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Covenant Logistics Group, Inc. (NASDAQ:CVLG)
Q3 2021 Earnings Call
Oct 21, 2021, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

[Operator instructions] We now have our speakers in conference. Please be aware that each of your lines is in a listen-only mode. At the conclusion of today's presentation, we will open the floor for questions. At that time instructions will be given as to the procedure to follow if you would like to ask a question.

I'd now, like to turn the conference over to Joey Hogan. Please begin. 

Joey Hogan -- Co-President & Chief Administrative Officer

Thanks, Victoria. Good morning, everybody. Welcome to Covenant Logistics Group's third-quarter conference call. As a reminder for everybody, this call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are subject to risks and uncertainties that could cause to differ materially from those contemplated by the forward-looking statements. Please review our disclosures and filings with SEC including without limitation of risk factor section and our most recent Form 10-K and our current year Form 10-Qs. We undertake no obligation to publicly update to revise any forward-looking statements to reflect subsequent events or circumstances. A copy of our prepared comments and additional financial information is available on our new website at www.covenantlogistics.com the investor's section of that new website.

I'm joined this morning by chairman, CEO, David Parker; our chief operating officer, Paul Bunn; and chief accounting officer, Tripp Grant. Well, I'll start with a summary for the quarter. After a strong second quarter, we once again achieved record revenue and earnings per share. We're extremely proud and appreciative of our teammates' efforts as we continue to transform our business into a full-service logistics provider.

We still have more work to do. We know what the issues are. We have good plans and we remain focused on our strategic direction. Additionally, during this time of supply chain disruption, we will remain extremely proud to be a product of an industry that has stayed behind the wheel consistently since the pandemic began.

The industry has shown great resolve, leadership, and sacrifices to keep goods moving on the road, and when and within our warehouse communities, I'm certain we will continue. In summary, the key I'll highlights are the quarter were freight revenue grew 28% to 250 million compared to the 2020 quarter. Our asset base truckload group revenue grew 7% versus the third quarter of 2020 with 157 less trucks. Our less asset-intensive Managed Freight and warehouse segments combined grew 73% compared to the third quarter of 2020.

On the safe side, we produced another solid quarter. With our DOT accident rate per mile being 13% below the year-ago period. The lowest third-quarter rate in 10 years. Although, rising insurance premiums and inflation in claims costs across our industry offset some of this benefit.

Our TEL leasing company investment produced another strong quarter contributing an additional $0.9 per share versus the year-ago period. And then lastly, we were able to capitalize on strong cash flows by reducing our net indebtedness by another $25 million since the second quarter of this year. For a total of $39 million since the year began. Providing a little bit more color on the items affecting each of the business units.

Our Managed Freight division continued strong performance for the year. For the first time, it's our largest division inside the group. Its revenue for the quarter grew 88% versus the year-ago quarter and eclipsed the $200 million mark on a year-to-date basis in the quarter. Results for the quarter were primarily attributable to the robust freight market.

Growing its own customer base, handling overflow flight freight from Expedited and Dedicated. Plus capitalizing on our heritage of providing profit capacity for various retail customers. This unit remains a strategic growth vision for Covenant from both [Inaudible] and its higher return on investment dynamics. Even though, we continue to be cautious about the long-term sustainability of the top-line revenue and operating ratio within this unit.

The leadership team is doing a great job for staying [Inaudible] for our customers, but also diligent in adding and developing sustainable relationships with the right customers in the right industries. The Expedited vision continues to produce strong results. The supply demand imbalance in the marketplace continues to lead us to customers that really need and value team supply for the long term. We're focused on partners with shippers that are looking past the day's freight market and octane capacity that keeps our teams busy and productive even during the slow times.

We're very excited about where this project and strategic direction is today. We've been able to improve our operating ratio by 730 basis points to 84.8 OR led by a 21% increase in revenue per truck. Both pricing and utilization are up nicely. On the negative side, we've lost some capacity, as our average tractors are down 156 but the driver market is being as bad as it's ever been.

