Covenant Transportation Group, Inc. (CVTI) Q1 2020 Earnings Conference Call May 20, 2020 11:00 AM ET
Company Participants
Richard Cribbs - Senior Vice President of Strategy & Investor Relations, Treasurer
David Parker - Chairman and Chief Executive Officer
Joey Hogan - Co-President and Chief Administrative Officer
Paul Bunn - Executive Vice President and Chief Financial Officer
John Tweed - Co-President and Chief Operating Officer
Conference Call Participants
Jason Seidl - Cowen
Jack Atkins - Stephens
David Ross - Stifel
Nick Farwell - Arbor Group
Operator
Excuse me, everyone. We now have all of our speakers in conference [Operator Instructions]. I would now like to turn today's conference over to Richard Cribbs. Sir, you may begin.
Richard Cribbs
Thank you, Samantha. Good morning, to everybody. Welcome to our First Quarter Conference Call. Joining me on the call this morning are David Parker, Joey Hogan, and Paul Bunn here, and John Tweed from another location.
This conference call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated by the forward-looking statements. Please review our disclosures and filings with the SEC, including without limitation, the Risk factors section in our most recent Form 10-K and our current year Form 8-K. We undertake no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances. As a reminder, a copy of our prepared comments and additional financial information is available on our Web site at www.covenanttransport.com/investors. Our prepared comments will be brief and then we will open up the call for questions.
In summary, the key highlights of the quarter were. Our Highway Services Truckload segment’s revenue, excluding fuel, decreased 1% to $77 million due primarily to 5.8% or 80 tractors average operating fleet reduction, partially offset by 5.1% increase in average freight revenue per tractor in the 2020 period as compared to the 2019 period. Versus the year ago period, average freight revenue per total mile was down $0.073 or 3.7%, while average miles per tractor was up 9.1%. The main factors impacting the increased utilization were 710 basis point increase in the percentage of our Highway Services’ fleet comprised of team-driven tractors and an improved average seated tractor percentage as only 3.1% of our Highway Services’ tractor fleet lacked drivers compared with 7.7% during the prior year quarter.
Our Dedicated Truckload segment’s revenue, excluding fuel, decreased 2.5% to $69.9 million due primarily to 3.1% or 53 tractors average operating fleet reduction, partially offset by 0.6% increase in average freight revenue per tractor in the 2020 period as compared to the 2019 period. Versus the year ago, average freight revenue per total mile was down $0.029 or 1.6%, while average miles per tractor was up 2.2%. The combined Truckload segment’s operating cost per mile net of surcharge revenue increased to $0.004 compared to the year ago period. This was attributable to higher non-driver wages, group health, workers’ comp and casualty insurance claims costs, basically offset by lower maintenance and repair, unloading, recruiting, net fuel and capital costs.
Our Managed Freight segment’s operating revenue decreased 4% versus the year ago quarter to $42.7 million. This decrease was driven by 10.4% decrease in freight brokerage operating revenue to $21.8 million, partially offset by 3.7% increase in the combined operating revenues of TMS and Warehousing. Managed Freight operating income was $1.6 million for an operating ratio of 96.2%. Our Factoring segment net fee revenue increased 48.2% versus the year ago quarter to $2.7 million. Factoring segment operating income was $2.2 million compared with $1.5 million in the prior year quarter. The increase in net fee revenue and operating income is the result of new customers, as well as growth with prior existing customers.
We recognized $700,000 pre-tax loss from our 49% equity investment in TEL compared with pre-tax income of $3 million in the first quarter of 2019. Ongoing weakness in the truck sales and leasing market have contributed to these results. The average age of our tractor fleet continues to be young at 1.8 years as of the end of the quarter, down from 2.3 years a year ago. During the first quarter, we took delivery of about 250 new tractors and 65 new trailers, while disposing of approximately 375 used tractors and 190 used trailers. We reduced our operational fleet size by 74 tractors or 2.4% to 2,947 tractors by the end of March from our reported operational fleet size of 3,021 tractors at the end of December. By the end of 2020, the size of our operational tractor fleet is expected to be down 12% to 14% compared to the end of 2019, allowing us to maximize the utilization of our operational fleet, including calling out lower performing freight where some shippers are not willing to sufficiently compensate us during the immediate term before freight demand returns and truckload oversupply is corrected.
