Please be aware that each of your line is in a listen only mode. At the conclusion of today's presentation, we will open the floor for questions. I'd now like to turn the conference over to Paul Bunn. Sir, please go ahead. .

Thank you, Katie. Welcome to the Covenant Logistics Group Fourth Quarter Conference Call. As a reminder, this call will contain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward looking statements are subject to risks and uncertainties, and actual results could differ materially from those contemplated in the forward looking statements. Please review our disclosures and files with the SEC, including without limitation, the risk factor section, and our most recent form 10-K and 10-Q.

We undertake no obligation to publicly update or revise any forward looking statements or subsequent or circumstances that may occur. A copy of our prepared comments and additional financial information is available on our website at covenanttransport.com at the investors tab. .

Thanks Paul. The main positives in the second quarter were a robust freight market across all of our service offerings. Number two a significant reduction in our net indebtedness and number three a reduction in fixed costs and better cost absorption given increased asset utilization. Number four TEL’s improvement in earnings.

Five, the flexibility and customer service provided by the efficient use of our Managed Freight segment to cover customer needs when Expedited and Dedicated lacked a driver. The main negatives in the quarter were number one, one of the toughest driver recruitment and retention markets in 20 years.

Number two, COVID’s negative impact of on driver availability. Three, less excess capacity for capitalization on the spot market. Number four, the increase in casualty insurance cost versus both the prior year and prior quarter resulting from several severe accidents in the third and fourth quarter of 2020.

And then number five, the loss contingency accrued related to the TBK indemnification..

Thank you, Joey. I want to take just a few minutes and address my transition into a consultant role later this year. But first of all, I think I have to point out that believe it or not, we're two and a half years from the sale of Landair to Covenant. Integration has gone phenomenally well.

We've done a phenomenal job at taking advantage of the strengths of both organizations to create the highest amount of value for the company and its stockholders.

Also, I want to point out that one of the things that brought me to this decision was the fact that the team has come a long way in a short period of time, if you look at the plan we laid out almost a year ago, I would tell you, we're about 8 to 10 months ahead of plan.

And it's due to the fact that we've got a phenomenal team, they work well together. They're embracing this management process and system that we put into place. .

This is David. I appreciate everything that John has done. He has been a great partner in this. He has been a great friend in this and he's done a fabulous job and this consultant role was not one of pick up the phone and saying I want to consult.

This role is going to be, John's going to be in a couple of days a week and assisting and helping in areas and in particular on what we bought from Landair, in particular the warehousing and the dedicated and the TMAs and those areas is where we're absolutely going to be brainstorming with John and continue to but there is no doubt that John's going to be hanging around with it..

Yes, one other thing. So this management process and this focus on stability. I know, Paul was mentioning a number of things around race and those types of things, but our goal was take this management process and build an organization that's going to be more consistent. And it's output of income through multiple cycles.

And that's something I really enjoyed. So I'll be here a lot of time in August, September when we're doing budget, building plans for the next year, but also through the force area open because of relationships and making our with. So I'm looking forward to that.

And I'm grateful to have the time and for David and Joey and Paul, the rest of the team, allowing me the opportunity to still be involved, but is able to take some time. So thanks..

So Katie, we're going to open it up for questions..

Our first question comes from Jason Seidl with Cowen. .

Thank you, operator. Good morning, gentlemen. Wanted to touch a little bit on the dedicated side. I think the comment was made that about half the contracts are operating under insufficient terms.

Is that purely price or what other terms that is in there that need to be changed going forward? And then if you could remind us what percentage of your contracts roll over on a quarterly basis in 2021 that would be helpful. .

So John's going to answer that one. .

So, Jason, a couple of things. First of all, we've got about 1,600 trucks running what we call dedicated to that. I would also point to the fact that about 300 of those trucks, we transition from one account to another in 2020. And that's part of the mix that you're seeing in some of the KPIs like yield and those types of things.

We've got a lot of trucks today that we're operating that don't have trailers compared to last year, and we've got four trucks where the fuel is passed through. So that's affecting how you look at yield per mile of those. But about 300 trucks were transitioned through the pandemic, which we're very proud of.

And the other thing I would add to that is we did cut some deals for the first year of those trucks operations, that if we didn't know what we were going to be where we are today, we probably would have been a little more aggressive.

But we are in a position as we go into 2022 to materially change the pricing on those agreements, and still have the stability of those customers are committed to three to five years. So if we go through another cycle, we'll be enjoying the decisions we made. .

And then as you move these 300 to 350 trucks over how far below market do you think these things are right now?.

Far below.

You’re talking about on the pricing?.

Yes, on the pricing side, yes. .

So the ones from last year are four to 5%. The ones going forward, none. .

