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Covenant Transportation Group Inc (NASDAQ:CVTI)
Q4 2019 Earnings Call
Jan 24, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Excuse me, everyone. We now have all of our speakers in conference. [Operator Instructions]

It is now my pleasure to turn the conference over to Mr. Richard Cribbs.

Richard B. Cribbs -- Executive Vice President and Chief Financial Officer

Hey. Thanks, Brett.

Good morning. Welcome to our fourth quarter conference call. Joining me on the call this morning are David Parker and Joey Hogan.

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 [Phonetic] Form 10-Q. 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 website at covenanttransport.com under the Investors tab. 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 Truckload segment's revenue excluding fuel decreased 13.4% to $152.8 million due primarily to a 10.4% decrease in average freight revenue per truck along with a 105 or 3.4% average truck decrease in the 2019 period as compared to the 2018 period.

Versus the year ago period, average freight revenue per total mile was down $24.02 or 11.3%, while average miles per tractor was up 1.1%. A portion of the reduction in freight revenue per total mile was planned as we have steadily increased the percentage of our assets allocated to dedicated truckload or other year-round service offerings, leaving a smaller percentage to participate in the more volatile peak season which secures significantly higher rate for a few weeks.

The other primary factors impacting the decreased average freight revenue per total mile were continued capacity and demand imbalance and a reduction in certain of our customers' peak season team capacity needs this year. The main factor impacting the increased utilization was an improved average seated truck percentage as only 1.5% of our operational truck fleet lacked drivers compared with 3% during the prior-year quarter.

The Truckload segment's operating cost per mile net of surcharge revenue was down approximately $0.033 compared to the year-ago period. This was mainly attributable to lower employee wages and group health claims costs, partially offset by higher net fuel expense, workers' comp claims costs and outside professional advisory fees.

Our Managed Freight segment's revenue excluding fuel decreased 15.5% versus the year ago quarter to $57 million from $67.5 million. The primary factor to this reduced revenue was a reduction in certain of our brokerage customers' peak season capacity needs this year.

Due primarily to the bankruptcy of one of Transport Enterprise Leasing's that we call TEL -- TEL's customers -- our consolidated net income included a $400,000 pass-through loss or $0.02 per diluted share from our minority equity investment in TEL compared to the inclusion of a $1.7 million pass-through gain or $0.09 per diluted share in the fourth quarter of 2018.

The average age of our tractor fleet continues to be young at 2 years as of the end of 2018, down from 2.2 years as of end of 2018. During the fourth quarter, we took delivery of 47 new tractors and disposed of 256 used tractors, and at December 31 had approximately 625 tractors, the excess tractors, removed from our operating fleet that are either in the process of being prepared or have already been prepared and our held for sale. We expect to dispose of most of the excess tractor units in the first half of 2020.

Between December 31, 2018 and December 31, 2019 total lease adjusted indebtedness, net of cash, increased by approximately $50 million to $304.6 million. At December 31, 2019, our stockholders' equity was $350.1 million for a ratio of net lease adjusted indebtedness to total cap of 46.5% compared to a 42.6% ratio as of December 31, 2018. In addition, our leverage ratio has increased to 2.4 times from 1.5 times a year ago.

The main positives in the fourth quarter were: one, consistent profitability from our Landair dedicated truckload and managed freight businesses in a difficult freight economy; two, decreased truckload operating costs on a per mile basis; and three, a $24.2 million quarterly decrease in our net lease adjusted indebtedness.

The main negatives in the quarter were: one, the pass-through loss from our investment in TEL; two, the 10.4% year-over-year decrease in average freight revenue per truck for our Truckload segment; and three, the operating margin declines of our expedited and solo refrigerated service offerings on a year-over-year basis; and four, the large amount of excess non-operating equipment at year-end that results in higher indebtedness and related expense until sales proceeds are realized.

Our operational fleet size experienced an increase to 3,021 by the end of December, a small 13 truck increase from our reported fleet size of 3,008 trucks at the end of September.

From a financial perspective, we expect operating cash flows and our leverage ratio to improve for fiscal 2020 compared with fiscal 2019. We expect financial improvements to be weighted toward the second half of the year as year-over-year comparisons and consolidated average freight revenue per total mile and margin performance in certain irregular route Truckload operations are expected to be negative for at least the next several months.

Our expectations for improving performance throughout 2020 are based on assumptions of: declining truckload industry capacity due to, among other factors, a continuation of falling new truck production, competitors exiting the industry and tighter federal drug testing regulations; two, continued US economic expansion; three, the successful disposal of excess real estate and revenue equipment; and four, the reallocation of assets to more profitable operations. The timing and magnitude of these factors will impact our results.

For 2020, we are intensely focused on accelerating our plans to become embedded in our customers' supply chains, reduce the cyclicality and seasonality of our financial result through growth in our higher margin yet less volatile services and to enhance sustainable long-term earnings power and return on invested capital for our shareholders through disciplined strategic planning and execution.