Between December 31, 2019 and March 31, 2020, total indebtedness net of cash increased by $32.2 million to $336.8 million. This sequential increase to net indebtedness included cash payments during the first quarter of 2020, totaling $17.5 million for the repurchase of over 1.4 million shares of our common stock prior to the suspension of our stock repurchase plan in late March and $24.2 million increase to net funds employed in our factoring business to $106.6 million at March 31, 2020.
Total indebtedness net of cash decreased by $16.9 million for the month to $319.9 million at April 30, 2020. At March 31, 2020, we had cash and cash equivalents totaling $39.7 million, as well as available borrowing capacity of $35.6 million under our asset-based revolving credit facility for a total of $75.3 million in liquidity. The sole financial covenant under our ABL facility is a fixed charge coverage ratio that is tested only when available borrowing capacity is below a certain threshold. Based on availability as of March 31, 2020, no testing was required and we do not expect testing to be required in the foreseeable future. Liquidity increased $9.7 million for the month to $85 million at April 30, 2020.
The main positives in the first quarter were; one, a realignment of our executive structure and organizing our talent to most effectively design and execute our strategic initiatives; two, completion and initiation of certain elements of our plan to reduce our total capital employed, while reducing leverage and prioritizing our higher margin and less volatile core service offerings; three, cost control planning and ongoing execution to provide significant cost savings as we move through the fiscal year; four, the swift and effective response to COVID-19 by our teammates; five, year-over-year average freight revenue per tractor increases in each of the Highway Services and Dedicated Truckload segments; six, Combined Truckload segment operating costs net of fuel surcharges increased just $0.04 per mile compared to the first quarter of 2019, even with an excessively adverse insurance and claims in the quarter, partially offset by the $1.7 million gain on the sale of our Orlando terminal; and seven, growth and increased profitability from our Factoring segment.
The main negatives in the quarter were; one, the revenue and related profitability loss, while two of our large dedicated automotive customers shutdown operations in mid-March related to COVID-19 precautionary measures and are just now slowly stepping up production this week; two, the pass-through loss from our investment in TEL; and three, net indebtedness increasing $32.2 million from the end of 2019 to March 31st as we made the decision to repurchase $17.5 million of our common stock and to grow our Factoring segment significantly.
We are encouraged by the initial positive results of our strategic plan execution and structural advancements, as an improved business mix and our cost control efforts offset the impact of a challenging volume and pricing environment in April. However, we expect volatility from month to month over the remainder of the year due to external factors, as well as gains and losses associated with our internal initiatives and changes in our revenue and cost structure.
Accordingly, our prior outlook for 2020 is no longer applicable and we do not expect to provide earnings or similar expectations for the foreseeable future. In the near term, we are well-prepared to support our partner customers as their productivity, the economy and business levels return to normal. Over the long term, we believe the influential structural improvements and strategic initiatives we are executing will strengthen our position in the U.S. logistics industry, de-risk our leverage profile and concentrate our less-cyclical business model on more sustainable higher margin sectors where we can add considerably greater value to our partner customers and for all of our stakeholders.
Thank you for your time. And we will now open up the call for any questions.
Question-And-Answer Session
Operator
[Operator Instructions] Our first question comes from Jason Seidl from Cowen.
Jason Seidl
So wanted to focus a little bit on your automotive business, because you tend to have I think a little more exposure than most people do. Number one, what percentage of your automotive businesses is in your dedicated side? And what are you seeing and hearing from some of them in terms of we all know they’re ramping up. But how are they going to come back like what percentage of the business should we expect in the month of May and in the month of June compared to what you had before?
David Parker
To give you an idea, it is in our contract logistics side of the dedicated. We've had done that business for 25 years. The contracts are not as sound as what I like and what we're doing on our existing dedicated business. But again, we've had it for 25 years and we've treated each other very good for that amount of time. There's no doubt that it's been hit. Again, we all have been been hit hard. We have about 300 trucks, a little bit over 300 trucks. So kind of 10%, 12% kind of number of total and it went down to zero.
And so what we are hearing so far is that they basically started back this week. [One may decide] to start back until next week but GM started back this week. And your projections are basically 25% add on each and every week up for the next month, and expected by the middle of June to be at 100% level, so it's kind of this week 25%. And then our other one is with BMW and we expect it to get up to about 75% over the next month. And there’s also that it’s probably is going to hang there. I don't know that it's going to get -- it's going to take them longer to get to the 75% to 100% level.
So anyway, those are in and Nissan is expecting, so those are three major ones. And Nissan is expected to start back next week, but there's a little bit more cloudier of expectations.