You know what, Jason, when automotive shutdown, we had about 300 trucks running in automotive last March, April, May, and as the automotive shutdown, not knowing if it's going to be one week or six months or a year, there's no doubt that we took about a bunch of trucks, 200 or 300 trucks and made a special deal with folks that we can't go back and talk to them until the second quarter of this year to move on dedicated.

And so that's one of the issues. .

So the other thing you saw in fourth quarter around dedicated Jason was the fact that in anticipating movements from trucks in 2021, one of the other things that we're doing is hiring what we call flex drivers to put in the trucks, driving for those accounts that we know we're going to be exiting, so that when we move those to a new customer, the driver will go with us because they're required to being in that flex status, instead of just having a driver that we've hired for that truck.

Then when we go away from that account because of where they live, or what their job description is, they won't move with the truck. So it'll give us a more seamless transition from one account to the other through 2021.

And then as we get those trucks placed at the right customer over about a 90 day period, we'll put a more permanent driver in that truck and the salary cost per operation of that truck will start to become more efficient. .

And Jason, that's part of why you saw about a $0.05 per mile increase in driver pay per mile on the dedicated fleet, which was about half of the deterioration of OR from Q3 to Q4. And because those flex drivers are our highest cost drivers in the dedicated operations.

To John's point, once those driver -- once the new business gets seeded the flex drivers will then move over do it again, on another account. So --.

And it's helping us to be more responsive to that new customer with having the truck stated up and running, replacing the account. But if there is one, and get the result. .

Jason another side to think through is that both on the expediting and the dedicated side, I mean, we all know that freight management is not going to operate at a 91OR. There is no doubt about that.

I mean there is on both those buckets, we went out to the market and grab trucks and grab trucks on the dedicated side because we didn't have the drivers. And so we had to go fulfill at a market rate, you can do the math.

We’re charging the dedicated rate at a market rate just to make sure that we're fulfilling the obligation on both dedicated and expedited. So there's some of that margin -- of freight management that they got rewarded for, which is great that came out of the profits of the expedited dedicated. .

But we've also been able to take some dedicated accounts that didn't make sense for our assets, and they become a permanent customer of our Solutions Group that we think is going to be a real win for us as well. .

Okay, appreciate those responses.

My other question here, when you look at your trouble seeding the fleet, how much do you think is driver availability? And how much of it would you sort of put on COVID right now?.

Well, if I knew the answer to that I would be probably doing some -- lot less work. I mean, the availability of drivers is unlike up seen in the 30 years I've been in this business. And part of that Jason is -- I can tell you a different story, depending on the geographic area. So it's just tough all over for different reasons.

But the more we pay people to stay home, the tougher that's going to get. And the sickness has taken an impact on our population from the standpoint of Monday. I was talking with our Sunoco Group, and we had 10 drivers out that were sick. So we have to find ways to fill those trucks. I wish I knew that number. .

Here's there's one data point that I think could at least illustrate the point.

I know in our expediting fleet throughout the -- let's call it the second, third, fourth, early part of the fourth quarter, our student hires which is important for expedited segment, let's call it half of our hires are students-ish half are experienced drivers, that was cut in half, as school capacity was limited greatly, as far as how many they could get to classroom, how many they could put on the truck with a trainer at the school, it really slowed down for everybody, not just us.

So that ended up impacting our system. As far as the driver availability, our students that varied significantly.

Now our team has worked extremely hard to add additional capacity on the student side through additional relationships that cost money, frankly, to get that count back up to where it needs to be more schools, probably costing us a little bit more money, but we are seeing the results of that starting to pay off.

And our expedited fleet which in this market, we think is very important and is in a market that if we will -- if you will, we can pass some of that on to our customers, because again at the end of the day, freights got to move. I got to have driver to get it done.

So that's one data point that I know it's real, it impacted our expedited side pretty significantly, but we have recovered through cost as well as adding additional relationships. .

Your next question comes from Jack Atkins with Stephens. .

Hey, guys, good morning. Thank you for the time. So I guess, David, this one's for you. But I'd love to hear John or Joey's thoughts on this as well. But with all these limitations around capacity out there, that's as tough as it, is to find drivers that have got to be good for rates.

So can we can we maybe kind of talk about if we go back three months ago David, you were kind of talking about 6% to 8% type rate increases on the expedited side, 3% to 4% type rate increases on the dedicated side.

Has anything changed in terms of your rate outlook for 2021, just based on how the markets developing early this year?.

Yes, there's no doubt that it's been a very strong -- it's a strong market.

And as I look at things on ours is to make sure that we're -- there's so many moving parts that you're really not going to see the results of what the numbers are going to be in my mind, until about the second quarter, Jack, as you know we've got is -- as I think about we usually call it top three is really top four major accounts or a second quarter event for us.