Our operational focus areas are as follows. In our Truckload operations, we are seeking to tighten our one-way irregular route truckload freight network to reallocate capacity from solo driven refrigerated to more profitable dedicated and dry-van opportunities, to decrease real estate and revenue equipment capital costs per mile and to reduce other controllable costs. Regarding the dedicated truckload service offering, we have recently been awarded significant new long-term business that is scheduled to be operational beginning with end of second quarter of 2020.

In our Managed Freight operations, we have attained excellent customer retention rates in our more profitable warehousing, transportation management and factoring service offerings. We expect continued growth with these customers as well as with new customer opportunities. We have a strong sales pipeline in these offerings for which we have targeted growth and have already secured some long-term awards for our warehousing services that are scheduled to begin late in the first quarter or during the second quarter of 2020.

From a balance sheet perspective, with net capex scheduled well below normal replacement cycle, along with positive operating cash flows, we expect to reduce net lease adjusted indebtedness over the course of fiscal 2020.

Thank you for your time, and we will now open the call for any questions.

Questions and Answers:

Operator

[Operator Instructions] We'll take our first question from Scott Group of Wolfe Research.

Scott Group -- Wolfe Research -- Analyst

Hey, thanks. Good morning, guys.

Richard B. Cribbs -- Executive Vice President and Chief Financial Officer

Good morning.

Scott Group -- Wolfe Research -- Analyst

Can you talk about what you're seeing so far in January from a demand and capacity standpoint? And then, also utilization was up a little bit in the fourth quarter. Sort of what your expectations are for utilization here in the first quarter?

David R. Parker -- Chairman and Chief Executive Officer

Thanks, Scott. It's David. I definitely feel like over the first 23 days of January that a big piece of our business is up over the same time 12 months ago, and so that's very encouraging. Keep in mind that as you think about utilization, we're growing the dedicated side, continuing to grow it pretty fast.

So you've got -- some of those accounts, as you know, are 185 miles with a haul and they don't run a whole lot of miles. Just to look and I was thrilled with the 1% increase in utilization, in particular with a lot of the shorter length of haul dedicated business. So that's probably not going to be a good measurement. It's there -- and it's a measurement that -- it's not going to give us a fair measurement of what's going on with our business as we continue to grow the dedicated side.

So, as I just look at the -- in particular the expedited side on the highway services, the expedited side, I'm very pleased with the last -- the beginning of this year, the three weeks. So, I'm definitely seeing an uptick in that business. And so that's good. The solo refrigerated side -- the South West region of the country was pretty solid. But other than that, I'm not happy. It's one of the reasons why we're devoting -- starting to devote a lot of that -- some of that equipment to dedicated as well as to the dry van operation. And we're going to figure out on the reefer side what is solid for us, and that's where the reefer is going to go and, other than that, we're going to convert some of that to the dry van.

So, the expedited side, which is again on the highway services is right now at 60% or so of that business. So, for the month of January, in terms of getting better, I'm pleased with.

Richard B. Cribbs -- Executive Vice President and Chief Financial Officer

Yeah. And Scott. I'll add. I think first quarter, we're kind of looking at being up a little more than what we were up Q4 on a year-over-year basis. So kind of in that 2% to 3% year-over-year range of increase in utilization from first quarter of last year, that would still be down to 2% to 3% from Q4.

Scott Group -- Wolfe Research -- Analyst

Okay. Helpful. And then maybe what are you seeing right now from a pricing standpoint? How are the early 2020 bids coming in? And then I think rates were down 11% year-over-year fourth quarter. How are you thinking about first quarter?

David R. Parker -- Chairman and Chief Executive Officer

I think the best way to look at it is that -- I do believe in the last couple of quarters, that rates have bottomed from its -- again on the highway services side of the business because the dedicated is pretty solid and it's not -- the customers look at that in a different light. So that side of the business really does not concern me that much. It's the highway services is probably the main thing that concerns me and part of the question that you're asking there.

And I think it's bottomed out. But I can tell you that the rates have started going up because one of things that we're doing it keeping the business that we've got and at the present time not asking for rate increases on that business until the market allows us to. And then on the new business, we're just going after new business. And if that means that my rates are $0.02 a mile cheaper than what I wanted to haul it for, then it's going to be $0.02 a mile cheaper.

So new business coming on is not where -- it's not where I exactly wanted at. But the existing businesses out there, it's flat. I think that we still got -- because there's no doubt about that. The capacity is leaving the market. That we've all seen for the last, whatever, six to eight months, that is leaving, and I think it's even going to leave a little bit faster. So we're not being bombarded by our customers for decreases overall. And so that's the best time. 12 months ago -- 10 months ago, we were being bombarded, the whole industry was, about pressure on the rate standpoint. That is not there anymore. So that part is good. So that's what I think about.