Richard Cribbs
And out of that 280 to 300 trucks that run that, we did replace some of the freight on those trucks through some broker freight and some other customer freight, and then some of the freight that picked up with pause of the COVID. So grocery and paper goods and all that kind of stuff. So a little bit zero revenue on those trucks during the middle of March when the plant shutdown. But it was quite a scramble at the end of March, because the timing of the plant closures were a little quicker than we had been told, they were looking at week out two weeks out when they all of a sudden, one bank decides now we're going to close that. And so that took the brand one of the last few week of March, but April use some of those trucks and some of them got furloughed, et cetera.
Jason Seidl
But the way maybe I'm asking how we should look at it is, as that comes back that's going to help obviously your profitability, because you guys were let's say breakeven in April, even though you replaced some of that business. I'm assuming some of them might have been at not the best rates in the world in the spot market, plus there was a scramble, I'm sure that cost you guys a little bit too, and getting trucks out in service. So as they come back that should help the profitability numbers that you guys saw in terms of being breakeven in April as we moved to the outlook for, let's say June. Is that fair to say?
David Parker
Yes.
Jason Seidl
The next question, I wanted to focus a little bit on your costs that you have, that you guys outlined a little bit. And maybe you could start going over. So how many of these costs should we consider permanently out of your cost structure going forward, and how many are more just variable reacting to the marketplace?
Joey Hogan
I think, we've got very hefty target that the leadership team is working towards as we adjust the fleet size on the cost side. So we are -- the metrics that we're targeting, we're about a little more than halfway towards the goal. And so what I would say is measuring our productivity impact, which we relate to the our situation pre and post are sort of, I think we've done a pretty good job of bringing most of that variable profit miss with current cost savings that we've been able to put on the books, but we're not done. And so I think regardless of how fast things ramp up, slow or fast things ramp up, we're going to keep pedal down on, let’s call it, streamlining the organization. And so we need a little bit more time where we're comfortable really sharing the details of that but we've got hefty targets.
Now as it relates to your main question how much permanent versus short term, of that that we've been able to get thus far, I would say, actually I don't have a really good number. There's a couple of things, for example, we suspended our 401(k) match for our employees. They all know it and that's pretty meaningful number on a year-to-year basis and it’s immediate. Well, our goals turn that back on and we feel good about that, because I think being in competitive marketplace is important. So, that's one that for example is temporary, it's not permanent it’s long term.
Most of the things that are on the books that we're working on are permanent in nature. For example, we've started this process coming out of the year of rationalizing our fixed infrastructure. It’s public that we sold our Orlando terminal and it's also public there’s another large one for sale into it's own market, so people can go look at trying to sell our balance facility. We hope to close that very, very soon. So, in addition to those two, we made decision as to also public to close our Texarkana facility. So that's in process. We're in process of transitioning some of those positions, eliminating some of those positions and so that's -- and that’s a large operation there. So, those three assets are permanent and they’re significant, the impacts of those three.
And so, that's an example of some permanent savings that are big. So we do a good job of keeping the revenue that we want to for some of the solo trucks for hauling in Texarkana operation. We don't like it. Frankly, it's just not profitable. We do a good job to keep the freight that we want to keep and to take the costs out, we’ll incrementally get better. So, there's a lot there. The restructuring on those is close to 200 non-driving positions that are involved in either voluntary or involuntary shutdown or layoffs, if you will, Texarkana's a big chunk of that, it's permanent in nature. So, that's a big offset.
So, those are some examples on the fixed cost items, the executives took salary reductions. So, that's temporary in nature. Sam just grabbed me a good one. We had quite a bit of equipment that was carried over from 2019 tractors and trailers. So, as that works as well fleet that's permanent reductions in capital costs. And it was kind of getting started this year that that's going to help us quite a bit, it's already kind of looking in the month of April, what should happen in the month of May, we’ll start to really see that start to show up in income statement. So, between the headcount reductions, the terminal rationalization and then the equipment plan, it's a significant number of all of those.
And there are several more as well. And on all the equipment side, a lot of that trade back and proceeds from that came in the month of April and early May, we had gotten a decent way long by the end of March 31st but there’s a lot of that that really got out of the system in April.
Jason Seidl
So when I think about your P&L going forward, we're going to see a lot of the impacts, obviously in salary and wages with some of the reductions. I'm assuming as well it's going to go in operations and maintenance is probably going to go lower too and maybe just general supplies?