And most of those, three out of those top four accounts or two out of those top four accounts took rate decreases last year, and, and all four of them will get very nice increases this year. So it's really a second quarter. The second thing is I look here is that it's critical to make sure that we're looking at examine the revenue per truck per week.

I mean, it's up very, very dramatically, I mean, utilization is up very strongly. But there are just so many moving parts. So when you look at 6% to 8%, by getting 6% to 8%, today, absolutely, we are even out of some of the major customers even though they won't go into effect into the second quarter.

But there's also when you look at decreasing the on the highway services or expedited side of it in the second quarter last year, I mean, there's 450 less trucks than there was 12 months ago, when a lot of those were running as a solo operation at a lower length of haul and a higher rate per mile. And so, all of that is part of the mix.

So the thing to look at is the revenue per truck. And it's up dramatically. And I think that again, it will start showing itself in the second quarter.

Because here's kind of the way in which I've looked at on the right side is that, as we all know, we did an event in the second quarter that just revolutionized our company and put our company on the path of which we are on today. And we will continue on.

And it's been just such a tremendous blessing, evident by the fact of what we've done on the debt side. There's a lot of things are going on, why, but the plan is working in. And as we did that in the second quarter, then as I look at the third quarter, you got a glimpse of it. And the third quarter was outstanding, a good quarter.

And then we saw another good quarter in the fourth in the fourth quarter. And we got a lot of runway that is there. Another thing on the expedited side that goes into the bucket because 99% of the dedicated, that we classify as dedicated is also low.

And actually, if there's any dedicated that is that is running under dedicated, it goes over to the expedited side. And that has also grown very nicely. And then we got to the team, the team is going to bet on the expedited side, excuse me. The team side if there's any dedicated team that goes on the expedited of which that has grown very nicely.

And I've only got dedicated trucks that are producing over $9,000 a week of revenue on those trucks. So you can just do your own math, that says what the rates and watch the bow, a hell lot of miles and a lower rate per mile.

And the things are operating in the in the low 80s a lot from that standpoint, and we'll bring all that on that we can and actually got another deal that's getting ready to start with another 50 of those kind of kind of trucks. So there's a lot of mix that is going on.

And so the thing, I'm looking at it is strictly the revenue per truck, per week, and in the second quarter, you'll start getting a sense for what it really means as all these trucks have been taken out as a solo operation is evaporated, and the list of haulage increased, and I hope I helped you there a little bit Jack. .

Yes, David, no doubt about it. I mean you've transformed the business over the last 12 plus months, and I think we're going to really start seeing that as we move through this year, but just trying to get a feel for the market is so tight, and it's got to be supportive of what you're trying to do on the right side.

Now, I know there's a lot of mix issues there. So okay, that makes sense. I mean, we kind of think about the balance sheet and cash flow for a moment, and Paul to kind of bring you into the conversation for a minute.

How are you thinking about free cash flow this year? And going back to the prepared comments, the stock is trading just above tangible -- just above book value, that new $40 million buyback? How should we think about the plans around that given where the stock’s trading? You're not getting credit for the changes you've made in this business?.

Yes, so let me start with, absent any cash that goes out the door for the TBK indemnification or the share repurchase, we're probably going to spin off $50 million plus of free cash flow this year. So you start with around $100 million of net indebtedness, and I think that number’s probably $50 million to $60 million of free cash flow.

So absent those two events, you can be down in that $30 million, $40 million of net debt range. We don't know the timing of anything relative to the TBK indemnification. Triumph and Covenant are working hard every day to minimize that. But as discussed we put the accrual up for GAAP accounting purposes.

But for argument's sake, let's assume we have to fully fund the $40 million for the Triumph indemnification, you're still only sitting at $75 million $80 million a day at the end of the year, which then leads into kind of the share repurchase you talked about. We're not bothered at all about trying to fully fulfill the $40 million share repurchase.

It's a serious repurchase, the largest repurchase that I believe Covenant has ever announced. And so the market will dictate how much of that gets filled versus how much of it doesn't. We're fine to fill the full $40 million depending on how the stock trades. So that's kind of where we're at.

Even with that, you're still sitting at a probably just a hair over one times leverage at that point. .

Yes, no, absolutely. It's a totally different class for a balance sheet perspective. So that's great to hear.

Maybe last question from me is just on tractor counted fleet, as we think about this year, relative to the fourth quarter levels can you maybe update us on the progress you've been able to make in terms of seeding tractors in January, given the driver wage increase it's gone through and how should we think about fleet count in general over the balance of this year relative to year end levels?.

Yes, let me let me start on fleet count. I think, for the balance of the year, I think you just assume a flat fleet count. You may see a tick up, just a hair, as John was talking about in a minute, as we go to replace in some dedicated accounts and using flex drivers to do it.

