Excuse me, everyone. We now have our speakers in conference. Please be aware that each of your line is in a listen-only mode. At the conclusion of today's presentation, we will open the floor for questions. I would now like to turn the conference over to Joey Hogan. Please begin..

Thanks Victoria. Good morning everybody. Welcome to Covenant Logistics Group Third Quarter Conference Call. As a reminder for everybody, 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, that could cause to differ materially from those contemplated by the forward-looking statements. Please review our disclosures in our filings with the SEC, including without limitation, the Risk Factors section in our most recent Form 10-K and our current year Form 10-Qs.

We undertake no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances. A copy of our prepared comments and additional financial information is available on our new website at www.covenantlogistics.com, the Investors section of that new website.

I'm joined this morning by our Chairman and CEO, David Parker; our Chief Operating Officer, Paul Bunn; and our Chief Accounting Officer, Tripp Grant. We're going to start with a summary for the quarter. After a strong second quarter, we once again achieved record revenue and earnings per share.

We're extremely proud and appreciative of our teammate's efforts as we continue to transform our business into a full service logistics provider. We still have more work to do. We know what the issues are, we have good plans, and we remain focused on our strategic direction.

Additionally, during this time of supply chain disruption, we will remain extremely proud to be a product and industry that has stayed behind the wheel consistently since the pandemic began. The industry has shown great resolve, leadership, and sacrifice to keep goods moving on the road and within our warehouse communities.

I'm certain we will continue. In summary, the key highlights of the quarter were freight revenue grew 28% to $250 million compared to the 2020 quarter. Our asset-based truckload group revenue grew 7% versus the third quarter of 2020 with 157 less trucks.

Our less asset-intensive Managed Freight and warehouse segments combined grew 73% compared to the third quarter of 2020. On the safety side, we produced another solid quarter for DOT accident rate per mile being 13% below the year ago period, a lowest third quarter rate in 10 years.

Although rising insurance premiums and inflation and claims cost across our industry offset some of this benefit. Our TEL leasing company investment produced another strong quarter contributing an additional $0.09 per share versus the year ago period.

And then lastly, we're able to capital -- continue to capitalize on strong cash flows by reducing our net indebtedness by another $25 million since the second quarter of this year for a total of $39 million since the year began. Providing a little bit more color on the items affecting each of the business units.

Our Managed Freight division continued its strong performance for the year. For the first time, it's our largest division inside the group. Its revenue for the quarter grew 88% versus the year ago quarter and eclipsed $200 million mark on a year-to-date basis in the quarter.

Results for the quarter were primarily attributable to the robust freight market. Growing its own customer base, handling over freight from expedited and dedicated, plus capitalizing on our heritage of providing profit capacity for various retail customers.

This unit remains a strategic growth provision for Covenant , and its high return on investment dynamics.

Even though we continue to be cautious about the long-term sustainability of the top-line revenue and operating ratio within this unit, the leadership team is doing a great job for our customers, but also diligent on adding and developing sustainable relationships with the right customers in the right industries.

The Expedited division continues to produce strong results, as the supply/demand imbalance in the marketplace continues to lead us to customers that really need end value, team supply for the long-term.

We're focused on partners with shippers that are looking past the day's freight octane capacity that keeps our teams busy and productive even during the slow times. We're very excited about where this project and strategic direction is today.

We've been able to improve our operating ratio by 730 basis points and 84.8 OR led by 21% increase in revenue per truck. Both pricing and utilization are up nicely. On the negative side, we've lost some capacity, as our average tractors are down 156, but the driver market being as bad as it's ever been.

Driver wages in this segment are up 15% on accidents per mile basis versus year-ago. With this being the number one issue in this division. The Dedicated division fell slightly short of our goal of a high 90s OR in the third quarter.

With the transition of mostly automotive but other businesses as well in July, July was a rough month with a lot of equipment movement, shutdown expenses and driver wages. The month of August and September did hit our hot 90s target.

