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Covenant Logistics Group, Inc. (CVLG) Q1 2021 Earnings Call Transcript

By Motley Fool Transcribing - Apr 27, 2021 at 10:31PM

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CVLG earnings call for the period ending March 31, 2021.

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Covenant Logistics Group, Inc. (CVLG 0.27%)
Q1 2021 Earnings Call
Apr 27, 2021, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Excuse me, everyone, we now have our speakers in conference. [Operator instructions] At this time, I would now like to turn the conference over to Joey Hogan. Please go ahead, sir.

Joey Hogan -- Co-President and Chief Administrative Officer

Thank you. Now welcome to Covenant Logistics Group's first-quarter conference call. As a reminder for everyone, this call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated by the forward-looking statements.

Please review our disclosures and filings with the SEC, including, without limitation, the Risk Factors section and our most recent Form 10-K and our current year Form 10-Qs. We undertake no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances. As a reminder, a copy of our prepared comments and additional information is available on our website at covenanttransport.com\investors. I'm joined this morning by our chairman and CEO, David Parker; our chief operating officer, Paul Bunn; and our chief accounting officer, Tripp Grant.

We're going to start with the excitement around our first-quarter results. From an adjusted EPS perspective, we reported the best first quarter in our history. And the team was able to exceed our previous best first-quarter result by 87% or $0.26 per share, which we did in 2015. The resolve and hard work of our team over the last year transforming our company into a multiservice logistics company is starting to bear fruit, and we're honored to serve and lead an exceptional team.

In summary, the highlights for the quarter. Our operating revenue grew 6% to $201 million compared to the 2020 quarter, while our tractor fleet was 467 trucks smaller than the same period a year ago. 35% of our consolidated revenue was in our more volatile expedited division versus 41% in the first quarter of 2020. Our managed freight and warehouse segments combined grew 56% compared to the first quarter of 2020.

Despite rising casualty insurance premium costs through reduced accidents is our third-best quarter in history. And minimal prior period claims costs were able to reduce our insurance cost significantly compared to recent quarters. Our tail leasing company investment has fully recovered from the soft equipment market and a large customer issue to increase earnings per share by approximately $0.16 a share. We received an indemnification call from Triumph Bancorp regarding the dispute resolution associated with the sale of our TFS segment in 2020 that resulted in us funding $36 million during the quarter, all of which was reserved during the fourth quarter of 2020.

Additionally, TBK was able to collect some funds related to our fourth quarter accrual that allowed us the opportunity to reverse $3.4 million of our accrual. Additionally, we were able to purchase approximately 460,000 shares of our stock at about $8 million. Providing a little more color on the items affecting the business units. The expedited division performed quite well for our first quarter.

The freight market continues to be strong and offers rate and lane improvement opportunities, evidenced by a 35% improvement in revenue per truck per week. Please recall that last year, we still had our solo division and the closure of that unit contributed to the 425 truck reduction in this unit. On a reported basis, revenue per mile for expedited appeared flat. However, the mix changed materially with our eliminating of the solo fleet, thereby increasing the length of haul by 39% and increasing our miles per truck by 34%.

The driver market continues to be a challenge, but the large driver pay increase put in place in early January contributed to a 7% increase in our team count and a reduction of 9% unseated trucks since the fourth quarter of 2020. The dedicated division continues to be our segment of earnings opportunity. There was huge transition in this division throughout 2020 as we merged three separate dedicated fleets under common leadership and operating systems. The leadership structure has been resolved, and the system merger will be complete in May.

There was some nice improvement in revenue per truck and earnings in March, which we expect to continue into the second quarter. We know which accounts need attention and the strength of the overall enterprise gives us confidence to take a long-term approach to industry segments, customer downside transitions, and contract negotiations. Our managed freight division experienced huge revenue growth, primarily driven by increases in brokerage freight. This unit works very closely with our expedite and dedicated divisions, provided both committed and overflow capacity.

The robust freight market plus continuing to capitalize on the full enterprise sales and service capabilities excite us as we continue to drive this strategic growth unit. We are cautious about the long-term sustainability of the operating ratio in this unit as gross margins and volumes can be volatile. Nevertheless, even at lower margins, the return on capital is high for this non-asset-based business. For the time being, the leadership team is doing a great job delivering expected service to our customers.

The warehousing division continues its solid profitable growth. We had one huge new start-up last year and the pipeline is robust for additional start-ups this year. As a reminder, around the current revenue side, the growth in this unit can be choppy as we expect revenue growth versus a year ago to level out in the second half of this year unless we have additional start-ups in the second half. Overall, we are very pleased with the direction of this unit.

Regarding our outlook for the rest of the year. No question that with this start to 2021, we are excited about our earnings range for this year. Although we're not providing specific guidance. We feel the transformation we've been working through over the last few years is beginning to show in a more consistent earnings model, better earnings in the first quarter and less in the fourth quarter intra-years as well as year to year.

