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

Thank you, Samantha. Good morning to everybody. Welcome to our First Quarter Conference Call. Joining me on the call this morning are David Parker, Joey Hogan and Paul Bunn here. And John Tweed is from another location. .

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 than those contemplated by forward-looking statements.

Please review our disclosures and filings with the SEC, including, without limitation, the risk factors set in our most recent Form 10-K and our current year Form 8-Ks. We undertake no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances. .

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Our Highway Services Truckload segment's revenue, excluding fuel, decreased 1% to $77 million due primarily to a 5.8%, or 80 tractors, average operating fleet reduction; partially offset by a 5.1% increase in average freight revenue per tractor in the 2020 period as compared to the 2019 period.

Versus a year ago, average freight revenue per total mile was down $0.073, or 3.7%, while average miles per tractor was up 9.1%.

The main factors impacting the increased utilization were a 710 basis point increase in the percentage of our Highway Services fleet comprised of team-driven tractors and an improved average seated tractor percentage as only 3.1% of our Highway Services tractor fleet lacked drivers compared to 7.7% during the prior-year quarter. .

Our Dedicated Truckload segment's revenue, excluding fuel, decreased 2.5% to $69.9 million due primarily to a 3.1%, or 53 tractors, average operating fleet reduction; partially offset by a 0.6% increase in average freight revenue per tractor in the '20 period as compared to the 2019 period.

Versus year ago, average freight revenue per total mile was down $0.029, or 1.6%, while average miles per tractor was up 2.2%. .

The combined truckload segments' operating cost per mile, net of surcharge revenue, increased just $0.004 compared to the year-ago period. This was attributable to higher non-driver wages, group health, workers' comp and casualty insurance claims costs, basically offset by lower maintenance, repair, unloading, recruiting, net fuel and cost. .

Our Managed Freight segment operating revenue decreased 4% versus the year-ago quarter to $42.7 million. This decrease was driven by a 10.4% decrease in freight brokerage operating revenue to $21.8 million, partially offset by a 3.7% increase in the combined operating revenues of TMS and Warehousing.

Managed Freight's operating income was $1.6 million for an operating ratio of 96.2%. .

Our Factoring segment's net fee revenue increased 48.2% versus the year-ago quarter to $2.7 million. Factoring segment operating income was $2.2 million compared with $1.5 million in the prior year quarter. The increase in net fee revenue and operating income is the result of new customers as well as growth of prior existing customers. .

We recognized a $700,000 pretax loss from our 49% equity investment in TEL compared with pretax income of $3 million in the first quarter of 2019. Ongoing weakness in the truck sales and leasing market has contributed to these results. .

The average age of our tractor fleet continues to be young at 1.8 years as of the end of the quarter, down from 2.3 years a year ago. During the first quarter, we took delivery of about 250 new tractors and 65 new trailers, while disposing have approximately 375 used tractors and 190 used trailers.

We reduced our operational fleet size by 74 tractors, or 2.4%, to 2,947 tractors by the end of March from our reported operational fleet size of 3,021 tractors at the end of December.

By the end of 2020, the size of our operational tractor fleet is expected to be down 12% to 14% compared to the end of 2019, allowing us to maximize the utilization of our operational fleet, including culling out lower-performing freight, where some shippers are not willing to sufficiently compensate us during the immediate term before freight demand returns and truckload oversupply is corrected.

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Between December 31, 2019, and March 31, 2020, total net indebtedness, net of cash, increased by $32.2 million to $336.8 million.

This sequential increase to net indebtedness, including -- included cash payments during the first quarter of 2020 totaling $17.5 million for the repurchase of over 1.4 million shares of our common stock prior to the suspension of our stock repurchase plan in late March and a $24.2 million increase in net funds employed through our Factoring business to $106.6 million at March 31, 2020.

Total indebtedness, net of cash, decreased by $16.9 million for the month to $319.9 million at April 30, 2020. .

At March 31, 2020, we had cash and cash equivalents totaling $39.7 million as well as available borrowing capacity of $35.6 million under our asset-based revolving credit facility, for a total of $75.3 million in liquidity.

The sole financial covenant under our ABL facility is a fixed charge coverage ratio that is tested only when available borrowing capacity is below a certain threshold. Based on availability as of March 31, 2020, no testing was required, and we do not expect testing to be required in the foreseeable future.

Liquidity increased $9.7 million for the month to $85 million at April 30, 2020. .

