Excuse me, everyone. We now have all of our speakers in conference. [Operator Instructions].

It is now my pleasure to turn the conference over to Mr. Richard Cribbs. .

Hey, thanks, Brad. Good morning. Welcome to our fourth quarter conference call. Joining me on the call this morning are David Parker and Joey Hogan. .

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 Factors section in our most recent Form 10-K and our current year Form 10-Q. We undertake no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances. .

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

our Truckload segment's revenue, excluding fuel, decreased 13.4% to $152.8 million, due primarily to the 10.4% decrease in average freight revenue per truck, along with a 105 or 3.4% average truck decrease in the 2019 period as compared to the 2018 period. .

Versus the year-ago period, average freight revenue per total mile was down $0.242 or 11.3%, while average miles per tractor was up 1.1%.

A portion of the reduction in freight revenue per total mile was planned as we have steadily increased the percentage of our assets allocated to dedicated truckload or other year-round service offerings, leaving a smaller percentage to participate in the more volatile peak season, which secures significantly higher rates for a few weeks. .

The other primary factors impacting the decreased average freight revenue per total mile were continued capacity and demand imbalance and a reduction in certain of our customers' peak season team capacity needs this year.

The main factor impacting the increased utilization was an improved average seated truck percentage as only 1.5% of our operational truck fleet lacked drivers compared with 3% during the prior year quarter. .

The Truckload segment's operating cost per mile, net of surcharge revenue, was down approximately $0.033 compared to the year-ago period. This was mainly attributable to lower employee wages and group health claims cost partially offset by higher net fuel expense, workers' comp claims costs and outside professional advisory fees. .

Our Managed Freight segment's revenue, excluding fuel, decreased 15.5% versus the year-ago quarter to $57 million from $67.5 million. The primary factor to this reduced revenue was a reduction in certain of our brokerage customers' peak season capacity needs this year. .

Due primarily to the bankruptcy of one of Transport Enterprise Leasing's, that we call TEL, TEL's customers, our consolidated net income included a $400,000 pass-through loss or $0.02 per diluted share from our minority equity investment in TEL compared to the inclusion of a $1.7 million pass-through gain or $0.09 per diluted share in the fourth quarter of 2018.

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The average age of our tractor fleet continues to be young at 2 years as of the end of 2019, down from 2.2 years as of the end of 2018. .

During the fourth quarter, we took delivery of 47 new tractors and disposed of 256 used tractors, and at December 31, had approximately 625 tractors, the excess tractors, removed from our operating fleet that are either in the process of being prepared or have already been prepared and are held for sale.

We expect to dispose of most of the excess tractor units in the first half of 2020. .

Between December 31, 2018, and December 31, 2019, total lease-adjusted indebtedness net of cash increased by approximately $50 million to $304.6 million. At December 31, 2019, our stockholders' equity was $350.1 million for a ratio of net lease-adjusted indebtedness to total cap of 46.5% compared to a 42.6% ratio as of December 31, 2018.

In addition, our leverage ratio has increased to 2.4x from 1.5x a year ago. .

one, consistent profitability from our Landair dedicated Truckload and Managed Freight businesses in a difficult freight economy; two, decreased Truckload operating costs on a per mile basis; and three, a $24.2 million quarterly decrease in our net lease-adjusted indebtedness. .

one, the pass-through loss from our investment in TEL; two, the 10.4% year-over-year decrease in average freight revenue per truck for our Truckload segment; and three, the operating margin declines of our expedited and solo refrigerated service offerings on a year-over-year basis; and four, the large amount of excess non-operating equipment at year-end that results in higher indebtedness and related expense until sales proceeds are realized.

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Our operational fleet size experienced an increase to 3,021 by the end of December, a small 13-truck increase from our reported fleet size of 3,008 trucks at the end of September. .

From a financial perspective, we expect operating cash flows and our leverage ratio to improve for fiscal 2020 compared with fiscal 2019.

We expect financial improvements to be weighted toward the second half of the year and year-over-year comparisons in consolidated average freight revenue per total mile and margin performance in certain irregular route truckload operations are expected to be negative for at least the next several months. .

declining truckload industry capacity due to, among other factors, a continuation of following new truck production, competitors exiting the industry and tighter federal drug testing regulations; two, continued U.S.

economic expansion; three, the successful disposal of excess real estate and revenue equipment; and four, the reallocation of assets to more profitable operations. The timing and magnitude of these factors will impact our results. .