Richard B. Cribbs -- Executive Vice President and Chief Financial Officer

Scott, in the third quarter rates were down about 5% to 5.5%, and they were probably down 5.5% to 6% on a core basis, non-peak customer basis in Q4. And so I think as you look at kind of first quarter, like David said, there hasn't been a whole lot of change from customer contracts. And so it should still be down year-over-year, but not at that 11%, 12% pace that we saw in the fourth quarter. It was really due to the peak customer freight.

And on the dedicated side of Truckload, we've also been able to get a handful of increases on some customers that were underperforming that we really needed to have at least something on to make that worthwhile to continue doing. And so there's a little bit of offset to the underwhelming pricing on the irregular route side.

Scott Group -- Wolfe Research -- Analyst

Okay. And then just last question. Maybe, Richard, if you can help with some guidance. I'm guessing first quarter is unlikely to be profitable, but any thoughts there. And then when you think about full year, do you think we can see full year margin expansion? Do you think we have contraction? And then maybe same question on earnings. Do you think do you have any line of sight to growing full year earnings or do you think it's likely that earnings are, for the full year, down?

Richard B. Cribbs -- Executive Vice President and Chief Financial Officer

Well, there is obviously a lot of wild cards, economy and the Presidential race and those type of things. I think we aren't expecting to be able to be profitable in the first quarter. Possible, not probably likely. For the full year, because we had a good first half last year comparatively, it's going to be -- have to be caught up in the second half of the year in order to get back to equal to what we performed this year or better. And depending on how tight the market gets, that's still possible in our eyes that we could beat this year's results. But there is a lot of wild cards.

Scott Group -- Wolfe Research -- Analyst

Understood. Okay. Thank you for the time, guys.

Richard B. Cribbs -- Executive Vice President and Chief Financial Officer

Thank you, Scott.

Operator

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

Jack Atkins -- Stephens Inc. -- Analyst

Good morning, guys. Thanks for taking my questions.

Richard B. Cribbs -- Executive Vice President and Chief Financial Officer

Hi, Jack.

Jack Atkins -- Stephens Inc. -- Analyst

David, if I could just go back to your comments on the market. And I'd just kind of want to, if you could maybe expand a little bit on it just in terms of how you think that maybe the next three to six months play out. Because it does seem like the capacity attrition that we've all been kind of talking about the last couple of quarters is starting to build and the market definitely seems more balanced today than it did, call it three months ago. And you're talking about a shift in sort of your customers' expectations around price, on the margin. Could you just kind of comment around -- as we kind of get into March, April, May, I mean, how quickly could this market turn, in your opinion?

David R. Parker -- Chairman and Chief Executive Officer

Jack, one of the things before we got on this call that I told this management group up here is that I just got back last night from three days in Chicago, saw 11 customers among all of our segments, expedited and brokerage as well as dedicated, and for three days. And if we had a month or so of what I had for three days, good thing would be back pretty strong. I mean, I would be thrilled.

And so those were the best three days that I've had in 14 months. I mean, I've been in depression for 12 months now since January last year, and I was very excited for the last three days. Every meeting that I went to was great opportunities that I am -- new opportunities that I am 90% sure that we're going to hit the home runs on these accounts. And that's just -- you kind of -- it's kind of one of those things that you've got a crawl before you walk, and you got to see some sign of life before it starts coming back.

And that's David Parker personally, but that's not our sales team. That's the first that I have experienced this year was the last three days and I was excited about what I felt in the last three days.

Jack Atkins -- Stephens Inc. -- Analyst

Okay. That's encouraging. That's encouraging to hear. Shifting gears here for a minute. And I guess this question is for any of you, guys, but just would be curious if you could expand a bit on the managed services pipeline and the recent wins there. And I guess as you guys, you're thinking about the opportunity set, the revenue potential for that business in 2020, could you maybe kind of help us put some brackets around that and if there are any sort of start-up costs associated with those new contracts.

Joey Hogan -- President and Chief Operating Officer

Hi, Jack. It's Joey. The way that I would kind of try to simply answer that -- and this includes dedicated, because we look at dedicated with our managed freight together, so it's kind of our logistics group. So we've got five start-ups in the next four months that are pretty significant. And that -- I mean, the management team has done a great job of building start-up plans for those. But we've never done it, and that's a significant challenge for us.

I'm very proud of how the whole enterprise has worked together, including shared services teams, for those start-ups. So it's significant. I must say $40 million to -- yeah, $60 million -- I'm going to adjust it here. It's almost like $50 million to $60 million of annualized opportunity for those, and that's huge. That's huge. But we've got to bring them across the go line, we've got to get assimilated, we've got to have a 90 day, we've got to be great the first 90 days [Indecipherable] critical. So, of those five, dedicated -- two dedicated, one managed freight and two warehouse. It is the -- it's pieces of us. And so that's neat because it's kind of spread out across that kind of logistics offering.