One, a realignment of our executive structure and organizing our talent to most effectively design and execute our strategic initiatives. Two, completion and initiation of certain elements of our plan to reduce our total capital employed while reducing leverage and prioritizing our higher-margin and less-volatile core service offering.

Three, cost control planning and ongoing execution to provide significant cost savings as we move through the fiscal year. Four, the swift and effective response to COVID-19 by our teammates. Five, year-over-year average freight revenue per tractor increases in each of the Highway Services and Dedicated Truckload segments.

Six, combined truckload segment operating cost, net of fuel surcharges, increased just the $0.004 per mile compared to the first quarter of 2019, even with an excessively adverse insurance and claims expense quarter, partially offset by a $1.7 million gain on the sale of our Orlando terminal.

And seven, growth and increased profitability from our Factoring segment. .

One, revenue and related profitability lost while 2 of our large dedicated automotive customers shut down operations in mid-March related to COVID-19 precautionary measures and are just now slowly stepping up production this week; the pass-through -- two, the pass-through loss from our investment in TEL; and three, net indebtedness increasing $32.2 million from the end of 2019 to March 31, as we made the decision to repurchase $17.5 million of our common stock and to grow our Factoring segment significantly.

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We are encouraged by the initial positive results of our strategic plan execution and structural advancements as an improved business mix and our cost control efforts offset the impact of a challenging volume and pricing environment in April.

However, we expect volatility from month-to-month over the remainder of the year due to external factors as well as gains and losses associated with our internal initiatives and changes in our revenue and cost structure.

Accordingly, our prior outlook for 2020 is no longer applicable, and we do not expect to provide earnings or similar expectations for the foreseeable future. .

In the near term, we are well equipped, well prepared in -- to support our partner-customers as their productivity, the economy and business levels return to normal. Over the long term, we believe the influential structural improvements and strategic initiatives we are executing will strengthen our position in the U.S.

logistics industry, derisk our leverage profile and concentrate our less-cyclical business model on more sustainable, higher-margin sectors where we can add considerably greater value to our partner-customers and for all of our stakeholders. .

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

[Operator Instructions] Our first question will come from Jason Seidl with Cowen. .

So wanted to focus a little bit on your automotive business because you tend to have, I think, a little bit more exposure than most people do. .

Number one, what percentage of your automotive business is in your Dedicated side? And what are you seeing and hearing from some of them in terms of -- we all know they're ramping up, but how are they going to come back? Like, what percentage of the business should we expect in the month of May and in the month of June compared to what you had before?.

Jason, it's David. To give you an idea, it is in our contract logistics side of the Dedicated. We've had some of that business for 25 years. This is not -- the contracts are not as solid as what I like with what we're doing on our existing Dedicated business.

But again, we've had it for 25 years, we've treated each other very good for that amount of time. There's no doubt that it has been a hit. Again, we all -- it's been hit hard. .

We had about 300 trucks, a little bit over 300 trucks. So kind of a 10%, 12% kind of number of total, and it went down to 0. And so what we are hearing so far is that they basically started back this week. [ One may decide ] to start back until next week. But GM started back this week.

And their projections are basically 25% [ add on ] each and every week up for the next month. And expected by the middle of June to be at 100% level. So it's kind of this week, 25%. And then our other one is the -- with BMW, and it's -- and we expect it to get up to about 75% over the next month.

And their thoughts are that it's probably just going to hang there. I don't know that it's going get -- it's going to take them longer to get to the 75% or probably to the 100% level. So anyway, those are in. And [ Maytime ] is expecting -- so those are our 3 major ones.

And [ Maytime ] is expected to start back next week, but theirs is a little bit more cloudier of expectations. .

Now out of that 280 to 300 trucks that we're running at, we didn't -- we did replace some of the freight on those trucks through some broker freight and other customer freight and then some of the freight that picked up with the pause of the COVID, so grocery and paper good and all that kind of stuff.

So it wasn't 0 revenue on those trucks during the middle of March when the plants shut down, but it was quite a scramble at the end of March because the timing of the plant closures were a little quicker than we had been told. They were looking at a week out, 2 weeks out, when they all of a sudden on one night decided, no, we're going to close that.

And so that's just the scramble in the last few weeks of March, but April used some of those trucks and some of them got furloughed, et cetera. .

Right. No, that makes sense. But the way -- I guess, the way maybe I'm asking how we should look at it is, as that comes back, that's going to help, obviously, your profitability. Because you guys were, let's say, breakeven in April.