For 2020, we are intensely focused on accelerating our plans to become embedded in our customers' supply chains, reduce the cyclicality and seasonality of our financial results through growth in our higher margin, yet less volatile services and to enhance sustainable long-term earnings power and return on invested capital for our shareholders through disciplined strategic planning and execution.

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Our operational focus areas are as follows.

In our Truckload operations, we are seeking to tighten our one-way irregular route Truckload freight network to reallocate capacity from solo driven refrigerated to more profitable, dedicated and dry van opportunity, to decrease real estate and revenue equipment capital costs per mile and to reduce other controllable costs.

Regarding the dedicated Truckload service offering, we have recently been awarded significant new long-term business that is scheduled to be operational beginning within the second quarter of 2020. .

In our Managed Freight operations, we attained excellent customer retention rates in our more profitable warehousing, transportation management and factoring service offerings. We expect continued growth with these customers as well as with new customer opportunities.

We have a strong sales pipeline in these offerings to which we have targeted growth and have already secured some long-term awards for our warehousing services that are scheduled to begin late in the first quarter or during the second quarter of 2020. .

From a balance sheet perspective, with net CapEx scheduled well below normal replacement cycle along with positive operating cash flows, we expect to reduce net lease-adjusted indebtedness over the course of fiscal 2020. .

Thank you, and -- for your time, and we will now open the call for any questions. .

[Operator Instructions] We'll take our first question from Scott Group of Wolfe Research. .

Can you talk about -- can you talk about what you're seeing so far in January from a demand and capacity standpoint?.

And then also utilization was up a little bit in the fourth quarter, sort of what your expectations are for utilization here in the first quarter?.

Thanks, Scott. This is David. I definitely feel like that for the first 23 days of January, that a big piece of our business is up over the same time 12 months ago. And so that's very encouraging. Keep in mind that as you think about utilization, we're growing the dedicated side, continue to grow it pretty fast.

So you got -- some of those are accounts, as you know, are 185 miles length of haul and they don't run a whole lot of miles. So just to look and I was thrilled with a 1% increase in utilization, in particular, with a lot of the shorter length of haul, dedicated business. So that's probably not going to be a good measurement.

It's there, and it's a measurement, but it's not going to give us a fair measurement of what's going on with our business as we continue to grow the dedicated side. So as I just look at the -- in particular, the expedited side on the highway services, the expedited side, I'm very pleased to the last -- the beginning of this year, for the 3 weeks.

I'm definitely seeing an uptick in that business. And so that's good. .

The solo refrigerated side, the southwest region of the country was pretty solid. But other than that, I'm not happy.

It's one of the reasons why we're devoting -- started to devote a lot of that -- some of that equipment to dedicated as well as to the dry van operation, and we're going to figure out on the reefers side what is solid for us, and that's where the reefers are going to go. And other than that, we're going to convert some of that to the dry van. .

So the expedited side, which is the gain on the highway services, is right now at 60% or so of that business. For the month of January, in terms of getting better, I'm pleased with. .

Yes. And Scott, I'll add. I think first quarter, we're kind of looking at being up a little more than what we were up Q4 on a year-over-year basis, so kind of in that 2% to 3% year-over-year range of increase in utilization from first quarter of last year. That would still be down 2% to 3% from Q4. .

Okay, helpful.

And then maybe what are you seeing right now from a pricing standpoint? What were -- how are the early 2020 bids coming in? And then, think rates were down 11% year-over-year, fourth quarter, how you're thinking about first quarter?.

I think the best way to look at it is that I do believe in the last couple of quarters that rate sales have bottomed from a -- again, on the highway services side of the business because the dedicated is pretty solid and it's not -- the customers look at that in a different light. So that side of the business really does not concern me that much.

It's the highway services is probably the main thing that concerns me and probably the question that you're asking there. .

And I think it's bottomed out, but I can't tell you that the rates have started going up because one of the things that we're doing is keeping the business that we've got. And at the present time, not asking for rate increases on that business until the market allows us to. And then on the new business, we're just going after new business.