Our short-term focus will be on improving the dedicated division while balancing the managed freight division's margins for the long term. We feel the freight market will continue to provide opportunities for price and utilization improvement to help offset the challenging driver market and other cost headwinds, primarily casualty insurance. Thank you for your time. And now, Casey, we'll open up the call for questions.

Questions & Answers:


Operator

[Operator instructions] We'll take our first question. Caller, your line is live. Please state your name.

Jason Seidl -- Cowen and Company -- Analyst

Hey, guys. It's Jason Seidl from Cowen. How are you this morning?

Paul Bunn -- Chief Operating Officer

Hi, Jason.

David Parker -- Chairman and Chief Executive Officer

Hey, Jason.

Paul Bunn -- Chief Operating Officer

Good morning.

Jason Seidl -- Cowen and Company -- Analyst

I want to concentrate a little bit on the obvious here, the dedicated segment. That seems to be where you guys sort of have the most upside. You alluded to some changes that were made and then some improved numbers in March. Can you tell us, directionally, where you think profitability is going in 2Q? Can you guys turn a profit? And then also, if you could expand upon some of the, let's say, problem trials that you might have among your customer base and what to be done about that.

Paul Bunn -- Chief Operating Officer

Jason, it's Paul. So it's kind of looking back at the first quarter, one thing, don't underestimate the effect of weather in March -- sorry, February. It had a really negative effect. Hence, the significant improvement in March, and some of the rate increases had started.

We've got a couple -- we've said it before, about half that business runs at acceptable margins and is really good long-term dedicated business and about half of it right now is, I would call kind of commoditized dedicated, and it's business that we're good with. The way the driver market is soaring up, we're going to have to get improved pricing on. A large number of those contracts have rate increases kind of in the June, July time frame. So I think you're going to see some incremental improvement, I'll call it may be getting to the black in the second quarter, but you're not going to see it anywhere where we expect it to be long term.

In the third quarter, it should be better than the second quarter. And then we're going to continue that kind of weed-and-feed momentum. And here's -- where people want to partner with us and pay for the service that they're getting. We're going to keep moving with them.

But we're going to have some help from customers, especially as dynamic as this driver market is. So I hope that helps you.

Jason Seidl -- Cowen and Company -- Analyst

No. It does, Paul. And when we look at the half of the business that you would consider sort of good long-term dedicated contracts. What sort of OR would you put upon that half through.

Paul Bunn -- Chief Operating Officer

Yes. Probably low 90.

Jason Seidl -- Cowen and Company -- Analyst

Low 90s. OK. And in terms of the driver market, what should we expect from pay? I mean, are there more pay increases coming down the road here?

Paul Bunn -- Chief Operating Officer

Well, I would say we're taking kind of a wait-and-see approach on the expedited side. And a lot of that's just going to be dictated by what happens with our competitors and with the solo market. Our expedited pay increase was received really well, not just in terms of the pay increase, but the miles we're being able to put on the trucks, the W-2 wages of those drivers are really good numbers. On the dedicated side, I would say it's in pockets, but way more accounts are going to have to be adjusted upwards than not.

And so we've done an analysis this week and we've got a number of several -- here's what I'd tell you, there's a correlation between the accounts that what we're calling in the green for driver pay, which is 75% or better kind of quartile for driver pay. Those accounts are doing pretty good from our client's perspective. The ones that are in the red where we're bottom 30% of pay. Those are accounts we're not making a lot of money on right now.

And so we're going -- we've got to move driver pay to steady the fleet and not be filling in with a bunch of expensive fill-in drivers. And that's what's going to help us get the profitability back. So overall, yes, dedicated is going to have rate increases. It's just how much depends on -- it's very location specific right now.

Jason Seidl -- Cowen and Company -- Analyst

Yes. That makes sense. And my last question on the Logistics segment. Obviously, just an excellent quarter for you guys.

Can you talk a little bit about how we should look at that growth as the drop yield?

Paul Bunn -- Chief Operating Officer

Well, if the market stays as hot as it is today, I think you're going to see similar returns. I think what happens to managed freight is going to be dependent on how long you think we stay in this cycle. As we've said before, that segment, a large percentage of that is where we play in the spot market. And so you're seeing a lot of spot rates in there and a lot of spot freight and pop-up type freight among a number of customers.

And there are a lot of customers that are expedited that we have expedited and dedicated business with. And so how that business goes for the rest of the year is going to be dependent on how hot the overall freight market maintains. I mean, if Q4 is not Q1, you'll probably see a similar number. If things were to trail off, you're going to start to see the volume in that division going down and the margin going up a little bit.

Our goal was by that time to have dedicated growing from a returns perspective to offset or more than offset the decline in managed freight.

