Covenant Logistics Group, Inc. (CVLG) Q3 2020 Earnings Report, Transcript and Summary

Excuse me, everyone, we now have all of our speakers in conference. [Operator Instructions] At the conclusion of today's presentation, we will open up the floor for questions. [Operator Instructions] I would now like to turn the conference over to Paul Bunn. Please go ahead.

Yes. Thank you, Shelby. Welcome to the Covenant Logistics Group Third 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 that could cause actual results to differ materially from those contemplated by the forward-looking statements. Please review our disclosures and filings with the SEC, including, without limitation, our Risk Factors section in our most recent Form 10-K and our current Form 10-Q. We undertake no obligation to publicly update or revise any of these forward-looking statements to reflect subsequent events or circumstances. As a reminder, a copy of our prepared comments and additional financial information are available on our website at covenanttransport.com, under the Investors section. I am joined this morning by our Chairman and CEO, David Parker; and Co-Presidents, John Tweed and Joey Hogan. In summary, the key highlights of the quarter were: we experienced significant sequential improvement in revenue, adjusted cost per mile and capital efficiency, resulting from significant progress in implementing our strategic plan as well as industry-wide factors, including a bounce back in economic activity, inventory restocking and ongoing shortage of qualified professional truck drivers. The freight environment for the quarter improved sequentially, with July being better than average, and August and September, both being robust from a supply and demand perspective. The ability to attract and retain drivers became progressively harder from July through September. We downsized our fleet by 10% versus the average tractor count in the second quarter, and by 18% versus the prior year quarter, in an effort to focus on freight where we could earn an acceptable return on the related capital employed. We exited the factoring business by disposal of the related factoring asset and a transaction that generated $108 million in cash. We utilized the proceeds from the sale of the TFS portfolio, and the sale of a portion of the aforementioned tractors to pay off $131 million in debt and reduce our leverage to levels not seen in over 10 years. The third quarter of 2020 was the second best of any third quarter in the past 15 years, only behind the third quarter of 2018. Turning to more detailed results for the quarter. The quarter included several non-GAAP adjustments that had a net positive impact of $0.08 per share related to discrete source third quarter items plus the ongoing $0.04 per share add-back of noncash intangible amortization. Our expedited segments revenue, excluding fuel surcharges, decreased 8%, primarily related to a 22% decrease or 270 tractors, in average fleet compared to the 2019 period. Versus the year ago period, average freight revenue per total mile was down $0.14 or 7%, while average miles per tractor were up 28%, resulting in an 18% increase in average freight revenue per tractor per week. The significant fluctuations in the operating profile are the result of: a change in mix to a more focused expedited model using a higher percentage of team-driven tractors; and eliminating the majority of the solo refrigerated fleet and the related costs. Expedited's adjusted operating ratio for the quarter was at 92%. Our Dedicated Truckload segment's revenue, excluding fuel surcharges, decreased 15% to $63.3 million due primarily to a 15% or 274 tractor reduction compared to the 2019 period. Versus the year ago period, Dedicated's average freight revenue per total mile increased $0.09 or 5%, while average miles per tractor were down 5%. The fluctuations in operating profile are the result of focusing on dedicated freight that has a better long-term operating profile. Dedicated's adjusted operating ratio for the quarter was at 94%. Excluding the impact of the truckload-related third quarter adjustments, total operating expenses decreased $0.22 a mile or 12% compared to the year ago period for our truckload operations. This decrease is a direct result of our strategic plan initiatives of downsizing our terminal network and solo driver fleet, short-term cost reductions to improve liquidity in response to COVID-19, and additional miles per tractor that more effectively spread fixed costs. Our Managed Freight segment's operating revenue increased 43% versus the year ago quarter to $47.6 million. This increase was driven by a 64% increase in our freight brokerage operating revenue to $39.4 million, partially offset by a 12% decrease in the operating revenue of our TMS platform as a result of the ongoing COVID impact on a large customer. The growth in brokerage was primarily spot or project-type freight that should remain strong as long as capacity is constrained. Managed Freight's adjusted operating ratio for the quarter was at 95%. Our Warehousing segment's operating revenue increased 13% versus the year ago quarter to $13.6 million. Adjusted operating income for the segment increased 9% to $1.7 million. Both operating revenue and adjusted operating income increased as a result of a new business startup that began in the third quarter of 2020. Warehousing's adjusted operating ratio was at 885. Finally, we recognized the $1.2 million pretax income from our 49% equity method investment in Transport Enterprise Leasing compared with pretax income of $2.1 million in the third quarter of '19, as TEL continues to rebound from a key customer bankruptcy that occurred in the fourth quarter of 2019. At this time, I'll turn the call over to Joey Hogan to recap a few additional items.