I did see this -- I would say, it kind of piggyback on what David said on the highway or one-way side. Yeah, I went through it pretty detail this morning on those. It's exciting there also. Now, you got to get them across the go line [Indecipherable] strategy that David alluded to, starting to leave the marketplace. So we started seeing that just some date that we tried last summer.

But there's a lot of things going on that's affecting capacity. I think a key sign will be when the spot market stabilize and that's stabilizing now -- it's just not payment [Phonetic]; it could be up and down a day or a week at a time. But yes, that's a sign of capacity, and then obviously going to start [Indecipherable] tightness when spot moves and that contract will move with that. But I agree with David. I saw a few customers earlier in the week. They were still what I'll call some soft-ask. Some soft-ask going on out there. But generally speaking, these were some large shippers, customers.

So I think everybody is starting to see it. But I'm excited on the highway side too, some of the things we're seeing there also.

Jack Atkins -- Stephens Inc. -- Analyst

Okay. That's great. And then kind of shifting gears back to sort of the bigger picture on 2020 for a moment. When we think about 2020, a lot of the discussions have been on the capacity front and the potential for supply to come out of the market. But I guess one of the interesting things to me is the demand comps are pretty easy in 2020 versus 2019. You have an extra day in the first quarter with leap year, you've got a more favorable holiday calendar and timing in the fourth quarter.

When you kind of think about the opportunity in 2020 versus 2019, I know the first half comps are tough just from an earnings perspective, but just what do you think about how the calendar shapes out? Does that kind of -- is that maybe something in the positive category for you guys as you think about this year?

David R. Parker -- Chairman and Chief Executive Officer

I mean, I agree.

Joey Hogan -- President and Chief Operating Officer

It does. I think the key -- well, a key was brought up earlier is that, all the pricing moves throughout 2019, first half comps for price are going to be very difficult, and so till you get past that full year effect of those, that's a headwind. That's a pretty heavy headwind as we do -- as we comp versus year ago. And I think that's just something that -- the several things that Richard mentioned, the equipment, that's been huge both for CVTI or the operating company as well as TEL, and there's just a significant amount of equipment capital, that we're very confident that we've got good plans on moving those.

But it's been a huge earnings drain that we've got to push through the system. And that will take a while. It's going to take a bit of the first half to get a large chunk of that out of the system to get paid for. So -- or getting revenue generating off some of it on the TEL side. So those are two kind of big headwinds when you -- what I'll call comped [Phonetic] a year ago that's -- just the market -- that we'll have to push through it get through this bid season.

Jack Atkins -- Stephens Inc. -- Analyst

Okay. That's helpful, guys. I'll hand it over. Thanks very much for the time.

Joey Hogan -- President and Chief Operating Officer

Thanks, Jack.

Operator

Thank you. Our next question comes from Jason Seidl with Cowen.

Richard B. Cribbs -- Executive Vice President and Chief Financial Officer

Hi, Jason.

Jason Seidl -- Cowen & Co. -- Analyst

Hey guys. Good morning. How are you?

David R. Parker -- Chairman and Chief Executive Officer

Hey, Jason.

Jason Seidl -- Cowen & Co. -- Analyst

A couple of quick things. One, Richard, I just want to make sure I heard what you said earlier about tractors held for sale. You said there were 625 being held for sale and prepped?

Richard B. Cribbs -- Executive Vice President and Chief Financial Officer

Well, I don't use that term because that's an official accounting term, but there are 625 that are either being prepped for sale or are held for sale that are excess at the end of December. That number was over 800 at the end of third quarter and we should run those 600 through the system and get them out by the end of June.

David R. Parker -- Chairman and Chief Executive Officer

And some of those [Speech Overlap] we trade in.

Joey Hogan -- President and Chief Operating Officer

Yeah, and probably about 60% of those are sold back to the OEM and then about 40% of those will be sold outright to the market.

Jason Seidl -- Cowen & Co. -- Analyst

Okay. Perfect.

Joey Hogan -- President and Chief Operating Officer

We feel good about the book value on those, etc.

Jason Seidl -- Cowen & Co. -- Analyst

Okay. When you think about fleet growth from here, you said you [Indecipherable] quarter at 3,021. Is this going to basically remain flat as we move throughout the year? Do you see it growing [Indecipherable] maybe in the second half as things improve?

Richard B. Cribbs -- Executive Vice President and Chief Financial Officer

Yeah. Fleet size at the end of the quarter was -- yeah, it was 3,021. I think what will have is a little bit of decrease over the first half of the year as we do a few things: as we move trucks, as we get new customers on the solo dry van side, as we move to dedicated from the solo refrigerated side. So there is partly that.

And then, in addition, some of those dedicated account start second quarter and we'll start to seeing that pick back up, but there's also some dedicated accounts that if we can't get them to the profitability levels that we want, then they may be called out. And so there is a piece of that that could happen where the truck count could decrease for that in the first half of the year as we're really evaluating the profitability of each of those accounts. So, between those things I think it probably goes down a little bit, maybe down 50 by the end of the first half and then starts picking back up by the end of the year.