Even though you replaced some of that business, I'm assuming some of it might have been at not the best rates in the world in the spot market. Plus, there was a scramble, I'm sure, that cost you guys a little bit, too, in getting trucks out in service.

So as they come back, that should help the profitability numbers that you guys saw in terms of being breakeven in April as we move to the outlook for, let's say, June.

That fair to say?.

Yes. .

Okay. Perfect. The next question, I wanted to focus a little bit on your cost that you have that you guys outlined a little bit. And maybe you could start going over.

So how many of these costs should we consider permanently out of your cost structure going forward? And how many are more just variable reacting to the marketplace?.

This is Joey. I think we've got a very hefty target that the leadership team is working towards as we adjust the fleet size. Yes, on the cost side. So we are -- by the metrics that we're targeting, we're about a little more than halfway towards the goal.

And so what I will say is measuring our productivity impact week-to-week related to the -- our situation pre and post virus start-up, I think we've done a pretty good job of bridging most of that variable profit miss with the current cost savings that we've been able to put on the books. .

So -- but we're not done. And so I think regardless of how fast things ramp up, slow or fast, things ramp up, we're going to keep the pedal down on, let's call it, streamlining the organization. And so we need a little bit more time till we're comfortable really sharing the details of that. But we've got hefty targets. .

Now as it relates to your main question, how much permanent versus short term? Of that, that we've been able to get thus far, I would say -- actually, I don't have a really good number. There's a couple -- I mean, for example, we suspended our 401(k) match for our employees. They all know it.

That's a pretty meaningful number on a year-to-year basis, and it's immediate. Well our goal is to turn that back on when we feel good about that because I think being competitive in the marketplace is important. So that's one that, for example, is temporary. It's not permanent and long term. .

Most of the things that are on books that we're working on are permanent in nature. For example, we started this process coming out of the year of rationalizing our fixed infrastructure. It's public that we sell in our Orlando terminal. It's also public there's another large one for sale into its own market.

And so people can go look at it and trying to sell our Dallas facility. We hope to close that soon, very, very soon. So in addition of those 2, we made the decision, as it's also public, to close our Texarkana facility. So that's in process. And we're in the process of transitioning some of those positions, eliminating some of those positions.

And so that's -- and that's a large operation there. So those 3, in essence, are permanent and they're significant, the impacts of those 3. And so that's an example of some permanent savings that are big. .

So if we do a good job of keeping the revenue that we want to keep to some of -- even the freight -- some of the solo trucks for hauling in the Texarkana operation we don't want to keep, frankly, it's just not profitable. We do a good job to keep the freight that we want to keep and take cost, we'll incrementally get better. .

So there's a lot there. The restructuring on -- is close to 200 non-driving positions that are involved in either voluntary or involuntary shutdown or layoffs, if you will, Texarkana's a big chunk of that. That's as permanent in nature. So that's big also. So those are some examples of the fixed cost items. .

The executives took salary reductions. So yes, that's temporary in nature. [ We spent look on that ], temporary in nature. .

Sam just grabbed me a good one. We had quite a bit of equipment that was carried over from 2019, tractors and trailers. So if that works as well, fleet, that's permanent reductions in capital cost. .

It was rough kind of getting started this year, but that's going to help us quite a bit. And it's already kind of looking in the months of April and what should happen in the month of May, we'll start to really see that start to show up in the income statement.

So between the headcount reductions, the terminal rationalization and then the equipment plan, it's a significant number of all of this..

And there are several more as well. And on the equipment side, a lot of that tradebacks and proceeds from that came in, in the month of April and early May. We had gotten a decent ways along by the end of March 31, but there was a lot of that, that really got out of the system in April. .

Okay. So when I think about your P&L going forward, we're going to see a lot of the impacts, obviously, in salaries and wages with some of the reductions.

But I'm assuming as well, it's going to go into -- operations and maintenance is probably going to go lower, too, and maybe just general supplies?.

Salaries and wages; operating taxes and license; depreciation; a little bit communications, that line, as you roll out telematics and things of that nature relative to the equipment and interest expense. .

And then we're doing a lot of work on safety as well. There's a new initiative related to that. And it does appear that the first quarter was an excessive number. So that should be back down to whatever the new normal is.

We did note that we are adding about $500,000 a quarter for additional premium expense and did take on some more exposure in this part insurance market. .

Yes. No, that makes sense.

How should we think about D&A for the full year?.

Yes. I mean -- again, the second quarter is going to be difficult to peg with various things going on, changing out equipment and those type things that, I'd say, after the second quarter, you're going to see that number to continue to decrease a bit.