And if that means that our rates are $0.02 a mile cheaper than what I wanted to haul it for, then it's going to be $0.02 a mile cheaper. .

So new business coming on is not where -- it's not where I exactly want it at. But the existing business that's out there, it's flat. I think that we still got -- because there's no doubt about that.

The capacity is leaving the market that we've all seen for the last, whatever, 6 to 8 months that it's leaving, and I think it's ever going to leave a little bit faster. So we're not being bombarded by our customers for decreases overall. And so that's the best time.

12 months ago, 10 months ago, we were being bombarded, the whole industry was, about pressure on the rate standpoint. That is not there anymore. So that part is good. So that's what I think about it. .

And Scott, in the third quarter, rates were down about 5% to 5.5%. And they were probably down 5.5% to 6% on a core basis, non-peak customer basis in Q4. And so I think as you look at kind of first quarter, like David said, there hadn't been a whole lot of change from customer contracts.

And so it should still be down year-over-year, but not at that 11%, 12% pace that we saw in the fourth quarter. That was really due to the peak customer freight. .

And on the dedicated side of Truckload, we've also been able to get a handful of increases on some customers that were underperforming and that we really needed to have at least something on to make that worthwhile to continue doing. And so there's a little bit of offset to the underwhelming pricing on the irregular route side. .

Okay. And then just last question, maybe, Richard, if you can help with some guidance.

I'm guessing first quarter is unlikely to be profitable, but any thoughts there?.

And then when you think about full year, do you think we can see full year margin expansion? Do you think we have contraction? And then maybe same question on earnings, do you think -- do you have any line of sight to growing full year earnings? Or do you think it's likely that earnings are for the full year down?.

the economy and presidential race and those type things. I think -- I think we aren't expecting to be able to be profitable in the first quarter, possible, but not probably likely.

For the full year because we had a good first half last year comparatively, it's going to be -- have to be caught up in the second half of the year in order to get back to equal to what we performed this year or better. And depending on how tight the market gets, that's still possible in our eyes that we could beat this year's results.

But there's a lot of wildcards. .

Our next question comes from Jack Atkins with Stephens Inc. .

David, if I could just go back to your comments on the market.

And I just kind of want to -- if you could maybe expand a little bit on it, just in terms of how you think that maybe the next 3 to 6 months play out? Because it does seem like the capacity attrition that we've all been kind of talking about the last couple of quarters is starting to build and the market definitely seems more balanced today than it did, call it, 3 months ago.

And you're talking about a shift in sort of your customers' expectations around price on the margin.

Could you just kind of comment around as we kind of get into March, April, May, I mean, how quickly could this market turn, in your opinion?.

Jack, one of the things before we got on this call that I told this management group up here is that I just got back last night from 3 days in Chicago, saw 11 customers among all of our segments, expedited and brokerage as well as dedicated and -- for 3 days.

And if we had a month or so of what I had for 3 days, this thing would be back pretty strong. I mean, I would be thrilled. .

And so those were the best 3 days that I've had in 14 months. I mean, I've been in depression for 12 months now since January last year and I was very excited for the last 3 days. Every meeting that I went to was great opportunities that I am -- new opportunities that I am 90% sure that we're going to hit the home runs on these accounts.

And that's just -- you kind of -- it's kind of one of those things that you got to crawl before you walk and you got to see some sign of life before it starts coming back, and that's -- David Parker personally besides our sales teams, that's the first that I have experienced this year was the last 3 days, and I was excited about what I felt the last 3 days.

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Okay. That's encouraging to hear. Shifting gears here for a minute and I guess this question is for any of you guys, but just would be curious if you could expand a bit on the managed services pipeline and the recent wins there.

And I guess, as you guys are thinking about the opportunity set, the revenue potential for that business in 2020, could you maybe kind of help us put some brackets around that? And if there are any sort of start-up costs associated with those new contracts?.

Jack, it's Joey. The way that I would kind of try to simply answer that and this includes dedicated because we, we look at dedicated with our Managed Freight together, so it's kind of our logistics group. So we've got 5 startups in the next 4 months that are pretty significant.