Jason Seidl -- Cowen & Co. -- Analyst

Okay. That's great color. Also the charge in TEL for the CGI bankruptcy, is that all done or are we going to see more agreement in 1Q?

Richard B. Cribbs -- Executive Vice President and Chief Financial Officer

So, there will be some pullover into the first quarter and a little bit in the second quarter as several of that equipment that we've already taken back has not yet been redeployed or sold. So there is a piece of that where we'll continue to have depreciation and interest -- or not we -- where TEL, they will have additional depreciation and interest expense and no revenues to offset that.

So I believe that they will be profitable in the first quarter, but only slightly, not up to the kind of numbers they were producing in the first three quarters of 2019. And then in the second quarter that improves closer to that old mark,, and then in the back half of the year I expect them to be back to running very close to what they did in the first three quarters of this year -- of the '19 year.

Jason Seidl -- Cowen & Co. -- Analyst

Okay. Perfect. Then the last question before I turn over to somebody else. You talked about obviously the five new start-ups, two dedicated, two warehouse, one managed freight, $50 million, $60 million in annualized revenue, I think, Joey, you said. How should we think about that as it flows through -- is this $50 million to $60 million, you're confident you'll have that in 2021 and this will just build as you move throughout this year...

Joey Hogan -- President and Chief Operating Officer

Yes. It will build throughout this year. Those are annualized. Again, Richard said it also. There could be some offsets to that dependent on customer receptivity especially on the dedicated side and how [Indecipherable] frankly to pricing maybe on the existing business. So [Indecipherable] but if you just focus on the start-ups, it will build throughout the year and it will take -- most of that is coming on in the second quarter, early to late second quarter, so third quarter will be a good proxy to see a full kind of annualized effect in the third quarter.

Jason Seidl -- Cowen & Co. -- Analyst

Okay. Fair enough, gentlemen. Thank you so much for the time [Indecipherable].

Joey Hogan -- President and Chief Operating Officer

Thank you.

Operator

Thank you. [Operator Instructions] We'll take our next question from David Ross of Stifel.

David Ross -- Stifel -- Analyst

Yes. Good morning, gentlemen. Just a follow-up on the five start-ups in the next four months. Should that be a near-term headwind to EPS in 1Q and 2Q as you incur costs before the revenue start coming in and is significant more in one or the other quarter?

Richard B. Cribbs -- Executive Vice President and Chief Financial Officer

Yeah, the first quarter will have more of that. On the warehousing side, there are some technology start-up costs and then on the dedicated side, as we kind of move trucks around to the new locations. So there'll be a little bit of a headwind there in the first quarter, maybe some in the early second quarter. But for the most part, that will be done by June.

David Ross -- Stifel -- Analyst

And then, Richard, maybe I missed it. You talk in the release about net capex being well below normal replacement cycle. But I didn't see a range. Is $50 million to $60 million a good range or how are you thinking about that?

Richard B. Cribbs -- Executive Vice President and Chief Financial Officer

I think it will be lower than that. Didn't put it in the release, but I think probably a $20 million to $30 million net capex number for next year is likely, especially given that we've got two pieces of real estate that we're selling that are up for sale and we have some good prospects for selling those. And hopefully, we'll be able to get those done by March or, if not by March, by the end of the second quarter.

David Ross -- Stifel -- Analyst

And David, you mentioned that you were very pleased with expedited business year-to-date. How would you I guess characterize the drivers of that demand? Would that be on the e-commerce side, on the LTL side? Is there something else going on in expedited that's making you happy there?

Joey Hogan -- President and Chief Operating Officer

Yeah. I can say that the LTLs that we've brought on a couple of more because we do so much with a lot of LTLs as you already know, but we have brought on a couple of new ones. We got one [Indecipherable] really on existing business that's really been growing in the last three, four months, and we've brought on a couple more. But it's really across the board of new opportunities that are out there -- that are existing for us. And some of the air freight side that they're doing their math to put as much as they can on the road that we've been able to bring on a couple of those. But the expedited side, it's just I've been encouraged about it. And so that's the best way to explain.

It's really across the board. I mean, I think retail, good opportunities there existing now. Again, some air consolidation, customers that existing now -- a good medical piece of business that is coming on board with us. So, yes, it's really across.

David Ross -- Stifel -- Analyst

And then last question, Richard, around the operating tractor count. The fleet is expected to be flat or down up a couple of percent at least by the end of this year. How would you break that out between what the dedicated fleet should look like and what the rest of the fleet should look like? Would it be dedicated up 3%, the rest of the fleet down 3% to 5%? Or how do you think about that?