So on a normalized basis going forward, I think that's going to be definitely below what it was in the first quarter by the time we get done. .

Okay. That makes sense. One more question for you guys... .

The first quarter did include the gain on sale of Orlando of $1.7 million. But taking that out and then backing that out, whatever happens in the second quarter with all the properties Joey was talking about, I think it's -- will be significantly below that number going forward. .

Okay. Let me ask a final question and I'll turn it over to somebody else. .

You mentioned you obviously had to move some of the trucks to the brokerage side of the business.

What percent of the trucks went to brokers this quarter versus the prior year?.

Well it's not necessarily going to our brokerage, but to the spot market, the increase from what we generally do of, call it, 3%, was probably closer to 8%, 9% into March and in April. .

Kind of tripled. .

Yes. You should see that -- when you see that going down... .

We're starting to... .

Yes. Starting to see that now. .

Yes, starting -- out of its peak and starting to come down. .

Okay, good. So contract freight is coming back. Automotive freight will help that, et cetera, et cetera. .

That's good news. Well listen, gentlemen, I appreciate the time, as always. And just tell everyone out there in the Covenant world that we appreciate the men and women out there in the front lines delivering the freight every day. You take care. .

Thank you. .

Our next question will come from Jack Atkins with Stephens. .

And I just want to say to John, Joey, Paul and Richard, congratulations to everybody on the new roles. It certainly sounds pretty encouraging to hear you guys talk about breakeven in April.

And I guess, as we sort of think forward over the course of the next several months and into the back half of the year, I know you're not giving guidance, but the opportunity is really here, with the costs you're taking out, to really drive the company back to some sustainable levels of profitability.

And I just -- I think that's just very encouraging to hear. .

Yes. We are encouraged about it, Jack. It's a process we've been on for 2.5 years. And some of it was when the pandemic hit. I don't want to use the work for us. I mean, we've been dealing with the Texarkana for quite a few years.

And we would -- as we all know on this call, we would have -- we would get and have a good year, and then we'd have a bad year, then a good year and a bad year. When it went to depression in March, it was just time. It was time to say it's over. .

And so look. That's good, and it is. It's going to take us to places that we have never been, but we've been on this journey for about 2.5 years on -- from the contract logistics side of the business and the expedited side of the business. And that's where we're getting to more equipment. .

Well that's great. That's great. So I guess, let me switch gears here for a moment. And maybe, David, I'd love to get your thoughts on sort of what's happening in the market. You referenced demand trends stabilizing in May. It feels like underlying volumes have kind of picked up after bottoming in early -- excuse me, mid-April.

What are you sort of seeing and expecting in the market as we sort of move forward here over the next couple of months? Would you anticipate some attrition in the market, maybe to help balance out supply/demand? And what are you seeing on the contract rate renewal side right now, just given the difference between spot and contract right now?.

Yes. You asked about 4 or 5 questions there, so hopefully, I can get them all answered there. .

But starting off, every trucker you talk to -- this is my 47th year in trucking, believe it or not. I know I don't look that old. But 47 years in trucking, and April was the worst operation -- operating environment I've ever had. But we all -- everybody can say that's true for [ them ] as well.

Just a horrible, horrible environment, the last of March and all of April. And -- but this month, in the month of May so far, you started -- you sensed it starting to build. .

From a standpoint, that is like -- the best way to describe it is that I worked hard, and I know I've got an [ account ] over here. It's going to be $2 billion of new business. I know that. We've had every conference call there is. We know they're getting ready to give these up. That's 100 loads a week, and it's going to be $2 billion of business.

And we signed a contract. We've done everything. We have operational meetings with their transportation departments and they're wanting of them to call and say, "We're starting tomorrow.".

And that's really where it's at there, is that we've now got most of our customers are at least having discussions and talks.

And that they are -- they've gone from, I have no idea what [ status ] and when we're going to be taking business, too; they're starting to come up with plans, whether it's the General Motors example that I gave you there or the retail companies that -- because at the end of the day, you weren't talking to Lowe's, Home Depot and Walmart.

Today, we're talking to all these retail people that were working, the rest of the retail, that we talked [ across the board ] in this room, the rest of the retail just went to sleep for a long time, some of them had gone broke. .

That said, they are starting to -- they contacted us, and they're starting to come up, hey, we think it's going to be the first week of -- first -- the last week of May or the first week of June, put our trailers back in here. That is happening across the board. And so I definitely sense that something has started to build. .

