Covenant Logistics Group Inc (CVLG) 2021 Q3 法說會逐字稿

Excuse me, everyone. We now have our speakers in conference. (Operator Instructions) At the conclusion of today's presentation, we'll open the floor for questions. At that time, instructions will be given as to the procedure to follow if you would like to ask a question.

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 and filings with SEC, including, without limitation, 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. 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 are extremely proud and appreciative of our teammates 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 remain extremely proud to be a part of an 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, with our DOT accident rate per mile being 13% below the year ago period, the lowest third quarter rate in 10 years. Although, rising insurance premiums and inflation and claims costs 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 were able to -- 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 the $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 overflow freight from Expedited and Dedicated, plus capitalizing on our heritage of providing pop up capacity for various retail customers. This unit remained a strategic growth division for Covenant from both (technical difficulty) 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 staying (technical difficulty) this is 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. The supply demand imbalance in the marketplace continues to lead us to customers that really need and value team supply for the long term. We are focused on partners with shippers that are looking past today's frothy freight market and lock in 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 to an 84.8%, or led by a 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 with the driver market being as bad as it's ever been. Driver wages in this segment are up 15% on a cents per mile basis versus a year ago, with this being the #1 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 months of August and September did hit our high 90s target, however, revenue per truck improvement is beginning to accelerate, being up 5% sequentially versus the second quarter and up 13% versus the third quarter of 2020. Another positive in the quarter is that our open truck situation is the lowest we've seen in several quarters, with only 7% of the fleet opened at quarter end. Continued progress on rates and utilization, particularly among a handful of customers remain necessary. Nevertheless, we're on track for meaningful improvement in 2022.

Despite the rare loss of 1 customer early in the quarter, the Warehousing division continued to grow from a revenue perspective, but took a step back from a profitability perspective in the quarter. We added 1 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 the 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, i.e., "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 in 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 feel like -- we feel we are 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.

(Operator Instructions) We'll take our first question.

It's Scott Group from Wolfe Research. I want to follow-up on the comment about the seated tractor count 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?

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 late (technical difficulty) 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 -- a pretty material pay increase that we launched the first or second week of July. So I think it's -- I'm going to break it into the Dedicated mix, but I think it's a little bit of different stories. So Dedicated 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 up, I would call it, decent levels, not just the floodgates are open on the Expedited side. So fair.

On the Dedicated side, a lot of pay increases in June and July. And probably by late August, early September, we started seeing unseated stabilized in Dedicated. And I would say, late September, we were getting the drivers we needed. In the last couple of weeks, that's actually fell off a little bit. And so, it's a little bit of a rollercoaster with both of them. Dedicated was -- got better, has gotten a hair worse in the past couple of weeks; Expedited, got worse and has gotten a hair better in the last couple of 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 of 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?

Scott, this is David. Two things, next year, if you depend upon what side of the coin you own then, 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'll 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 disruptor out there. But it really is the take on -- all of our take on what the economy is going to do next year will depend upon which way the rates are going to go. But it's going to be -- 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, driver pay and equipment and in-house people and there's maintenance. I mean, there's just a lot of cost wins, they're going to have to be absorbed by rate increases.

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

No, not yet. No, not 10, we have our fourth quarter conference call kind of when it'll start.

Our next question comes from Jack Atkins with Stephens.

So I guess, if we can maybe start 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 secured? Could you maybe give us an update on sort of where that process stands? And how are you feeling about that as we go into 2022?

Yes. I would say 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 it's a couple of things: It's a significant portion of the business -- a significant portion of the business the significant portion of the business that we worked to engineer and try to optimize freight within an Expedited network so that it's stickier from a customer standpoint and a driver standpoint. And so, hopefully, we're -- by doing that, it's not as -- it's not as OTR feeling-ish, it's not Dedicated, but it's not OTR. It's kind of somewhere in between. And it depends on the customer exactly how those agreements look and there's some hybrids of things in there. And so, I think we're continuing to press down that path nicely. On the Managed Freight 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 walk in some, I'll call it, 12 months or greater contracts. And I would say that's not as great of a percentage. This is something we're continuing to work on every day.