Richard B. Cribbs -- Executive Vice President and Chief Financial Officer

Well, kind of as a percentage, looking at averages for '19 versus '20, I think that the average of the dedicated -- average of total truck count is going to move up probably by the end the year closer to something like -- or let's just say for the average of '20, it will be closer to 59% to 60% from 54% this year. And then on the expedited side, I think that'll stay about the same, which will make it a little higher percentage of our truck count decreases. And then the solo reefer side, that averaged closer to 400 or so trucks this past year, '19. I believe that we'll be down to probably 200 by the end of the year and will be replaced with -- some of that goes to dedicated and some of that goes to one-way irregular route dry van solo. So that's kind of how it should break down.

David Ross -- Stifel -- Analyst

Okay. Thank you very much.

David R. Parker -- Chairman and Chief Executive Officer

There is a lot of moving parts within that, Dave. One of the things that we purchased, the Landair acquisition and all the dedicated, it's coming under John Tweed. I want to say that we've been working diligently own for the last eight months as individual P&L statements by [Phonetic] every dedicated because we've grown it dramatically in the last year and a half. And we are about got 99% through that. Good number, 95%.

And they were at the tail end of having crystal clear numbers by account instead of just averaging the dedicated. And what I mean by that, if we got some that got insurance at 15 and some miles and some 17 instead of having at 12 across, we're going to know exactly that it's 15 and 12 and we can deal with that. And so we're about 95% through that. And I know we'll be there in the first quarter that we will know exactly.

Now, what is my gut -- there are 700 trucks there. My gut says there's probably 150, might be 200 trucks, that one of two things will happen. Either we will exit it or we will go to the customer first and we will get price increases to offset and to make those things acceptable. I'm guessing that 50% of those will -- that the customers will give us what we need on that is what my gut is telling me. We also -- we've got about 200 trucks in the highway services that Richard was talking about there that our goal, whether it's today or six months from now is to put it into the dedicated side of the business.

So depending upon how many trucks we got to replace because the customers will not give us what we need on that dedicated is 150 or 200, I could draw a picture that there could be 300 trucks in the network that we want to get into dedicated. Now, I'm very happy you heard a little bit. The pipeline is pretty good. And it's growing. I'm pretty excited about the pipeline that we have got and I'm here to tell we've got a couple of three that we're working on that if we have one or two of them, I mean, they're big. They're big operations that could take care of my problem pretty quickly.

So that give you a flavor -- hopefully, that gives you a flavor of the trucks are moving around, and I think in the next few months, they will get to where, going forward, we'll have them again, and with the financial picture on the dedicated side of the business being something that we all will be happy with.

Operator

Thank you. And we'll take our next question from Nick Farwell of Arbor Group.

Nick Farwell -- Arbor Group -- Analyst

David, good morning. Just a quick update, if you wouldn't mind, profiling the improvement in expedited just generally by regions and lines and comment a little bit about the stability of that business in January and does it have anything to do, do you think, with especially relative to rail traffic that maybe you're gaining share versus rail again for some reason?

David R. Parker -- Chairman and Chief Executive Officer

Yeah. There is no doubt that a little bit of what intermodal has done on their precision tracking and doing what they're doing there has definitely taken some freight off of rail in the last year and a half and it's gone from OTR. So depending upon where the origin, and that depends upon if that is made available. So even though I don't have anything concrete, I'd say I know I took that up intermodal. I know there are some that has done that, especially on the LTL side of the world that is happening -- that's been happening there.

Another thing that is happening is that for a lot of the carriers out there that are competing with same-day delivery, quote Amazon, as leading that. But all the other retailers are following suit. So, they're all doing it. On the retail side, a lot of that is becoming -- as you reading about it, it's true that six and seven day delivery from five day delivery, and the only way that can happen is through a lot of that being in the expedited side. So we're -- same thing you heard me mention a little bit ago that in particular our existing customer that we've got -- that we've really grown with in the last five or six months, is because they've taken their network and they're going to seven day delivery to make sure that they're competing.

And so we're seeing -- also seeing some of that on the expedited. One of the things that we've been talking about, say, for the last couple of years and one of the reasons why we started going on the dedicated side of the world as well as the purchase of Landair almost -- it'll be two years in July -- but one of the things that we all know about the expedited side. The expedited -- love it. It's our heritage. It's what I started the Company with. Those are all positives.

What's the negative on the expedited is that it can be volatile, and we know that and we've seen that ever since we've been public or ever since I've been in business is that that model absolutely goes from 85 to 95 Ors, and whether that's in the first quarter, weather that's slow on the ground and I got two people, there's a higher cost, the truck can't run like a third [Phonetic] shift manufacturing like that dedicated -- I mean, that expedited needs to that hinders that.

Now, the positive side is that when things are going well, price good and the weather is good, I mean that thing is pumping in the low 80s. And so that's what the model is. So we decided two years ago -- there is no doubt the value of that expedited is tremendous. No doubt. 900 teams that running that expedited division is something that the market absolutely need. But how do you deal with the volatility. And our question -- and our answer to that question is to continue to get deeper in the supply chain and go into more of the dedicated side of the business as well as managed services there and warehousing, and that's what you're seeing it perform.