And I agree that we know the capacity has left the marketplace and will continue to leave the marketplace. And we know -- I think truck orders, you ought to know the numbers. So whether it's in June or whether it's in October or December, we're getting ready. The industry is getting ready to have a very good time.

And I think there's going to be a 2018 reflection whenever that happens. And I think it is going to last for a year or 2, for a long period of time. .

This [ insurance ] is going to get worse before it gets better. I mean, just this pandemic in itself are some crazy numbers that have gone out. Just this week, renewed hours on April 1. And so there is just a lot of stuff that's happening there. But we are starting to see and begin those conversations with customers. .

And we're starting to sense it now. Our brokerage is down, the brokerage being the spot market, that we go. I heard -- you heard me say earlier, is up from 2.5% to 8.5%, so triple basically. And we just stayed there for a while longer for the month of April. And now that number is back down to 4% kind of number, to give you an idea.

So we've cut that in half, it'll be cut in half again, hopefully in the next month. And so the spot market will continue to get better for us. .

And so as I look at the regions out there today, the West Coast has been very hot, very hot. I mean, you're seeing that the boats are flying in -- or not flying in. The boats are coming in and the planes are flying in.

And so California has been -- and it just happened in the last 2 weeks, I was just giving you an idea, but there's very strong produce season out of California is very soft. And so that's perfect [ spotting ]. .

And then I would say the Southeast, predominantly because we are in the produce season out of Florida today, that will last about another month, but we have seen a tightening in the Southeast, California are the 2 major regions of the country. And then we're bringing home some new business in all parts of the country, not -- again, it's building.

So we aren't there yet, but we're seeing some fruits that are starting to pop out of the tree, Jack. .

Well, David, that's great. That's really great to hear, and I really appreciate that answer. Last question for me, and I'll turn it over. .

But the stock is trading at 0.6, 0.7x tangible book value. Your peers are at 1.5 that or more. Most are between 2 and 3. That would imply that there's some need to impair assets or something needs to happen there from an asset impairment perspective. But Richard, from what you're saying, it doesn't sound like that's the case. .

But I just want to know, what is the stock seeming to miss from a book value perspective? Just any sort of color there because there's just this big discrepancy there versus where you historically have traded. .

So kind of going back to where we were at 12/31 to 3/31, tangible book value went from $15 07 to $15 05 per basic share. Because we took down 1.4 million shares -- took out, when we bought those back.

And in the second quarter, we've had to look at some things, I'll say it that way, with all -- with excess equipment, with us downsizing the fleet, when used truck market is, we've just got to evaluate that and see if there is any equipment there. And there probably is a bit. Whatever that is, $10 million, $20 million, whatever it is, it's a number. .

There are some other things that will offset that more than likely. We've got the real estate, take Texarkana for example. We're getting offers on that probably aren't quite to book value. And so there is a possible or probable impairment there as that moves to for sell. But we're going to have gains on the other products.

So there's puts and takes in all of that, where I really don't think tangible book value is going to decrease much, if at all, by the end of the second quarter. But there's so many moving parts. I wouldn't guarantee one way or the other on that. And then this... .

Right. But it doesn't sound like -- I was just going to -- it doesn't sound like there's -- just doesn't sound like there's any big change coming. And going forward, if you're breakeven in April in the middle of a pandemic, that's all very constructive. .

Yes. We feel good about our future as good as we have [ in a long while ]. So if that shouldn't be any losses that would impair the book value. .

Okay. Okay. Well, that's what I wanted to just get to. But I think it's still like -- I just wanted to follow-up on that. .

Our next question will come from David Ross with Stifel. .

I had a long introduction through the machine voice, but I'm with you guys now. It said I have ascended to the podium, whatever that means. .

John Tweed, I got a question for you. Welcome to the call.

In your new role, what do you see as opportunities in your initial look? In being a Covenant for a while or part of the Covenant team, what are your initial thoughts on what needs to change? What's easy, low-hanging fruit to improve?.

It's Dave -- Joey and I are going to have to answer that. And the reason for it is because John's mobile location, he wasn't able to go through the main process. And so he got on a cell phone and he can't even hear us, can't hear your question. .

Okay. I think you're making him wear a mask or something. .

Yes, he'll be full forward on the next call with us. But I know that John is very excited about what he sees there. And on the contract logistics side of the business, I would narrow them down to a couple of things.

We've been growing that, not including the acquisition of Landair 2 years ago, but just on the Covenant side, we've been growing that Dedicated side during '18 and '19, if you remember, about 900 trucks. And we have a lot of growth that is in that side of business. .