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, whenever that is, 2023 or whenever, 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 they're going to be peaks and troughs, but 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 1.5 years. And pre-pandemic, starting around early part of 2020, so it's been 1.5 years 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 question is 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 that's going to be under contractional agreements that make it much more difficult for the customers to get out of those trucks. Now utilization may go down a little bit just because at the end of the day, our load is there, our load is not there, but they cannot fire the trucks. And we still got -- we've 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 a 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 there 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 evidenced by the fact of what you're seeing the last couple of quarters on the OR on that business. So I'm excited about that. I think the runway on the Dedicated side is making great headways, because I wish you could see the amount of accounts -- we've only got down 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 held with whatever that means, and it's going to be with a better OR, a better profitability, or we're not going to do the business, one or the other. 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 has talked about on the Managed Freight. As I look at that besides the spot side of the business, there's only 5 or 6 that I would say -- 5 or 6 customers that I want to get held on the exposure side. And we got a couple of them, so we're probably 1/3 there, but we're having meetings over the next couple of months to attempt to get the rest of them there. And I think that -- I'm happy with the success out there, a bit 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. The Dutch tender that you announced during the quarter, I would just maybe curious to kind of hear how you guys are thinking about the opportunities to use the balance sheet strategically, both returning capital to shareholders, perhaps, but also maybe M&A opportunity? How are you guys looking at that as you kind of move forward over the next year, 1.5 years?

Yes. I think, Jack, obviously, there's no question, a well-capitalized balance sheet gives you a lot of flexibility. And so when our stock was lower, let's just stay there without getting into what's going on today, was lower with where we are presented an opportunity. We just felt very strongly about the long-term view of the company, and we'll continue to watch that very carefully. Second, as far as the M&A side, we're feeling better in total, but maybe just said, in total, about the business, in my opinion, a lot better, and the model is playing out. So I think with the balance sheet where it is, are we ready to make -- to pursue in addition, either internally or externally? Yes. And so, the market's hot right now. I'm not saying we're getting ready to do something right now, but market's hot and -- but we're being -- trying to be very strategic in 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 earnings upside. We're feeling 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 their commitment is strong. Brokerage, it's -- brokerage is probably the 1 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 on a very big project supplier for our shippers.

We've done that for a 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 Allegra launch years ago, 800 loads in 2 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 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 not to recognize that it's going to go all the way tomorrow more. But what do we do to solidify that and internally grow our business. And we're doing both of those.

And so, will it stay where it is? You look externally and you go, oh, that is not going to 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 in 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 the quarter. 36% of the revenue, Expedited and Dedicated were about the same, call it, 29%. Warehouse is 6% and growing. I mean model's playing out and the model's playing out that's one of the things I'm most excited about.

Yes. Just to add on to Joey's point, I went back yesterday and I was looking at net debt, 18 months ago, we were sitting at $337 million of net debt. So we've had $272 million of improvement from where we were March 31 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 the 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.

Caller, please go ahead.

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

Sorry, the thing went blank. This is Bert Subin with Stifel. 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 it typically has 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 '22?

Yes, I think depending upon, Bert, on how we think -- how all of our take's 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 carriers is going to be decimating to them. I mean it's going to be a difficult time for small carriers. I mean, we're negotiating equipment right now on numbers that are not pretty. And I don't know what a small guy -- a small company does. And so, yes, they're 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 with somebody the other night. If you think about, David talked about there's the cost of the equipment, and then there's the availability of equipment. And I mean drive-in trailers are a lot little buckets of gold running around 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 that gets you this time next year, what about '23 and beyond '23? And the folks we're talking to are big equipment leasing and resale company and they start talking about EPA engine changes that are coming in kind of '25, '24 timeframe. And you got the -- there's the pre-buy phenomenon that truckers do 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, it could be a 24, 36-month kind of deal. Again, it's -- so I think it is probably a tailwind, as you mentioned. For a couple of different --

I would hate to be a small carrier running a 7-year old truck. I mean, we're standing there, what average age, 22 months or so. So we're -- our average age is 22 and the manufacturers, whether it's 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 the 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 in with a 7-year old truck, that you're going to run in another 2 years, I mean the maintenance cost in itself will implode them.