Jason Seidl -- Cowen and Company -- Analyst

That makes sense. I'll turn it over to somebody else. Gentlemen, I appreciate the time. As always, be safe out there.

Paul Bunn -- Chief Operating Officer

Thanks, Jason.

David Parker -- Chairman and Chief Executive Officer

Thanks, Jason.

Operator

Thank you. And we'll take our next question. Caller, your line is live. Please state your name.

Jack Atkins -- Stephens Inc.-- Analyst

Hey. Great. Good morning, everybody. It's Jack Atkins from Stephens.

Thank you for taking my questions.

Paul Bunn -- Chief Operating Officer

Hey, Jack.

David Parker -- Chairman and Chief Executive Officer

Hi, Jack.

Jack Atkins -- Stephens Inc.-- Analyst

So I guess, let me start just on Paul, if I could just kind of dovetail to one of your last points there in terms of just sort of how you think the next kind of several quarters play out from a cycle perspective. Because given what we're hearing out there in terms of difficulty finding drivers, it certainly feels like we're in for an elongated cycle this time. So I don't know who wants to take the question. But maybe David, I'd love to get your perspective just given your tenure in the industry and all you've seen.

Just on sort of where you think we go from here, both from a rate perspective and how are we going to be able to get enough drivers to be able to grow the fleet?

David Parker -- Chairman and Chief Executive Officer

Jack, first of all, how do we get enough drivers, I don't know. Basically, it's a difficult environment. Subpart of that difficult environment does keep a lid on capacity as we all know. So there could be a blessing at a lot of times.

The freight environment, I had a -- we had a big management meeting last week, I guess it was, and not a talk of some of our teammates. And when you think about -- I always preface this with, I don't know how my five-year-old grandchild is going to pay for it. But if I'm only worried about the next couple of years, because I do think it's two years, I think we're going to be seeing, I think, 5% GDP growth is going to be a norm, if not more, for the next two years based on what Washington is doing. And so as it relates over the next couple of years, I mean, I think the freight environment is going to be hot.

I think what we are feeling today will -- I want to say it will -- does it slow down? I mean, are we at 7%, 8% GDP that goes to 5%? Well, probably. Or it could stay at 7% or 8%. But it could be a little bit, but it's still going to be numbers that you and I have never sensed or felt from a freight standpoint. And so I don't see that letting up.

I see that a solid couple of years of being in that kind of environment. And then on top of that, you heard Paul talk about what we've done to expedited and what we're having to do on the dedicated side, and we're having to go to the market because of driver pay And he's right that a lot of the dedicated side is in pockets because you've got 20 trucks here, 100 trucks there, 50 trucks over here and all that different markets throughout the United States. So while we're going to have to pay them is dependent upon that. But this driver situation is at best, it's the same.

It's not improved. And you could paint a picture that it gets worse. Another stat that came up that it would be something for everybody to just kind of pay attention to that I'm starting to pay attention to, and that is working percentage. Talking to other personal freight and freeing carriers out there.

We all know we got to pay the drivers more, and we're all trying to figure out what that is. Is it at $85,000? Or $90,000? Or $100,000? We're all trying to figure out where the driver pay's got to go to, and that's one thing. The second thing, though, is that I think that we're in the process, in the last couple of months as we're going down this road, that we're finding out that just to get our driver, let's say, the number is $85,000. But a lot of those drivers are happy at $70,000 Now they're not coming to work for me.

And as I said the 80s because to be honest with you, that's where the market is getting to very quickly. But they're happy making $70,000. And one thing that we're seeing for the last -- the first quarter is that your working percentage of your equipment is less than what it has been about three or four points because we got more drivers that want to stay home and they're happy if they're making in the 70s and they'd rather give away $10,000 in the 80s of pay and stay home a little bit more. So I think that's an interesting dynamic that none of us have got calculated.

So we don't have drivers. There's nothing out there that tells me that drivers are going to readily be available over the medium one to two years, that's where I'm at. And so the driver situation, and then I could say we're going to have pressure, trucking companies are, on capacity, working capacity by two to three percentage points as I'm looking at past the overall. So that said, it's going to remain tight.

I believe that the -- our segment of business, the pipelines are going to continue to be good. And I think that we're going to be able to accomplish what we need to do accomplish on what we want to accomplish over the next couple of years.

Paul Bunn -- Chief Operating Officer

You said something about growing fleet, how much is pay to grow, but it would be hard to grow a fleet right now. I mean driver pay is so tough right now. The driver situation is so tough. It's all you can do, just to hold serve.

Jack Atkins -- Stephens Inc.-- Analyst

Yes. No. Yes. Absolutely.