However, revenue per truck improvement is beginning to accelerate being up 5% sequentially versus the second quarter, and up 13% versus the quarter of 2020. Another positive in the quarters that our open truck situation is the lowest we've seen in several quarters, but only 7% of the fleet opened at quarter end.

Continued progress on rates and utilization, particular among a handful of customers remain necessary. Nevertheless, we are on track for meaningful improvement in 2022.

Despite the rare loss of one customer early in the quarter, the Warehousing division continue to grow from a revenue perspective, but took a step back from a profitability perspective in a quarter. We added one new customer late in the quarter with a strong pipeline for the next several months.

Operating income was negatively impacted due to additional contract labor costs as it relates to the pandemic and tight labor market and additional building rent for a relocated customer facility prior to resumption of revenue and additional revenue at that location. We remain very excited and committed to this strategic growth division.

Regarding our outlook for the future. For the balance of 2021, our focus remains to improve the profitability of our dedicated segment and continue running Expedited and Managed Freight for the long-term. A, “we're not getting caught up in the spot market”.

Additionally, peak will be small for us relative to our past, further allowing us to remain focused on the previous initiatives. We continue to anticipate cost headwinds and driver and non-driver compensation and benefits along with equipment and parts supply. Inflation is definitely affecting transportation and logistics.

On the bright side, we expect to be able to pass-through cost increases to customers that value our services. As we expect the supply/demand imbalance to continue for the next few quarters. All things considered, we're feeling – we feel we're going to close out 2021 on a very strong note, with earnings approximating third quarter results.

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

Thank you. And we’ll take our first question..

Hey. It's Scott Group from Wolfe Research. Good morning, guys. Thank you..

Hey, Scott. Good morning..

I want to follow-up on that comment about the seated tractor counts starting to improve.

Maybe just talk about what you're seeing from a driver standpoint, and if you think that that's sort of broadly happening in the industry or more specific to you with respect to the driver market?.

Yes. Hi Scott, this is Paul. So let me just kind of paint a picture sequentially. We did a lot of pay increases Dedicated and Expedited in light unseatedness was still pretty rough in July and August.

I would say the team count on the Expedited side actually went backwards throughout the quarter even in light of the pretty material pay increase that we launched the first or second week of July. So I think it's -- I'm won’t break it into the Dedicated and Expedited, because it's a little bit of different stories.

So Dedicated whilst some awesome trucks and was more unseated as the quarter went on. And it's only been in the last couple of weeks that we've really started seeing that kind of bounce up early October. And it's bouncing, I would call it decent levels, not just the floodgates are open on the Expedited side. So, fare.

On the Dedicated side, a lot of pay increases in June and July, and probably by late August, early September, we started seeing the unseated stabilize in Dedicated. And I would say late September, we were getting the drivers we needed, in the last couple weeks that's actually fell off a little bit.

And so, it's a little bit of a roller coaster with both of them. Dedicated was got better, he’s gotten here worse in the past couple of weeks. Expedited got worse. It's gotten here better in the last couple weeks. And so, there's some bounciness and noise.

But, if you put it in a macro view, the last week of September and first couple weeks of October, are -- in total are better than June or July, but not materially better..

Okay. That's helpful.

And then, maybe just do you have some preliminary thoughts around pricing for next year? And just what are the puts and takes that you see in terms of the ability to grow earnings, again next year from pretty amazing results this year?.

Hey, Scott. This is David. Hey, two things. Next year, if you depend upon what side of the coin your own that – does the economy stay where it's at today or does it go backwards. If it goes backwards, then we all know that, truck is not going to be as great as it is this year.

So, that is something that we just have to watch and figure out what it's going to do. If it stays the way it is, you'll see double-digit increases in my mind, throughout the market. And so, I think that's going to be a very good year. I think that the supply chain is still going to be a major disrupter out there.

But it really is the take on -- all of our take on what's the economy going to do next year, will depend upon which way the rates are going to go. But it's going to be -- by the way, even if the economy slows down, rates are going to go up. They're going to continue to go up.