Just remember, as we know, the average size of (technical difficulty) 7 trucks and that includes nights 18,000 and our 2,500 which is dominated by the small carrier. So they don't buy new trucks. They buy in the used market. And so, the used market right now is -- it's silly as far as what a used truck is selling for. So it's that -- obviously, the spot market is holding up the market, if you will, assuming it's being hauled by smaller carriers. And so that's being propped up. And then if you have needs, you need to add a truck or lock that truck or replace a truck, smaller folks are paying goodness, 20%, 30% more than they would normally.

And so, we still got to fund that. Yes, the interest rates are cheap today, but -- and then how they're going to pay for that capital in the 'future' whenever the future, let's call it, that effects the economy or freight. And so that's a pretty big question as you kind of work your way through that in the next 2 to 3 years in the cycles. And so, the good thing for us is, 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 to extend if you have to. 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 here's the thing, everybody shouldn't get all geeked up about gain on sale. All of us -- we're in the business of moving equipment. We're -- I mean, moving freight. We're in the business of moving freight, yes, if you're selling a truck and how you're going to make $9. So okay, what about tomorrow? What's the business tomorrow? What's the cost tomorrow? What's the -- so to run a business off a gain on sale isn't an answer because that's not what your business is. So I think there's some -- obviously some opportunity to help earnings with gain on sale. I know where your trade cycle is. And folks that have a trade cycle that's big and were able to keep their orders-ish for this year, you're going to have big gains just helping our zone. Ones that had a low cycle this year aren't. So it's a -- I think the smaller folks, the equipment issue is a huge issue over the next 2 to 3 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 of whenever it raises its head. My opinion.

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 is probably going down. But if you just take -- if you think you're in an inflationary environment, whenever you have a dip in spot rate, the people that are relying on spot rates is going to hurt bad.

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

Yes.

So I appreciate that. Just one follow-up for me. On the Dedicated side, have you -- would you say competition's 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 shifters 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 it's maybe us exiting more than them 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, because are taking the rates up.

And we all know when we started the pandemic, we had about 300-plus trucks run at automotive. We had a big portion of, what, 20% of our fleet was automotive, and we're still living that out there, 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, everybody 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 to 150 drugs and put them into other types of business, but the second quarter got a tremendous amount of cost of doing the (technical difficulty) and you think where that goes. I mean they may need to go to 0, but we'll return 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 the business with 10, 15, 20 trucks as opposed to sort of larger swaps contracts. Is that -- do you think that's still the right strategy? And is that working?

It is. Here's what I'd say, it is -- but it takes a while to get there. When you're taking a little bit pots -- big pots are easier and they fill you up faster, but it takes a lot more swings to plate on those 10 and 20 truck 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've got to make it up with 4 20s, there's just -- there's a lot of cost in moving all the trucks and trailers and drivers and do that. One of the things just to add on to the Dedicated, 4 of our top 10 customers in Dedicated had major supply chain issues in the third quarter. Three of those (technical difficulty) and what I'm having to do with the ports. And so again, it's -- The cost to, as David and Joey most said, downsize some business. And then when 4 of your coping customers have major supply chain issues, that's part of the reason the Dedicated ran for the full quarter.

We'll take our next question.

It's Jason Seidl from Cowen. So apologies, I jumped on a little bit late here, but I wanted to drill down on the Dedicated and sort of 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 taking along their level of profitability as we look out at opportunity too?