And that's what we're hearing from others. And so I guess when you kind of put all of those comments in context, with the efforts that you guys have been undertaking over the last year, year and a half to structurally improve the profitability of your business and you put this type of super cycle on top of it. You've got to be pretty excited about -- certainly, your expedited and managed freight businesses, as you look out over the next couple of years, but this is -- this really has to be very strong type of backdrop to be able to get the changes you need implemented and dedicated.

David Parker -- Chairman and Chief Executive Officer

Yes. You're exactly correct. That's the thing that we've told internally to our people and it's true and that is We are producing some numbers now that we have never produced from a standpoint of turning our company around. If I think about 12 months ago, this time 12 months ago, none of us knowing where this virus was going.

None of us know if there's one week or five years that we were going, and we made decision to shut down the assets and the solo operation and those kind of things during the second quarter last year and to see what improvement we've made. Because that was part of our plan. I mean, our plan, as you all know, was to do where we're at today. And the background has helped us tremendously, and that's why we're using the words internally that the runway is very long.

I mean, we got a runway and it's everything you just talked about. It's getting our dedicated straightened out. We could not ask for a better market to get our dedicated straightened out, and we will get it straightened out. And we just got to work with the customers.

And again, the pipeline is good on the ones that we can't work with or decide not to work with us, etc. But yes, we're very -- the most excited we've been in 35 years in this business.

Paul Bunn -- Chief Operating Officer

Jack, one thing I'd add on the driver piece that David mentioned is that we may get some help if or when, I hope it's a when, not an if, but when let's call it, the government subsidies end. So we could argue that might help a little bit. But then on the other hand, with all the energy around an infrastructure bill and spending, we know that's probably construction in general is a monster competitor of our industry. So if that gets approved, whenever it gets approved, and all will matter if it's when it's -- or if but when, that's going to be a big pull from -- because again, where the market is.

Because those jobs are going to need to be paid, and they're going to probably be well paid as they are now. So I think the view on labor, which is affecting all kinds of industries right now, is going to be a -- it's going to be a capacity constraint. Does it drive inflation and what does that do and all that? That's another question that's out there, too. But I think capacity is going to be limited.

the OEs, the manufacturers are limited capacity. They're not ramping up in a major, major way. So because of labor, because commodity pricing, because, because, because. And so I think the capacity part of this equation, and I agree with David, 100%.

The next couple of years, at least, capacity is going to be, what's the right word I'm looking for? It's going to be reasonable. It's not going to be crazy, people growing fleets significant amounts.

Jack Atkins -- Stephens Inc.-- Analyst

OK. That's very helpful. Last question, I'll turn it over. And, Tripp, I'd love to bring you into the conversation here around cash flow.

Because the capital needs this year are not great. I think the net CAPEX is about $20 million. I believe that's what you said in the press release for your plan for this year. How should we be thinking about free cash flow in 2021? And can you kind of help us think through that?

David Parker -- Chairman and Chief Executive Officer

Yes. So we took a little bit of a step backwards from a debt perspective in Q1 because of the indemnification call. But our plan is to pay down debt and to continue to buy back stock as we get it. So I think from a free cash flow perspective, rest of the year, probably in the neighborhood of $80 million.

Jack Atkins -- Stephens Inc.-- Analyst

OK. That's great. That's great to hear. Thanks again for the time, guys.

Appreciate it.

David Parker -- Chairman and Chief Executive Officer

Yes.

Operator

Thank you. [Operator instructions] We'll take our next question. Caller, your line is live. Please state your name.

Scott Group -- Bank of America Merrill Lynch -- Analyst

Yes. Scott Group from Wolfe Research. Thank you. Good morning, guys.

Paul Bunn -- Chief Operating Officer

Hey, Scott.

David Parker -- Chairman and Chief Executive Officer

Hey, Scott.So just on the expedited side, can you just talk about the underlying pricing trends there? And if we're doing, I don't know, 9% margins in the first quarter, how do you think about those margins the rest of the year?

Yes. Scott, there's no doubt that the pricing side on the expedited has been very strong. Over the first quarter, definitely the last sometime in January, the last two and a half months, it has been very good and we expect that to continue. We expect that there's going to be more opportunities to raise pricing in the expedited side.

And we've got three or four accounts that are top accounts, but those are yearly kind of negotiations that we have. And a lot of those -- a couple of those have already been pulled up. They're pulled up in the first quarter. So those are usually in that May -- April-May time frame, we're able actually to get some a couple of months ahead of time.

And so that's already taken the benefit. I'd say that -- I said we won't go back to those customers and demand another one until the one year is up. But the rest of the accounts that we've got out there is that we're looking at it on any new business that comes in. It's coming in at a higher price.

And we expect -- we really believe that our expedited model that is, as you know, can be volatile. And that we've always operated it when it was 75% of the total. Today, it's 35% of the total. Is that we expect that that number to have about -- instead of being 85% to 95%, we think it's going to be 83% to 93%.