And then we acquired the Landair business. That gave us more Dedicated. And it gave us more Warehousing and TMS opportunity. And we continue to grow in those areas very nicely. And that's -- if we want to, for the next few years, we'll continue to grow in those areas. .

What has been working on for the last 1 year has been paying the contract -- Dedicated contract you heard me earlier talk about. Even though we've had of those automotive for 25 years, the contracts are not as solid as what me and you would like. Even though the relationship has been good and they've proven that they won't take it to nothing.

But he's been working on some of those contracts to make sure that the contract would definitely be one that are pure, true Dedicated. .

And so out of that, say, 900 trucks that he was given under his new role, there's probably about up to 300 of those that we've already dealt with -- about 100, 120 or 130 of those. But there's probably about 300 of those that is more loose than what it should be.

Adding in there is pandemic, and some of them rightly so, but instead say, "Can you help me take 10 trucks out of a fleet of 50?" We've had too many, say, 100 of them, that were more, "Hey, my contract allows me to get out." The contract was not as tight as what any of us would want it to be, and there are too many outs.

John has been working on that. .

And even if it means, from my standpoint, I'm -- we're almost there now, it's almost there today. And that is, take it as low as it needs to go so that when we come out of this mess, the industry and us, we have our company operating in the right verticals, expedited contract logistics, which is dedicated warehousing, TMS and [ inter ].

And so that is exactly what he is zeroing in on, on making sure that's accomplished. And I would say that he still has a little bit to go, but he's made great [ headway ].

Do you agree that, Joey?.

Yes. .

So I'm speaking for him, but I feel confident with what he's been doing. .

Okay. And just to make sure I heard correctly, when you talk about the fleet size, the expectation is it's going to be down at year end, 12% to 14% versus 12/31/19.

So that means somewhere in the 2,600, 2,650 range, is that accurate on the tractor count?.

Yes. That's correct. .

And those trucks that are being taken out, is that coming out of over-the-road team? Dedicated from contracts that don't pay? How do you think about where those trucks are leaving?.

Yes. It's a little, Dave, both mainly sort of on the OTR side or what we call other services side. No change, actually trying to grow our [ drive to help ] a bit. And then some of those businesses that David mentioned on the Dedicated side is not quite where we want it, either contractually or the customer gives the trucks back frankly. .

And so I think that it's in both. I think in Highway, it's going to sort out to around 1,100-ish trucks; Dedicated, around 1,500-ish trucks, including owner-operators. And so 2,600. We're probably going to get there a lot sooner than the end of the year. And so we're aggressively trying to adjust that now.

And so we're -- our equipment plan in the [ second quarter is huge ]. .

And fuel has been, I guess, somewhat kind as an operating cost, although you guys have fuel surcharges move up and down.

Would you say fuel has been net good or net bad for margins over the past few months?.

It's been net good through March and April. I think it catches back up to itself starting now, meaning that even though the cost of fuel is lower, our surcharges are also lower. And that works out to be not necessarily, beneficial as the cost of fuel goes down. It's kind of, sometimes, they can help.

So we're in that place right now where I think it might turn a little bit, but it's still going to remain a good number for us for a while. .

Yes, there's been so much... .

[ The broker ].

There's a lot of pluses and minuses of that today. .

Yes. And the broker freight that we had in higher percentage all through April and saw that start going down, that revenue all shows up as freight revenue rather than fuel surcharge revenue. Basically, it's included in the freight revenue number on a per total mile basis.

And so if that moves back to contract rate, I guess you could see the fuel surcharge rates improve a little bit, but that would just come out of the freight rate a little bit. .

And then last question, just on TEL.

Do you expect that to stay a headwind all year in terms of losing money? Or do you expect them to get breakeven at some point?.

Yes. It will be a headwind in the third quarter for sure. And fourth quarter, we should be much better versus year ago. But they just -- because of the large client we disclosed back at year-end, we're just working through some excess inventory as we speak. So starting -- it's moving, but it's just moving slow. .

The base business is still very good. It's a fleet leasing business. Write-offs or bad debt has been very, very small. Our lease-purchase business is doing well. The equipment purchase and the sales side, that's more opportunistic, and that can go up and down with the market. .

So we're not trying to overreact. The company's in good shape, and we're trying to put equipment to work both on the -- trailer leasing business is still really good. And it slowed, but it's still okay. And it's just putting the excess truck inventory to work. We're just trying to be smart. .

