Excuse me, everyone, we now have all of our speakers in the conference. [Operator Instructions] I would now like to turn the conference over to Richard Cribbs. Sir, you may begin. .

All right, thank you. Good morning. Welcome to our fourth quarter conference call. Joining me on the call this morning are David Parker and Joey Hogan. .

As a reminder, this conference call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated by the forward-looking statements.

Please review our disclosures and filings with the SEC, including, without limitation, the Risk Factor section in our most recent Form 10-K. We undertake no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances.

A copy of our prepared comments and additional financial information is available on our website at the Investors tab on our covenanttransport.com website. Our prepared comments will be brief, and then we will open up the call for questions. .

our Truckload segment's revenue, excluding fuel, increased 21.9% to $176.5 million due primarily to a 562 or 22% average truck increase and a 1.7% increase in average freight revenue per truck in the 2018 period as compared to the 2017 period, partially offset by a $1.7 million year-over-year reduction in intermodal revenues.

Of the 562 increased average trucks, 430 average trucks were contributed by the Landair acquisition, as Landair contributed $19.2 million of freight revenue to combined truckload operations for the fourth quarter of 2018.

Versus the year ago period, average freight revenue per total mile was up $0.252 or 13.4%, and our average miles per tractor were down 10.4%. Truckload rates were impacted favorably and utilization was impacted unfavorably by the impact of the Landair operations on the combined Truckload segment.

Landair's shorter average length of haul and dedicated contract, solo-driven truck operations, generally produced higher revenue per total mile and fewer miles per tractor than our other truckload business units as a whole. Versus the prior year quarter, freight revenue per tractor at our Covenant Transport subsidiary experienced an increase of 2.4%.

Our SRT subsidiary experienced an increase of 15.7%, and our Star Transportation subsidiary experienced an increase of 5.4%. The Truckload segment operating cost per mile, net of surcharge revenue, were up approximately $0.177 per mile compared to the year ago period.

This was mainly attributable to higher employee wages, casualty insurance claims costs, and the impact of the Landair truckload operations higher cost per mile model.

These increases were partially offset by lower net fuel cost and net depreciation expense as we recognized a small gain on disposal equipment, totaling $100,000 in the fourth quarter of 2018 versus a loss of $0.8 million in the fourth quarter of 2017. .

The Truckload segment's adjusted operating ratio was 90.5% in the fourth quarter of 2018, compared with 91.9% in the fourth quarter of 2017. Our Managed Freight segment's total revenue increased 83.6% versus the year-ago quarter to $67.5 million from $36.8 million.

Of the $30.7 million of increased total revenue, Landair contributed $21.4 million of revenue to combined Managed Freight operations in the fourth quarter of 2018. The Managed Freight segment's adjusted operating ratio was 90.6% in the fourth quarter of 2018, compared with 91.5% in the fourth quarter of 2017.

The result was an increase of Managed Freight operating income contribution to $6 million in the current year quarter from $3.1 million in the prior year quarter.

Our minority investment in Transport Enterprise Leasing contributed $2.3 million to pretax earnings or $0.09 per diluted share in the fourth quarter of 2018, compared with a $0.8 million contribution to pretax earnings or $0.03 per diluted share in the prior year quarter.

The average age of our tractor fleet continues to be young at 2.2 years as of the end of the quarter, slightly up from 2.1 years a year ago. .

In connection with the July 3, 2018 acquisition of Landair, we invested approximately $106.5 million, including an $8.2 million tax gross-up payment in connection with a postclosing Internal Revenue Code section 338(h)(10) of election for which we expect to receive a future net cash benefit and excess of the tax gross-up payment.

Between December 31, 2017 and December 31, 2018, total balance sheet indebtedness, net of cash, increased by only $14.3 million to $212.7 million.

At December 31, 2018, our stockholder's equity was $343.1 million, for a ratio of net debt to total balance sheet capitalization of 38.3%, which compares favorably to the 40.2% ratio as of December 31, 2017, even with the cash expended for the Landair acquisition.

In addition, our leverage ratio has improved to 1.4x as of December 31, 2018, from 1.9x as of December 31, 2017. .

successful integration steps completed related to Landair; improvement in the operating income at each of our Truckload segment and Managed Freight segment subsidiaries; an approximate 5% increase in average freight revenue per truck for our Truckload segment, excluding Landair's truckload operations versus the same quarter of 2017; improved year-over-year earnings contributed from our investment in Transport Enterprise Leasing; and five, reducing our leverage ratio to 1.4x.

The main negative in the quarter was the increased truckload operating costs on a per mile basis, most notably the unfavorable employee wages and casualty insurance claims costs, partially offset by lower net fuel and improved net depreciation expense.

Our fleet experienced an increase of 3,154 trucks by the end of December, a 77 truck increase from our reported fleet size of 3,077 trucks at the end of September. A portion of this growth was a 15 truck or 5% increase of independent contractor trucks to 315 by the end of December from 300 at the end of September.

Our fleet of team-driven trucks averaged 866 teams in the fourth quarter of 2018, a 1.6% decrease from 880 average team-driven trucks in the third quarter of 2018. .

Our earnings outlook for 2019 is positive. We expect to deliver adjusted earnings per share improvement for the first quarter of 2019 as compared to the first quarter 2018.

For the full year, we expect adjusted earnings per share to increase modestly over 2018, based on the favorable impact of a full year of contribution from Landair's service offerings, partially offset by investment in growing the Managed Freight segment.

From a balance sheet perspective, with net capital expenditures scheduled at normal replacement cycle, along with positive operating cash flows, we expect to reduce combined balance sheet and off-balance sheet debt over the course of fiscal 2019. .