There's headwinds from a standpoint of cost increases that are happening, in driver paying equipment and in-house people and maintenance, I mean, there's just a lot of costs wins, they're going to have to be absorbed by rate increases..

Is 2022 bid season starting at all yet or not yet?.

Not yet. No..

Okay..

By the time we have our fourth quarter conference call, it's kind of when it will start..

Got you. Okay. All right. Thank you guys. Appreciate the time..

Okay. Thanks Scott..

Thank you. Our next question comes from Jack Atkins with Stephens..

Hey, good….

Hi, Jack..

Hi, Jack..

Hey, good morning, everyone. Thanks for taking my questions. So I guess, if we can maybe start out, and Joey, I don't know if you want to take this or Paul.

But would just be curious to kind of get a little bit more color on the steps you guys are taking to get some of these longer term commitments, particularly within Managed Freight and Expedited secure.

Can you give -- maybe give us an update on sort of where that that process stands? And, how are you feeling about that as we go into 2022?.

Yes. I would say only on the Expedited side, Jack we're feeling really good. I don't know that we want to give an exact percentage, as to where we are on what we're calling longer term agreements. But I would say its a couple things.

This a significant portion of the business -- a significant portion of the business -- the significant portion of the business, that we've worked to engineer and try to optimize Freight within an Expedited network, so it is stickier from a customer standpoint and a driver standpoint.

And so, hopefully we're -- by doing that, it's not as -- there's -- it's not as OTR filling-ish. It's not dedicated, but it's not -- it's not OTR. It's kind of somewhere in between. And it depends on the customer, exactly how those agreements look and there're some hybrids of things in there.

And so, I think we're continuing to push down that path nicely. On the Managed Freight right side, the base business, there's a lot of spot business in there, no doubt. We're working hard with a handful of customers right now to lock in some, I'll call it 12 months or greater type contracts.

And I would say, that's not as great of a percentage, there's something we're continuing to work on everyday..

Okay. That's encouraging to hear. I mean, I would be curious, maybe, kind of, within that context. And David, if you would like to give some -- maybe a longer term perspective in terms of how you've seen the business trend over the cycles.

But, how do you feel like the business is positioned, once you kind of get those longer term contracts in place, longer term commitments in place, rather? As we kind of -- maybe if we go into a more challenging Freight Market, whatever that is, 2023, or whatever --.

Yeah..

-- to weather the cyclicality. Because it feels like you guys have made a heck of a lot of progress putting the business in a position where, there’re going to be peaks and troughs --.

Yeah..

-- but there the volatility is much less..

Jack, I would say, I've never been this excited. I mean, it is unbelievable what the team has been able to accomplish over the last year and a half, and pre-pandemic starting around the early part of 2020. So it's been a year and a half since we've been going down this road with our strategic plan.

And the next slowdown is not going to be as critical to us, because the Expedited and that's your real questions on the Expedited side, it's not going to be as up and down to the market as it has been, because there's a big portion of our business is going to be under contractual agreements that make it much more difficult for the customers to get out of those trucks.

Now utilization may go down a little bit, because at the end of the day a load is there, a load is not there, but they cannot fire the trucks. And do we still got -- we're still got some more to go on that. But I'm excited where it's at right now.

And we're still in the process of getting a couple of more large customers that we're negotiating with now. And I think it's our 80% chance that we're going to get it done. And so it is going to protect Expedited to a good degree. I mean, is it still when the things get slow, is it going to slow down? Yes.

But it's not going to be, we're not going to operate that division from 88 to 102s. And you’ve evident by the fact of what you're seeing in the last couple of quarters on the OR on that business. So I'm excited about that.

I think a runway, the Dedicated side is making great headways, because I wish you could see the amount of accounts, we've only got about a dozen accounts that we need to really attack and we're in the process of attacking them and have been attacking them, once those dozen are healed with whatever that means.