So you're seeing, as I look at a lot of our dedicated -- last year -- even with the year that we had nothing that any of us are pleased with, the dedicated side operated excluding some that we didn't have the P&L zone, but the dedicated side operated very strongly in a lot. I would say about half of the fleet on dedicated operated very strongly. The warehousing was absolutely good. The TMS was absolutely good. And the brokerage performed the way that we wanted the brokerage to perform.

So we're going to continue to grow that. Expedited will find its place we're supposed to be. Maybe it's 1,100 trucks right now, 1,300 [Phonetic]. I would say 200 to take out of there on the highway services. And let's say that it runs 1,100 trucks and that it is just pumping. It's just pumping, but it's always going to have that, whether we can get it down to our goal internally is to get that from 83 to 93 instead of 85 to 95. Get an 83, 93 Ors. And then it's the one-third of your bids that you grow in other one that's got consistent earnings.

So that is what we've been working on for the last two years, and I really believe that [Indecipherable] we get past the first couple of quarters this year, because of the first two quarters last year being year-over-year performance better before the world started coming down the second half. I think the second half of this year that we're going to start seeing that coming to fruition for us.

That's a long answer and I don't really know if I answered your question but I guarantee I answered a lot of people's questions.

Nick Farwell -- Arbor Group -- Analyst

That's OK. Are there any -- there has been comments about the diminution in capacity. Have you seen that in the long haul expedited team business also? Or has that largely been elsewhere?

David R. Parker -- Chairman and Chief Executive Officer

Yeah. You have seen some of that. But as you know, Nick, as you get past three or four carriers -- big carriers [Indecipherable] Werner, US Xpress. I mean, when you get past three or four major carriers, it becomes people running 5,000 [Phonetic] trucks. Now that they had this 11,000 trucking companies that we know went out of -- they did not renew operating authority in 2019 over 2018. Some of those were those 50 truck operations that were running some teams. And so we have felt some of that also is one of the reasons why I guess we started off the first three weeks of January feeling a little bit better.

Nick Farwell -- Arbor Group -- Analyst

I'm just curious. If you were to look conceptually at where your mix is today -- and you've commented how it will shift between now and June. But I'm really -- I'd be curious to know how do you see it shifting over the next two to three years. So in other words, if roughly expedited -- I'm using trucks as a surrogate and it may not be perfect. Maybe by revenues it's slightly higher. But if expedite is a third of your business and reefers going from 10% to 5% roughly, the balance being simplistically dedicated, how do you see that shifting over the next three years? Does expedited become even smaller?

David R. Parker -- Chairman and Chief Executive Officer

Well, yes. I mean, I think that it stays in that -- let's say right now 1,300 what we call highway services. But I think that it gets into that 1,100 truck operation. And our goal is to run that thing 83 ORs, 93 ORs is our goal and just print cash -- when you can print the cash there in that model and grow around it and it will continue to be a smaller piece in the pie. That is our plan. Not that it's not important.

It's critical because look here, when you pump 83, none of our other divisions are pumping 83 [Phonetic]. So when it's running like that, it can really do extremely well. But we want to grow these other ones that got the solid earnings consistency.

Richard B. Cribbs -- Executive Vice President and Chief Financial Officer

Yeah. Nick, the revenues were about 40% for that irregular route piece of our business. Total -- across all, not just trucking. And we think that over a three year period that will be down to about a third as we kind of grow around that with the dedicated and managed transportation and warehousing pieces of our business.

Nick Farwell -- Arbor Group -- Analyst

Okay. And does that -- is that reefer something like then down to 5% in your model that you're talking about?

Richard B. Cribbs -- Executive Vice President and Chief Financial Officer

Yeah, that's pretty close.

Nick Farwell -- Arbor Group -- Analyst

Yeah, OK. So literally, you're going to be roughly 60% dedicated which really in many respects changes the model obviously. You know better than I do -- changes the model of the business. It moderates the downside. But you still capture the upside and improve rates with volume in the highway business. I mean, that's sort of conceptually the way I think you're heading from a financial model standpoint.

Richard B. Cribbs -- Executive Vice President and Chief Financial Officer

Yeah, that's the strategy to reduce the financial volatility that we've experienced, which we still experience greatly this year, and we still have a lot of work to do on that.

David R. Parker -- Chairman and Chief Executive Officer

You know, and we really felt that folks. Look, I remember -- Richard and I, I mean, we really felt like we had got into this recession I think [Indecipherable] showed some of it even, but we really felt like 12 month, 14, 15 months ago, we felt like that we had reached a lot of that. We really did and. And then the recession hit and we realized that some of the dedicated trucks that we were operating in were not performing as well as we had.