Joey Hogan
Operating taxes and licenses that line, our property tax and utilities, so should with facilities and what we’re actually able to sell. Obviously, depreciation with the equipment side, the interest expense as it relates to the equipment, as well as we close the sale of these facilities. So, we should be able to see it in probably four big areas, salaries and wages, operating taxes and the license and depreciation, a little bit of communications that line has been rolled out, telematics and things of that nature relative to the equipment and interest expenses. I mean there is a lot of work on safety, as well as new initiative related to that. And it does appear that the first quarter was an excessive of number, so that that should be back down to whatever new normal is. We did note that we are adding about $500,000 a quarter for additional premium expense and to take on more exposure in this part insurance market.
Jason Seidl
How should we think about D&A for the full year?
Joey Hogan
Yes, I mean in the second quarter it’s going to be difficult to pay with various things going on, changing out equipment and those type of things. But I'd say after the second quarter, you’re going to see that number continue to decrease a bit. So on a normalized basis going forward, I think that's going to be definitely below that was in first quarter by the time we get it done.
Jason Seidl
One more question for you guys...
Joey Hogan
The first quarter did include the gain on the sale of Orlando of $1.7 million. But taking that out and then backing that out, whatever happened in the second quarter with all properties dealing and talking about, I think it's significantly below that number going forward.
Jason Seidl
Let me ask a final question and I'll turn it over to somebody else. You mentioned you obviously had to move some of the trucks to the brokerage side of the business. What percent of the trucks went to brokers this quarter versus the prior year?
Richard Cribbs
Well, it's not actually going to our brokerage. To the spot market, the increase from what we generally do we got 3%, it was probably closer to 8% to 9% in the March and in April. It kind of [Multiple Speakers] when you see that go down…
Unidentified Company Representative
And so it started coming down [Multiple Speakers]…
Richard Cribbs
[Multiple Speakers] the contract is coming back and on those freight held back, etc, etc.
Jason Seidl
That's good news. Well, listen gentlemen, I appreciate the time as always and just to tell everyone out there in the Covenant world that we appreciate the men and women out there on the front lines delivering the freight every day. You take care.
Operator
Thank you. Our next question will come from Jack Atkins with Stephens.
Jack Atkins
Good morning guys. And just one for John, Joey, Paul and Richard congratulations everybody on the new roles. It certainly sounds pretty encouraging to hear you guys talk about breakeven in April, and I guess as we sort of think forward over the course of the next several months and into the back half of the year, I know you're not giving guidance, but the opportunity is really here with the costs you're taking out to really drive the company back to some sustainable levels of profitability. And I think that's just very encouraging to hear.
David Parker
Yes, we are encouraged about it, Jack. The process we've been on for two and half years and some of it was when the pandemic hit, I don't want to use the work force and you know we've been dealing with the Texarkana for quite a few years, and as we all know on this call we didn't have a good year and then we have a bad year, a good yer and bad year. And it went to depression in March, it was just time. It was time to say it's over and that's it. So that's good and it is. It’s going to take us to places that we have never been, but we've been on this journey for about two and a half years from the contract logistics side of the business and the expedited side of the business, so that's where we're getting to work with it.
Jack Atkins
So I guess, let me switch gears here for a moment and maybe, David, I'd love to get your thoughts on sort of what's happening in the market. You referenced demand trends stabilizing in May and it feels like underlying volumes have kind of picked up after bottoming in early -- in mid-April. What are you sort of seeing and expecting in the market as we sort of move forward here in the next couple of months? Would you anticipate some attrition in the market maybe to help balance out supply demand and what are you seeing on the contract rate renewal side right now just given the difference between spot and contract right now?
David Parker
Yes, you asked four five questions there, so hopefully I can get all answer there. Starting off, as every trucker you've talked to, this is my 47th year in trucking, believe it or not. I know I don't look that old, but 47 years in trucking and April was the worst operation -- operating environment I’ve ever had. But everybody can say that's true for [them] as well. Just a horrible, horrible environment the last of March and all of April.
But this month and the month of May so far, you started -- since this -- this is starting to build from a standpoint that it's like, the best way to describe it is that, I've worked hard and I know I've got an account over here, it's going to be $2 million of new business. I know that. We've had every conference call every year, we know they're getting ready to get things done, that’s hundred loads a week and that's going to be $2 million of business and we signed the contract, we've done everything with that operational meeting with their transportation department and you're waiting on them to call them and say we're starting tomorrow.