We may have to flex up on a few fleets for a few of the dedicated fleets we’re exiting, come back down at the end of the second quarter. So I wouldn't be surprised at the end of the first quarter to see the truck count grow a little bit, but not a lot. For the balance of the year, though.

I think you're going to see a fleet count that's roundabout what you saw at the end of the fourth quarter. We announced the largest driver pay increase on expedited that the company has ever had. I will tell you it has been successful thus far in saving teams.

We're hopeful and prayerful that, that continues, both in terms of new entrants coming into the company, and stymieing some turnover. I’ll, John kind of speak to the details. Dedicated especially in a couple of geographic markets, it is really hard to keep trucks seeded right now.

And in summary, I will tell you some of the things you're seeing around getting trucks seeded and shop issues around downed trucks around the country, from the fourth quarter are persistent into the early part of the first quarter. .

So when I came back from the New Year holiday, I started acting like a child around two facts. One is we had a lot of unseeded trucks. And a lot of trucks in the shop that were down and were costing us revenue. Those numbers, those two numbers alone on the first day of the year represented about 16% of our fleet.

And this morning when I came in with work that’s down to about 9%. So I think we're making good progress there.

We are committed to becoming the place for a driver to want to work and we continue to refine our recruiting campaign around a building density of drivers in certain geographic pockets and for those drivers being able to offer them whatever job fits the needs of their lives based on the season they're in.

And we're starting to see, as we get on into January, we're starting to see productivity from that. So if you would have been in Chattanooga or Greenville, the first two weeks of January, you would have heard me yelling a lot about revenue and concerns.

But as we got through last week, and we're getting into this week, our daily revenue numbers are starting to show us recovering. We do have a couple of pockets, some driver jobs that hard to, sort of a little more difficult, that we're still trying to figure out exactly what's the strategy to saving those trucks.

But for all-in-all, we're much better shape than we were at the end of December, or when we started out the year this year. .

I think I'd add to that Jack, as Paul said, it's both on the recruit -- the pay increase on the expedited side has impacted both the recruiting side and the retention side. And so the net-net of those since early December, our team count’s up very, very, very nicely. And so we're excited.

I won't say what the number is yet, but we'll wait till the end of the quarter. But it's -- we're excited about where that is right now. .

Our next question comes from Scott Group with Wolfe Research. .

Hey, thanks, good morning, guys. Hey, we want to take the driver pay increase, the trends as far as COVID cost coming back.

how much cost is that? And then, when you balance how good the pricing environments can be with some of these costs, what's your realistic level of margin improvement on the trucking side this year?.

Scott, I think you're going to see -- I think you're going to see margins improve. We don't give guidance, but I think the rate increases are definitely going to outpace the driver pay increases and other cost inflation items we talked about before.

I think you're probably closer to a margin that's about closer to kind of where we were in Q3, Q4, averaging them out, as opposed to kind of what you saw for Q4. So I think we will continue to get better in 2021, and the revenue increases will outpace the cost increases on a full year basis. .

Do you think you should give away, give or take on the trucking side, you think you can do that in full year 2021?.

In Q1, okay your phone's -- your phone is really horrible, Scott. .

Is this any better one? Is it any better guys?.

A little. About every third word we can't hear.

But did you say first quarter of -- what quarter did you say I asked?.

No, I can't remember that year. I’m just saying if you look at you’re seeing similar to the third and fourth quarter.

So what was at 94 bars in truck?.

Yes, I think on the trucking side, that's in a reasonable range really, depending on the outcome of getting trucks seeded. And where shakes out, and insurance claims for the year. .

So that’s reasonably better than what you guys were trying to communicate a quarter ago. That just the pricing environments gotten a lot better. .

The pricing environment, yes, Scott, is a lot better. The pricing environment is very good.

It’s a lot better than where we were back in October when we visited?.

It's really about the pipeline. And what we're anticipating the change in the mix of our dedicated business looking line between now and the end of June.

And our dedicated pipeline is very robust, to the point that we're not only getting a good rate, we're being able to get some real good commitments on the contract terms and the time, so that if the cycle does turn we've got some good cash flow assistance. So that would be what I'd be speaking to.

The expediting business, and our freight management business and our warehousing business today are hitting on all cylinders. .

And if we can continue to grow our team count, that's just going to get better. .

Scott, where the real opportunity is, is transitioning these 300 trucks, they quite frankly, are the least performing legacy business that we have. .

So Scott, I think you heard John and Joey just speak to the revenue side and we've got more visibility. I would say the other thing that's changed is we've got more visibility into cost. I mean, you saw where we firmed up our insurance deal for our primary lawyer. We didn't know what that looked like the last time we spent time with you.

We didn't know what our driver pay increases were going to look like the last time we talked to you. We've got more visibility into that, and then some of the items where we expect the cost to come back, a big one were group insurance, because of the pandemic. We saw a lot of that costs go ahead and come back in the fourth quarter.