Thank you, Paul. The main positives in the second -- in the third quarter were a robust freight market across all of our service offerings; number two, a significant reduction in our net indebtedness; number three, a significant reduction in fixed cost and better cost absorption given an increased asset utilization; number four, TEL's sequential improvement in earnings; and lastly, subsequent to the end of the quarter, we were able to close a 5-year extension on our asset-based revolving credit facility with favorable terms, no fees and retaining the flexibility that the current facility provides. The main negatives in the quarter were: one, it's one of the toughest driver recruitment and retention markets in over 20 years; number two, there were several large prior period insurance claims eroding the limits of our 9x of 1 policy, creating both the charge to write-off the remaining premiums recorded as a prepaid asset and a potential forward-looking exposure and volatility; number three, less excess capacity for capitalization in the spot market; and then number four, the amended agreement related to the disposition of our factoring segment, resulting in returning a portion of the consideration, and taking on additional risk concerning the portfolio of assets that we sold. We've not recorded any reserve for potential claims under the risk-sharing mechanism to date, and future amounts will be recognized when the requirements of GAAP for recording claims are satisfied. As we look to the fourth quarter, we're focusing on delivering superior service to our customers in what is expected to be a very robust peak shipping season with limited trucking capacity. Similar to the third quarter, our reduced fleet size and more focused and committed model provides limited capacity to flex up and take advantage of the peak spot market to the same extent we have in prior years. However, we do expect fourth quarter volumes and pricing to be favorable and to support sequential margin improvement. In 2021 and beyond, our focus will be continued execution of our strategic plan, which consists of steadily and intentionally growing the percentage of our business generated by Dedicated, Managed Freight and our Warehousing segments, reducing unnecessary overhead and improving our safety, service and productivity. This will be a gradual process of diversifying our customer base with less seasonal and cyclical exposure, improving legacy contracts, investing in systems and technology and people to support the growth of these relatively underinvested areas. As we undertake this multiyear effort, I would like to remind investors that our goal is to improve our earnings and returns in a matter -- in a manner that is sustainable and less susceptible to upward and downward market forces. The gradual improvements we expect will be offset at time by short-term forces. For example, in 2021, we expect underlying progress on efficiency and cost control, improved contract pricing and improved safety. These benefits are expected to be offset to some extent by the return of certain cost pressures. Over time, we expect to exit the plan a stronger, more profitable, more predictable business, with the opportunity for significant and sustained value creation. Thank you for your time, and now Shelby will open the call for questions.

At this time, we will open up the floor for questions. [Operator Instructions] We'll take our first question. Caller, please go ahead.

Congratulations on a great quarter. So I guess, I don't know who wants to take this, whether -- I just want to throw this out there. But as we sort of think about the rate momentum in the business going into 2021, we've heard others talk about double-digit rate increases, and I think it's important maybe to kind of walk through. Your business as we go forward into 2021 is going to be different than I think the way people have historically thought about Covenant in the past, more mix of Dedicated, which probably has a little bit less rate volatility. But how are you guys thinking about the potential for contractual rate increases across your book of business in 2021? Can you kind of help us think about that for a moment?

Jack, this is Joey. Yes, I'm going to kind of do on this call what I did last call, kind of direct traffic [ then to use ]. So I'm going to let John take that one. So John, why don't you go ahead?

Thank you, Joey. So a couple of things I would say. On the Expedited side, which is where most of our transactional commodity type businesses is, we're working very hard to get the best rate we can get and also trade off some of that rate for sustainability and consistency and commitment of our customers through the entire cycle. But as we see it right now, we're looking at rates in that part of our business being up in the range of 6% to 8%. And then on the contract side, we're looking at 3% to 6%. And I think it's important for you to recognize, unlike the commodity side of our business where those rates change quickly, and you'll probably see a lot of that in the fourth quarter, most of the contract side will realize itself in the first of the year because we go through this budgeting process to identify: one, what has happened to the cost in that operation; and what do we need to do, pricing wise, to keep us at our profit margin that we model the business at in the beginning of the contract.