Our outlook is based on our expectation of a relatively balanced freight environment measured over the entire 2019 year, with a potential for intra-period volatility in response to national and global events. We believe these conditions are consistent with U.S.

economic growth of 2% to 2.5%, modestly growing industrial production, balanced inventories and mid-single digit percentage increases in revenue per total mile across our truckload business. The freight market in January has thus far been consistent with our expectations, but not as strong as January 2018 nor the majority of 2018.

Beyond the general freight environment, we believe company-specific improvement opportunities exist as we continue to execute on our strategic direction to grow our contract logistics service offerings, including dedicated contract truckload, warehousing and transportation management services.

We expect that the growth of our dedicated contract truckload service offering will come somewhat from reallocation of capital from our transactional over-the-road, or OTR, truckload service offering, most specifically from the less profitable solo-driven refrigerated OTR service.

In addition, we expect to continue to invest in the organic growth our freight brokerage services, which could pressure Managed Freight profit margins until revenue growth catches up with the investments.

Even with these changes, attracting and retaining highly qualified, professional truck drivers will remain a significant challenge, and we will continue to work actively with our customers to improve driver comp, efficiency and working conditions, while providing a high level of service.

In the aggregate, the goals of our capital allocation strategy are to become increasingly embedded in our customers' supply chains, to reduce the cyclicality and seasonality of our business and financial results and to enhance our long-term earnings power and return on invested capital. .

Thank you for your time. We will now open up the call for any questions. .

[Operator Instructions] Our first question comes from David Ross with Stifel. .

Happy to see that unseated truck count come down, certainly a positive sign in this difficult labor market.

If we can just start off by talking about Landair a little bit, and now that it's been with the company for 6 months or so, what's surprised you to the upside? What's been better than expected about Landair? And what might've been some issues that you didn't see before the acquisition that's been a little harder than you thought it would be at Landair?.

We all 3 could probably make some statements there, David. Let me tell you though, we've done a few acquisitions in the past, but by far, this is the best acquisition that we've ever had, and it is because of the people.

And it's been one of those transactions that -- the surprise is it has been at 9 out of 10 to the good side versus anything that's negative. And the people up there, the culture fits so wonderfully between our organizations, and the folks up there really -- have made the acquisition a lot more easier than the acquisitions that we've done in the past.

They've been with open arms, ready to go, and anything that -- it's not something that you've had to say here at CTG let's bring the value, and if somebody -- some company may think they already got the value. They're saying, yes, we want to do that, bring the value, if it helps us, we're all for it.

And so it's just been a wonderful acquisition from that standpoint. So my #1 would be the people. The customer side of it has been exactly the way that we thought.

A lot of times, you get into something when you're buying a company, whether you're buying a car for your staff or buying a company like we buy, is that you think it's a lot better during the selling standpoint where you're negotiating than when you buy it, and this has not been the case.

It's been exactly the way we thought it was when we were doing due diligence, and the customer's have not missed a beat. As a matter of fact, because of the relationship with CTG, there's been more opportunities. And so we're going to be able to expand upon their existing customer base because of the CTG side of the equation.

So from a business standpoint, I'm a bit -- I just could not be anymore pleased.

Joey? Richard? Anything you want to add?.

I would add regarding that it's first point on people. On due diligence, your exposure to the management team is usually limited to, what's called, the executive staff unit within the company. And -- so you have questions in your mind about the strength and the depth below that group.

And until you kind of get close, you start to get a feel for that, and I would say that's been one of the very best parts for me is the overall quality and depth for a small organization relative to the CTG at the total, has been very, very good.

And the flexibility of which we've been able to move folks around to capitalize on the growth that we're asking that operations to do over the next 3 to 5 years. And so that's been, I would say, a pleasant surprise that gives us confidence and continue to allow them to grow.

And so it's kind of in that first one, but that's been a big part that contributes to our confidence about the operations. .

And Dave, this is Richard. I think they've also added what they went through over the last 6, 7 years of really changing their company to grow into a lighter asset base and reduced capital intensivity of their business.

They've been through that over the 6 to 7 years to grow that Managed Freight side of their business, and they offer us a lot of experience and know-how of handling that, that we're trying to accomplish with our overall business.

And the group here is humble enough to receive that and utilize all of their knowledge to help us do what we're trying to accomplish that they've already accomplished. So that's been a big plus. As to the integration efforts on the cost side has gone a little, probably faster and a little stronger than we expected going into the acquisition.

We've been able to work through some things around fuel and workers comp insurance. Our risk group has done a really good job of employing some things there that we have in place for the CTG group, and it's just kind of greater and faster than we expected.

And so some of that is already in the fourth quarter results, but there's still some cost synergies to come into the full 2019 year as well. .

And then just looking out to 2019. In the guidance, you just said that the EPS is supposed to be up only modestly year-over-year, partially due to the investment in growing the asset-light Managed Transportation segment.

Can you give any numbers around what the investments should be? Or can you talk about it in terms of, is it just hiring staff ahead of the revenue? Is it investing in a new IT system? Is it new offices and maybe a combination of the 3?.

You got all 3. You nailed it. It is -- most of it is higher investment in people. And on that TMS space, if you think about it, that's a little bit longer sales cycle.

And so as you add high-level employees -- high-level sales employees there, the expectation is that you're going to recover that in sales really more 12 to 15 months down the line and not immediately like you would for a transactional business. In addition, we are investing in some real estate space as well as some systems.

So you nailed all 3 of those. From a standpoint of the modest statement, you know, we're historically cautious.

We are cautiously optimistic about this year, and we have more visibility, of course, into the next 3 to 6 months than we do into those last 6 months, and so that's -- I think that's really the reason we would state that as a modest improvement at this point, and we'll see where the year goes.

But we're excited about the opportunities that we have before us in 2019, mostly around the internal initiatives as well as an okay economy. .

And then just to follow-up lastly on that IT bit, do you have a TMS, either at legacy Landair or Covenant that you like and are going to expand upon? Or are you either getting a whole new TMS in there for the Managed Transportation, or are you developing something internally?.