So we've kind of gotten a feel -- kind of got a little more solid footing on what we think our cost structure is going to look like. So maybe what you're hearing is, we've got a little more visibility into revenue, and a little more visibility into cost.

And so, yes, we're probably incrementally more positive than we were at the end of the third quarter looking into 2021. .

Yes, I think the pipeline is par. If you say freight, freight was good in October, really good. It's really good today. I think pricing was really good in October, and it's really good today. I think the visibility on the cost side that Paul mentioned has been significant as far as our picture.

I think the one piece that has moved meaningfully is the pipeline. It's not that it wasn't good in October, I mean, it is firmed up and is really strong across all the segments right now. So that would be the piece that I would look to and where you'll see evidence is either in pricing or utilization or new awards, things of that nature.

So and hopefully, those are that affect drivers. As David's already mentioned, it should show itself in the revenue per truck as we move into the late first quarter into the second quarter. But the pipeline is very robust across all the segments right now. .

And it's not just demand, it’s partnerships, which is what we were concerned about in the third quarter. We knew there'd be a lot of demand. We just didn't know if there would be a lot of partners out there looking for service provider. .

Our next question comes from David Ross with Stifel. .

Yes, good morning, gentlemen. Start with a couple of clarification questions. First, on the insurance, you talked about having the $10 million deductible.

Was that just for a brief period of time as you didn't have that nine in excess of one covered and now that you've got seven in excess of three, your deductible basically went from a $1 million to $10 million back to $3 million?.

Yes. It went to $10 million in August and effective February one, it's going to go back to $3 million and before that it was $1 million. So yes, we kind of had a -- correct. .

Okay.

And then during that five, six months of exposure, how many accidents pierced that $3 million to $10 million layer? Did you have any in that range?.

None pierced the $3 million to $10 million layer. We did -- you'll see our insurance cost was higher in the fourth quarter, when it ran $0.18 a mile. Truckers can't make good money at $0.18 mile insurance. We did have a couple accidents that pierce the excess of one where we had two where we didn't have any coverage.

So there was a couple that that was above the one, but less than the three in that intervening period. But we also didn't have the premiums there in that period, because we wrote those off at the end of Q3. So it was probably about a wash. But we're looking forward to having some more solid coverage to minimize volatility in the next few days. .

And then on the TFS sale, I know there's been a lot of puts and takes on that as you're trying to get it done.

How should we think about that $45 million indemnification or hold back? Is it effectively going to be a $63 million sale price rather than $108 million or what's your view?.

Well, I think that’s a fair way to look at it. .

Yes, I don't think you'll see anything else coming forward out of that. The full potential was 45. I think we put up 44.2. And so I think we said earlier, we're working with Triumph to minimize the exposure on that number but where we stand today the estimate were 44. .

Okay, and then on dedicated, a lot of demand for dedicated right now, given the capacity issues. You've got a 1,600 trucks running in dedicated. You said about half are acceptable and half are not. That’s 800 trucks running at probably 110 or lower. You said that the pricing is only 4% to 5% below market.

Help me square that because it sounds like pricing 15% to 20% below market while the costs are just way too high?.

Well, those 800 trucks you're referencing, they don’t have quite that many. Remember part of those we cut deals, as we mentioned, it's a transition business. But the other part of the business where we're looking to transition over the next six months. So I think that's kind of what we're up against.

And there is some cost, it's really high in that the drivers, we put in those 300 or 400 trucks, we're going to try to move out this year, we've got flex drivers, and which are about 150 $200, a week more expensive than a permanent driver in that day. .

Dave, when you're comparing your -- the math you just did, you're bouncing off the fourth quarter number, which did have a little bit of that kind of some excess insurance in there for some more declines. And it did have this flex driver deal John talked about in there. If you look back to Q3, they ran at 94 or lower.

And so I think when you do your math, kind of averaging them out or using something in the mid-90s, as opposed to the high 90s taken out some anomalies in the fourth quarter that number of trucks and 5% under market, I think it gets closer to reconcile. .

So once you get through this period of adjusting the contracts, past 2Q and changing out some of the business. So you look at the 2022 or 2023.

What's the targeted OR for the dedicated segment?.

I would say given the number of trucks we're offering today, where we don't provide trailers or field; it's probably going to be in that 90 area. .

Okay, thank you. .

Our return on invested capital is really good at a 90. But like I said, we don't have -- we're not investing into fuel we don’t have to try that list. .

Oh, yes, we said do a fresh kind of last quarter's call, we went through a little discussion about that long term dedicated, what the hot and the high mark is at 92, on the expedites the high marks at 86. So that's what we're pushing both of the asset -- divisions too. So and that's where we're headed.