Driver wages in this segment are up 15% only cents per mile basis versus a year ago. With this being the number one issue in this division. The Dedicated division fell slightly short of our goal of the high 90s OR in the third quarter. With the transition of mostly automotive but other businesses, as well in July was a rough month.

With a lot of equipment movement, shutting down expenses, and driver wages. The month of August and September did hit our high 90s target. However, revenue per truck improvement is beginning to accelerate being up 5% sequentially versus the second quarter and up 13% versus the third quarter of 2020. Another positive in the quarters is that our open truck situation is the lowest we've seen in several quarters, but only 7% of the fleet open at quarter-end.

Continued progress on rates and utilization, particularly among a handful of customers remains necessary. Nevertheless, we're on track for meaningful improvement in 2022. Despite the rare loss of one customer early in the quarter, the warehousing divisions continue to grow from a revenue perspective. It took a step back from a profitability perspective in the quarter.

We added one new customer late in the quarter with a strong pipeline for the next several months. Operating income was negatively impacted due to additional contract labor costs as it relates to the pandemic and tight labor market. And additional building ramp for relocated customers facility prior to resumption of revenue and additional revenue at that location. We remain very excited and committed to this strategic growth division.

Regarding our outlook for the future, for the balance of 2021, our focus remains to improve the profitability of our Dedicated segment and continue running Expedited and Manage Freight for the long term. I quote We're not getting caught up in the spot market in quote, period. Additionally, the peak will be small for us relative to our past. Further allowing us to remain focused on the previous initiatives.

We continue to anticipate cost headwinds in driver and non-driver compensation and benefits along with equipment and parts supply. Inflation is definitely affecting transportation and logistics. On the bright side, we expect to be able to pass through cost increases to customers that value our services, as we expect the supply demand imbalance to continue for the next few quarters. All things considered, we feel like we're going to close our 2021 on a very strong note with earnings approximating third-quarter results.

Thank you for your time for this opening and Victoria will now open up the call for questions.

Questions & Answers:


Operator

Thank you. [Operator instructions] We'll take our first question. 

Scott Group -- Wolfe Research -- Analyst

Hey, it's Scott Group from Wolfe Research. Good morning, guys. Thank you.

Tripp Grant -- Chief Accounting Officer

Hey, Scott. Good morning.

Scott Group -- Wolfe Research -- Analyst

I want to follow up on the comment about the seated attractor count starting to improve. Maybe just talk about, what you're seeing from a driver standpoint. And if you think that that sort of broadly happening in the industry. Or more specific to you with respect to the driver market.

Paul Bunn -- Chief Operating Officer

Yeah. Hi there, Scott. This is Paul. So when this kind of paint a picture sequentially.

We did a lot of pay increased, Dedicated, and Expedited in light [Inaudible] unseatednes was still pretty rough in July and August. I would say the team count on the Expedited side actually went backward throughout the quarter even in light of the pretty material pay increase that we launched the first or second week of July. So I think it's -- I'm won't break it into the Dedicated and Expedited because it's a little bit a different stories. So Dedicated while some awesome trucks and what's more, we've really started seeing that kind of bounce up early October.

And it's mounting up I would call it decent levels, not just the floodgates are open on the Expedited side. So fair. On the Dedicated side a lot of pay increases in June and July, and probably about late August-early September we started to see an unseeded stabilize and Dedicated. And I would say late September, we were getting the drivers we needed and the last couple weeks that's actually set off a little bit.

And so it's a little bit of a roller coaster with both of them. Dedicated was got better has gotten a hair worse in the past couple of weeks. Expedited got worse and gotten a hair better in the last couple of weeks. So there's some bouncing and some noise But if you put it in a macro view the last week of September and the first couple weeks of October are in total or better than June or July, but not materially better.

Scott Group -- Wolfe Research -- Analyst

OK. That's helpful. And then, maybe just some preliminary thoughts around pricing for next year and just what are of the puts and takes that you see in terms of the ability to grow earnings again next year from some pretty amazing results this year?

David Parker -- Chairman and Chief Executive Officer

Hey, Scott. This is David. Hey, two things. Next year if you depend upon what side of the coin your own, that the economy stays where it's at today, or does it go backward.