We came out of '18, the best year in the history of our company and expedited was blowing and doing extremely well and we brought on a lot of dedicated. And I would say those 900 trucks that we brought on, I think about 400 of them would be ones that none of us in this room or on this phone would be pleased with. None that -- some are operating at a loss [Phonetic], but they will be operating in the high 90s to low 100s, and those are the ones that now we've identified and I really think -- our close to identify and I think it's 150 to 200 trucks that we got to deal with.

But once we get that solid, as I think about first quarter last year, it was still our third best quarter in the history of our company, if I remember correctly, Richard?

Richard B. Cribbs -- Executive Vice President and Chief Financial Officer

Third best first quarter.

David R. Parker -- Chairman and Chief Executive Officer

Okay. Yeah, that's what I meant. Sorry. Third best first quarter last year until the recession started hitting. And once it stabilizes and business comes back better, I think the work that we've been doing for two years and the acquisition of Landair, I think it starts showing it there. So, to sum up...

Nick Farwell -- Arbor Group -- Analyst

David, just very simplistically what I think I hear you saying is, the repositioning of the Company and the focus on the balance sheet suggests that you reduce over time if it's a successful strategy; you reduce volatility, enhance cash flow, reduce leverage and ultimately end up in three or maybe it's four or five years with really a much -- a slight -- no, actually a much different business model than you've had heretofore.

David R. Parker -- Chairman and Chief Executive Officer

Yes, yes. I 100% agree with that and I think instead of three or four, I think it's a couple. I think we're getting there [Speech Overlap].

Nick Farwell -- Arbor Group -- Analyst

I appreciate it. Thank you. The implications to valuation are pretty obvious when one looks at the way -- and Old Dominion, for example, which is not in your business [Indecipherable] get valued. And how different models -- revenue models are rewarded in the marketplace. That's the concept I'm trying to understand better. Thank you for your answer.

David R. Parker -- Chairman and Chief Executive Officer

Thanks, Nick.

Operator

Thank you. Our next question comes from Barry Haimes with Sage Asset Management.

Barry Haimes -- Sage Asset Management -- Analyst

Thanks, guys. Just had a quick question. Richard, I think you mentioned that the fleet age at the end of the year was about 2 years. With the reduced capex that you alluded to in 2020, approximately what the fleet age pencil out to at the end of the year, at the end of 2020? Thank you.

Richard B. Cribbs -- Executive Vice President and Chief Financial Officer

Yeah. At the end of 2020 I expect that to be closer to 2.2 to 2.3 years. Still very young.

Barry Haimes -- Sage Asset Management -- Analyst

Yeah. Sounds great. Thanks very much.

Richard B. Cribbs -- Executive Vice President and Chief Financial Officer

Thank you, Barry.

Operator

Thank you. And our next question comes from Jack Atkins with Stephens Inc.

Jack Atkins -- Stephens Inc. -- Analyst

Hey, thanks, guys. Just one quick follow-up question. Richard, the tax rate in 2019 was around 20% on a consolidated basis, adjusted. Could you kind of talk about some of the puts and takes for 2020? Would you expect tax rate to kind of bump back up to something more normalized like 26%, 27% or should we expect something lower than that?

Richard B. Cribbs -- Executive Vice President and Chief Financial Officer

Yeah. I think on an effective tax rate basis, the annual ended up being about 29%, but that included the reversal of the federal income tax credits that we had taken. So we pulled that out in the adjusted earnings for Q3 and for the full year. And looking forward to this year, part of what was reduced in the fourth quarter on a tax rate basis was when we remeasured our state effective rate, it would reduce by about 2 percentage points. A lot of that has to do with a portion then of where we run and where our revenues come from.

We have had more of our revenues and income in the states that have lower income tax rate. So we -- as we've grown with the Landair side and the contract side, we've been able to grow that outside of the West Coast, the Northeast and other states where there is higher tax rate. So I expect the tax rate this year to be anywhere between 25.5% [Phonetic] and 27%. So, appreciate the question.

Jack Atkins -- Stephens Inc. -- Analyst

Okay. Great. Thanks very much.

Richard B. Cribbs -- Executive Vice President and Chief Financial Officer

Thanks, Jack.

Operator

Thank you. And we have no further questions in the queue at this time.

Richard B. Cribbs -- Executive Vice President and Chief Financial Officer

All right. Well, thank you, everyone, for calling in. We'll talk to you next quarter.

Operator

[Operator Closing Remarks]

Duration: 51 minutes

Call participants:

Richard B. Cribbs -- Executive Vice President and Chief Financial Officer

David R. Parker -- Chairman and Chief Executive Officer

Joey Hogan -- President and Chief Operating Officer

Scott Group -- Wolfe Research -- Analyst

Jack Atkins -- Stephens Inc. -- Analyst

Jason Seidl -- Cowen & Co. -- Analyst

David Ross -- Stifel -- Analyst

Nick Farwell -- Arbor Group -- Analyst

Barry Haimes -- Sage Asset Management -- Analyst

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