No. David, I think, as it relates to Landair in particular, their truck operation is on a different platform than the truck operation from CTG. So I think that that's a part of the system development for 2020, maybe 2021 that we got to work through.

On the Managed Freight side, I think we're at a pretty good spot except for possibly our -- we're taking a hard look at our brokerage operations across the enterprises. Right now, it's linked up with our asset side, or truck side, as far as the operating system, and we've got some questions.

Is that the best platform for that business to be on? That's not a '19 event, at earliest that's a '20 event, but we think that will be fairly seamless as far as the options that are out there that we're considering. But you got a large customer on the asset side, again, I think value that, a large customer on the TMS side, which you support also.

And so you've got to be able to talk to both of those customers. And so I -- we're doing a lot of study investigations, investing in some people on the IT side to kind of help us with these questions that we can work through overt the next 3 years, basically. .

[Operator Instructions] Our next question comes from Scott Group of Wolfe Research. .

So David, maybe can you give us a little bit more color on the -- your comments around January in the environment?.

Yes. I think a couple things. As I look at our company as a whole, we're up to -- about 50% of our trucks now are dedicated. And the dedicated side of the business has not missed a beat. I mean, besides the holiday and -- the things -- when they shut down. Other than that, those trucks run exactly the way they're supposed to run.

So then it becomes the other 50% of the fleet of trucks. And I would say that the first 2 weeks of January, as we've said at the release, they were above our expectations. And then last week, the weather was horrendous. It basically killed 1.5 day of operating performance last week, but it was not as strong as the first 2 weeks of January.

And I would say that this week, it started off with similar to last week, but then I started seeing yesterday, and by the time yesterday rolled around, for the first 3 days I was starting to get encouraged last night with the final numbers that I was looking at throughout the enterprise, and I was starting to get pretty encouraged about the freight environment and what we left it at last night.

So I'm thinking that maybe it started to pick back up. But keep in mind, I really think what is happening is that we're going from a 4% GDP to 2.5%. And is 2.5% bad? Let me tell you. For 8 years, give me the 2.5%, we'd all been thrilled, and the business environment would've been very strong for 8 years.

But when you get to 4% and you go to 2.5%, it's going sense a slowdown. But that said, the business environment is not bad. I'm pretty satisfied with what I'm feeling.

So to me, it's slower than 2018, and it really feels like -- I was thinking about this the other day, just a couple days ago, Scott, I really think that how I feel, I feel like it is -- we saw something happening August 2017 that said, wow, I think something is starting to turn around from '15 to '16. I think something is turning around.

We started then looking at -- when people came out with second quarter numbers, it was kind of a June effect. But in August is when I would say that we felt that things are turning around, and it just got stronger from August, September, October, November, December. I was extremely happy, and then it just rocketed starting in January throughout 2018.

It was just like a rocket ship that we all know about. And I would say that we're in that August 2017 to the end of the year '17, and we were very excited about that time. And there's been many opportunities out there. Freight is not bad.

I'm happy about the freight environment, and we're bringing on new freight, we're getting rate increases, and I'm still a pretty happy camper. .

I think, Scott, let me bring a little perspective to what David is saying this for. The model and the plan that Richard mentioned in his comments is -- these numbers are rough, but it's pretty close. For the fourth quarter of '17, our expedited and refreight was called one-way business of the consolidated total. It was about 60% of the revenue.

Fourth quarter of 2018 it was about 40%. So the combination of the growth for the dedicated inside the legacy CTG business and then the addition of the Landair dedicated business, the addition of the Landair Managed Freight business moved significantly.

The exposure to the day in, day out, week-in, week-out balance issues that we -- that all the folks have written on one-way truckload space have. And so that's been our mission for several years is to continue to push through that. Our brokerage business grew greatly throughout 2018 as well, again, that was a stated goal.

So I think, as it relates to the overall consolidated results, we feel the plan moving, the plan is working, and the balance and addressing the volatility of our own expectations as well as our shareholders' expectations should begin moving.

Obviously, the results will prove that out, but I think that that's a very significant number and movement to consider when you think about CTG earnings and mix and things of that nature. So we've only had 2 quarters, you know that. But as it relates to kind of what's going on right now, that's something to keep in mind. .

So that makes sense, Joey.

Do you have any prospective or thoughts on, what's the range of like through a cycle of peak to trough margins for your over-the-road business versus your dedicated business? So right as -- to you point, dedicated gets a lot bigger as, I think you're trying to say the margin cyclicality should be less, but how do you think about the peak to trough margin differential on OTR perspective?.

Well, I think, from a storage standpoint, you can see about what it did for us if you look at what happens from different trough periods and peak periods of '15 to '16.

I think it's -- I still feel like it's interesting that 2014 was the stronger economic year than 2015, but there were better results in '15 as you saw the full year impact of rate increases updated in '14, and even decent rate increases in early '15, which I think were kind of in the same kind of mode of looking at '18 and '19.

However, I don't feel like '20 is going to drop off to the same level that we saw in '16, not even close. And a lot of that is based on our business model that we've built. So you've got some numbers you can go back and look at for what I would say would be related to transactional business.

It's what happened in the past, and I think you've noted it fairly strongly that we've generally dropped off deeper than our peer groups, but we've also increased greater in the good times.

We believe that we're starting to balance that out now, and so that -- on the dedicated side, instead of maybe dropping back 500 to 600 basis points, maybe the dedicated is 200 to 300 basis points, and that's assuming that you can't get equal rate increases, the driver pay increases or other cost increases, which maybe you can't in this new environment and the way new contracts are built.

So I think we're still learning on that side what that would be, but we feel much more comfortable with that than what we would with the additional transactional business. .

Right. Okay. That makes sense and is helpful. And then just lastly, obviously, there's -- we can all see the spot rates that are down year-over-year.