And it's going to be with a better OR, a better profitability, we're not going to do the business one or the other. But as I look at, been here 35 years and I look at this, the best quarter in the history of the company, best quarter ever in the history of the company and the runway is still long. That's what has me excited.

And the same thing as Paul's talked about on the Managed Freight. As I look at that, besides the spot side of the business, there's only five or six that I would say that five or six customers that I want to get healed on the Exposure side. And we got a couple of them.

So we're probably one-third there, but we're having meetings all the next couple of months to attempt to get the rest of them there. And I think that, I think I'm happy with their success out there build more success. But anyway, that gives you an idea..

No, absolutely. And I know another strategic priority over the last couple of years has been to really strengthen the balance sheet. And you guys made another significant step over the last quarter paying down debt. And it gives you a lot of flexibility here. You have the Dutch tender that you announced during the quarter.

Would you speak to maybe curious to kind of hear, how you guys are thinking about the opportunities to use the balance sheet strategically both returning capital shareholders perhaps, but also maybe M&A opportunities? How are you guys looking at that as you kind of move forward over the next year and a half?.

Paul Bunn:.

Second, as far as the M&A side, we're feeling better in total, what Navy just said. In total, about the business, my opinion, a lot better and the model is playing out. So, I think with a balance sheet where it is, are we ready to make the pursue in addition, either internally or externally? Yes. And so, the market is hot right now.

I'm not saying we're getting ready to do something right now. But the market is hot, but we're being trying to be very strategic and things that complement what we're already doing that add scale and value into our growth services. So, I mean, it's a good place to be. It's really a good place to be. And everybody's aligned with that.

And I think obviously, we have some opportunity on the table with the dedicated division that gives us some learning outside. We feel a lot better about the long-term consistency of the Expedited franchise. Obviously, the question in the back of everybody's mind is will it stick with a downturn? We believe the majority of it will, if not all of it.

So, we won't know till we get there. But everybody that we've done these agreements with are good long term, customers/partners and so, we're highly confident that there commitment is strong. Brokerage, its -- brokerage is probably the one or managed freight, if you will, that to me, it's not dedicated. It's managed freight from a standpoint of.

Obviously, the returns are really strong right now, no question. We've historically been a very big project supplier for our shippers. We've known that for a long, long, long, long, long, long time, whether it's peak, whether it's other Christmas products, whether it's consumer product launches. This is all public. I'll go back.

I mean, we handled the Allegro launch years ago, 800 loads in two weeks. We handled that and question, what could pull that off or not? And we did a good job of that. And so we've had -- we've got that heritage with the shipping community. And yet, we're going to continue to capitalize on that and we're doing quite a bit of that right now.

And so, we're trying to keep that. It's not -- try and not to recognize that it's going to go all the way to more. But what do we do to solidify that, and internally grow our business, and we're doing both of those. And so will let stay where it is. You look externally, and you go, that angle stay there, but we're working hard to keep it.

It's just hard for us to say because of the external marketplace and the comparisons across the marketplace and all that, but we're working our tails off and providing a service for our shippers. And that's the one to me, that I don't want to call it a wildcard, but is really important, and as we think about Covenant and its model and the future.

If we can keep it where it is, it's huge. If it backs up more to industry standards, it's going to back up more to industry standards. So, that to me is the big question. But we're excited that how the model is playing out. Just real quick, I mean, as I said, managed freight was the largest division in a quarter.

36% of the revenue, Expedited and Dedicated were about the same, call it 29%, warehouse is 6% and growing. I mean models playing out. And the models plan out. And that's one of the things I'm most excited about..

Yeah, just to add on to Joey's point. I went back yesterday, I was looking at net debt, 18 months ago we're sitting at $337 million of net debt, but we've had $272 million of improvement from where we were at March 31st of 2020 to where we are today. And we've got no goal of becoming debt free, but we're certainly quickly moving to that direction.

And again, that's not a goal. But what that does is provide us opportunities. And Joey has said this before, our biggest opportunity has been internally with our current business that we have. And I've been impressed because there's a lot of M&A opportunities out there. They're flying all over the place.