If it goes backward then we all know that truck is not going to be as great as it is this year. So that is something that we do have to watch and figure out what it's going to do. If it stayed the way it is. You'll see double-digit increases in my mind throughout the market and so I think that's going to be a very good year.

I think that the supply chain is still going to be a major disruptor out there, but it really is the take on all of our take on what the economy going to do next year will depend upon which way the rates are going to go. But it's going to be by that way -- even if the economy slows down, rates are going to go up. They're going to continue to go up. There are headwinds from a standpoint of cost increases that are happening on driver pay and equipment and in-house people and maintenance.

I mean there's just a lot of cost wins they're going to have to absorb rate increases. 

Scott Group -- Wolfe Research -- Analyst

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

David Parker -- Chairman and Chief Executive Officer

NO. Not yet. No.

Scott Group -- Wolfe Research -- Analyst

OK.

David Parker -- Chairman and Chief Executive Officer

By the time we have our fourth-quarter conference call, it's kind of when it will start.

Scott Group -- Wolfe Research -- Analyst

Got you. OK. All right. Thank you, guys.

Appreciate the time.

David Parker -- Chairman and Chief Executive Officer

OK. Thanks, Scott.

Operator

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

Jack Atkins -- Stephens Inc. -- Analyst

Hey. Good morning.

David Parker -- Chairman and Chief Executive Officer

Hi, Jack.

Paul Bunn -- Chief Operating Officer

Hi, Jack.

Jack Atkins -- Stephens Inc. -- Analyst

Hey. Good morning, everyone. Thanks for taking my question. So I guess you can maybe start out.

And Joey I don't know if you want to take this or Paul, but would just be curious to kind of get a little bit more color on the steps you guys are taking to get some of these longer-term commitments particularly within Managed Freight and Expedited secure. Could you maybe give us an update on sort of where that process stands and how are you feeling about that as we go into 2022?

David Parker -- Chairman and Chief Executive Officer

Yeah, I would say only on the Expedited side Jack we're feeling really good. I don't know that we want to give an exact percentage as to where we are on what we're calling longer-term agreements. But I would tell you it's a couple of things. This is a significant portion of the business.

A significant portion of the business that we've worked to engineer and try to optimize Freight within an Expedited network. So to stick here from a customer standpoint and a driver standpoint. And so, hopefully, we're -- by doing that, it's not as -- there's -- it's not as OTR filling-ish. It's not dedicated, but it's not -- it's not OTR.

It's kind of somewhere in between. And it depends on the customer. Exactly how those agreements work. And there are some hybrids of things in there and so I think we're continuing to press down that path nicely.

On the Managed Freight side, the base business, there's a lot of spot business in there, no doubt. We're working hard with a handful of customers right now to walk in some I'll call it 12 months or greater type contracts. And I would say, that's not as great of a percentage. There's something we're continuing to work on every day.

Jack Atkins -- Stephens Inc. -- Analyst

OK. That's encouraging to hear. I mean I would be curious maybe kind of within that context. And David if you would like to give them a maybe a longer-term perspective in terms of how you've seen the business trend over the cycles, but how do you feel like the business is positioned.

Once you kind of get those longer-term contracts in place longer-term commitments in place rather, as we kind of maybe if we go into a more challenging Freight Market, whatever that is, 2023, or whatever -- 

David Parker -- Chairman and Chief Executive Officer

Yeah.

Jack Atkins -- Stephens Inc. -- Analyst

To weather the cyclicality and it feels like you guys have made a heck of a lot of progress putting the business in a position where there're going to be peaks and troughs --

David Parker -- Chairman and Chief Executive Officer

Yeah.

Jack Atkins -- Stephens Inc. -- Analyst

 But there's volatility as much less.