Okay, John. So just so I've got that clear, when you say the commodity side of the business, are you referring to more of the Expedited piece and the content that will be more Dedicated?

Yes.

Okay. Just want to make sure. I'm thinking about...

Absolutely. So the contract side will include our Dedicated, our Warehousing operations and our Contract Freight Management businesses, which we call TMS.

Okay. Okay. That all makes sense. And so I guess, just kind of looking at -- I thought you had a very interesting note in the press release, where you've said that about $0.14 of the cost per mile improvement this quarter is due to the action that you guys have taken to structurally improve the profitability of the enterprise. I mean that's a significant amount of costs that you've taken out on a per share basis if you want to extrapolate that. So I mean when we combine that with -- obviously, we know we've got some costs coming back into the business next year, but when we think about the rate that you'll be able to [ improve on ] or you'll see in the business, I mean, as you guys look into 2021, can you help us frame up how we should be thinking about the next year broadly? Not asking for specific guidance, but it just feels like you got costs net in your favor, plus rate in your favor. What else should we be thinking about?

Yes, Jack. Let me start, and then I'll pitch it to Paul. And this year has been a challenge for everybody for a lot of reasons. And I think one of the things when the economy was shut down on March, the -- what was it?

16th.

16th. Thanks, Dave. I just got that date [indiscernible]. So March 16. None of us knew, none of us on this phone, how long, how deep, how wide this situation was going to be. So we all responded in various ways. I think as we think about that cost headwind that we mentioned in the release as well as Paul talked about, some people have "turned things back on" faster or slower than others. We made the decision to just hold because we're going through a transformation also. We felt it was important to the things that we committed to that we're going to be deemed temporary to kind of sustain us through this year. So we got a commitment from our leadership team to do that. And so I think as we have moved through the second half and surveyed the situation economically, socially, where we are in our transformation, all the decisions we've made, we do see that coming back. We know it was going to come back, it's just waiting. And so I think that's important. I don't see it as a negative. I see it as it's kind of some adjustments that we made to weather in an unknown storm of time. And so some people turn it back on the third quarter. We're choosing to turn a lot of it back on kind of sometime first quarter, second quarter. So that is cover around kind of what Paul is talking about. So Paul, why don't you take the cost question?

Yes. So Jack, a couple of things. I'll kind of talk a little bit about gating, and maybe even later in a little bit about Q4 because we mentioned this. And I'm -- you can kind of use Q3 as your benchmark or your starting spot. We do expect a little bit of OR improvement in the fourth quarter from the third quarter. A lot of it's by coming from rate, but we're going to have to start giving back to driver pay, the freight environment, and then I'm sure we'll talk about it at some point, the freight environment is very good thus far in October. So do we expect Q4 to be better than Q3? Not materially better than Q3. As we look into next year, if you kind of take Q3 when you take the rate increases John talked about and then the driver pay, here's what we know. John said the contract rates will come sooner, the expedited rates are going to come later in the year. I think we'll have to give the driver pay before we give the -- get the rate increases on the Expedited side of the business. And then if you kind of take that $15 million that we put out there, $0.05 a share -- $0.05 a mile, it's a pretty big number. And so we haven't really balanced out kind of the gating across next year, but I think with cost increases coming before rate, and as Joey said, a lot of those costs coming back in the first quarter that some people either didn't cut off costs, they just -- they kind of just weather through it. And some people have already put the cost back on. Ours are coming in Q1. Our OR will go backwards in 2021 from the third quarter of 2020. We're going to do everything we can do to get as much rate and cut as much -- continue to push some overhead and cost containment. We've got a good list of things. But I think it's safe to say we think that OR will deteriorate some into next year from the adjusted OR you're seeing in Q3.

So Jack, I think in summary, to Paul's statement, we are working hard to not have that happen. Some of the other things that can impact that is, a, startup of new businesses as our non-expedited, so Dedicated, Warehouse, Freight -- and Freight Management business, there is start-up costs on that side of the business. And so on the truck piece of that, we'll grow that as drivers are available. We like the dedicated space. And so that -- we'll see. On the Warehousing and Freight Management side, there is start-up costs. And so as we push to grow those, the market is favorable from a pricing standpoint. But there are some costs as we grow that business. So our goal will be to improve our margin. But as we see it today, I think that building a consistent model, I think, is extremely important. And so we're taking a measured approach as we move into next year, but it's possible that our ORs passe, could deteriorate a little bit, but we're working hard not for that to happen.