And that -- I mean, the management team is doing a great job of building start-up plans for those, but we've never done that before. And that's a significant challenge for us that I'm very proud of how the whole enterprise is working together, including shared services team to support those startups. .

So it's significant. I'm going to say like $40 million to -- or $60 million, I'm getting adjusted here, I'm going to say $50 million to $60 million of annualized opportunity for those. And that's huge. That's huge. And so -- but we've got to bring them across the goal line. We got to get them simulated. We got to have a 90 day, we got to be great.

First 90 days, that first QBR after each of those is critical. .

dedicated -- 2 dedicated, 1 Managed Freight and 2 warehouse is the pieces of those. And so that's neat because it's kind of spread out across that kind of logistics offering. I did see -- this I would say, kind of piggyback on what David said on the highway or one-way side, went through it in pretty detail this morning and it's exciting there also. .

Now you've got to get them across the goal line indeed, because of all the capacity that David alluded to and start to lead the marketplace, I mean, we started seeing that just for some data that we tried last summer. But there's a lot of things going on that's affecting capacity. I think a key sign will be when the spot market stabilize.

And I think it's stabilizing now. It's just not payment. Could it be up and down a day or a week at a time? But yes, that's a sign of capacity. And then obviously, when it's starting to tighten, that's when spot moves and then contract will move with that.

But I agree with David, I saw a few customers earlier in the week, there's still what I would call some ask some soft ask; some soft ask going on out there. But generally speaking, at least for some large shippers' customers that we had, I think everybody is starting to see it.

But I'm excited on the highway side too, some of the things that we're seeing there also. .

Okay. That's great. And then kind of shifting gears back to sort of the bigger picture on 2020 for a moment. When we think about 2020, a lot of the discussions have been on the capacity front and the potential for supply to come out of the market. But I guess, one of the interesting things to me is the demand comps are pretty easy in 2020 versus 2019.

You have an extra day in the first quarter with leap year. You've got more a favorable holiday calendar and timing in the fourth quarter. .

When you kind of think about the opportunity in 2020 versus 2019, I know the first half comps are tough, just from an earnings perspective.

But just when you think about how the calendar shakes out, does that kind of -- is that maybe something in the positive category for you guys as you think about this year?.

I mean, I agree. .

It does. I think the key -- well, a key that was brought up earlier, is that all the pricing moves throughout 2019, first half comps for pricing are going to be very difficult. And so until you get past that, you'll have a full year effect of those. So that's a headwind. That's a pretty heavy headwind as we do -- as we comp versus year ago. .

And I think that's just something that -- there are several things that Richard mentioned, the equipment, that's been huge, both for CVTI or the operating company as well as TEL. And there's just a significant amount of equipment capital that we're very confident that we've got good plans on moving those.

That's been -- it's been a huge earnings drain that we've got to push through the system. And that will take a while. That's going to take every bit of the first half to get a large chunk of that out of the system and get paid for. So we're getting revenue generating on some of that on the TEL side.

So those are 2 kind of big headwinds when you, what I would call, comp a year ago. That's just the market. They're going have to push through it, get through this bid season. .

Our next question comes from Jason Seidl with Cowen. .

A couple of quick things. One, Richard, I just want to make sure I heard what you said earlier about tractors held for sale.

You said there was 625 being held for sale in prep?.

Well, I don't use that term because that's an official accounting term, but there are 625 that are either being prepped for sale or are held for sale that are excess at the end of December. That number was over 800 at the end of third quarter, and we should run those 600 through the system and get them out by the end of June. .

And some of those that we sell, some we trade in. .

Yes, probably about -- probably about 60% of those are sold back to the OEM, and then about 40% of those will be sold outright to the market. .

Okay, perfect. .

We feel good about the book value on those, et cetera. So... .

Okay. If you think about fleet growth from here, you said you ended the quarter at 3,021.

Is this going to basically remain flat as we move throughout the year? Do you see it growing maybe in the second half as things improve?.

The fleet size at the end of the quarter was 3,021. I think what we'll have is a little bit of decrease over the first half of the year as we do a few things, as we move trucks, as we get new customers on the solo dry van side as we move to dedicated from the solo refrigerated side. So there's partly that. .