I've been impressed with a discipline that we've had to stay focused on the internal business and look at the opportunities that really align really well with our strategic priorities. So the discipline of doing that has really been impressive to me..

Sounds great. Thanks again for the time guys, really appreciate it..

Thank, Jack..

Thank, Jack..

Thank you. We'll take our next question. Caller, please go ahead..

Hey, good morning. Thanks for the time..

Who is it? I'm sorry, we didn't hear your name..

Sorry, the thing went blank. This is Bert Subin with Stifel..

Hey, Bert..

Hi, Bert. Sure..

Hi, guys.

How are you doing?.

Good..

You mentioned the impact of inflation on your business in your prepared remarks.

Do you think that's what's keeping the smaller carrier growth at bay? So even if you end up paying higher wages across the board, the supply part of the equation just doesn't pick up -- pick back up as fast as typically as just because of the cost side of the equation? Is that the right way to think about it? And do you think that's a tailwind that maybe gets you beyond 2022?.

Yeah, I think depending upon, Bert, how we think how all of our takes on what the economy is or is not going to do. But yes, there is a big inflation that we all have got, but the small carrier is going to be decimating to them. I mean, it's going to be a difficult time for small carrier.

And we're negotiating equipment right now on numbers that are not hurting. And I don't know what a small guy, a small company does. And so yeah, they are going to have a wall that they're going to have to go through. And if there's any slowdown in the economy, some of those costs are not going to stop.

And it's going to be very difficult for the small carrier. There's no doubt about it..

Bert, we were talking to somebody the other night, if you think that -- maybe talked about, there's the cost of the equipment, and then there's the availability of equipment. And I mean driving trailers are like little buckets of gold running out there right now. And so the cost is going up, the availability is tight.

And it doesn’t matter who you talk to, nobody sees that changing for 12 months. And so then you got to ask yourself, well, -- gets you this time next year, put them out 2030 and beyond 2023.

And the folks we're talking to or maybe equipment leasing and resale company and they start talking about EPA engine, changes that are coming in kind of 2025, 2024 timeframe.

And you got then there's the free bar phenomenon on the truckers through because they're trying to get ahead of the new technology because the first year of engine technology, there's generally a lot of issues.

And so you start doing that and you start kind of, you see this squeeze on equipment, could be – 24, 36 months kind of deal, it again, it's – so I think it is probably a tailwind as you mentioned for a couple….

I would hate to be a small carrier running a seven year old truck, I mean, we're still there, what average age 22 months or so. So we're – our average age is 22. And the manufacturers, where this tractors or trailers, but let's just talk about tractors. We're not going to get our order that we want next year.

We're not going to get a total order I mean, it's going to – our average age will continue to increase not because of our dues, but because they can't manufacture the trucks and you're sitting there with a seven year old truck that you're going to run another two years, I mean, their maintenance – maintenance costs in itself will implode them..

Remember, as we know the average – average size is seven trucks. And that includes Knights 18,000 and RR 2,500, which is dominated by the small carrier. So they – they don't buy new trucks. They buy in the used market. And so the used market right now is silly, as far as what a used truck is selling for.

So is that obviously, the spot markets holding up the market, if you will, assuming it's being hauled by smaller carriers. And so that's been propped up. And then if you have needs to, you need to add a truck or locked add a truck or replace a truck, the smaller folks are paying goodness.

20%, 30% more than they would normally, and so they still got to fund that, yeah, the interest rates are cheap today. But – and then how are they going to – how are they going to pay for that capital “in the future” whenever the future, whether let's call it that affects the economy or freight.

And so that's a pretty big question is you kind of worked your way through that in the next two or three years in the cycles.

And so – so the good thing for us is that, our equipment plans, we can weather an equipment storm whatever that means, and the larger fleets are, because you've got flexibility, you've got capital structure, you've got the flexibility extend, if you have too. The big issue is just supply.