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

It's Jason Seidl from Cowen. I wanted to think about total fleet growth next year in some of your different business lines and then talk a little bit about your CapEx levels, which are really, really low I guess, probably lower than we at least would have thought for '21. Is this going to be like -- is there going to be a big catch-up in '22? How should we think about that?

Yes. I think, Jason, I kind of alluded to it just briefly. Our plan for next year in the fleet is to hold it. We've been through a huge amount of change this year. As Paul said, 18%, almost 20% of the fleet versus the same time period a year ago, has been taken out. That's been huge. We've closed some facilities. We've reduced the fleet significantly. We've made some really tough decisions, not only because of the kind of the buyer situation, but also for our business. And so the enterprise has been through a tremendous amount of change. So right now, we're planning on holding the fleet. We'd like to grow our dedicated piece of that, again, if our seatedness or if our unseated trucks are in a good position. We're not intending to grow just for growth's sake. So if you look on the truck side of the portfolio, Expedited is moving rapidly and it's doing a good job. We got out of the solo reefer business that was kind of housed, and that's what we used to call highway services. So today, that franchise is, I think, is in a good spot. I think the margins are going to continue to improve. But it's not been targeted for additional capital. So if we can hold it, keep them seatedness in a good spot, we're happy with that. On the Dedicated side, right time, right place, right opportunity, good seatedness, you might see us grow that a little bit next year.

Jason, on your point on CapEx, specifically, as you know, we put in the release $35 million to $45 million of net CapEx. It is a low CapEx, and we should have a lot of free cash flow next year to pay down debt or whatever. The next year after that, we're back on about a maintenance CapEx plus cycle, so you're not going to see it boomerang the other way. I think some of this is the result of moving more into Dedicated, and a lot of our Dedicated shorter length of haul dedicated. So they're getting more time out of the trucks. And so this year is the year we're going to take advantage of that. So low next year and then back to kind of maintenance CapEx levels after that.

Jason, could I add something here for you? I mean the next 3 years, our goal is not to grow our fleet at all. What we're going to be working on is rationalizing fully across business that's more profitable and more consistent through multicycles of the business. So if you look at the trucks themselves, we're pretty much planning on staying at the numbers we're at and then growing our warehousing and freight management business to get our revenue growth, and also improving the revenue stream there across those assets we own today. But one of the things you're going to hear us talk about, I think, it goes back to an earlier question as to speak to our 2021 earnings is, we're transforming our entire model so that we're placing more of our growth emphasis on those other asset-light parts of our business. But we're going to go through a little transition while we do that. So I think -- I just wanted to add that.

I want to stay a little bit on sort of cash flow and everything else. I mean, obviously, your balance sheet has changed a lot here over the last 6 months or so. How should we look at leverage ratio? And where's sort of that comfort level? I'm assuming you don't want to take the debt to 0.

Yes. I mean, I think around 1 makes us really comfortable. I agree with you, 0 debt with these low interest rates, probably doesn't make the most sense. You may see us dip below 1, and then go back to up strategically. And so -- but with the cash flow coming off next year, I think you'll see leverage actually continue to go down in the fourth quarter of this year. I think that comfort level for us is probably between 1 and 1.5, long term, but you're going to see it dip down below that in the short term.

Okay. That's good color, too. Last question, I want to follow-up a little bit on your OR commentary. When you were saying that you might dip a little bit below, you were talking about sort of that adjusted truckload operating ratio between your 3 segments, I'm assuming. And I was assuming that was the commentary for the back half of '21, not for the full year?

No, I think it would be -- when you say debt below, improve?

Well, get worse, yes, exactly.

I think that it will. The truckload businesses could get a little large next year. I think the warehousing business will stay about the same. And then the managed freight really depends on what the spot market does and how high capacity remains.

Right. But this is...

Most of the costs coming back will be in that truckload side of the business.

Right. But this was a commentary for the back half of the year not the front half of the year, where, obviously, you had some pretty hefty ORs there that you're putting up in 2020. So I'm -- so as we look at it, you are going to have pretty good improvement on a full year basis?

Yes. Yes.

