12 per cent or higher.
Pretty easily.
Usually that's not easy to get all that and have them, but we should be north of 12% a.
Our return on invested capital around a 1 billion plus or minus a little bit of revenue and producing.
You know very good returns on their or EBIT or gross margin and earnings per share, though I'm not going to tell you what that Jackie couple of years well go next three years. If you look at the $1 billion, it's 100 million and warehousing and 300 million and freight management, three arm and a dedicated freight or a man of expedited yep.
And we're getting a pretty quick right.
And some cases, where they want and that's right and so what it does though with what you're seeing with with the announcement that we made around the stock buyback that is playing out yes. We had a lot of decisions that we made this year to kind of quote survived the virus. If you will because we didn't know and now a lot of those decisions were already in play we had already were.
Starting on a let's call it a terminal rationalization program, but when that hit we started accelerating those and so on.
I think that the.
As you play that out as John said, it's accelerating and moving quickly you know the cash flow production is significant and the.
The reduction of leverage is meaningful or the other 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.
And we get from affiliate and and gross revenue with the volume of Capex.
Which means just and a conceptual sense you should be generating very substantial amounts of free cash flow yes.
Yes, sure and it's going.
And do better and a wide earlier right. Okay, well. Thank you very much I appreciate it thank.
Thank you.
Yeah.
Thank you. Our next question comes from Daniel Moore with Scopus.
Gentlemen, how are we doing all.
And Oh.
Always good to be and company with a net Nick Farwell I'm going on.
It does tail and 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 can't remember the last time I heard a story like this and the stock was trading at 2.1 times forward.
P E and so.
Here's the pushing on when I ask $35 million 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 Bam, that's pretty much all tractors this year.
No trailers or you want to break it down between expedite and dedicated.
And I'd just like some granularity. So we can we can understand how that money is being spent so we can we can start thinking about free cash flow going forward. So you're welcome to do and however, you'd like whatever is easiest.
Yeah. So I mean basically it is all revenue and very.
Very minimal non revenue equipment capex. So it's pretty much all replacement of a replacement of trucks that are that are near end of cycle.
And I think probably maybe Dan my thoughts on but what is maintenance capex. There are SaaS and maintenance Capex is probably going to run up to $50 million to $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 and go look at where we record and up of 19.
So that's the result of debt Big rationalization has left us with and what we chose to dispose of its left us with another low capex here. So it's all set 35 ish plus or minus and that's 20 million ish under normal maintenance Capex for 'twenty 600 trucks, plus or minus so you.
We're gonna have.
And I'm gonna have a fast.
And two in 'twenty and grow back up and another couple on another let's call it 20 million or so true.
<unk> will be small again and 22, just because again, we're our trailer fleet is because we reduced our trailer fleet significantly I'll also plus and so much longer but asset sales.
But you move into 'twenty, two depending on where your view is on on EBITDA.
Being able to swallow and another 20 million and we're confident that so you put you kind of look through the leverage ratio, that's kind of what I would draw people to kind of and I think Paul said it earlier, even with T V K, even with the buyback we're gonna be under we're gonna be at or under one or two.
For this year for this year, we're gonna be at or under one this year.
And so that as we lead into a 22 with the growth of the Johns mentioned and I talked about on the non asset based businesses as we move we continue to grow that as well as move the margin and and 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 and one more time and where.
And about 1000 basis points of margin improvement potential and that's what you're targeting.
801000.
Timing now.
I know, we second quarter, we're going to see a lot third quarter I would imagine as much as well could you give us and 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 and on achieving that that opportunity set and that's it. Thanks.
And I'm not sure on the Quay, he's he's we set it up.
Let's call it 190, 900 or and the fourth quarter, we have a target to get down to 90 ish thousand points of difference what do we feel is doable from a margin from and improvement standpoint, you know from 802 and that is it two years to get there. It's a three years to get there is a year to get there.
Yeah, I think it's between four and six quarters.
So we're confident a.
Dan that we're gonna make some some very meaningful improvement this year I think you'll see improvement every quarter and try next four to six quarters to get there and the wildcard simply.
Not not concerned about.
Pricing and I am concerned about some of our cost objectives.
Gotta go day to 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 trucks a day and 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 and focused.
Eight weeks to figure out the right pay package to keep some of our operations Sated and then we went from front and the customer win and so.
I would say between four to six quarters, we should be in that range.
Right. It strikes me that we are weir and instruct weir and definitely and a structurally impaired driver market the likes of which is unique.
Got it and Fedex U P S Amazon.
Which created a huge pool in terms of driver availability away from over the road to milk runs and cities and alike. Obviously.
Drug and alcohol clearinghouse and.
And then just schools being shut down and so yeah, I think I think debt.
And if 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 and their.
But I appreciate the time gentlemen, thank you and I have a good day.
Good day.
Thank you at this time and I'm showing no further questions and I'll now turn it back over to management for closing remarks.
We appreciate everybody's time day, and Katie and thank you fingers assistance and thanks everybody.
Yeah.
Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect.
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