David Parker -- Chairman and Chief Executive Officer

Jack, I would say I've never been this excited. I mean it is unbelievable what the team has been able to accomplish over the last year and a half and three pandemics starting around the early part of 2020. So it's been a year and a half that we've been going down this road with our strategic plan and with the next slowdown is not going to be as critical to us, because the Expedited and that's your real questions on the Expedited side, it's not going to be up and down to the market as it has been because there's a big portion of our business that's going to be under contractual agreements that makes it much more difficult for the customer to get out of the truck. Now, utilization may go down a little bit because at the end of the day a load of their load is not there, but they cannot fire the truck and we've still got -- we're still got more to go on that.

But I'm excited to work that right now and we're still in the process of getting a couple of more large customers that we're negotiating with now and I think it's an 80% chance that we're going to get it done. And so it is going to protect Expedited to a good degree. I mean, is it still when do things get low is it going to slow down. Yeah, but it's not going to be we're not going to operate that division from 88 to 102s.

And you've evident by the fact of what you're seeing in the last couple of quarters on the OR on that business. So I'm excited about that. I think the runway, the Dedicated side is making great headways because I wish you could see the amount of accounts, we've only got about a dozen accounts that we need to really attack and we're in the process of attacking them and have been attacking them, once those dozen are healed with whatever that means. And it's going to be with a better OR, better profitability, we're not going to do the business one or the other.

As I look at being here 35 years and I look at the best quarter in the history of the company. Best quarter ever in the history of the company and the runway is still long that's what has me excited. And the same thing as Paul talked about on the Managed Freight. As I look at that besides the spot side of the business there are only five or six that I would say five or six customers that I want to get healed on the exposure side and we've got a couple of them.

So we're probably one-third there, but we're having meetings over the next couple of months to attempt to get the rest of them there. And I think that I'm happy with their success out there build more success. But anyway, that gives you an idea.

Jack Atkins -- Stephens Inc. -- Analyst

Absolutely. And I know another strategic priority over the last couple of years has been just really shrinking the balance sheet and you guys made --

David Parker -- Chairman and Chief Executive Officer

Absolutely.

Jack Atkins -- Stephens Inc. -- Analyst

Another significant step over the last quarter paying down debt. And it gives you a lot of flexibility here. Give the Dutch tender that you announced during the quarter. Would you speak to maybe curious to kind of hear, how you guys are thinking about the opportunities to use the balance sheet strategically both returning capital shareholders perhaps, but also maybe M&A opportunities? How are you guys looking at that as you kind of move forward over the next year and a half?

Paul Bunn -- Chief Operating Officer

Yeah. I think Jack obviously, there's no question a well-capitalized balance sheet gives you a lot of flexibility. And so -- when our stock was lower, let's just say that without getting into what's going on today, was lower with where we have presented the opportunity. We just felt very strongly about the long-term view of the company and we'll continue to watch that very carefully.

Yeah, we're feeling better in total what David just said, in total about the business, in my opinion, a lot better and the model is playing out. So I think with the balance sheet where it is, are we ready to make to pursue in addition either internally or externally? Yes, and so the market's hot right now I'm not saying we're getting ready to do something right now, but the market is hot. And, but we're being trying to be very strategic and in things that complement what we're already doing that add scale and value into our growth services. So I mean it's a good place to be.

It's really a good place to be and everybody is aligned with that. And I think obviously, we have some opportunity on the table with the dedicated division that gives us some earning upside. We feel a lot better about the long-term consistency of the Expedited franchise. Obviously, the question in the back of everybody's mind is will it stick with the downturn.

We believe the majority of it will not all of it. So we won't know till we get there. But everybody that we've done these agreements with or a good long-term customer/partners and so we're highly confident that their commitment is strong. Brokerage, it's a -- brokerage is probably the one our managed freight, if you will, that to me, it's not Dedicated.

It's Managed Freight from a standpoint of -- obviously, the returns are really strong right now. No question. We've historically been a very big project supplier for our shippers. We've done it for a long, long, long, long, long, long time.

Whether it's the peak, whether it's other Christmas products, whether it's consumer product launches this is all public. I'll go back. I mean we handled the Allegro launch years ago, 800 loads in two weeks. We handled that and question, what could pull that off or not? And we did a good job of that.

And so we've had -- we've got that heritage with the shipping community. And yet, we're going to continue to capitalize on that and we're doing quite a bit of that right now. And so we're trying to keep that. It's not -- try and not to recognize that it's going to go all the way to more.