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

Dave Ross from Stifel. I want to just follow-up again on the cost pressures, because I'm having a hard time understanding why margins can't improve year-over-year. I mean, obviously, to Jason's question, you're not going to do 100 OR in the first and second quarter next year, so those are out the window. But you've got almost a year to work through a contract pricing and talk to customers. And if your costs are going up in this type capacity environment, I'm not sure why you wouldn't be able to raise price enough to get the margins higher because you're still not really earning the cost of capital and getting to that 90 OR that you want?

Yes, Dave. This is Paul here. On a full year basis, next year, there's no doubt that or will improve. I think what we were trying to get out there is you can't just annualize what we did in Q3 of this year because there's costs that are going to come -- we talked about the costs that are going to come back, plus rate, minus driver pay, and we'll just have to see where all that nets out as we go into next year. But full year next year, 2021, earnings will be higher than 2020. And OR will be better. It's just the run rate that we were on in Q3, but I think where the question is, if -- with the costs that are going to come back, are we going to be able to get enough rate to more than offset that?

Yes. So I would just advise you to push the rate to be able to do that, to get an extra 2% that's an extra 200 basis points on the margin.

And as Joey said, we're going to try our darndest. I think the move to more contract-type business, some of those are multiyear deals, and it's -- can we move the contract rates as fast and as much. And with that being a higher percent of the business now than the expedited, I think that's the million dollar question.

Yes. I mean the good news is on Dedicated contract, if driver pay is the main pressure, you could usually negotiate those individually to recover the increased driver pay cost and not impact the margin.

Yes.

But on the comment around little in the way OR sequential or improvement. Now historically, you do have material OR improvement from 3Q to 4Q. Is it not the case this year just because some people have said, we've been operating at peak already for several months. So the surge and expeditor peak type business has already happened in 3Q, and so you got that benefit now, and it's not a step function change in 4Q?

I think a couple of things. I think unseatedness, can we get enough drivers in the seats to operate the full number of trucks that we have, one; two, we're already turning about as many miles per truck as you can turn, and so there's really not much left in the paint from a utilization standpoint. But I'll give you a data point I was looking back at. If I average the rate increase from Q3 to Q4 in 2015 and 2016, it was $0.25 a mile on a total mile basis. Last year, it was $0.03 a mile. And so I think it's a couple -- I don't think the rate pop will be anything like it used to be when we made a lot of money in Q4, when Q4 was just our biggest quarter, and we're going to have some driver pay, and we don't have as much capacity to throw at peak because of the growth in the contract. And so again, we think Q4 is going to be better than Q3, but I don't think it's -- we're not going -- it's not going to be materially better.

And then last question, just on the expedited side. I think the comment was made that expedited is going to take the longest to see increases maybe until back half of next year. Curious as to why that is, because I would expect that expedited freight is the most important freight and the place where you would be able to get price the easiest because that's capacity that's absolutely necessary.

Yes. This is David. If you -- the major thing that you got there, if you remember, on the expedited side, most of those contracts that have lived with us for years and years and years, going on 15 to 20 years, most of those do not -- I don't expect you to remember this, but most of them don't happen until the May, June time frame. And so it's a second quarter, late second quarter event before that starts happening. And those are the large major customers that we do business with from all the expedited side of the world. And so we just got a large portion of our freight, our business that doesn't come up for available to increase the rates until late second quarter. The other freight -- so 2 things. The other freight that we've got, it's increasing very nicely as we speak, and any new business that comes on is increasing nicely. But freight is so robust that we're trying to take care of the accounts that have been with us forever and not take total advantage of a market that may disappear, because if they did, our whole goal -- our whole goal is to get the volatility out of our business model that you all have seen for years and years and years is, when it's great, we do great. And when it's poor, we don't do as well. And we're starting to show the signs of eliminating that, and that's part of it, is that the expedited side is there. It's a nice portion of the business, but years ago, it was 75% of the business. And today, Joey, expedited is...

35%.