And then in addition, some of those dedicated accounts start second quarter and we'll start seeing that pick back up. But there's also some dedicated accounts that if we can't get them to the profitability levels that we want, then they may be called out.

And so there's a piece of that, that could happen where the truck count could decrease for that in the first half of the year as we're really evaluating the profitability of each of those accounts.

So between those things, I think it probably goes down a little bit, maybe down 50 by the end of the first half and then starts picking back up by the end of the year. .

Okay. That's great color.

Also, the charge for the TEL, for the CTI bankruptcy, is that all done? Or are we going to see more driven in 1Q?.

So there will be some pullover into the first quarter and a little bit in the second quarter as several of that equipment that we've already taken back has not yet been redeployed or sold.

So there's a piece of that where we'll continue to have depreciation and interest -- or not we, where TEL, they will have additional depreciation and interest expense and no revenues to offset that.

So I believe that they will be profitable in the first quarter, but only slightly, not up to the kind of numbers they were producing in the first 3 quarters of 2019. And then in the second quarter, that improves closer to that old mark.

And then in the back half of the year, I expect them to be back to running very close to what they did in the first 3 quarters of this year, of the '19 year. .

Okay, perfect. My last question before I turn it over to somebody else. You talked about, obviously, the 5 new startups you dedicated to warehouse, 1 Managed Freight, $50 million to $60 million in annualized revenue, I think, Joey, you said.

How should we think about that as it flows through your income statement? Is this $50 million to $60 million you're confident you'll have that in 2021, and this will just build as we move throughout this year? How should we think about that?.

Yes. It will build throughout this year. Those are annualizing -- and again, Richard said it also, there could be some offsets to that. Depending on customer receptivity on -- especially on the dedicated side and the highway side, frankly, to pricing taking on the existing business, so there could be some deducts.

But if you just focus on startups, it will build throughout the year. And it will take -- most of that is coming on in the second quarter, early to late second quarter, so third quarter will be a good proxy to see the full kind of annualized effect in the third quarter. .

[Operator Instructions] We'll take our next question from David Ross of Stifel. .

Just to follow-up on the 5 startups in the next 4 months, should that be a near-term headwind to EPS in 1Q and 2Q as you incur costs before the revenues start coming in? And is it significant more and more in the other quarter?.

Yes, the first quarter will have more of that. On the warehousing side, there's some technology start-up costs, and then on the dedicated side, as we kind of move trucks around to the new locations. So there'll be a little bit of a headwind there in the first quarter, maybe some in the early second quarter.

But for the most part, that will be done by June. .

And then, Richard, maybe I missed it, because you talked in the release about net CapEx being well below normal replacement cycle. But I didn't see a range.

Is $50 million to $60 million a good range? Or how are you thinking about that?.

I think it'll be lower than that. We didn't put it in the release, but I think probably a $20 million to $30 million net CapEx number for next year is likely, especially given that we've got 2 pieces of real estate that we're selling that are up for sale, and we have some good prospects for selling those.

And hopefully, we'll be able to get those done by March or, if not by March, by the end of the second quarter. .

And David, you mentioned that you were very pleased with expedited business year-to-date.

How would you, I guess, characterize the drivers of that demand? Would that be on the e-commerce side on the LTL side? Or is there something else going on in expedited that's making you happy there?.

Yes. No, it is -- I can't say that the LTLs that we brought on a couple of more, because we do so much with a lot of LTLs, as you already know, but we have brought on a couple of new ones.

We got one in particular that's really -- on existing business that's really been growing in the last 3 or 4 months, but -- and we brought on a couple of more, but it's really across the -- it's across the board of new opportunities that are out there that are existing for us.

And some of the air freight side that -- they're doing their best to put as much as they can on the road that we've been able to bring on a couple of those. .

But the expedited side is just I've been encouraged about it. And so that's the best way to explain. It's really across the board. I mean, I'd say retail, good opportunities. They're existing now, again, some air consolidation customers that existing now. A good medical piece of business that is coming on board with us. So yes, it's really across. .

And then last question, Richard, around the operating tractor count. The fleet is expected to be flat or down, up to a couple of percent by the end of this year.