They're in tough environment. They're in tough environments at 93% and they're in greater environment still and be at 83%. We're also dealing with long-term contracts with customers. In our top five, we got -- we're working on our second one that have multiyear contracts that do not allow them to downsize the fleet.

If they elect to, it's over a couple of year period of time. So anyway, they're multiyear contracts on those. So anyway, I think the most important thing that I said there is that pricing will continue to increase But to me, the most important thing is that we really believe we're running that 83% to 93% OR and that models today instead of where it used to be.

Tripp Grant -- Stephens Inc.-- Analyst

I think, Scott, one thing I'd add, we talked about it at the last quarter call that is a difference versus history. When expedited was a much bigger piece of the pie, in good times, we're always trying to grow it. So we grew it -- which added to the volatility factor of the model. Now we're not.

Now whether or not we could if we wanted to isn't a question because of drivers. But strategically, we have made the decision. We're very happy with the fleet size. We're not planning to grow the fleet size.

The division is performing very well, take that pressure off to continue to grow the capital base and to feed that thing, but to improve it inside of itself. So that in and of itself, which only time will tell if that's successful or not. But it helps the volatility question significantly in my mind, who's lived through a lot of the different cycles of the past, that says, oh, my goodness, I wish we hadn't done that 200 trucks then or that 400 trucks then or whatever. So now we're living with it.

And so only time will answer that, but that's a significant move for us versus the past that's contributed to a lot more volatility as a lot of the growth, frankly, at the wrong time. So we'll see how that plays out. As far as margins, Paul, I just -- how would you comment on the margins?

Paul Bunn -- Chief Operating Officer

I think incrementally better as the year goes on. Again, kind of back to the same comment, if drivers stay tight, the market stays hot, I think it will get incrementally better each quarter, not materially, but incrementally better up. Won't be dealing with weather and some of those kind of things.

David Parker -- Chairman and Chief Executive Officer

Yes.

Scott Group -- Bank of America Merrill Lynch -- Analyst

Can I just follow up on just putting those comments together? I mean, if the right range is in 83% to 93% OR for that expedited business, I would think this is the kind of environment where we'd be closer to that 83%? Why wouldn't we start trending closer to that level?

Tripp Grant -- Stephens Inc.-- Analyst

Good question, Scott. I think we're not where we want to be yet, a; b, we did disclosed quite a bit of kind of temporary costs coming back into the model to start 2021. So we did work through that. It ended up being a little bit less than we thought, but nevertheless, we did talk about that.

And so we're in transition to that, and we think that that will continue. Now that said, 91% is the best first quarter in expedited's history also. So I could -- first quarter is always the worst quarter for expedited. And so I think that we've -- expedited has started off the year.

Yes, it's a good market, but it started off the year very well.

Paul Bunn -- Chief Operating Officer

Yes, Scott. Is it going to get to an 83%? I don't know. But is it going to improve every -- do you think sorely better than the first quarter sequentially?

Tripp Grant -- Stephens Inc.-- Analyst

Absolutely.

Paul Bunn -- Chief Operating Officer

Yes.

Scott Group -- Bank of America Merrill Lynch -- Analyst

OK. And so I guess, big picture though, your point is we've made a lot of mix changes in the business here to improve profitability and reduce sort of cyclicality here. And yes, we're seeing tremendous benefits of cyclicality on the upside, but we're not chasing the market. So we don't think we'll see as much of the pressure on the downside of cyclicality if and when that environment emerges.

Paul Bunn -- Chief Operating Officer

Absolutely. That's been the plan. We've been working on for the last five years-ish, I would say. But I think here in the last -- last year, frankly, through all the difficulty for all of us.

It actually accelerated the transition. There's no question about that. But I think that where we are is giving us a lot of confidence. As we move -- as we said in the prepared comments, intra-year, the cyclicality, we're starting to see less.

We didn't go down. Fourth quarter was a good quarter from a freight standpoint. We didn't go down near as much, but we're not going to go up near as much in the fourth quarter either. And so you're going to see intra-year, more or less volatility.

And then year to year, we hope, from the cycles, will be less than we've had in the past.

David Parker -- Chairman and Chief Executive Officer

Scott, a couple of things. Joey talked about expedited being less volatile long term and because of the kind of constriction on the size and really kind of dialing in what we're doing and who we're doing it for and maybe not being as exposed. But getting dedicated getting 50% of those dedicated trucks where we need them is probably the biggest key to that. And then the other thing, don't forget is the cost structure changes we made last year.

Those are also aiding and helping make the returns, the margins more consistent.

Paul Bunn -- Chief Operating Officer

Yes. One thing, too, I had a friend in here remind me, expedited, even though was 91%, I mean, weather hit it hard in February And so a lot of the earnings impact hit our expedited group the most and still achieved a 91% in the first quarter. So that would have been a --

David Parker -- Chairman and Chief Executive Officer

And then, Scott, just minimum of probably two OR points for the quarter, two to three for the quarter was the negative weather hit in February on expedited. If you haven't had that weather, if that had been in April or something, we probably ran 88%.