Can I continue my trade cycle in the normal course of business and move – and right now it's really tough. So I could argue, until that moves, there's some inflation coming with that.

If you're not able to move with that, because and then the other thing, everybody shouldn't get now geeked up about again on sale, all of us we're in the business of moving equipment. We're – I mean moving freight, yes, we're in the business of moving freight. If you were sell a truck today, you're going to make on it.

So okay, what about tomorrow? What's the business tomorrow? What's the cost tomorrow? What's the – so to run a business off again on sale isn't an answer, because that's not what your business is. And so I think there's some obviously some opportunity to help earnings we're gaining on sales, I don’t to want to price stock list.

And folks that have a trade cycle that’s big and we're able to keep their order-ish for this year, you're going to have a big gains is helping our zone. Ones ahead of low cycle for this year aren't.

So it's a – I think the smaller folks, the equipment issue is a huge – is a huge issue over the next two or three years, which in my opinion is bullish is good for the survivors. I think it's a good thing for the survivors. It's going to kind of help the supply, demand imbalance question whenever the prices its hit, my opinion..

If you could say it like this, nobody thinks labor is going down. Nobody thinks maintenance is going down. Nobody thinks trucks are going down. Nobody thinks fuel probably going down.

But if you just take – if you think you're in an inflationary environment, whenever you have a different spot rates, the people that run on spot rates its going to hurt bad..

Yes, no, that's a great answer. I guess I look at it as the equipment side is, to some degree, transitory, maybe insurance, maintenance, tires, other inputs are less so and so when you got three trucks versus 3,000, your ability to unitize, that's a little different. So it sound like you guys would agree with that..

Yes..

Yes..

So appreciate that. Just one follow-up for me. On the dedicated side, have you -- would you say competition has been a challenge? Clearly there's been a lot of carriers moving into the space over the last year, just by virtue of the labor situation. It sounds like some of your shippers are okay exiting contracts.

So, I mean, what do you think, why would they exit if they didn't have an alternative?.

I would say, maybe we -- maybe us exiting more than they may exiting in a couple of situations, where they just -- they think they can get a one way model or some other top model to work better for them but because the curve have taken the rates up..

And we all know, when we -- start of the pandemic, we had, what, 300 plus trucks run in automotive. We had a big portion, what, 20% of our fleet was automotive and we're still living that nightmare that they're going through. And, we're about halfway through that on our sales.

We've taken that from 20% of the fleet down to about 10% of the fleet, but one of the things you saw in the second quarter is, when you start getting rid of 150 trucks or so, and there's 400 trailers that are all over the United States, think about the costs that are involved in saying, never going to come back, but I can't handle this shutting down a plant every other week.

I mean, I can't do that. And we had the pipeline, 150 trucks and put them in the other half of the business, but the second quarter got a tremendous amount of cost of doing the and you see where that goes. I mean, it may need to go to zero, but we'll determine where that's going to go..

Maybe just one quick follow-up on that.

You talked about -- I think you've historically talked about dedicated trying to sort of go after pieces of business with 10, 15, 20 trucks as opposed to sort of larger swath contracts, does that -- you think that's still the right strategy and is that working?.

It is, but here's what I'd say, it is -- but it takes a while to get there. When you're taking little bitty mods for -- big mods are easier and they fill you up faster, but it takes a lot more swings to deploy it on those 10 and 20 trucks deals. And so, I would tell you, a lot of what we're adding are those top accounts.

But to David's point, when you're exiting 80 or 90 or 100 and you got to make it up with 420s, there's just -- there's a lot of cost in moving all the trucks and trailers and drivers to do that.

One of the things, just to add on to the dedicated, four of our top 10 customers in dedicated had major supply chain issues in the third quarter, three of them and one of them had to do with the forks.

And so, again, it's the cost to -- as David and Joey, most said, downsize some business and then when four of your top 10 customers have major supply chain issues, that's part of the reason the dedicated ran -- were ran for the full quarter..