And that's really where it's at there is that we've now got most of our customers are at least having discussions and talks, and then they are -- they've gone from I have no idea what that is and when we're going to be back in business too, they're starting to come up with plans, whether it's a General Motors’ example that I gave you there or the retail companies that -- because at the end of the day, if you’re Target, Lowe's, Home Depot and Walmart. Today, we're talking to all these retail people that we’re working the rest of the retail that we got up on the board in this room, the rest of the retail just went to sleep for a long time or gone rogue. That said, they are starting to call -- they have contacted us and they're starting to come up hey, listen we think first week of -- the last week of May or the first week of June, put our trailers back in here that is happening across the board.
And so I've definitely sense that something is starting to build, and I agree that we know the capacity has left the marketplace and we’ll continue to lead the marketplace. And we know -- so I think truck orders mostly those numbers. So whether it is in June or whether it is in October or December, we're getting ready, the industry is getting ready to have a very good time. And I think there's going to be a 2018 reflection whenever that happens, and I think that it’s going to last for a year or two for a long period of time. This in turn is going to get worse before it gets better. And just as pandemic in itself are some crazy numbers that have gone out just as we renewed ours on April 1.
And so there is just a lot of stuff that’s happened there that we are starting to see and begin those conversations with customers, and we're starting to sense it now, our brokerage is down, the brokerage been the spot market that we go. And you heard me say earlier that it does from 2.5 to 8.5, so triple basically. And we just stayed there for a while longer for the month of April and now that number is back down to 4% kind of number to give you an idea. So we've cut that in half, it’ll be cut in half again, hopefully in the next month. And so the spot market will continue to get better for us.
And so as I look at the regions out there today, the West Coast has been very tight, very tight. I mean you're seeing the boats coming, but boats are flying in -- you know boats are coming in and the plane are flying in. And so California has been -- and it just happened in the last two weeks. I was just giving you an idea and it’s been very strong produce season out of California is very strong and so that part is exciting. And then I would say the southeast, predominately because we are in the produce season out of Florida today that will last about another month. But we have seen the passing in the southeast California are the two major regions of the country. And then we're bringing on some new business and all parts of the country not, again, it's built or anything there yet but we're seeing some fruits that are starting to pop out on the tree, Jack.
Jack Atkins
Last question for me and I'll turn it over. But the stock is trading at 0.6, 0.7 times tangible book value. Your peers are at 1.5% or more most are between 2 and 3. That would imply that there's some need to impair assets or something needs to happen there from an asset perspective. But Richard from what you're saying, it doesn't sound like that's the case. But I just want to know what is the stock seeming from a book value perspective just any sort of color there, because there's just this big discrepancy there versus where you historically have traded?
Richard Cribbs
So kind of going back to where we were at 12/31 to 3/31, tangible book value went from 15.07 to 15.05 per basic share, but that was down 1.4 million shares took out when we bought those back. And in the second quarter, we've got a look at some things, I'll say it that way. With excess equipment with us downsizing the fleet where the new truck market is, we just got to evaluate that and see if there is any equipment there and there probably is a bit, whatever that is 10 to 20 whatever it is, it's a number.
We have some other things that will offset that more than likely. We've got the real estate except for Canada for example. We're getting offers on that, that probably aren't quite the book value. And so there's the possible or probable impairment there that moves for sale, but we're going to have gains on another properties. So, there's puts and takes in all of that where I really don't think tangible book value is going to decrease much if at all, by the end of the second quarter, but there's so many moving parts. I wouldn't guarantee one way or the other…
Jack Atkins
But it doesn't sound like there's any big change coming and going forward if you're breakeven in April the middle of a pandemic that's all very constructive?
Richard Cribbs
Yes, we feel good about the future as good as we had a long time. So, there shouldn't be any losses there we impaired for that.
Jack Atkins
Okay. Well, that’s just what I wanted to just get to, because I think it’s really -- I just wanted to follow up on that. Okay, thanks very much for the time guys.
Operator
Thank you. Our next question will come from David Ross with Stifel.
David Ross
John Tweed, I got a question for you. Welcome to the call. In your new role, what do you see as opportunities in your initial look, and being at Covenant for a while or part of the Covenant team. What are your initial thoughts on what needs to change, what's easy low hanging fruit to improve?
David Parker
Dave, Joey and I would have to answer that and the reason is forward, because John's mobile location, he wasn't able to go through the main process and so we got on a cell phone and he can't even hear us.
David Ross
I thought you're making up him wear a mask or something.