How would you break that out between what the dedicated fleet should look like and what the rest of the fleet should look like? Would it be dedicated up 3%, the rest of the fleet down 3% to 5%? Or how do you think about that?.

Well, kind of as a percentage. Looking at averages for '19 versus '20, I think that the average of the dedicated of -- average of our total truck count is going to move up probably by the end of the year closer to something like -- or let's just say for the average of '20, it will be closer to 59% to 60% from 54% this year.

And then on the expedited side, I think that will stay about the same, which will make it a little higher percentage if our truck count decreases.

And then the solo reefer side that averaged closer to 400 or so trucks this past year in '19, I believe that will be down to probably 200 by the end of the year and will be replaced with -- some of that goes to dedicated, and some of that goes to one-way irregular route dry van solo, so that's kind of how it should break down. .

There's a lot of moving parts within that, Dave. One of the things that we purchased -- the Landair acquisition and all the dedicateds coming under John Tweed.

We want to think that we've been working diligently on for the last 8 months, is individual P&L statements by every dedicated because we've grown it dramatically in the last 1.5 years, and we're about, yes, 99% through that. Is that a good number? 95%. .

I mean, we're at the tail end of having crystal clear numbers by account instead of just averaging the dedicated. And what I mean by that, if we got some that's got insurance at $0.15 a mile, and some at $0.10 instead of having it at $0.12 across, we're going to know exactly that it's $0.15 and $0.12 and we can deal with that.

And so we're about 95% through that. And I know we'll be there in the first quarter that we will know exactly. .

Now what is my gut? There's 1,700 trucks there, my gut says there's probably 150, might be 200 trucks that one of two things will happen. Either we will exit it or we will go to the customer first, and we will get price increases to offset and to make those things acceptable.

I'm guessing that 50% of those will, the customers will give us what we need on that is what my gut is telling me. We also have got about 200 trucks on the highway services that Richard was talking about there that our goal, whether it's today or 6 months from now, is to put it into the dedicated side of the business.

So depending upon how many trucks we got to replace because the customers will not give us what we need on that dedicated is 150 or 200, I can draw a picture that there could be 300 trucks in the network that we want to get into dedicated. .

Now I'm very happy, you heard a little bit. The pipeline is pretty good. And it's growing. I'm pretty excited about the pipeline that we have got, and I'm here to tell you, we got a couple, 3 that we're working on that if we hit 1 or 2 of them, I mean, they're big, they're big operations that could take care of my problem pretty quickly. .

So that -- to give you a flavor. Hopefully, that gives you a flavor of the trucks are moving around. And I think in the next few months, they will get to where, going forward, we'll have them again and with the financial picture on the dedicated side of the business being something that we all will be happy with. .

And we'll take our next question from Nick Farwell of Arbor Group. .

David, just a quick update, if you wouldn't mind profiling the improvement in expedited.

Just generally by regions and lanes, and comment a little bit about the stability of that business in January? And does it have anything to do, do you think, with especially relative to rail traffic that maybe you're gaining share versus rail again for some reason?.

Yes. There is no doubt that a little bit of what intermodal has done on their precision tracking and doing what they're doing there, it's definitely taken some freight off of rail in the last 1.5 years, and it's gone from OTR. So depending upon where the origin is at depends upon if that is made available.

So even though I don't have anything concrete that says I know I took that off intermodal, I know there are some that have done that, especially on the LTL side of the world, that is happening -- that's been happening there. .

Another thing that is happening is that for a lot of the carriers out there that are competing with same-day delivery, "Amazon is leading that", but all the other retailers are following suit. So they're all doing it.

On the retail side, is that a lot of that is becoming -- as you're reading about it, it's true, that 6- or 7-day delivery from 5-day delivery, and the other way that could happen is through -- is through a lot of that being the expedited side. .

So we're thinking -- you heard me mention a little bit ago that, in particular, an existing customer that we got that we've really grown with in the last 5 or 6 months, it's because they've taken their network, and they're going to 7-day delivery to make sure that they're competing. And so we're seeing -- also seeing some of that on the expedited. .

One of the things that we've been talking about, say, for the last couple of years, and one of the reasons why we started going on the dedicated side of the world as well as the purchase of land there, almost be 2 years in July, but one of the things that we all know about the expedited side, the expedited, love it, it's our heritage.