35% of the business. So you're seeing that. So run out sale, it's peak. So therefore, we're going to do, whatever. You all remember, $0.70, $0.80 a share because it's peak, that is not going to be as much. At the same time, we're not going to go back saying, boy, I hope I make money in the first quarter. We're eliminating that side of it. So you're going to start seeing more of the volatility leave and consistency coming back. But I would say, though, David, that work, we are probably 50% through this plan, something that we started, I got with the Board 4 years ago now and said we're going down this path, the first piece of business we got on the 3PL is Delta Airlines, that's the one we're talking about in the model here, we know the issues there. Thank God, it bounced off the bottom and started to come back. But then we bought the Landair purchase that got us into all the dedicated, the warehousing, the TMS, and we've grown that side of it. And so as I look at that piece of the business, that business has been about -- through all this virus, this entire year, really for the 2 years that we've owned it, that business has been within about 2 operating reports, OR report every quarter. I mean, it's been very consistent since we've owned that business, and we're growing that business very nicely, and I'm very happy with that, but it's coming out of the highway service, coming out of the solo refrigerator that we had. And so, anyway, the volatility is not going to be as bad as it used to be, but you're not going to have 0 in the first quarter on earnings and $0.80 in the fourth quarter because we got 1,500 trucks to throw to peak. Does that help you any?

[Operator Instructions] We'll take our next question. Caller, please go ahead.

It's Scott Group from Wolfe. I guess, I want to just go back to this point of volatility. Because, I guess, I don't know that I understand it. We -- in the first and second quarter, when it was tough, we were losing money. It got good in the third quarter, we had one of your best third quarter as ever, it feels like there's still the same volatility that there's always been. And so I guess I'm not sure why that wouldn't continue in the fourth quarter. I must be missing something.

Yes. I think, Scott, of the things that just keep in mind, and kind of mentioned it in our prepared comments, but over 500 trucks has been taken out of fleet between the first half and the second half. We've sold 3 facilities between the first half and the second half. And so we've unfortunately laid off a portion of our non-driving, if you will, workforce. We've added in certain areas, but in total, our non-driving workforce is down quite a bit. And so we've done a lot of things from the model in addition to other cost savings. I mean, there's been a lot of work done on the pure cost side, and that's that $0.22 a mile reduction in cost adjusted that Paul mentioned in his comments. And so you're right, great question. From a standpoint of looks extremely volatile, we've done a lot of work on the cost side, and we've tried to identify and transparently say, but, hold on a minute, $0.05 of that is probably going to come back that were temporary in nature. So call it $0.17, if you will. But a ton of cost capital has been -- has come out of the -- we had a lot of carryover fleet on trucks and trailers from '20 -- from '19 into '20 that we've been able to dispose of. I mean we've done a lot. So quote cost, i.e., interest expense has been reduced significantly, and I think that one's going to continue to drop, as Paul mentioned. So I wouldn't necessarily -- it's kind of like 2 things that we're pointing to is the transformation of the model is impacting revenue volatility, number one; but also a lot of the work we've done on the restructuring side, transformation is another word that people are using, transformation side has been significant since March. And so...

I think we're early in the ballgame on getting this plan moved on the path. And so I agree Scott that the proof will be in the pudding. And but we're early in the ball game, but if you kind of just -- if you take a 10,000-foot step back, you're right. We've got less than half the debt we had at March 31. We've got -- exited, as Joey said, a bunch of terminals in a solo reefer business where we were losing money. And so I think a lot of that stuff will structurally help us. We've kept the consistent stuff, kept the good margin stuff, gotten rid a lot of the costs, gotten a little bit of a lot of capital. We're going to keep tweaking it. I mean it should be more consistent. Now will it be as tight as we want it -- as you want it, we'll wait and see. But it will be more consistent. And all those changes we just talked about, terminals, people, excess equipment, exiting the solo reefer business, all that's been done since April 1. So I don't think we've afforded it the chance to see the consistency. But I'll tell you, every day we come in here, try to find ways to improve margin, cut costs, reduce capital and improve our return on invested capital. And over time, I think you're going to see the results.

And so if we're early in the ball game, and we've done a lot of stuff since April, I guess, why are we just talking about $15 million of cost coming back and not incremental costs that weren't apparent in the third quarter that could still come out? Meaning, have you done all -- is that -- I mean, everything that you're talking about the restructuring, if that's your word that you're doing here, did we see the full impact of that in the third quarter? Or is there still more to go there?

Here's what I'd say. You saw the impact of the low-hanging fruit. And some of it was hard decisions, but it was rather low-hanging fruit to get there. We have a list that we are actively working, of projects that will continue to take cost out of the business and reduce overhead. I think we'll see in 2021 how successful we are in continuing to strip those out.