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 a lot of that costs in July. And we feel confident that we're going to be able to improve sequentially from 3 to 4. 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 in the fourth quarter. And I think you'll see some incremental improvement from Q4 to Q1. And so it's -- 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%. Yes, 8% to 10%. And then we got another maybe 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, that's a good way to look at it at.

Perfect. I want to follow-up on a question that Scott asked. You asked about CD trucks, I want to come at it 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 butt in a seat right now put it all in?

Driver pay Q2 over Q3, just in the Dedicated, up about 12%, and then you're going to have the increased cost of recruiting so it's 20%, probably 15%, 20% from Q2 to Q3. And you saw the rates up nicely as well, too, but rates are up, but some of the costs. On the Expedited side, we begin -- 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 a 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 so where you can get somewhere between 3Q and 2Q in terms of that OR?

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

That sounds fair enough. Lastly, talk a little bit, obviously, your Dutch tender. You probably didn't get anyone near as many shares as you wanted. Unfortunately, today, you're getting another part of the apple in terms of a much lower stock price than where you were before. Any thoughts on kind of repurchasing your shares on a regular basis at these current levels?

Yes. I think, Jason, well, we were disappointed. We saw really good value, the market wasn't recognizing it, and we came out big and were wanting 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 at that. So the market moved. So and in our strategy, we want to buy. And so that desire depending on value and the recognition of value and our progress remains on the table. 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.

We'll take our next question.

This is Nick Farwell. 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?

None, none and maybe. Nick, as you've known for a long time, we don't have anything outstanding right now, looking back, 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 or wasn't. The difference between then and now is there was -- 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 -- some of them we did really well. Some we really cost a lot of money, but our cost restricts. And 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 on whatever you want to call it, an 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 I'm more concerned about the impact of the field of 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 "as a growth statement" sort of the swing in energy prices?

75%.

Okay.

About 75%.

Okay. And the other quick question is, as you restructure Expedited, and you focus more on longer-term customers. In what ways has this changed your geographic activity, your lanes? Is 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? What are the implications?

Nick, this is Paul. No, it's a length of haul and the Expedited franchise is probably as long as it's been an average of the last 5 or 6 years. So it's -- I'd say it's more of the same.

I'll say what 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 downtimes that they have got more -- they'll be picking us to haul that load than somebody that's a nickel a mile cheaper than us during the tough times. And that's really what the contract does. And so that -- and then (technical difficulty) and again, there's no Dedicated "in the Expedited" but we've got 60% of our freight that's engineered. And I mean, it's going from A to B to back to A or A, B, C back to A and we started this year, that number was called about 20%. And we're up to 60% of that. It will probably go up to about 70% of the freight that's engineered, and the turnover is unbelievable, that on that group of drivers that have the consistency.

I see that, David --

Go ahead.

No, I was going to say that anecdotally, which is a weak insight, but perhaps an insight, driving -- 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, obviously, Gordon and U.S., et cetera, and Hunt. It's very unusual. Over the last 3, 4 months, for whatever it's worth, very few name, what would I call, brand named long-haul truckers, Gordon, you guys, U.S. Express, et cetera. It's almost all logistics. And I find that confusing. Maybe you can enlighten me as to why that's the case, especially around the Port of L.A., it's just -- I'm astounded.

You got -- first of all, if I were -- freight going to, in particular, California has not changed a bit. We're still running the same (technical difficulty) I'd say 90% of them are the same lanes that we've always ran. So you're just not seeing the trucks. That said, as we all know, California is a -- it's a state into itself. It's less than port, I watched 200 whatever they got, 200,000 containers out of the ocean, and well no wonder. I mean, we can then predict you some of this 10 years ago when some of the craziness in the state of California has. So that said, there's a lot of carriers that are staying, hey, Managed Freight at Covenant, let somebody else that wants to go to California, take my assets off it and "broker" it 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 you 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.

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.

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