Is this impacting bid discussions? Like do you see a risk that new contracts get renewed at the lower rates and that will start showing up in the model by the, sort of the end of the year?.

number one, as we have said, we're in that 5% to 7% kind of rate increase environment when we go and talk to a customer. And excluding as we continue to grow from a mix standpoint, as you know, the dedicated might be a little bit smaller rate increase, which are getting consistency on the dedicated side.

But excluding the outcome, I'll just sit it down in front of a customer. I'd say that the rates are in that 5% to 7% kind of number, and I'd state that has been for 6 months, and I believe that, that's where it's going to be at.

And as we look at -- talking with all the customers, we've got some contractor in place that go by certain metrics that are already established in the contract that will help us in a lot of those areas, but the customer is really doing 2 things.

They've always allowed a portion of the business to be in that spot market, and they are shouting hallelujah.

As we speak right now, with it down 40% to 35%, 30%, 40% kind of numbers, they have taken a very dramatic decrease in their costs, and they're very aware of what the past did to them 12 months there -- for 12 months there in the year 2018, and they're very cautious on that.

And so if I add a portion of the business, whether it's 5% or 40%, that is down 30% or 40%, they are not beating us up. I mean, we have already had a couple of major account transactions that have already happened as we speak, and I'm very pleased with the results that we have been able to get from our customers.

And I think that, that continues throughout 2019, if, in fact, we're in that 2.5% GDP. I mean, if we go into a recession, like some people might see on TV that's tanking, and believe we are -- if we go to a recession, that's a different world. We all know that.

But we're not -- that's not part of our plan that we think the economy is going in to recession. So I think that we're in that 5% to 7% number. .

Scott, what David was referencing on the metric base rate increases, there's several customers that agreed to -- in their contracts, allowing some of the indices, for example, this year's rate increase, is maybe it's public truckload index or DAT index, or whatever that is that would be utilized, and those generally have collars around that upside and downside.

But there still should be fairly attractive rate increases, at least from our standpoint, and still give those customers the capacity that they need and the service that they need, A. B, from a standpoint of -- I think we are seeing 5% to 7% or greater kind of numbers from customers currently.

However, as you see that mix change into a heavier dedicated market, our dedicated average rate is approximately $0.15 to $0.20 lower than our average rate for the entire group.

And so, as we build that dedicated mix, of course, it also has a lower cost associated with that, so they're good ORs, sub-90 OR-type freight that we're adding in that dedicated space, but the rate itself is $0.15 to $0.20 lower than the average.

So as you see that mix change, I think we will see our numbers are going to be more on that lower side of the mid-single digits, call it 3% to 5% instead of the 5% to 7% that we're getting at an actual rate increase, if that makes sense. .

Our next question comes from Kevin Sterling of Seaport Global. .

I jumped on late, so I apologize If I'm asking questions that you've answered, please jump in. But can I take that last question that Scott was asking and that you guys are talking about, maybe taking it with a different direction.

As we think about last year and just the incredible rate environment and how many shippers were kind of caught blindsided, if you will, and pretty much every shipper you talked to blew through their transportation budget early in 2018 and were really beaten up, so to speak.

As we think about 2019 and yes, spot rates are negative year-over-year, but shippers still have those scars from 2018.

Are they willing to maybe pay up a little bit more on the contractual markets just to block in capacity than not have to deal with the headaches of, oh my gosh, can I get caught again on the wrong side of the equation? So maybe you could talk a little bit about the shipper mindset, how they were scarred last year and how they're thinking about it this year.

Does that make sense?.

Yes. And that's where I really believe that it is, Kevin, that do I think that in 2018 where you're able to get 12% and 14% rate increases, do I think that the market is still at 12% and 14%? No, it's not. It's not at that kind of number.

But these -- we don't have a customer -- I don't know 1 customer that we've got that was not impacted in 2018 and that were hurt tremendously. And the meetings that I've been in, which is a lot of them, they are not sitting there telling me that we've got to reduce pricing or we're going to get kicked out.

We're not having those kinds of conversations. And that's why -- and evidenced by the fact that we've already received some decent increases from 2 or 3 customers that I'm very happy with, and I think that, that is the attitude of the customers that they cannot -- their job will be gone.

A transportation management job will be gone if he has another 2018 out there and can't move his freight, much less what the rates are going do in 2018. They could not move their freight. And they will allow a portion -- if you are considered important to their business, they are going to allow you to have some form of a rate increase.

And I think that if that is 5% to 7% kind of number on those existing customers, non-dedicated. So I really believe that's worked out. .

Kevin, I think you're seeing that answer in the growth of dedicated, and we know it's not just us. We've done a very good job with that on our sales group. We've built around being able to handle those dedicated accounts and understand them better. I think that, that goes to show how strongly we've gotten closer to the customer that we talked about.

We have gotten closer to the customer, and that gives us more opportunities to show them that there's a way that they can actually potentially save money through working with us to tighten their network into a dedicated contract where the lower overall rate per mile is there, yet our costs are also lowered by being able to have a higher quality of life to our drivers around home time and those of types of things as well as better utilization of our trucks and trailers so that the overall cost for us is lowered and again, the rates lower for them as well, so it's a win-win situation.

And our top line for dedicated is well beyond what trucks we could ever offer. And so the dedicated top line is still very strong, and I think that's part of the evidence of the shipper's understanding of what the new market is and the new supply chain looks like. .

Yes. And then with dedicated, obviously, shippers can see they can lock in capacity for a couple years, and get that guaranteed capacity.

And I imagine that's part of their mindset too because as you talk to your customers, I'm sure they understand the driver problem, as it continues today are -- I haven't heard a single carrier say, I've got plenty of drivers, I don't need anymore. It means that's the mindset from shipper's too.

They really understand the driver challenges persist today. .

Yes. They do, they do. Yes, to answer question, the customers do understand that there's a driver issue out there, and that that's going to be multiple years before it is -- that, that is straightened out. And this is -- any of us carriers that have relationships with the customers, those customers understand it.