Scott Group -- Bank of America Merrill Lynch -- Analyst

OK. Very helpful. Thank you, guys. Appreciate it.

Paul Bunn -- Chief Operating Officer

Thanks, Scott.

David Parker -- Chairman and Chief Executive Officer

Thanks, Scott.

Scott Group -- Bank of America Merrill Lynch -- Analyst

Thank you.

Operator

Thank you. [Operator instructions] And we'll take our next question. Caller, your line is live. Please state your name.

Dan Moore -- Scopus Asset Management -- Analyst

Hey, guys. How are we doing?

David Parker -- Chairman and Chief Executive Officer

Good. How are you? Who is this?

Dan Moore -- Scopus Asset Management -- Analyst

I'm sorry. This is Dan Moore with Scopus.

David Parker -- Chairman and Chief Executive Officer

Hey, Dan. How are you doing? We didn't hear. Couldn't hear you. Sorry, bud.

Dan Moore -- Scopus Asset Management -- Analyst

No worries. No worries. Congratulations on a great quarter and obviously a challenging operating environment. One thing I wanted to focus on a little bit more was dedicated.

And I think most people view that as an extremely important segment to the long-term success of the organization and the turnaround that you guys are progressing through. And, Paul, you kind of said as much with Scott on the line a second ago. What I'd like to ask is your peers tend to focus on double-digit returns in dedicated, not 8%, not 6%. Some would argue that something, in fact, north of 10% is necessary to generate the kind of returns on assets and -- that you want to be able to deliver long term.

Could you talk to us a little bit about what your return profile is in that business long term? What you're targeting? And I guess it sounds like it sounds like the driver environment is the biggest impediment. Beyond that, if there's anything else we need to be aware of?

David Parker -- Chairman and Chief Executive Officer

Yes. I would say, right around that double-digit number, Dan. I mean, I think we're -- I think we would all be pleased right now getting that segment down to 90%, very low 90s OR. We've got some accounts that operate some legacy accounts, good accounts that operate in that space, and we have a long time.

There's a -- as we've gone through this journey, really trying to -- as Joey said, bringing three dedicated fleets together, get them under one operating system, under one leadership team, one group of people recruiting it. One of the things that has become evident is there's kind of -- there's two groups of customers in that bucket. There's the customers that have the profile you just talked about, and we want more of those, and we're going to go to the customers that we have that with and say, "Can we have more of your business?" And then there's customers who have just commoditized dedicated. And right now, those are the hardest accounts to see and open trucks and we're either going to have to value it or we're going to give those trucks to somebody who's in the first bucket.

And what we try to stay true to is to kind of our culture and our history. We met with somebody a few weeks ago that talked about another company just yanking a bunch of trucks out. We're not going to yank a bunch of trucks out. We're going to honor our word.

But we also -- we're not going to run dedicated at 98%, 99%, or 100% OR.

Joey Hogan -- Co-President and Chief Administrative Officer

And also, Dan, I'd throw in it, just it's important is that the complementary nature of our services, especially on the truck side, I mean, it is a neat complement between expedited and dedicated. And we're just scratching at the surface on opportunities that -- one of the things that Paul, in his change, with him taking the leadership role on the operations side, I think there's a couple of really unique projects there that really expose -- they've been there, and we've talked about it, but I think kind of trying to try to move the ball in that regard. But I think there's -- there are complementary, especially from a driver standpoint. And so that's just something that -- it's not that, yes, they're stand-alone, but there is some complementary nature between the various services.

And to the driver side, I think there's some opportunity there that helps us entirely as well.

David Parker -- Chairman and Chief Executive Officer

Yes. to Joey's point, Dan, I mean, we're just looking at how do we strategically manage the life cycle of a driver and give them career options, come to Covenant, never leave. And we've probably got the best collaboration that we've had in my 12 years here and starting to move down that path. And so there's still a lot of work to do, and we're excited about where it might take us.

Dan Moore -- Scopus Asset Management -- Analyst

And just as a follow-up to all of that, could you touch on when you'll have had an opportunity to touch 100% of those contracts within dedicated? Because I don't know what percentage of those contracts, we don't know, our one year or multiyear?

David Parker -- Chairman and Chief Executive Officer

Yes. We will have touch two-thirds of them by September 30. And so I think we'll know closer to where we are in Q4. So earlier, I said there's a number of them that are June, July.

There's some that have some notice requirements that we're working through right now. And so those may take four months, five months. And so I do think that we will know in the second quarter for the field advance.

Paul Bunn -- Chief Operating Officer

Yes.