Thanks so much for the time..

Thanks, Bert..

We'll take our next question. Caller, please go ahead..

Hey, guys. This is Jason Seidl from Cowen..

Hello, Jason..

So apology, I jumped on a little bit late here but wanted to drill down on the Dedicated and how you're looking at that improvement. Understand, you got rid of some accounts, and there were some supply chain issues in the quarter.

But what, sort of, improvement do you think that we're going to see quarter-over-quarter, and then how should we look at some of the new accounts that you're speaking of attheir level of profitability as we look on 2022..

Here's what I would say. We ran kind of that high 80s, high 90s OR in September once we got through August and September, once we got through all of that cost in July. And we feel confident that we're going to be a bit improved sequentially from three to four.

And so we're trying to leave it at that right now Jason, but it's going to improve from what you saw in Q3 and the fourth quarter. And I think you'll see some incremental improvement from Q4 to Q1, and so it -- the incremental improvement is coming..

Let me ask it another way.

What percent of your business changed over in the quarter to new customers?.

Here in the quarter probably 10% during the quarter -- 8%. Yeah, 8% and then we got another 5% in process right now..

Another 5%.

Is it safe to say that the accounts that have changed over are well in the profitability levels?.

Yes..

Okay. That's good way to look at it. Perfect..

Yes..

I want to follow-up on a question that that Scott asked. He asked about CD trucks. I want to comment that from another angle.

When you look at increased driver pay, look at increased recruiting costs, what on a percentage basis, how much more does it cost you to put a new button in a seat right now?.

Well, the driver pay Q2 over Q3 just in the Dedicated just about 12%, and then you're going to have the increased cost of recruiting, and so it's 20%, probably 15%, 20% from Q2 to Q3. the rates up nicely as well too, but rates are up but so are the costs.

On the Expedited side, we beginning -- we raised pay as we said in July, and we're going to have another pretty sizable pay increase coming out on the Expedited side in the next few weeks..

Okay, fair enough. Switching over a little bit to the warehousing side of things. Obviously, we saw spike up there in the OR. How should we look at that business? You talked about partially offsetting some of the costs going forward.

Is this where you can get somewhere between 3Q and 2Q in terms of the OR?.

Here’s what I would say, Q3, Q4 investment for growth, I think you'll see more revenue and more OR in Q1..

That sounds fair enough. Lastly, talk a little bit, obviously, your Dutch tender. You probably didn't get anywhere near as many shares as you wanted. Unfortunately, today you're getting another bite of the apple in terms of a much lower stock price than where you were before.

Any thoughts on repurchasing your shares on a regular basis at these current levels?.

Yes, I think, Jason, we were disappointed. We saw really good value. The market wasn't recognizing it. And we came out big, and we're wanted to go after it. Obviously, the market didn't play with us, and said, oh, wait a minute, that's too cheap, I'm not going to sell it that. So the market moves. So I want our strategy, we want to buy.

And so that desire depending on value and the recognition of value and our progress which remains on the table, where -- I'm not going to comment if we're going to institute a regular program or whatever.

But as Tripp said earlier and I said, I think anything around capital structure and/or growth opportunities that make sense, because of where the balance sheet is, is we're looking at everything very, very closely..

You're in a much nicer position now than you were a few years ago. That's for sure. Gentlemen, appreciate your time as always..

Thank you, Jason..

Thank you. We'll take our next question..

This is Nick Barwell. Joey, could you comment a little bit about your hedging strategy, fuel hedging strategy.

To what degree have you implemented it? To what degree are you going to implement it? And where do you stand on that?.

looking back, we wish we had, we didn't. We've historically been pretty active in the market. And we've had periods of time where it was really good and period of times they weren’t. Difference between then and now is, there was a -- there's several chapters where we had to make sure our cost was as fixed as possible.

And so, we were willing to take on some additional insurance to just to know what our cost was, as we were kind of going through some various transition times. Today with where we are and I can say, overall, it was a negative, but the periods of -- some of them we did really well, some we really, really lost a lot of money, but our cost was fixed.