That do my number 100 and 101 and 102 customer understand? They probably don't care because I'm not in a relationship with them. I do 10 of those a week and et cetera, they probably don't care. But I'm sure that they care with whoever their partners are. And so yes, to answer your questions, they do understand it. .

And then last question from me, and I really appreciate your time today.

And if you've already touched on this, no need to answer, but could you guys talk about some of the insurance headwinds you saw particularly in the back half of the year and the impact there? And some of the things you're doing to maybe help correct the higher insurance and claims as we approach 2019?.

Yes. I think there's a couple of things. That is an area that Richard mentioned in his comments about our insurance cost per mile. A couple things. It's a severity issue, and if you -- we track a group of actions that we call critical actions. It's DOTs plus a few other things that can turn into large actions.

And so we call this critical actions, and actually, for the fourth quarter they were down 7% versus fourth quarter of last year. But our DOT rate was up 20% to 25%. And so the severity in the accidents for the third-party was up a little bit versus a year ago. So all that to say, we're not happy with how 2018 did.

We had a few large unfortunate accidents that -- had somebody, a competitor 20 years ago, tell me as we were setting up our high deductible program, and we were benchmarking a model with them as we were setting it up, and he said, "Joey, the unfortunate thinking of our industry is you're going to have bad accident.

And there's going to be some things that you'll see in that there's no way that you could have probably prevented it, and then someone, the next one -- the next bad accident, you're going to see some things." And he said, "Don't get worked up too much about beating yourself up over you didn't see something because it's going to happen." And as I reflect over the last 20 years as it relates to our industry and its more severe accidents, they're horrible.

We take a great accountability in those. It's unfortunate. I don't like going into remediation and apologizing for -- to somebody about losing a loved one on something that was our fault, and we do that. And so I think as it relates to this year, we spent a lot of time on that issue.

I don't think that -- I'm very proud of our safety program, our CSA scores continue to improve for the enterprise, and especially in the fleets that have more incidences. So I see some really positive things throughout our safety program, but nevertheless, we did have some severe accidents that did impact our results.

So I'm encouraged about our journey long-term, but we've had a tough second half of the year. There's no questions about it from an experience standpoint. .

Kevin, one note. Out of our 3,150 trucks or so, about -- almost 1,900 of those are automatic transmissions at this point, which is about 60%. We're adding about 1,150 new tractors, so that's our plan anyway for next year. That will give us very close to being 100% automatic transmissions. We think that, that helps with safety.

In addition, all of those trucks will have all of the latest technology around safety, whether that's lane departure or lane keep assist if freight models gets that in there soon enough.

At the end of the year all the stability control, front collision mitigation, adaptive cruise control, all those type of things -- and one of the things that's happened, even though adaptive cruise control, front collision mitigation is improving.

They're doing a lot of good work on the technology side, that being OEMs around looking at how they can improve that where it's supposed to shut down quicker especially around stationary objects in front of you, a stopped vehicle, those type of things that have been more difficult than in the past, where if it was a slow-moving vehicle, it could recognize it better than a stopped vehicle, and there's good reasons for that.

But we're seeing improvements in that technology, and as we continue to upgrade our equipment and replace our equipment, we should see some improvement there. In addition, our safety staff has -- is recognizing certain behaviors and those type of things.

And at least, at one of our subsidiaries, we're changing some hiring standards around some things we're seeing and some analysis that's been done that can allow us to see -- predictive analytics to help us see where drivers might have the best opportunity to have crashes in the near term.

And so we're adjusting our hiring standards at least at one of our larger subsidiaries to help with that. .

Our next question comes from Jason Seidl of Cowen and Co. .

This is Adam on for Jason. I guess, I'll ask couple of kind of follow-up style questions here, and apologies if any of them kind of overlap a little bit too much with the earlier question.

But I guess, the first one is a little bit about -- so your EPS outlook kind of set a modest increase, and that was kind of looking for positives from Landair and then offset by the reinvestment in the Managed Freight business.

I guess, I kind of want to ask a little bit about what that means for your legacy [ CHI ] business? I think the earlier question kind of asked what that means in terms of the reinvestment, so maybe I'll ask it the other way and whether that being kind of the other side for your dedicated and for your legacy business. .

Yes, I think, on the trucking side, we've talked a little bit about expectations around rate increases. I think we -- you have some cost -- probably headwinds, definitely around driver pay, and a little headwind for us should be in the fuel area where we had fuel hedge in place that earned us about $1.6 million of fuel hedge gain in the 2018 year.

We have no hedges in place going forward in '19 or in any future years, and so there's a headwind there with the fuel.

So we think we can -- we're hoping we can hold margins in the general trucking business, and then one of the legacy business is still the solution brokerage, that group is getting a heavy amount of investment and additional people and resources just to drive that business to grow faster, which we believe is a good ROI as well. .

Got it, okay. And I guess I can kind of a follow-up style one. A little bit more on bid season.

And so I know you kind of gave that 5% to 7% rate increase number, is that kind of more about contracts that you've already re-signed? Or is that kind of your outlook going forward? And maybe just a little bit more broadly about bid season, how has it been so far? When does it usually end for you guys? Is this something that kind of carries on for a few more months? Or that is mostly wrapped up by now? And I think we've heard pretty good results from our channel checks early on, but with spot rate falling, obviously, kind of what have you guys been seeing on your end in terms of bids?.

Adam, the ones that we have done so far, which is a couple of large accounts, again, we're very satisfied, very happy with those that we have received and they've all been in that number that we've been talking about, 5% to 7% kind of numbers.

And most of our bids are in the first phase 6 months of the year, with the second quarter being our largest, more impactful processes that we go through. But we are having, as we speak, 3 or 4 large accounts that we're in the process of communicating and actually doing bids as we speak. And again, we feel good about it.