But what do we do to solidify that and internally grow our business? And we're doing both of those. And so will it stay where it is. You look externally, and you go, that angle stays there, but we're working hard to keep it. It's just hard for us to say because of the external marketplace and the comparisons across the marketplace and all that, but we're working our tails off and providing a service for our shippers.

And that's the one to me that I don't want to call it a wild card, but it is really important. And as we think about Covenant and its model and the future. If we can keep it where it is, it's huge. If it backs up more to industry standards.

Just going to back up more industry standards. So that to me is that is the big question, but we're excited at how the model's playing out. Just real quick, I mean as I said, managed freight with the largest division in the quarter, 36% of the revenue. Expedited and Dedicated we're about the same, call it 29%.

Warehouse is 6 and growing. I mean models playing out and the models playing out and that's one of the things I'm most excited about.

David Parker -- Chairman and Chief Executive Officer

And just to add on Joey's point, I went back yesterday and was looking at net debt, 18 months ago we're sitting at $337 million of net debt. But we've had $272 million of improvement from where we were in March or March 31, 2020, to where we are today and we've got no goal of becoming debt-free, but we're certainly quickly moving that in that direction and -- again that's not a goal, but what that does is provide this opportunity. And Joey said this before, our biggest opportunity has been internally with our current business that we have. And I've been impressed because there's a lot of M&A opportunities out there.

They're flying all over the place. I've been impressed with the discipline that we've had to stay focused on the internal business and look at the opportunities that really align really well with our strategic priorities. So the discipline of doing that has really been impressive to me. 

Jack Atkins -- Stephens Inc. -- Analyst

Sounds great. Thanks again for the time guys, really appreciate it.

Joey Hogan -- Co-President & Chief Administrative Officer

Thanks, Jack.

David Parker -- Chairman and Chief Executive Officer

Thanks, Jack.

Operator

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

Bert Subin -- Stifel Financial Corp. -- Analyst

Hey, good morning. Thanks for the time.

David Parker -- Chairman and Chief Executive Officer

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

Bert Subin -- Stifel Financial Corp. -- Analyst

Sorry, the thing went blank. This is Bert Subin with Stifel.

David Parker -- Chairman and Chief Executive Officer

Hey, Bert.

Joey Hogan -- Co-President & Chief Administrative Officer

Hi, Bert. Sure.

Bert Subin -- Stifel Financial Corp. -- Analyst

You mention the impact of inflation on your business in your prepared remarks. Do you think that's what's keeping with more carrier growth at bay? So even if you end up paying higher wages across the board, the supply part of the equation just doesn't pick up -- pick back up as fast as typically as just because of the cost side of the equation. Is that the right way to think about it and do you think that's a tailwind that maybe gets you beyond '22?

David Parker -- Chairman and Chief Executive Officer

Yeah. I think depending upon how we take -- how all of our takes on what the economy is there is not going to do that. Yes, there is a -- hey, a big inflation that we all have got, but the small carrier is going to be decimating to them. I mean, it's going to be a difficult time for small carriers.

And we're negotiating equipment right now on numbers that are not hurting. And I don't know what a small guy, a small company does. So, yeah, they are going to have a wall that they're going to have to go through. And if there's any slowdown in the economy some of those costs are not going to stop and it's going to be very difficult for the small carrier.

There's no doubt about it.

Joey Hogan -- Co-President & Chief Administrative Officer

Bert, we were talking to somebody the other night, if you think that -- maybe talked about, there's the cost of the equipment, and then there's the availability of equipment. And I mean driving trailers are like little buckets of gold running out there right now. And so the cost is going up, the availability is tight. And it doesn't matter who you talk to, nobody sees that changing for 12 months.

And so then you got to ask yourself, well, -- gets you this time next year, put them out '23 and beyond '23. And the folks we're talking to or maybe equipment leasing and resale company and they start talking about EPA engine, changes that are coming in kind of '25, '24 timeframe. And then there's the free bar of a phenomenon that truckers do because they're trying to get ahead of the new technology because the first year of engine technology there's definitely a lot of issues and so you start doing that and you start counting -- you see the squeeze on equipment, could be a 24, 36 months kind of deal, it again, it's – so I think it is probably a tailwind as you mentioned for a couple.