So, we've taken a more, let's say, aggressive approach and kind of let's call it ride the market, if you will. It's not that we're not hedging. We're not interested ever, ever. It's just we're taking a little bit more, whatever you want to call it, aggressive approach on that and kind of ride with the market. Our surcharge program is still really good.

The recovery percentage continues to increase. I'm not the net cost of fuel after surcharge. We're in pretty good shape, and more concerned about the impact of fuel to the economy than I am to us, because of the strength of our surcharge program..

If you take into consideration the time lag and the surcharge, how much does that “cover” is a gross statement sort of the swing in energy prices?.

75%..

Okay. Okay..

About 75%..

Okay.

And the other quick question is what -- as you restructure Expedited, and you focus more on longer-term customers, in what ways is this change your geographic activity, your lanes? Has it -- did it shrink your average length of haul? Did it take you out of the West Coast? Did it focus you more in the Northeast? But what are the implications?.

Hey, Nick. This is Paul. No, it's linked to haul and the Expedited franchise is probably, as long as it's been an average or less in the last five or six years. So it's, I'd say, it's more of the sign..

Great, Thank you, Paul..

I would say, we did Nick is that the long-term contracts with the customers versus having some of those customers, we've had a lot of them for years-and-years-and years, but we just firmed it up, so that during the downtime, that they have gotten more, they'll be taking us to haul that load than somebody that's a nickel a mile cheaper than us, during the tough times.

So that's really what the contract does. And so, that and then and again, there's no dedicated quote in the Expedited. But we've got 60% of our Freight that's engineered. And….

Yeah..

I mean, it's going from A to B to back to A or ABC back to A. And we started this year, that number was probably about 20%. And we're up to 60% of that that will probably go up about 70% of the Freight that's engineered. And the turnover is unbelievable better on that group of drivers that have the consistency..

I say ….

And in other way we're taking this stuff -- go ahead….

No. I was going to say that anecdotally, which is a weak insight but it -- but perhaps an insight. Driving in – I'm in California and driving up to Lake Tahoe or down to the southern part of the state. In the past, I've seen Covenant trucks at a fair -- fair number of Covenant trucks and others..

Yeah..

Obviously, Gordon and US, et cetera. And it's very unusual over the last three, four months, for whatever it's worth, very few name take. What would I call, brand name long-haul truckers, the Gordon, UGAI, US freight, etcetera. It's almost all logistics. And I find that confusing.

Maybe you can enlighten me is why that's the case, especially around the port of LA. It just, but I'm astounded. You’ve got – first of all our freight going to in particular California has not changed a bit. We're still running the same volume I'd say 90% of them are the same lanes that….

Yeah..

… we've always ran. So you're just not seeing the trucks. That's said, as we all know, California is a – it’s a own – its a state into itself. And what's important now watch 200 -- whatever they got 200,000 containers out in the ocean.

And for no wonder, I mean we could have been predicting some of these 10 years ago with some of the craziness of the state of California has.

And so, that said, that said, there's a lot of carriers are saying, "hey, Managed Freight a Covenant, let's somebody else that wants to go to California take my assets off it and grow grid out, going to the West Coast. Covenant really does not do that.

We've been committed to California for many years, but that's another reason you're seeing logistics and all brands.

And who's that? I guarantee those carriers that you used to see are still controlling the freight, but they're saying why am I going to California, let somebody else go?.

Well, I’ll leave here a second. And I can totally endorse what you're saying. Thank you very much, David. That has surprised me..

Okay..

Thanks, David..

Thank you. That concludes today's question-and-answer session. Mr. Hogan. At this time, I'll turn the conference back to you for any additional or closing remarks..

Okay. Thanks, everybody, for participating. Victoria, thanks for your help. And we'll talk to everybody next quarter. Thanks a lot..

This concludes today's call. Thank you for your participation. You may now disconnect..