We don't see anything yet that any of our customers are saying, we want you at 0. We're not sensing or feeling that. So that's why we're encouraged and feel like we will get to the numbers that we've been talking about.

And as you know, I would say, as one of our customers that do bids every year, that are still doing bids, I would say that we have received more bids this year -- and actually, I saw a number and I can't remember it, but there's no doubt that the customers are, in general, doing more bids this year than they did last year, which makes common sense, and we're sensing that, and we see that as the opportunity.

And we have received some of the opportunities in the last 30 days through bids that we weren't doing business with these customers before. So that's the benefit. Another thing that I think that we all need to remember as it relates to freight or relates to the shipping patterns in January and et cetera.

One of the things is we have been on the sidelines watching, and I think that we're getting ready to see it.

But it is the impact of the ELD to small carriers, and I don't think that last year when they went into effect "April", and the things that we know we though was in our own brokerage, which is now getting -- late in the last year, they did over $100 million, so it's a good sized company that we deal with carriers out there.

We have -- the spot market rates were so high, the ELD -- less miles without a doubt, we all know it's whatever number you believe it is, negative 5%, negative 9%, negative 12%, whatever the miles are, it's definitely a negative number in ELD. But we got spot rates that are going up 30% to 40%, and it covers a multitude of sins.

And that's what happened last year and those with small guys are absolutely able to make it last year because of the spot rates. Spot rates are down now, and the miles are still the same, and we are already starting to see capacity leave our brokerage side of our business.

And so I think, over the next upcoming months, that the ELD bill that we've all been talking about for 2 or 3 years, I think you will start to see it come into play in this economy. .

Our next question comes from Brad Delco of Stephens. .

I apologize, I jumped on late as well. So if you answered this already, I'll just go back to the transcript.

But can you talk about the ORs you are seeing across your asset base division, the SRT in Star and in Covenant and kind of where those were in the fourth quarter and what you think the opportunity is for those segments in 2019?.

We don't usually talk about all of those, Brad. We kind of talked a little bit more about SRT because of the need for improvements there. We're very happy with the improvement they had this year. They didn't have the record OR, operating ratio year, but they actually did have a record operating income year in dollar amount.

So really strong improvement even through the fourth quarter. They still -- we still believe they have some room for improvement. They're kind of in the low- to mid-90s ORs right now, that's a significant improvement from well above 100 in 2015 and kind of breakeven for 2017.

And I still think there's a path from there, especially if we convert their OTR solar driven trucks into dedicated trucks, but there's a -- already a strong path for that early in 2019 to move some of those trucks, and we pointed that out in the outlook section as well. So I think that's probably all I'm comfortable to discuss at the moment. .

I think, Brad, one thing I'd add to that is, again, the other side, the change -- the involvement of the model, a lower percentage and the, let's call it the one-way side expedited and ready as well is that the Managed Freight side, as we all know, OR-wise, isn't historically as strong as the asset side in a good market.

So that Managed Freight side grows on a consolidated basis, you've got some mix scooping around to our consolidated OR. Now we know the return on investment capital on that segment is extremely strong -- extremely, extremely strong.

And so I think our brokerage, if you had a brokerage at 94 OR, you're at a -- well on the double-digit return on investment capital. And so, I say that to say, that's one thing to think about as our model continues to move as we continue to grow aggressively in that Managed Freight side, whether it be warehousing or brokerage or TMS.

It will put pressure on the consolidated OR, just mix-wise. All things I see.

And so, I think with the cost pressure that you saw with the truckload piece as we disclosed, we have the 2 kind of segments that we're setting up that Richard disclosed in the release as well as his comments, it did improved 130 to 150 basis points over the fourth quarter of '17.

And I think a lot of that, all 3 of the divisions, all 3 of the companies that run trucks, Landair included, so call it 4, but we didn't have all that in '17, all 4 that are included their operating ratio there in the fourth quarter on the truck side, even despite an increase in accident cost. That's extremely encouraging.

It's not 1 full of a wagon for the whole truckload piece. All of them moved nicely. I think we're encouraged about all of them. All of them dedicated to supporting all 4 of the companies that run trucks, and I think all of them are very focused on continuing to move that piece. And I want to make sure, I want to provide another clarifying comment.

Dedicated is not just to -- the growth of dedicated is not only to minimize volatility of the earning stream, that's the result of why we're growing dedicated aggressively. The reason we're growing dedicated aggressively is because of the dynamics in the marketplace. Our drivers need more consistency in paychecks.

Our drivers need more consistency in home time, work-life balance, things of that nature, so it's a response to the changing demographics in the market place over the last 4 to 5 years, it's really longer than that, but really greatly. And so that's why we're doing that. Yes, a benefit, it is.

It does have volatility of earnings, but I just want to make sure that's clear. We're not doing that just to minimize volatility of our earnings historically. .

And in general. If the freight is replaced, it's more profitable business as well. .

Yes. So we're very happy, and it doesn't have better return on invested capital because it's loss of time, there's trailers involved, it's power only top opportunities. Some of them do have a lot of trailers, so you've got to balance that, but generally speaking, the dynamics or the financial results from that segment we're really pleased with.

But it's really to offer something in the marketplace that are driving workforce wants. So we got to participate in that. .

And I think Richard, you were kind of going to get to the point, I know you provided specific details on each of the segments, but the point being that SRT was still challenged a little bit as we started '18, and I guess saw improvement throughout '18 until coming into 2019 as I try to -- and I think the rest of us are trying to bridge '18 to '19 in the comments about modest earnings improvement.

You got a little bit of a tailwind with SRT. We should probably think about, hopefully, insurance and claims cost coming down relative to what we saw in '18. I know you mentioned you have little bit of a fuel headwind, and then of course you have 7 additional months of accretion from Landair.

Am I missing anything on the sort of puts and takes and how to bridge '18 and '19?.

I think that's pretty fair. I just... .