I think the team, [ they're all ] good job of managing that, just managing this big boat anchor we've got that's called excess inventory. And I think I'm confident we won't be all the way out of it by end of fourth quarter. But to your question, the comparison a year ago should start looking much better by the fourth quarter. .

[Operator Instructions] Our next question will come from Nick Farwell with the Arbor Group. .

I'm a little confused about the timeline for rationalization. I've heard some different -- I think, different data points here. David, I think you mentioned we're roughly -- you're roughly -- well, we are, since I own the stock. We are roughly 2.5 years into this rationalization process.

And your -- then you said later, I believe, or someone did, that were roughly halfway through the process.

Am I missing something? Or are we not closer to sort of reaching a point where you feel you've pretty much completed, as you describe it, the restructuring of the business?.

Yes. I do believe that you're right. I went to the Board 3 years ago with the plan. [ We had Paul there, and we said to him ], with a plan. .

And as we all know, on the expedited side, for the first 4 years we've been here, the expedited side is a -- it's a great peace of business. And we love it. It's the heritage of the company. And a thing that's going to make a lot of money, but it also operates about a 10-point OR. And we know that.

It's in the 85% to 95% bucket, depending upon is it peak season, or is it the end of the quarter, or is going to be snowing outside? And we know that it just has a lot of volatility in that. And -- but when you look over period of having the expedited aside, it made this company a lot of money, and you see it in the balance sheet, what it's done. .

That said, we've had for quite a few years the solo refer side of the business that has been a thorn in our flesh, running 800, guided to 1,000 trucks. We've kept pretty consistent around 800 trucks operating there. And we all know that we worked very diligently, say, the last 5 years on fixing that.

And we would have a good year and we'd have a bad year, and we'd have a good year, a bad year. We just couldn't get the momentum. Underneath that, the expedited side was very -- it was consistent in operating in the bucket that I just said there. .

And so I went to the Board 3 years ago and said, "We are going to fix this. And we want to be expedited side, eventually, at 70% and 75% of our business. We want it to be 25%. Whether 25% or 30%, but a lower number the 75%." It's not that we don't love it, or not that don't bring a great value to our company. It absolutely does.

There's a lot of value on that expedited side. [ Delay ] all that stuff. .

And so we started down that road 3 years ago just internally, and then we purchased Landair in July of 2018, so 2 years ago. And then 1 year ago, we said contracts -- and that is, after purchase of Landair, reduce the exposure tremendously from a percentage standpoint, 75% to 25%, getting there.

And it kind of got us into that 60-40 range with that acquisition. .

And then our goal was to continue to work on the Dedicated side. A year ago, we gave John Tweed the Dedicated side of what you all remember as kind of an SRT. We don't call it that today, it's just Covenant. But the company SRT, gave him all the Dedicated, which is about 900 trucks.

He worked the last year on identifying that, what the good and the bad, the ugly; the one that had a good contract with the one that didn't have the good contracts. And you heard my statement on that today, that maybe 250,300 trucks, down to now 100, that were not acceptable. And we've been working on that.

We're about halfway through that group of trucks. .

And then when the pandemic hit is when we made the final decision that said we're moving on the OTR refrigerated solo side and shutting down of Texarkana, et cetera. .

That said, as you heard Joey and Richard talking about, that we're going -- these trucks are here, they're coming down. The fleet goes from 3,000 to 2,600, we're bringing the trucks in the used truck market. Good matter of difference, maybe an impairment charge on that equipment because it's coming in, period.

And we'll deal it whatever we got to deal with. .

And then, so we got 2 things happening is, a, getting down into 2,600, which we're close to there now. We're probably 2,750 as we speak. Getting down to 2,600. Correcting the rest of the Dedicated side of it. And we believe that it ends up being in the 2,600. .

So we're selling this equipment because on top of just the tractors you heard about, there's also 700 reefers. There's also trailers associated with that, that we will be looking at selling during the course of this year. .

So the question is, is impairment's now, tomorrow? It's going to be when we can know the value is correct and how we can move it.

So does it slip? And is that I would say -- does it flip into the third, does it slip into the fourth? But I really believe that once that we all can shake our hand on this phone call and say, "From a trucking standpoint, the pandemic is basically over with," we will have our company right-sided in the verticals and the equipment that we should be running to get us a start on prosperity...

.

So yes, to be very simplistic, it sounds to me like your long-haul, the traditional long-haul, over-the-road is going, say, 40% to 35%; the reefer is going 10% to 5%; and perhaps, Dedicated as rationalized, it leaves dedicated at roughly 60%. So 1,500 Dedicated -- this is simplistic math, but 1,100 long-haul once rationalized by year-end.