It's what I started the company with. Those are all positives. .

What's the negative on the expedited is that it can be volatile. And we know that. We've seen that ever since we've been public or ever since I've been in business is that, that model absolutely goes from 85 to 95 and ORs.

And whether that's in the first quarter, whether that's snow on the ground and I got 2 people and they've got higher costs that their truck can't run like a third ship manufacturing like that dedicated -- I mean, that expedited needs to, that hinders it. .

Now the positive to that is that when things are going well, freight's good, and the weather is good, and it's -- I mean, that thing is pumping in the low 80s. And so that's what the model is. So we decided 2 years ago, there's no doubt that the value of that expedited is tremendous, so no doubt.

900 teams that run in that expedited division, it's something that the market absolutely needs.

But how do you deal with the volatility? And our question is, is to -- it's our answer to that question is to continue to get deeper in the supply chain and go into more of the dedicated side of the business as well as managed services there and warehousing. And that's what you're seeing us perform. .

So you're seeing -- as I look at our -- and a lot of our dedicated last year, even with the year that we had, nothing that any of us are pleased with, the dedicated side, operated, excluding some that we didn't have the P&Ls on, but the dedicated side, we operated very strongly in a lot.

I would say about half of the fleet of dedicated operated very strongly, the warehousing was absolutely good. The TMS was absolutely good. And the brokerage performed the way that we wanted the brokerage to perform. .

So we're going to continue to grow that. Expedited will find its place of where it's supposed to be. Maybe it's 1,100 trucks. Right now, it's 1,300. We're saying a couple of hundred to take out of there on the highway services, and let's say that it runs 1,100 trucks. And that it is just pumping, it's just pumping, but it's always going to have that.

Whether we can get it down to our goal internally as they get that from 83 to 93 instead of 85 to 95, get an 83, 93 ORs and then it's 1/3 of your business and you're growing this other one that's got consistent earnings. .

So that is what we've been working on for the last 2 years, and I really believe that as we get past the first couple of quarters this year because of the first 2 quarters last year being year-over-year performance better before the world started coming down the second half, I think the second half of this year, that we're going to start seeing that coming to fruition for us.

That's a long answer and I don't even know if I answered your question, but I guarantee I answered a lot of people's questions. .

Okay.

Are there any -- there's been comments about the diminution in capacity, have you seen that in the long-haul expedited team business also? Or has that largely been elsewhere?.

Yes, you have seen some of that. But as you know, Nick, as you get past 3 or 4 carriers, big carriers, us, [ BRST ], some Werner, U.S. Xpress, I mean, when you get past 3 or 4 major carriers, it becomes people running 50 to 100 trucks.

Now that said, this 11,000 trucking companies that we know went out of -- did not renew operating authority in 2019 over 2018. Some of those were those 50 truck operations that were running some teams. And so we have felt some of that also. It's one of the reasons why, I guess, we started off the first 3 weeks of January felt a bit better. .

I'm just curious, if you were to look conceptually at where your mix is today, and you commented how it will shift between now and June.

But I'm really -- I'd be curious to know how do you see it shifting over the next 2 to 3 years? In other words, if roughly expedited, I'm using trucks as a surrogate, and it may not be perfect, maybe by revenues, it's slightly higher.

But if expedites is 1/3 of your business and reefers going from 10 to 5, roughly, the balance being simplistically dedicated, how do you see that shifting over the next 3 years? Does expedited become even smaller?.

Yes, well, yes. I mean, I think that it stays in that -- let's say, right now, it's 1,300 on what we call highway services, but I think that it gets into that 1,100 truck operations and our goal is to run that thing 83, 93 ORs is our goal and just print cash when you can print the cash here in that model and grow around it.

And it will continue to be a smaller piece of the pie. That is our plan, not that it's not important. It's critical because look here. When you pump 83, none of our other divisions are pumping 83, so when it's running like that, it can really do extremely well, but we want to grow these other ones that have got the solid earnings of consistency. .

Yes, Nick, the revenues were about 40% for that irregular route piece of our business, total, across all, not just trucking. And we think that over a 3-year period, that will be down to about 1/3 as we kind of grow around that with the dedicated and managed transportation and warehousing pieces of our business. .