David Parker
Yes, he'll be forward on the next call with us, but I know that John is very excited about what he sees there and on the contract logistics side of the business. I would narrow it down to a couple of things. We’ve been growing that, not including the acquisition of Landair two years ago. Just on the Covenant side, we've been growing that dedicated side during '18 and '19, if you remember about 900 trucks and we had a lot of growth that is in that side of the business. And then we acquired the Landair business that gave us more dedicated and it gave us more warehousing and PMS opportunity, and we continued to grow in those areas very nicely and we want to for the next few years, we'll continue to grow in those areas.
And he's been working on for the last one year has been taking the contract dedicated with contract, you heard me earlier talk about even though we've had some of the automotive for 25 years, the contracts are not as solid as what me and you would like, even though the relationship that they do and the improvement that they won't take into nothing. But he's been working on some of those contracts to make sure that the contracts would definitely be ones that are pure, true, dedicated. And so I would say 900 trucks that he was given under his new role, there's probably about up to 300 of those that we've already dealt with about 100, 120 or 130 of those.
So, there's probably about 300 of those that's more loose than what it should be added in there the pandemic as some are rapidly sold, but there you’re helping take 10 trucks out of fleet of 50, we've had too many, say a 100 of them that were more and my contract allows me to get out, the contract as well not in past as what any of those would wanted to be, and there were too many at. John has been working on that and even if it means from my standpoint, we're almost there today and that has taken as low as it needs to go.
So, that when we come out of this mess, the industry and us, we have our company operating in the right verticals, expediting contract logistics, which is dedicated warehousing TMS and expedite it. And so that is exactly what he is zeroing on, on making sure that’s accomplished. And I would say that he still has a little bit to go, but he’s made great inroads. Do you agree with that, Joey?
Joey Hogan
Yes.
David Parker
So I’m speaking for him, but I feel confident with what he’s been doing.
David Ross
And just to make sure I heard correctly, when you talked about the fleet size, the expectation is it's going to be down at year end, 12% to 14% versus 12/31/19. So that means somewhere in the 2,600 to 2,650 range. Is that accurate on the tractor count?
Richard Cribbs
Yes, that's correct.
David Ross
And those trucks that are being taken out, is that coming out of over the road, team dedicated from contracts that don't pay. How do you think about where those trucks are leaving?
Richard Cribbs
It's a little, Dave, mainly solo on the OTR side or what we call our services side. No change actually we’re trying to grow our same drive a little bit. And then some of those businesses that David mentioned on the dedicated side, it's not quite where we're wanted either contractually or the customer give us trucks back quite frankly. And so, I think that it's in both. I think highway is going to sort out after around 1,100-ish trucks dedicated around 1,500-ish trucks, including owner operators and so 2,600 and we’re probably going to get there a lot sooner than the end of the year. So we're aggressively trying to adjust that now and so our equipment plan in the second quarter.
David Ross
And a few have been I guess somewhat kind as an operating cost, although you guys have fuel surcharges move up and down. Would you say fuel has been net good or net bad for margins over the past few months?
Richard Cribbs
It's good through March and April. I think it catches back up to itself starting now. Meaning that even though the cost of fuel is lower, our surcharges are also lower. And that works out to be not necessarily beneficial as the cost of fuel goes down. It's kind of sometimes it can help. So where that plays right now where I think it might turn a little bit, but it's still going to remain a good number for us for a while.
David Parker
Yes, there's been so much. There's a lot of pluses and minuses of that, Dave.
Richard Cribbs
And the broker freight that we had the higher percentage all the way through April, and saw that start going down that revenue all shows up as freight revenue rather than fuel surcharge revenue basically is inclusive in the freight revenue number on per total mile basis. And so as that moves back to contract freight, just because the fuel surcharge rate improved a little bit but that would just come out of the how the freight rate would move.
David Ross
And then last question just on TEL. Do you expect that to stay a headwind all year in terms of
losing money, or do you expect them to get breakeven at some point?
Richard Cribbs
Yes, it will be a headwind in the third quarter for sure. And fourth quarter, we should be much better versus year ago. But just because of the large clients we disclose back at year-end, we're just working through some excess inventory as we speak. So let's move it but let’s just move it slow. The base business is still very good. It’s pre leasing business right after bad debt has been very, very small, lease purchase business is doing well. The equipment purchase and sale side that's more opportunistic and that could go up and down with market.