Is that sort of the... .

Yes, you got it. You're exactly correct. .

And what do you think, just what's your hunch what your major verticals will look like going into the sort of the rationalized model? Just roughly.

Like, will automobile go from 15% to 5%? Just what's your hunch?.

What was your last data? I'm sorry. 15% to 5%. What did you just say it's... .

Automotive. .

Automotive. Yes. The thing is, is that automotive will probably stay exactly where it's at. Again, we've had some of them for 25 years. We're not running out to grow out automotive because we know that it can change as we all saw it here.

But most of the Dedicated, the contract that we've got, Nick, are Dedicated contracts that we are truly their in-house fleet. And even if their business goes down, we may lose some variable expense that is there. But 75% of the expense is covered.

And so it's not based upon you've got to run 2,500 miles a week to get there, that is based upon how many miles they can run. And so there is a variable side in that, that you could get a bit on any other Dedicated pieces of business. .

But more important that I look on this, is that those contracts that we've got that are in place that are probably about 1,200 of that 1,500 that we're talking about there -- well, yes. Let's just say 200 or 300 that are not.

The rest of them are that we may let a customer -- let's say there's another pandemic, and then a customer came to us dying and hurting, we would, just because it's the correct thing to do in business, say, "Let's take out 10 or 15 trucks out of your 100." But we're not obligated to do that.

You would do it because you're in a pandemic and you need to show the business faith with the customer, but the contract does not demand that you do it. That's where we will be at when this is all said and done in the next, whether it's 1, 2, 3 quarters. .

Okay. But basically, by year-end is your expectation, I think. Is that -- or it sounds... .

Yes. .

Okay. And then I have one other question. And that is, are there other terminal -- you call it rationalization. But other potential terminals that you'll close? And if so, you don't have to tell me which they are.

But do you own them? And is there expected capital beyond Texarkana that you -- that might be generated through additional sales of terminals? That's meaningful.

I don't mean a couple of hundred thousand, but that is a meaningful cash-generation opportunity?.

Yes. I think, Nick, on the terminal side, we're about done. Once you've closed, is scheduled to close within -- that's significant. Not a Texarkana. It could take us a while to sell [ picture ]. And we've got some interest pretty quick. So we'll see how it sorts out. .

But no other terminals, which is really the ones that we think about, are Allentown, Pomona, which is La Novena, we were able to see. You may see us boost some leases expire in one of those locations. In Greenvile, for example, we don't own that facility.

So we may end up buying that facility, moving it from a lease to a purchase that technically could look like capital employed. .

But that would be a big advantage of lifetime exchange treatment on the sale of real estate... .

Yes, other than facilities, you've got equipment services, and we're looking at everything to continue to rightsize the balance sheet, get capital employed at the dry places. .

We've got plenty of other levers that we could pull if we had to, but I don't think we will have to do anything. But -- on the liquidity side and put the cash back in the coffers. So we're in pretty good shape here. .

Do I remember correctly that Texarkana came with the reefer business of SRT? Is that right?.

That's correct. .

Okay. I actually have one quick question. That is, David, you made some comments about spot pricing, and I'm sure it's quite volatile as you bounce off a bottom.

But is there anything unique, in either a vertical, meaning the type of business you're bidding on or you're actually contracting to move, either by vertical or by region or anything that gives you some sense that, really April or the end of March, April, may have really represented the nadir in this particular cycle? Not knowing we could have -- see a '19 crisis again.

I realize that's unpredictable.

But if that doesn't occur, what's your read of sort of the spot market?.

I think that the spot market has -- is starting to climb back up on pricing. I think that it's hit unbelievable lows. Lows that I have not seen in 20 years from what carriers are hauling freight for, including that 8% or so that we haul it for. I haven't seen those rates in 20 years.

And we are now seeing that -- I know that we are, and we're also seeing in our brokerage company, that the margins are starting to get compressed as the carriers have reached the point that say, "I will not haul it for this 20-year-old rate." And those rates are starting to climb, and we will continue to see them climb.

As I spoke about, some of these accounts that are [ staying on where are you next month in coming on ], you'll continue to see the spot market increase to a sustainable rate that you cover your costs on what the spots are. .

[Operator Instructions] I am not showing any further questions in the queue at this time. .

Thank you. Thank you all for calling in today, and we appreciate your interest in Covenant. And we'll talk to you again next quarter. Bye. .

Thank you. .

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