Tripp Grant -- Chief Accounting Officer

I would hate to be a small carrier running a seven-year-old truck, I mean worst to there one average age 22 months or so. So we're – our average age is 22. And the manufacturers, where these tractors or trailers, but let's just talk about tractors. We're not going to get the order that we want next year.

We're not going to get a total order I mean, it's going to – our average age will continue to increase not because of our dues, but because they can't manufacture the trucks and you're sitting there with a seven-year-old truck that you're going to run another two years, I mean, their maintenance – maintenance costs in itself will implode them.

David Parker -- Chairman and Chief Executive Officer

Remember, as we know the average – average size [Inaudible] is seven trucks. And that includes Knights 18,000 0 and RR 2,500, which is dominated by the small carrier. So they don't buy new trucks. They buy in the used market.

And so the used market right now is silly,  as far as what a used truck is selling for. So that obviously, the spot markets holding up the market, if you will, assuming it's being hauled by smaller carriers. And so that's been propped up. And then if you have needs to -- you need to add a truck, or locked add a truck, or replace a truck, the smaller folks are paying, goodness, 20%, 30% more than they would normally.

And so they still got to fund that, yeah, the interest rates are cheap today. But -- and then how are they to -- how are they going to pay for that capital quote in the future? Whenever the future, whether let's call it that affects the economy or freight. And so that's a pretty big question, as you kind of work your way through that in the next two or three years and the cycles. And so the good thing for us is that our equipment plans, we can weather an equipment storm whatever that means, and the larger fleets are sure you've got the flexibility to extend if you have to.

The big issue is just supplied. Can I continue my trade cycle? Well in the normal course of business they move -- and right now it's really tough. So I could argue, until that moves, there's some inflation coming with that. If you're not able to move with that, because and then the other thing, everybody shouldn't get now geeked up about again on sale, all of us we're in the business of moving equipment.

We're – I mean moving freight. Yeah, we're in the business of moving freight. If you were to sell a truck today, you're going to make on it. So OK, what about tomorrow? What's the business tomorrow? What's the cost tomorrow? What's the – so to run a business off again on sale isn't an answer because that's not what your business is.

And so I think there's some obviously some opportunity to help earnings we're gaining on sales, I don't want to price stock list. And folks that have a trade cycle that's big and we're able to keep their order-ish for this year, you're going to have big gains is helping our zone. Ones ahead of the low cycle for this year aren't. So it's a – I think the smaller folks, the equipment issue is a huge, is a huge issue over the next two or three years, which in my opinion is bullish is good for the survivors.

I think it's a good thing for the survivors. It's going to kind of help the supply demand imbalance question and whenever it raises to say, in my opinion. 

Paul Bunn -- Chief Operating Officer

You could say it like this, nobody thinks labor's going down. Nobody thinks maintenance is going down and nobody thinks trucks are going down. Nobody thinks fuel is probably going down. But if you just take -- if you think you're in an inflationary environment.

Whenever you have different spot rates, the people that run on spot rates it's going to hurt bad.

Bert Subin -- Stifel Financial Corp. -- Analyst

Yeah. No, that's a great answer. I guess I look at it as the equipment side is, to some degree, transitory, maybe insurance, maintenance, tires, other inputs are less so. And so when you got three trucks versus 3,000, your ability to unitize, that's a little different.

So it sounds like you guys would agree with that.

David Parker -- Chairman and Chief Executive Officer

Yup.

Joey Hogan -- Co-President & Chief Administrative Officer

Yeah.

Bert Subin -- Stifel Financial Corp. -- Analyst

So appreciate that. Just one follow-up for me. On the Dedicated side, have you -- would you say competition has been a challenge? Clearly, there's been a lot of carriers moving into the space over the last year just by virtue of the labor situation. It sounds like some of your shifters are OK, exiting contracts.