We're confident we've got a good plan to get there. A lot of it is that type of situation, but that's where we're heading. 90 would be terrific. .

Our next question comes from Roger Brandenburg, a Private Investor. .

Hey, good morning, I just wanted to congratulate you on being able to pay down so much debt for the last several years. And my question is basically on cash flow. Going forward, it's really exciting to see that the share repurchase program that you've put in place.

But going forward, I just want to ask about your methodology, about your cash flow, is there a certain amount of leverage that you feel comfortable with, that you're probably going to maintain? And going forward in the next year more? What to expect to be able to use your excess cash book?.

Yes. So Roger thanks for the question. A couple of things. In the next year, I would say the excess cash flow would probably be used for some combination of the share repurchase and any of the indemnification payment that's due to trial.

After that, it'll probably be to continue to delever or potentially look at acquisitions when, when and if they made sense, and were accretive to the business. From a leverage standpoint, we probably target staying below one and a half. But two is probably where we don't want to get below or get above. .

I think Roger what you would see, what we did with our Landair acquisition, is you may see it tick over that two or up to it or around it possibly up and our target will be to get it back down below that to heading it back down to that one and a half kind of long term target as quick as we can. .

Our next question comes from Nick Farwell with Aurora Group. .

David, I'm curious what your expedited rate increase was in January.

Can you give us an approximation what that number was?.

We've averaged -- to give you an idea of the big four. Again it don't happen Nick until second quarter. And we are at about a 7%, increase viewer just go down and look at all the other ones that that have been done since August. That's including since August, September, and October.

And we're actually going back again for another round on those that make us average 6.7%. So you got some that are five that were done in September, before you really saw what was going on in the marketplace. And we will go -- and we're speaking to those customers again.

But the big four are such a large portion of the business, a big portion of the business, over 50% of the business. So what you what you get out of those is going to be very nice. And we already know that those numbers are -- I've got A plus kind of number almost.

We felt confident to have the four done, and we're negotiating with the other with the other ones as we speak and we feel like that we will get there. We don't have it done yet. It's a second quarter event before it does. So if that gives you any idea. .

Yes, do you would you expect an additional -- who knows, because the economy's fragile at best.

But would you expect another dedicated price increase, either this spring, maybe late, early spring, late spring, given what you're seeing in the market today?.

Yes, we really don't the way in which we're doing the dedicated side. And again, there's a couple of moving parts there. And that is one that needs to be addressed as we speak those 300 trucks or so that need to be addressed. And we will be addressing the period as we speak it is the next anyway, that's happening.

And then you've got about another 300 trucks on top of that, we were warned that when the automotive shut down in April, that we just went we just went to the customers, and we gave them long term contracts. But we can talk right after a year.

And that year doesn't happen until the second quarter, that we'll be able to go into those customers and ask for eight to make those rights. But we were very grateful. In April, when they were saying here it is. And we were sitting there saying is it in the black. If I'm in the black, I'm happy. And that's where we were, as automotive was shutting down.

And so there are 600 of the trucks, the rest of them are ones that we talk about on a yearly basis. And while we bid on that is not to take advantage of the marketplace. It is the long term contracts that we get with those customers on 345 year contract agreement that allows us to go through ups and downs of the cycle.

And so that's the way in which the dedicated. Yes, John. .

Let me add also, most of our dedicated contracts, since we went to a more committed model of dedicated, have driver's surcharges or indexes in there. So if we see this driver pay situation go for another round, we will absolutely go back to get the customers to reimburse us for that. .

So I was curious more about the long haul expedited business. I understand the dedicated because you've addressed that before. I'm just curious about the pricing environment for long haul. .

Yes, the pricing environment for long haul I would say on the on the low end is in that seven 8%. And what I mean by that is account that you're operating at 85 alarms. 7%, 8% is a good number. It's a good number.

And so I think on the low end of that sale that 7%, 8%, last quarter was 6% to 8%, 7% to 8% somewhere there on great accounts that have been with me forever.

I'm not going to I'm not going to go out there and say just because I can get 12 out of them, are going to go get a 12 because believe me, they don't -- a year from now, it may be going negative toil and we're not going to do that. And so but for an existing piece of business, that'd be a better question.

Nick would be to bring on a new account today; those rates are basically 10% higher than our existing rates. .

Would you expect given the current environment that you might be able to affect another rate increase on long haul, spring-ish or so given --?.

Yes, sometimes I do on the -- if you were to take away the top four, that, 50%, top four I'm not going to do that. We've been there for 20 years with those guys. We've been there 20 years with those accounts. So we won't go back and ask him for another one after we get it negotiated.

But anything underneath there, most of those are open to hey, it's time to talk. .

Especially the ones you raised back in the envelope. .

We're doing that now. .