David Parker -- Chairman and Chief Executive Officer

I think that we'll know which ones we're going to be successful with, which ones we're not going to be successful with. And then looking at our pipeline, on the ones that are not, that will be implemented in that third quarter. But I think that we'll have an idea, we're going to know the second quarter how the field is laid. And then the pipeline, I mean, just -- it's -- I mean, it probably goes without saying, but the pipeline or all accounts that would fit in that first bucket of partnership, value, engineering, problem solving, not commoditized, smaller fleets.

Smaller fleets compared to maybe more commoditized type fleets.

Dan Moore -- Scopus Asset Management -- Analyst

Guys, congrats again on a great quarter, and best of luck through the balance of the year.

David Parker -- Chairman and Chief Executive Officer

Thanks, Dan.

Paul Bunn -- Chief Operating Officer

Thanks, Dan.

Operator

Thank you. [Operator instructions] We'll take our next question. Caller, your line is live. Please state your name.

Nick Farwell -- Arbor Group -- Analyst

Hi. I think I've been released. This is Nick Farwell. Can you hear me, David? Joey?

David Parker -- Chairman and Chief Executive Officer

I can. Hey, Nick.

Nick Farwell -- Arbor Group -- Analyst

Good morning. I'm curious, I missed the comment about free cash flow. I apologize. What was the number over the next six months or annualized?

Tripp Grant -- Stephens Inc.-- Analyst

So we think it's going to be in the neighborhood of about $80 million of free cash flow for the next nine months, if you will, for quarters two through four.

Nick Farwell -- Arbor Group -- Analyst

Gotcha. OK. Thank you very much. And the other question is, David, what do you believe is a reasonable OR in dedicated once it's stabilized in a more normalized, whatever the hell that means, environment? Do we not get something below 90% given that as an example? Knight seems to, even with Swift, to have achieved their old sort of low to mid-80% OR?

David Parker -- Chairman and Chief Executive Officer

Yes. Yes. What you just said there is the internal discussions that we're also having, Nick. And as you heard earlier, about half of that fleet -- half of our dedicated business is in the low 90s, let's say, it's 91%, 92%.

I mean, there's sprinkled in there, 88% and 87%. As I'm sitting here looking at it, there's quite a few of those. But our first goal is to get 102% down to 92%. And then we'll see where the market is going to allow us to go.

So it's one of those things that I feel confident we can get it, take 10 points out of those underperforming assets and get it for the first sale. And that's why Joey earlier, some time or another, either released or on one of his questions, that he said that fourth quarter, first quarter, second quarter next year that we're working toward that. So, I mean, what you're seeing and what you're just saying is exactly what we are studying and seeing ourselves. And half our fleet is in those -- in that range, but we've got to first get our -- we got to get the other half down there in an acceptable number.

Nick Farwell -- Arbor Group -- Analyst

And what would you say, I know you'd commented a bit about under the same sort of parameters, where do you think you can get long haul over-the-road business? Where do you -- what's an OR that you think might be sustainable, again, in whatever the hell normalized environment?

David Parker -- Chairman and Chief Executive Officer

Yes. Yes. We do believe that where we used to be in that it's really -- it was really 87% to 97%. And then when the fourth quarter came, when peak came, we would get into 82% and 83%.

That was kind of the model that we operate on forever. And during the first quarter, we breakeven, make a little money, those kind of things because the Expedite was 75%, and it operated at 97% OR. And so we were down at 87% to 97%, and we have changed that in our thoughts that the 83% to 93%, and it's not long, to be honest with you, that I could see possibilities that 93% is too high. But that said, as then you heard them talk about that on the table, we just came out of the first quarter with a 91%, and it cost us two or three points in two weeks in February because of the -- just the cost of expedited and the cost of people who truck and the lag of sitting in Wyoming for 24 hours.

And snow and ice and all that kind of stuff, it just -- the cost can get there. And so you saw that at 75% of the total, whatever it was, and today, it's 35%, we're going to even make it less than that. So there is a range, whether it's 87% to 97%. Now it's 83% to 93%.

But with a horrible February, and it was in the high 90s, I can tell you that, the OR was in the high 90s in the month of February, we operated at a 91%. And February cost us two or three points. So I can almost say that the first quarter, because we've never been there, but the first quarter may have been at 88% or 89%. And so that said, I feel comfortable 83% to 93% is the number.

When it's at a normal capacity, then that's probably at 85% or 86%. Because today is not normal, today is unbelievable freight environment. So anyway, it's better. It's probably better by five points than where we've ever been in 35 years.

And can it get better than? Yes. It can. And we're trying -- we're working our bottoms off to get there. And Paul said earlier about the cost.

You need to look, that P&L statement. We have cut so much cost out of this company. I'm so proud of the folks, and we're continuing to cut costs. So every time we cut the cost, it is absolutely making it a better operating, from a financial standpoint as long as you don't have insurance going up 40% as it did April 1, and you don't -- there's some headwind.