So we're trying to overreact. The company's in great shape. And we're trying to put equipment to work both on the -- trailer leasing business is still really good and it is still okay, and it's just putting the excess truck inventory to work, just trying to be smart. I think the team, they’re all doing a good job of managing that. This managing this big -- we’ve just called the excess inventory. And I think I'm confident we won’t be all the way out of the third and fourth quarter but to your question, the comparison a year ago should start looking much better out in fourth quarter.
Operator
Thank you [Operator Instructions] Our next question will come from Nick Farwell with Arbor Group.
Nick Farwell
I'm a little confused about the timeline for rationalization. I've heard some different -- I think different data points. David, I think you mentioned we're roughly -- you're roughly where we are since on the stock. We are roughly two and half years into this rationalization process and you're -- then you said later, I believe or someone did that we're roughly halfway through the process. Am I missing something? Or are we not closer to sort of reaching a point where you feel you pretty much completed, as you described it, the restructuring of the business?
David Parker
Yes, I do believe that you're right. I went to the board three years ago with a plan before we have bought Landair and et cetera with a plan. And as we all know when the expedited that for 34 years we've been here, the expedited side it's a great piece of business. And we love it is the heritage of the company and the thing is you can make a lot of money. And it also operates in about 10 points on and we know that is that 85 to 95 bucket, the big component is take it ether, or just the end of the quarter or just throw it outside. And we know that it just has a lot of volatility in that.
But when you look over the period of having the expedited size, it's made this company a lot of money and you see it in the balance sheet of what it's done. That said, we've had for quite a few years the solo reefer side of business that has been has been a thorn in our flesh running, 800 to 1,000 trucks. We’ve kept pretty consistent around 800 trucks operating there. And we all know that we've worked very diligently, stabilized five years on fixing that. And we would have a good year and we'd have a bad year. And we'd have a good year and a bad year. But we just couldn't get the momentum well underneath that the expedited side was very, very consistent in operating in the bucket that I said there.
And so I went to the board three years ago and said we are going to fix this, and we want to be expedited side eventually as 70% to 75% of our business we want it to be 25%. Whether it's 25% or 30%, it’s been a lower number than the 75%. Now that we don't love it but it don't bring a great value to our company, it absolutely does. There's a lot of value in that expedited side, the e-commerce, air freight all that stuff. And so we started down that road three years ago just internally, and then we purchased Landair in July of 2018, so two years ago. And then one year ago we said contract -- that’s the purchase of Landair reduced the exposure tremendously from a percentage standpoint 75-25 getting there. And it kind of got us into that 60-40 range with that acquisition.
And then our goal was to continue to work on the dedicated side. A year ago, we gave John Tweed the dedicated side of what you all remember as Covenant SRT. We don't call it that today, it’s just Covenant. But the Covenant SRT gave them all the dedicated, which was about 900 trucks. He’s worked last year on identifying that what the good, the bad, the ugly, the one that has the good contracts and the one that didn't have the good contracts. And you heard my statement on that today, there's maybe 250-300 trucks out in that 100 that were not acceptable. And we've been working with that we're about halfway through that group of trucks.
And then when the pandemic hit, it's when we made the final decision to say that we're moving on the OTR refrigerated solo side and the shutting down the Texarkana et cetera. That
is, as you heard Joey and Richard talking about, okay, these trucks are here, they're coming down. The plane goes from 3,000 to 2600, we're bringing the trucks in, the used truck market, good, bad, or different maybe an impairment charge on that equipment, because this coming year period and we'll do whatever we got to deal with and be in. So we got two things happening is, A, get it down to the 2,600, which we're close to there now. We're probably 2,750 as we speak, getting down to 2,600, correcting the rest of the dedicated side of it. And we believe that it ends up being in the 2,600. But we're selling this equipment because on top of just tractors you heard about, there's also 700 reefers.
There's also trailers associated with that, that we will be looking at selling during the course of this year. So the question is, is impairment, now tomorrow it's going to be when we know that the value is correct and how we can move it. So does it slip, is it all the second, is it slip into the third, is it slip into the fourth. But I really believe that once that we all can shake our head on this phone call and say from a trucking standpoint, the pandemic is basically over with. We will have our company right sided in the vertical and the equipment that we should be running to get us a start on prosperity.
Nick Farwell
So to be very simplistic, it sounds to me like your long haul, the traditional long haul over the road is going say 40 to 35. The reefer is going 10 to 5, and perhaps dedicated as rationalized at least dedicated at roughly 60. So 1,500 dedicated. This is simplistic math. But 1,100 long haul once rationalized by year-end. Is that sort of…
David Parker
You're exactly correct.