I think there's one other item is the models of impact to the dedicated question is if the model is evolving inside even within truckload. There's more dedicated opportunities in the driver side than there are on the reefer side.

They're there, and so I think one of the things we're seeing as we completed our planning for 2019, which speaks into '20 also, but 2019, we needed less reefers in 2019 going forward. So we are going through a pretty meaningful kind of transition year between reefers and drivers within the consolidated fleet, and that's pretty sizable.

That's a sizable 7-figure type of depreciation in interest move or capital move every year. It's an annualized savings, a pretty good size of number. So that's another positive put, but I'll have Richard kind of handle that. .

Yes. I think, there's a small -- I think this year, we ended up with, I think, we still end up with a small loss on disposal of about $300,000 for the full year '18, and in '19, we expected that to be somewhat positive, call it in the $1 million to $2 million range. That should help.

We are still replacing it to better equipment, so on the -- just net depreciation side, I think it's going to be fairly similar to what we saw, although with more trucks with Landair. And so -- but I still think we'll try to keep it in that $18.5 million to $19.5 million per quarter depreciation number as we roll forward.

Net CapEx, as we said, it's kind of a replacement year -- general replacement year. So to me that means that, that CapEx is fairly similar to depreciation, kind of in that $75 million to $85 million, which should allow us to continue to pay down debt, barring any significant investment that we feel is necessary.

But right now, I think we have a good opportunity there to continue to pay down debt and deleverage. And we still have a goal, which we have even in the year that we've made a large acquisition, we still have a goal to get our leverage ratio down to 1x or lower. And so that's a really strong number for a cyclical company and industrial type companies.

And so, we got it down to 1.4 from 1.9, we still have a goal of 1.0. I don't say we achieve that in '19, but we still should work down the path and improve on that in '19 versus '18. .

Our last question comes from Nick Farwell of The Arbor Group. .

Assuming your integration of Landair continues to proceed apparently smoothly, are you still considering adding additional capacity to your dedicated through acquisitions? Or to try to enhance the mix or balance and accrete them further?.

Our -- good question, Nick. Our definition of where we're taking our company to and our goal and our desire is to continue to get deeper in the supply chain, whatever that means. And to us, so far, that has meant the Landair acquisition, along with what we've done over the last 1.5 year or so on the dedicated side.

And so we're going to continue adding dedicated trucks. We're going to continue to get deeper in the supply chain from TMS, contract logistics, and we're going to do that definitely internally through internal growth that we're looking at that.

We have not -- there's nothing on the pipeline that sits there today that says, hey, let's go do this, but -- on the acquisition front. But we're not closed to that either. And if we were to see the rise another Landair come available, we would be very interested in that transaction. And so, that's what we're going to continue to do.

So the dedicated TMS contract logistics, along with the brokerage is also part of that. That's where we're headed, and to get deeper in the supply chain. .

This is Richard. You've seen us being very disciplined and selective in what we look at and what we went through with Landair. It's the first large acquisition we've had since 2006.

And so I think, we'll continue to be disciplined in that manner, and we'd only make such an acquisition as it really had a strong ROI potential for us and really fit the needs to get it deeper in the supply chain. .

So very simplistically, you're managing down the reefers side, you're building the dedicated side, and the long haul is accreting over time? Is that it?.

In the long haul, we're -- yes, I don't disagree there. We're very happy with the long-haul, but it'll probably stay where it's at. .

Yes, I was hoping the expedited teams kind of -- are able to maintain that level of fleet size, we think. .

In terms of looking at long haul, David, would you say, over the last several years, you've lost sort of net -- if you could measure a market share by truck, have you intentionally so, loss share? Or is long haul, in general, shrinking?.

It basically stays pretty flat. I mean, as you go back 10 years, yes, but the last 4, 5 years, it's basically been kind of a flat kind of number.

The long haul has changed from the standpoint that, as ELDs have came into play in the last 1.5 year, that 700 miles, 800 miles trips are considered long haul today, so we have seen our average length of haul decrease over the last 3 or 4 years, and that's just where the supply chain is located at.

They're paying us for those teams, but it's not like you're picking up a load in Chattanooga and going to Los Angeles on every one of them. We do that, but it's not like it used to be 10 years ago. And so those expedited teams are doing that, but they're growing into the shorter length of haul that a solo can't do in 24 hours. .

Okay.

And one other quick question, and that is, if you look at insurance claims between simplistically long haul and dedicated, do you find last year, in particular, was different than the prior years of mix? Or does it tend to be repetitive every year? I realize it's random, but in general, do you find that long haul has higher insurance claims? I realize they have more miles, but do they have higher insurance claims then dedicated?.

We typically make a dedicated fleet safer because -- for all the reasons. You get the same drivers, they get to know the haul, they get to know the traffic congestions, fuel stops, truck stops, working at rests, and so it's just -- we typically have a less incident rate, there's no question, in a dedicated versus a non-dedicated environment.

The severity of such is -- I'm not willing to say that -- if I'm thinking through the large action this year, those have been pretty much all non-dedicated on the severity side. And so I think that -- but I don't have anything that says that our dedicated cost per mile is less.

But the problem with that is that you run less miles, you still have exposure. So your fixed cost absorption of a dedicated Insurance is not as good as the one like that. And so you have to kind of manage through that.

But as I think of our offices that have dedicated fleets, we've got a -- our national location has a cost per mile that's unbelievable on the insurance side, and that's just phenomenal. And it's half, almost 60% of the consolidated number as far as insurance cost in their offers. And so dedicated is cheaper on the insurance side. .

I would also say on the dedicated side is that word that we all know is exposure. And as I think about the dedicated -- East Coast dedicated trucks' weather, through running -- which we do, we have dedicated in Florida.

We got our Nashville that predominantly is at Southeastern United States, even though they do get up to Michigan, but where the weather is great exposure is less, even in those good models. .