Paul mentioned the driver market. So there's some costs, there's $0.05 a mile on some temporary cost reductions that are coming back in starting in January. We've disclosed around a range around what those were. The driver market situation is, like we said, it's the worst we've seen in 20 years. And I don't -- we don't see anything right now that says that's going to loosen up. It's going to be good from the capacity standpoint, but from a cost standpoint, to keep what you've got seated, you're going to have to move. And I think, yes, it sets up, as Dave said, we're going to get as much of that or more to pay for that because -- and I do believe the market is going to allow us to do that. So I think the insurance market, we haven't talked a lot about, but I think that there's some potential headwinds. All of our policies renew April 1. And all of them, from our primary, all the way through our excess policy, in general, everything, more [indiscernible] all. And so we're anticipating, based on what we're hearing and seeing in the market, it's going to be incredibly difficult for the whole industry for a couple of years now. And I don't see that changing. And so that's even if our incident and our overall profile continues to get better, just to say tight tough market. And so there's another one that we foresee, and we're planning on having a meaningful increase. And so those are probably 2 biggies besides the temporary. Those are 2 biggies that are putting pressure on the cost side, will be driver wages and interests.

Okay. And then just last one your comment around the OR maybe next year being worse than the third quarter run rate, what is the actual pricing assumption you were making within that comment? Are you assuming double-digit contract rate increases like others are assuming? And then maybe, David, just help us out if typical van rates are up double digits, what should expedited rates be up next year?

So let me give you what's in the assumption, Scott, and then I'll let David tell you the what could be. That is low-single digits, kind of what John says, probably -- he gave a range of 3% to 6%, that's probably got 3% to 4 on the dedicated side. And that's probably got the mid-single digits, so 6% or 7% in for the expedited side. That's the pricing assumptions in the OR deterioration from the Q3 run rate, again, not on an annual basis. And so David can talk through what the -- what it could be and what he's seen in the past.

On both sides of our business, whether that's the dedicated side or whether that's the expedited side, I don't disagree with what you're saying there, Scott. I think from a standpoint of the almost 10,000-foot level that all of us in the industry are doing, I don't know how anybody can come out and say that 2021 is going to be double-digit increases. I'm not there, and I've been a leader in that side of the world of keeping up with what they expedited over the years. And I'm not saying that 20 -- I mean, double-digit increases. Right now, I hope that it is. But I think that we're all sitting here today in the industry hoping, how is the election going to go, what's going to happen to the economy? Does the virus get under control? Are we going to go into more shutdowns? Or are they going to kill itself or disappear? Or is things going to get back to normal? There is no doubt that there is pressure on the driver situation. That's the reason why we're feeling better from a start -- whatever the economy is going to do in the third quarter: GDP, 30%; fourth quarter, 5% or 6%. Those are all good numbers on the economy. But does a driver -- does a motor vehicle get more straightened out? Do we get the virus under control and the schools can do more than 15-feet spacing? Can they double the size of the people coming in that's probably what you were seeing over 100,000 more drivers this year that are not in the market? Well, there's no doubt, does that come back. And so I can only assure you, as I think you probably know, is that we will be absolutely attuned on what pricing is doing in the marketplace, in particular, on the expedited side of the business. We will be in-tune to what it is doing. But I'm not there yet to say, based upon everything I just said, virus, election, economy that I believe is 10%, I'd be lying to you. Today, I don't think it is. I hope it gets there. And I may change that too come January 5. But I'm not there today. I'm more in that 6% to 8% number that I feel confident that we can be able to perform that. So only time is going to be able to tell.

Right. And if I can just try one more. Just if we wanted to connect the dots and say, let's just say, we want to be optimistic and say, we get to 10% on price, would your -- Paul, would your margin comments be different?

Yes. Yes. It would improve. We'll get [ the financial slides ], but the margin would be better than the Q3 run rate.

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

This is Jack Atkins from Stephens. Just wanted to ask a follow-up question for John. John, as you sort of think about the opportunity set within your dedicated business, everything we hear from shippers and from others in the industry is just there's a significant demand for dedicated capacity. Are you seeing that as an opportunity to maybe upgrade your contract mix, your revenue mix within dedicated over the balance of 2021? Is that a potential source of upside there, longer term?