Okay.

And does that -- is that reefer something like then down to 5% in your model that you're talking about?.

Yes, that's pretty close. .

Yes. Okay. So literally, you're going to be roughly 60% dedicated, which really, in many respects changes the model. Obviously, you know better than I do, changes the model of the business, it moderates the downside, but you still capture the upside and improve rates with volume in the highway business.

I mean, that's sort of conceptually the way I think you're heading from a financial model standpoint. .

Yes, that's our strategy to reduce the financial volatility that we've experienced which we still experience greatly this year and we still have a lot of work to do on that. .

And we really felt like, folks, if you all remember, Richard and I, I mean, we really felt like -- we hadn't got into this recession. I think it has showed some of us even that we really felt like -- 12 months, 14, 15 months ago, we felt like that we had reached a lot of that. We really did.

And then the recession hit, and we realized that some of the dedicated trucks that we were operating in, were not performing as well as we had.

We came out of '18, the best year of our history of our company, and expedited was blowing and doing extremely well, and we brought on a lot of dedicated and I would say of those 900 trucks that we brought on, I think about 400 of them would be ones that none of us in this room or on this phone would be pleased with. .

None of that [ figures ] are off, some are operating and allows that, but they'll be operating in the high 90s to low 100s.

And those are the ones that now we've identified, and I really think -- or we're close to identifying, I think it's 150 to 200 trucks that we got to deal with but once we get that solid, as I think about first quarter last year, it was still our third best quarter in the history of our company, if I remember correctly, Richard?.

Third best first quarter. .

Okay. Yes, that's what I mean. I'm sorry. Third best first quarter last year until the recession started hitting. And once it stabilizes and business comes back better, I think the work that we've been doing for 2 years and the acquisition of Landair, I think it starts showing itself. .

David, just very simplistically, what I think I hear you saying is the repositioning of the company and the focus on the balance sheet suggests that you reduce -- over time, if it's a successful strategy, you reduce volatility, enhance cash flow, reduce leverage and ultimately end up in 3, or maybe it's 4 or 5 years, with really a slight -- no, actually a much different business model than you had here before?.

Yes. Yes, that's what I 100% agree with that. And I think it's in a 3 or 4, I think it's a couple. I think we're getting there. .

I appreciate it. The implications to valuation are pretty obvious when one looks at the way an old dominion, for example, which is not in your business on others over-night gets valued and how different models of -- revenue models are rewarded in the marketplace. That's the concept I'm trying to understand better. .

Our next question comes from Barry Haimes with Sage Asset Management. .

Just had a quick question. Richard, I think you mentioned that the fleet age at the end of the year was about 2 years.

With the reduced CapEx that you alluded to in 2020, approximately what would the fleet age pencil out to at the end of the year and then 2020?.

Yes, at the end of 2020, I expect that to be closer to 2.2 to 2.3 years, still very young. .

And our next question comes from Jack Atkins with Stephens Inc. .

Just one quick follow-up question. Richard, the tax rate in 2019 was around 20% on a consolidated basis, adjusted.

Could you kind of talk about some of the puts and takes for 2020? Would you expect tax rate to kind of bump back up to something more normalized like 26%, 27%? Or should we expect something lower than that?.

Yes. I think on an effective tax rate basis, the annual ended up being about 29%, but that included the reversal of the federal income tax credit that we had taken. So we pulled that out from the adjusted earnings for Q3 and for the full year.

And looking forward this year, part of what was reduced in the fourth quarter on a tax rate basis was when we remeasured our state effective rate, it would reduce by about 2 percentage points. A lot of that has to do with apportionment of where we run and where our revenues come from.

And we have had more of our revenues and income in the states that have lower income tax rates. So we -- as we've grown with the Landair side and the contract side, we've been able to grow that outside of the West Coast, the Northeast and other states where there's higher tax rate.

So I expect the tax rate this year to be anywhere between 25.5% and 27 kind of percent. So I appreciate the question. .

And we have no further questions in the queue at this time. .

All right. Well, thank you, everyone, for calling in. We'll talk to you next quarter. .

Ladies and gentlemen, this concludes today's conference. You may now disconnect..