But one thing too, Nick, to kind of follow-up on Richard's comment about profitability, and what you call the [ one-off ] long haul side, we'll call it expedited is -- one of the things we've been intentionally doing is that the returns on that piece of business needs and has to be very, very, very fluid because the capital investment in that business.

You trade your equipment sooner, it's usually higher turnover but it's tough to get folks that team together. And so there's a lot of work that you have to go through to the support that business.

So I think our team has done a phenomenal job of improving the profitability of that segment to a point that makes more sense relative to the capital employed, the work involved in managing that service. And so I'm extremely -- even though total revenue is strong in that service offering, there's no question. It has.

Profitability has improved to a point of much comfort of being able to continue to obviously support it. First off, because it's our [ peers ], but second, grow it if we can find those opportunities to grow and enable to get 2 folks to work the team together.

And so I just want to make sure that we're very -- everybody here is extremely supportive of that service offering and the profitability has gotten to the point where we would be open to growing it, if we can work our turnover down and get folks to advance and continue the team together, which is basically what we're doing every day.

And it's kind of challenging. .

I say that, Joey, because what you guys are facing, presumably is based on anyone else in the expedited long haul. And it's -- my impression is, it's a very important part of the supply chain. There's some attributes about it that you know way more than I would, that make it an integral part of the supply chain.

And if, in fact, the long haul has been flat-ish over some period of time, even during a period of expedited or substantial increase in rates and the movement of goods, it would seem to me, at some point in time, this segment of the marketplace is going to generate higher rates of return just by the nature of where it fits into the supply chain in the contraction of capacity.

And this ongoing effort over the last, I don't know, 10 or 15 years at least, towards taking resources out of dedicated -- I'm sorry, out of long-haul expedited and going into dedicated.

At some point in time, returns are going to -- are presumably going to increase to the point where it's going to be a very attractive business again, notwithstanding all the work you're doing internally to enhance profitability. .

But it is. Like I was saying, it's there now. And the challenge is, is getting again -- 20 years ago people paired up were commonplace. We talked about 8 out of 10 coming into orientation were already paired up with a team partner. Today, it's 2 out of 10.

And so it's just because the generational changes, demographic changes, work-life balance, all of that is impacting that expedited model greatly. So now you're convincing people to team, and to help you find a partner. And so the returns are at where we like and where we would be interested in growing.

We just haven't been able to because the dynamics of what the drivers in that marketplace demands in order to do that. Now the answer may be, and we talked about it forever, is wages. And so our wages have moved greatly.

It's the highest paid of our service offering we have in fleet, but as we've been growing dedicated in different parts of the marketplace in the country to get those drivers, it's pushing our team back. And so it's going to provide -- there's just going to be some challenges to grow that service offering.

We're trying to do it where we can, but there's just challenges to grow that service offering. .

I have one last little technical question, and that is, with your auto -- you're shipping further and further, and hopefully, it maybe 100% auto transmission.

If you're a long haul driver and you're going through the Midwest, especially, say, Nevada or Colorado, New Mexico, et cetera, Nebraska, et cetera, are there -- do they have the right or the ability to override that and be able to go 70 or 80 as opposed to constrained at 60?.

Well, there are -- right now, the answer is no. All our trips are governed and some of the -- our trucks are governed at 65. So that's the first thing. The second, there is technology that we're testing that is really neat that can allow trucks to go over the speed limit, whatever that might be.

So if the speed limit is 65, it will only allow you to 65, if the speed is 70, it will allow you to go 70, and we still put caps. So if you're in Montana and you're saying you're ready to go 80, okay, we're not going to go that fast. .

We have 72. .

So it's some technology that we're testing right now to potentially allow some of the longer lengths to stretch out a little bit and make out a little bit more time. But we're still early in that test. .

We are spending a lot of analysis on that before we make a decision on whether to go deeper with that. .

And, I'm sorry to take time, but the last question is we're all of sort of looking at this driverless truck, and it's increasingly in the public press, that there are trucks out there, people are working with them.

To what degree have you looked at that and when might you expect to start incorporating some driverless capability? Maybe you could -- if a driver is in the cab, one as opposed to 2? But when do you start seeing that coming into your fleet? Is that a 2021, '22? Or is it further out?.

It's further out. I mean, it is further -- I mean, yes, we continuously look at it. We continuously meet with our vendors, our manufacturers, and to make sure that we're staying on top of it. And even though the access may be there sooner than later, I just think there's so many issues that is not going to be a major provider.

First of all, when it does happen, it's going to be a driver in the truck. I can tell you, as you know, we -- on that expedited side, we got a lot of high-value freight.

And until they invest something that sits there and says -- we all know that if a car slows down in front of it, then there's no driver in the truck or if the driver stopped -- is not behind the wheel of the truck and a car slows down, the truck will slow down.

But what happens when a driver of the car in front of you and you've got $5 million load on, and they start slowing down to get the truck to slow down and they get it down to 0, the truck will stop. And so what do we do, just hand our freight over to whatever robbers wants to determine to get it? So I think there's insurance, there's safety.

It's not just the safety of the truck when it wrecks, but it's those kind of issues that -- here's what I know. I'm 61, and I'll be gone before we see all of it, and I'll probably work till 80. .

And as you know, it took about 7 -- 5 to 7 years to move from having front collision mitigation adaptive cruise control to I think it's the 2020 truck that Freightliner is including lane keep assist, which takes this to kind of a level 2 automation, Level 3.

So if you go from level 1 to level 2, it took 5 to 7 years, and it's going to another 5 to 7 years to go to even Level 3, which is still not autonomous truck -- fully autonomous, and it is -- it seems like it's a good ways away before you even consider that there might not be drivers in the trucks. .

At this time, we have no further questions in queue. .

All right, thank you, Kathy. Thank you, everyone, for calling in. We'll talk to you again next quarter. Bye. .

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