So I hope I answered your question.

Joey Hogan -- Co-President and Chief Administrative Officer

Nick, let me clarify something real quick. Just your question on cash flow. If you're thinking about net debt right now, we're about at $123 million. We've got CAPEX -- net CAPEX for the rest of the year of $10 million.

We've got some cash tax payments. So if you think about it, we're going to try to get down to about $80 million to $85 million of net debt by 12/31. So that changes the numbers a little bit.

Nick Farwell -- Arbor Group -- Analyst

Gotcha. OK. That's still a hell of an accomplishment. So $43 million -- $40 million to $45 million.

David Parker -- Chairman and Chief Executive Officer

Yes. The model and the cash generation, there's another place that you can see it week to week, month to month, quarter to quarter. I think it's -- the growth of the nontruck and the consistency of that growth is really contributing to the cash flow.

Nick Farwell -- Arbor Group -- Analyst

Joey, while you're -- you and David have been around a while in this business, as an observation, I'm just curious, we've talked -- you have and other trucking companies have talked about the constraints on the supply side. Drivers, for example, obviously, is a critical factor. And you guys contracted your business, other long-haul truckers are contracting their business. And yet, one might hypothesize that the demand for long-haul carriage is -- it hasn't changed in a significant dramatic sense.

In fact, if anything, clearly, with this current pandemic, it's probably increased dramatically, hence, the rate increases. So I'm just curious, with the long-haul business being restructured by a number of companies, and yet demand is still, if not exceeding what it might have been earlier, it would seem to me that pricing would be better than stable for some period of time, maybe two, three years. I know that sounds rather bizarre, but with this significant imbalance in supply and demand, I could see -- I could conjure up your over-the-road long-haul business, perhaps sustaining something in the low 80s.

Joey Hogan -- Co-President and Chief Administrative Officer

Yes. I think -- yes. So I think there are several factors that we've seen, Nick, probably call it a little gun shy over the years is whenever the expedited pricing really explodes it -- competition grows. Now I think the competition will be different through the cycles going forward, mainly around the other freight providers, let's call it the LTL space.

And so we all know a lot of the LTLs outsource certain amounts, whether it's union or nonunion. And so we've seen, there is an amount that a customer, even on the private company side, we were really serving expedited produce in the LTL space. Those are the big swallowers of our expedited product. And there's some big shippers on the produce side, there's some huge shippers on the LTL side.

And there's an amount they'll pay and then there's an amount they won't pay. And so we try to be very respectful and snugging up to that line where they don't say, "Well, I can go grow my own before I get to pay you for that." And so that's where you're constantly trying to find is where that is and still provide top-notch service because both of those segments require it. You can't fool them. And then the outsider of that is where does pricing -- and again, it depends on where fuel is, where does pricing pushes to where -- I'll give up the service, and so I'll go put it on the rail.

And so those are the things you're trying to watch. You have some big customers that can "Try to go and do it themselves," that have higher pay brackets than we do or when does the price push them to the rail so then, I can get a container.

Nick Farwell -- Arbor Group -- Analyst

Right.

Joey Hogan -- Co-President and Chief Administrative Officer

All spot and space and chassis and all that stuff. And so I agree with you, though, directionally. I agree with you. There's stuff still got to go.

And then when you put where overall inventories are across the supply chain, which is stupid low. It just speaks to -- I think it's going, as David said, several paragraphs or calls ago. I think expedited is in a good spot, at least for a couple of years. It's just our opinion.

Nick Farwell -- Arbor Group -- Analyst

I appreciate it, Joey. It's very intriguing environment for you guys with capacity. I don't mean just you, but anyone in the trucking business that has legitimate capacity.

David Parker -- Chairman and Chief Executive Officer

Yes. Yes. I agree.

Joey Hogan -- Co-President and Chief Administrative Officer

KC, do we have any other questions?

Operator

[Operator instructions] And speakers, we have no further questions in queue.

Joey Hogan -- Co-President and Chief Administrative Officer

OK. Thanks, KC, and thanks, everybody, for joining us on the call. I look forward to visiting with you all next quarter. Thanks a lot.

Operator

[Operator signoff]

Duration: 51 minutes

Call participants:

Joey Hogan -- Co-President and Chief Administrative Officer

Jason Seidl -- Cowen and Company -- Analyst

Paul Bunn -- Chief Operating Officer

David Parker -- Chairman and Chief Executive Officer

Jack Atkins -- Stephens Inc.-- Analyst

Scott Group -- Bank of America Merrill Lynch -- Analyst

Tripp Grant -- Stephens Inc.-- Analyst

Dan Moore -- Scopus Asset Management -- Analyst

Nick Farwell -- Arbor Group -- Analyst

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CVLG
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