I'm curious if someone could comment, if you have any sort of notion about the impact on your inventory replenishment post the holiday, given the dramatic shift from bricks and mortar to online, e-commerce.

Has that muted your -- what you normally would see is a better retail replenishment cycle?.

Oh, wow, that's a great question. What we are seeing out there is, there's still a lot of haves and have not, as I think about the big box retailers, their inventory levels -- in the last couple of weeks, I've been speaking to some of them, their inventory levels are still extremely low.

And then it's interesting also as I'm talking to some of their suppliers, that some of the large box retailers have gone to their suppliers just in time delivery.

And we've brought on about John, 60 dedicated trucks, think of Mississippi and Ohio -- we brought on about 60 dedicated trucks, in the last 45 days, we're in the process of breaking them out, in the last 45 days, strictly because of the service requirement that the big box retailers are making. So you can see a couple of things happening.

I'm seeing the big box guys that are saying I've got very low inventory. And I'm seeing some of their vendors that are increasing inventory levels to be able to make sure they hit on time performance that the big box guys are now regularly -- that's just happened John, in the last five, six months. .

Maybe the last 60 days. .

Yes, our consumer products, companies that we do business with, especially those we do business with on the warehousing side, we're seeing them build what I would call enormous inventories.

And products, we’re out all over the country finding outside our flex base or companies, ware house, companies that are -- yes, they are rain before you are exploding so there's something going on between the retailers and the consumer product companies that those finished goods aren't moving, right now. So I don't know the answer. .

Or they're moving quickly off the shelf. I mean, some of that stuff, comments, it's going off the shelf quickly. They just can't replenish it fast enough. .

That is correct.

But we're also finding it interesting that the big box are making some of the suppliers increased levels of inventory, because it's the only way that the suppliers can hit the own time performance that the big retailers are making, because we're growing the warehouse side of our business because of that, and we're growing that dedicated.

So I don't know it's just that interesting deal. But overall inventory levels are low. .

And then my last question, could Joey, could you just easily break down between dedicated revenues, not operating revenues between dedicated, expedited, and I'll call freight management warehousing the third sector and where they are today and where you might think they would be, as a goal you comment about OR goals, just that same sort of mindset that, where do you think the revenue mix would be? Whenever your ORs saying dedicated achieves the 92 or the 86 on long haul, just a rough feel.

.

Yes, if you go to the four pieces, warehouse and freight management, our target -- our goal is to double that business in three years. So that’s the goal on those two pieces. And today I have to do the math, Paul, what's….

About $200 million per trip..

Yes, between both of them. .

Today as a percentage they were 35%, 36% in the fourth quarter, that was a big spike. .

So we want to double both of those pieces. I would say long term, our warehousing business should be 792 and on startup expenses for an account and things of that nature. And then freight management frankly, we jerk your arm off for a long term rate in 95 -- 95, 96 on that business.

Our dedicated business, we've already said -- you've heard John says its targets 90, I would say, 92 to 90 at the top end. We are open to growing our dedicated business in total. You heard a lot of wheat and feed; we call it mix changes this year. So you kind of put that in hopper and you say, okay, then I go up a little bit down a little bit.

But Paul's already said they want to keep it flat. But long term, we're open to growing dedicated, right time, right place, and right industry. And kind of that sub-90, 92 overall. So little capital addition and dedicated we're fine.

Expedited on the other hand, our mission long term is we're trying to hold fleet, let's call it around 900 to 1,000 trucks that are where we're happy. And so the long term over the next three-ish years is to drive the margin better.

And really focus on margin return industry mix, which is going to be hard to move that because historically the LTL swallow up a lot of the expedited trucks, but hold that.

So no more capital, really weed and feed inside that book of business, produce more profits, more consistent, if we can, which all of that revolves around the driver of product that we're able to put together for the drivers that are willing to team up. So that's kind of the four buckets.

Now the end result of all that, let's say if we achieve all of that -- and our return on invested capital should be 12% or higher, pretty easily. It's not easy to get all that.

But we should be north to 12% return on invested capital, around a billion plus or minus a little bit of revenue, and producing very good returns on the OR EBIT, gross margin earnings per share. I'm not going to tell you what that.

You look at the billion dollar plan, it's $100 million of warehousing $300 million of freight management, $300 million dedicated, $300 of expedited. And we're getting there pretty quick. And so what it does though is what you're saying with the announcement that we made around the stock buyback that is playing out.

Yes, we had a lot of decisions that we made this year to kind of quote, survive the virus, if you will committed no. And now a lot of those decisions were already in play. We had already -- we're starting a let’s call a terminal rationalization program. But when that hit, we started accelerating those.

And so I think that as you play that out, as John said, it's accelerating and moving quickly, the cash flow production is significant. And the reduction of leverage is meaningful. Or another way to say it, the flexibility around the capital around the enterprise is significant. So our $1 billion model only requires replacement CapEx.