Nick Farwell
And what do you think, just what's your hunch, what your major verticals will look like going into the sort of the rationalized model? Just roughly, like auto go from 15 to 5, just what's your hunch?
David Parker
What was your last statement? 15 to 5, what did say?
Richard Cribbs
Automobile?
David Parker
Automotive. The thing is that automotive will probably stay exactly where it’s at. Again, we’ve had done it for 20 to 25 years. We're not running after to grow automobile, because we know that it can change as we all saw it here. Most of the dedicated contracts that we've got, Nick, are dedicated contracts that we are truly they’re in house fleet. And even if their business goes down, we may lose some bearable expense that is there, but 75% of the expense is covered. And so it's not based upon you got to run 2,500 miles a week to get this, it’s based on how many miles they can run. And so, there is a variable side of that that you could get paid on like on any other dedicated pieces of business.
But more important that I looked at on it is that those contracts that we've got that are in place that are probably about 1,200 of that 1,500 that we're talking about there were, let's just say 200 or 300 that are not, the rest of them are that we may let a customer, let’s say with another pandemic and the customer came to us dying and hurting, we would just because it's the correct thing to do as business safe, let's take out 10 or 15 trucks out of your 100. But we're not obligated to do that. You would do it there because you’re in a pandemic and you need to show the business faced with a customer so the contract is not demand that you do it. That's where we will be at when this is all said and done in the next, whether one, two, three quarters.
Nick Farwell
But basically by year end is your expectation I think. Isn't that what it sound?
David Parker
Yes.
Nick Farwell
And then I've one other question and that is, are there other terminal, you call it rationalization, but other potential terminals that you'll close. And if so, you don't have to tell me which they are, but do you own them? And is there expected capital beyond Texarkana that might be generated through additional sales of terminals that's meaningful? I don't mean a couple hundred thousand, but that is a meaningful cash generation opportunity.
David Parker
Yes, Nick, on the terminal side we're about done. One should close, the schedule close within this Friday, that's significant. Not to the extent. It takes while to sale Texarkana and we've got some surprising interest pretty quickly, so we’ll see how hat sorts out. But no other terminals, which is really the ones that we think are Allentown, Pomona, which is La Novena, we were able to see. You may see us boost some kind of leases to that in one of those locations. So in Greenville for example, we don't own that story. So we may end up buying that story, moving it from a lease to a purchase and that technically could look like capital employed…
Richard Cribbs
But that would be a big advantage of lifetime exchange treatment on the sale of real estate…
David Parker
Yes, other than facilities you've got equipment and services and we're looking at everything to continue to rightsize balance sheet, get capital employed at the right places.
Richard Cribbs
Nick, we've got plenty of other levers that we could pull if we had do, but I don’t think we will have to do anything. But on the liquidity side and put cash back in the coffers. So, we're in a pretty good shape here.
Nick Farwell
Do I remember correctly that Texarkana came with the reefer business of SRT? Is that right?
Richard Cribbs
That's correct.
Nick Farwell
I actually have one quick other question that is, David, you made some comments about spot pricing and I'm sure it's quite volatile as you bounce off a bottom. But is there anything unique in either of vertical, meaning the type of business you're bidding on or you're actually contracting to move, either by vertical or by region, or anything that gives you some sense that really April or the end of March, April, may have really represented the nadir in this particular cycle, not knowing, we could have see in '19 crisis again, I realized that's unpredictable. But if that doesn't occur, what's your read of sort of the spot market?
David Parker
I think that the spot market is starting to climb back up on pricing. I think that it hit unbelievable lows, lows that I've not seen in 20 years from what carriers are hauling freight for, including that 8% or so that we haul it for. I haven't seen those rates in 20 years. And we are now seeing that, I know that we are and we're also seeing it in our brokerage company that the margins are starting to get compressed as the carrier have reached a point that says, I will not haul it for this 20 year old rate, and those rates are starting to climb and we will continue to see them climb. As I spoke about some of these accounts that are saying ,where you’re the next month on coming on. You'll start -- you can see in the spot market increase to a sustainable rate that you covered your cost on the spot market.
Operator
Thank you [Operator Instructions]. I am not showing any further questions in the queue at this time.
Richard Cribbs
Thanks Samantha. Thank you all for calling in today, and we appreciate your interest in Covenant. And we'll talk to you again next quarter. Bye.
David Parker
Thank you.
Operator
Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.
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