Jack, if you were here, I'd hug your neck. That is exactly the objective. If you look in -- so Jack, a couple of things. If you look inside what's really going on in our business today, what you can't see is that through COVID, we lost a tremendous amount of unstable dedicated business. People, we didn't have good contracts with, people that we just -- the relationship and the value prop wasn't of the quality that we're trying to accomplish with our model that we're scaling from Landair. So that -- the point I was trying to make earlier is we're not going to add a lot of trucks, we're going to improve our business and our relationships, looking at those that will pay us the margin we need to get the return on capital we've invested. And at the same time, we're developing relationships that are sustainable. So that's exactly what you're going to see. In some cases, Jack, part of the margin struggle that we're going to go through the first half of 2021, as we cut some deals with some customers during COVID, they're the people that we want to build long-term relationships with, but we gave them a pricing break to let us go ahead and get started. And it allowed us to transition trucks from people that we didn't see a future with, the people that we think we can build a relationship with and bring our value-add prop to the table in a way that they'll appreciate it.

Okay. All right. That makes sense. And maybe my last question, just kind of thinking about the warehousing business for a moment. Could you maybe talk about the pipeline for new business wins in that particular segment?

It's big. Biggest I've seen in quite some time. I can't remember the exact numbers, I probably should have it in front of me. But the last time I looked at our pipeline, I think deals that would close in early 2021, it was like $70 million.

And all that would be at a double-digit margin, like you're seeing in that segment right now? Or is that sort of a different mix of business?

Well, typically, the first year is not the double-digit margin. It's much less than that, and then when the engineering takes hold, then we get our part of the bonus that comes from creating additional values when the margin goes up.

But John, would you agree that warehousing, at least one start-up, say, one start-up of year of size is a good target?

Well, absolutely. And I guess, I thought I said this earlier, our goal is to double the size of that through 2023.

That's right. So Jack, that $70 million number, that's what's in the pipeline. And so historically, one year -- and so one year is not $70 million. But we're going to work hard to -- that's what we're working on now. It's a pretty big pipeline on the warehouse side.

And to do 2 here instead of 1. Our history has been 1. We want to take it to 2.

Right. But double over the next 3 from what you're seeing today, I think that's a fair way to look at it and you kind of spread it ratably.

I think the other thing that I would throw out there about the 3-year plan is, once we get our freight under management, that's the freight that we're managing is not going on our trucks. The $350 million to $400 million spot, we think that there's going to be a tremendous amount of value in allowing us to engineer solutions with multiple customers at that point to include bringing extra value to our dedicated customers and creating engineered routes for our other trucks that will be more consistent, allow us to get more drive hours out of the driver's day.

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

Follow-up here, gentlemen. As you talk about the 3-year plan, and you mentioned kind of the rationalization of the fleet and where you want to be, is there, I guess, an OR target associated with the truckload division? Where are you pointing everybody in the organization towards? And where should you expect to fall out on an average year in a few years?

Is this Dave or Scott?

It's Dave Ross.

Dave, thank you. For expedited, our long-term vision for expedited is we need to get expedited year-in, year-out to an average of kind of mid-80s, low to mid-80s to justify the cost of capital. And so that's the long-term target, just where expedited needs to get to. Dedicated, for a good return on invested capital, you can run a 92% and have a good return on invested capital, the expedited is running mid-80s on. Kind of similar. So that's kind of the improvement on expedited to get it to the same return on invested capital, that at solo at a 92% would be -- because a lot of that dedicated, again, has a lot of pulling off customers trailers, too. So your invested capital is much less on the dedicated side. Plus you're running trucks longer, so your average invested capital is lower than on the expedite side. So hence, the difference in OR kind of targets between the 2, because primarily dedicated to solo in our model. So 92% or better on the dedicated side. I would say 85% or better on the expedited side is kind of long-term targets to justify the returns that we're looking for. John, do you agree with that?

No, I agree wholeheartedly. I'd just add to that. If you look at the model today, the expedited is not that far off. It's just -- the more we can create additional value around some of our overhead investment and bring it off of the expedited model and share it with other parts of the growing business, that truth will reveal itself a lot quicker.

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

Well, Shelby, thank you for leading us. Thanks, everybody, for their time on the call. I appreciate your patience. I want to say publicly, thanks for our financial team. A lot of this disclosure is new for the market as a whole. It's required a lot of work, but we hope it's helpful that it's different. And so if you have questions, please let us know, and we'll continue to refine the disclosures to get it exactly what's needed. But the group has done a good job as a result of a lot of changes in the last 6 months. So you have a good day, and we'll talk to you next quarter. Bye-bye.

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