So we get to affiliate and gross revenue, with replacement CapEx, which means just in a conceptual sense, you should be generating very substantial amounts of free cash flow. .

Our next question comes from Daniel Moore with Scopus. .

Gentlemen, how are we doing? Always good to be in company with Nick, Nick Farwell. I'm going to dovetail in on some of the questions he was asking, specifically around cash flow, because it seems to me that's a very important narrative for the company going forward. I love what you guys are doing.

I can't remember the last time I heard a story like this, and the stock was trading at 8.1 times forward PE. So here's the question, I want to ask, $35 million to $45 million worth of CapEx. Let's break that down if we could, just so we have a really good understanding what the buckets is this year, so we can start building things out from here.

So on the $35 million Dave, that's pretty much all tractors this year. No trailers. Are you willing to break it down between expedited and dedicated? I’d just like some granularity so we can we can understand how that money's being spent. So we can start thinking about free cash flow going forward.

So you're welcome to do it however you'd like whatever is easiest. .

Yes, so I mean, basically, it is all revenue, very, very minimal non-revenue equipment, CapEx. So it's pretty much all replacement of -- replacement of trucks that are near end of cycle. .

I think probably maybe Dan that’s.

But what is maintenance CapEx given our size?.

Maintenance CapEx it probably going to run up to $50 million - $55 million a year. .

So this year, as far as the plan is, because of all the huge reduction that we had this year down 20%, almost 600 trucks to go look at where we are at the end of ‘19. So the result of that big rationalization has left us with and what we chose to dispose of has left us with another low CapEx year.

So it's all said 35-ish, plus or minus, and that's 20 million-ish, under normal maintenance CapEx for the 2,600 trucks, plus or minus. So you're going to have 22 and 20, grow back up another couple -- let's call it 20 million or so.

Trailers will be small again in ’22, just because again, where our trailer fleet is, because we reduced our trailer fleet significantly, also plus it's a much longer lived asset. So but you move into ‘22, depending on where your view is on EBITDA, being able to swallow another $20 million, we're confident that.

So you kind of look through the leverage ratio, that's kind of what I would draw people to kind of, and I think Paul said it earlier, even with TBK, even with a buyback, we're going to be under -- we're going to be at or under one for this year. For this year, we're going to be at or under one this year.

And so that as we lead into ‘22 with the growth that John's mentioned that I talked about the non-asset based businesses, as we move and we continue to grow that, as well as move the margin, and couple of them are already at those tight margins.

It gives us a lot of flexibility around what the cash flow picture and leverage picture looks like over the next couple of years. .

So if we could maybe just as a follow up transition into the dedicated discussion one more time, we're talking about 1,000 basis points of margin improvement potential. That's what you're targeting, 800 to 1000. Timing now, I know we -- second quarter, we're going to see a lot, third quarter, I would imagine as much as well.

Could you give us -- can you talk to us about, obviously, we don't have a good sense of whether or not everything's on a one year contract. But in terms of your ability to progress, are you going to need two years, 18 months, 12 months? Could we talk just a little bit about glide path on achieving that opportunity set? And that's it thanks. .

As we said, we're at a, let's call it 100, 99 OR in the fourth quarter. We have a target to get down to 90-ish, 1,000 points of difference.

What do we feel is doable, from a margin, from an improvement standpoint, from 100 to a 90, is it two years to get there? Is it three years to get there? Is it a year to get there?.

Yes, I think it's between four and six OR. .

So we're confident, Dan, that we're going to make some very meaningful improvement this year. I think you'll see improvement every quarter. .

It takes four to six quarters to get there. .

And the wild card is simply not concerned about pricing; I am concerned about some of our cost objectives, just because we got to go do the work. And then the driver environment. One of the things about dedicated is it takes a little bit longer, our philosophy has always been figure out what it takes to get the truck seeded, then go get the money.

And sometimes that just takes a little longer. I mean, it took us longer to start seeing some of our northeast operations; it took us eight weeks to figure out the right package to keep some of our operations seeded. And then we went in front of the customer. So I would say between four and six quarters, we should be in that range. .

Right. It strikes me that we are in definitely in a structurally impaired driver market, the likes of which is unique. You've got FedEx, UPS, Amazon, which created a huge pull in terms of drivailability away from over the road to milk runs in cities and the like, obviously drug and alcohol clearing house and then just schools being shut down.

So yes, I think you're going to have to flip the script on that when you talk to dedicated customers, you've got to have the ability to go back in there. But I appreciate the time, gentlemen. Thank you. Have a good day. .

At this time, I am showing no further questions. So I'm now turning it back over to management for closing remarks. .

We appreciate everybody's time today. And Katie, thank you for your assistance. Thanks, everybody. .

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