So I mean, what do you think? Why would they exit, if they didn't have an alternative?

David Parker -- Chairman and Chief Executive Officer

I would say, maybe we -- maybe us exiting more than they may be exiting in a couple of situations, where they just -- they think they can get a one-way model or some other top model to work better for them but because the curve has taken the rates up.

Paul Bunn -- Chief Operating Officer

And we all know, when we start the pandemic, we had, what, 300 plus trucks run in automotive.  We had a big portion of what 20% of our fleet was automotive and we're still living that nightmare that they're going through. And we're about halfway through that. On our scale, we've taken that from 20% fleet and about 10% to fleet. But one of the things you saw in the second quarter is when you are getting rid of 150 trucks or so, and there are 400 trailers that are all over the United States.

Think about the costs that are involved in saying, never going to come back, but I can't handle this shutting down a plant every other week. I mean I can't do that. We had the pipeline [Inaudible] 150 trucks and put them into other parts of the business. But the second quarter got a tremendous amount of cars of doing the [Inaudible] and we'll see where that goes.

They may need to go to zero but we'll determine where that is going to go.

Bert Subin -- Stifel Financial Corp. -- Analyst

Maybe just one quick follow-up on that. You talked about -- I think you've historically talked about Dedicated trying to sort of going after pieces of business with 10, 15, 20 trucks, as opposed to sort of larger swap contracts. Does that -- do you think that's still the right strategy and is that working?

Paul Bunn -- Chief Operating Officer

It is, but here's what I'd say, it is -- but it takes a while to get there. When you're taking little bitty mods for -- big mods are easier and they fill you up faster, but it takes a lot more swings to deploy it on those 10 and 20 trucks deals. And so, I would tell you, a lot of what we're adding are those top accounts. But to David's point, when you're exiting 80, or 90, or 100  and you've got to make it up with 420s, there's just there's a lot of cost in moving all the trucks, and trailers and drivers to do that.

One of the things, just to add on to the Dedicated, four of our top 10 customers in Dedicated had major supply chain issues in the third quarter. Three of them [Inaudible] and one of them had to do with the forks. And so, again, it's the cost to -- as David and Joey, most said, downsize some business, and then when four of your top 10 customers have major supply chain issues, that's part of the reason that Dedicated ran where it ran for the full quarter.

Bert Subin -- Stifel Financial Corp. -- Analyst

Thanks so much for the time.

David Parker -- Chairman and Chief Executive Officer

Thanks, Bert.

Operator

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

Jason Seidl -- Cowen and Company -- Analyst

Hey, guys. This is Jason Seidl from Cowen.

David Parker -- Chairman and Chief Executive Officer

Hello, Jason.

Jason Seidl -- Cowen and Company -- Analyst

So apologies I jumped on a little bit late here but wanted to drill down on the Dedicated and sort of how you're looking at that improvement. Understand you got rid of some accounts and there were some supply chain issues in the quarter. But what sort of improvement do you think that we're going to see quarter over quarter? And then how should we look at some of the new accounts that you're taking on their level of profitability as we look at '22?

David Parker -- Chairman and Chief Executive Officer

Here's what I would say, we ran kind of that high 80 -- 80s high 90s OR in September once we got through August, September. Once we got through all of that cost in July and we feel confident that we're going to be improved sequentially from 3 to 4. And so we're trying to leave it at that right now Jason, but it's going to improve from what you saw in Q3 in the fourth quarter. And I think you'll see some incremental improvement from Q4 to Q1.

And so it -- the incremental improvement is coming.

Jason Seidl -- Cowen and Company -- Analyst

Let me ask it another way. What percent of your business changed over in the quarter to new customers?

David Parker -- Chairman and Chief Executive Officer

Here in the quarter probably 10% during the quarter -- 8%. Yeah, 8% to 10% and then we got another 5% in the process right now.

Jason Seidl -- Cowen and Company -- Analyst

Another 5%. Is it safe to say that the accounts that have changed over are well in the profitability levels?

David Parker -- Chairman and Chief Executive Officer

Yeah.

Jason Seidl -- Cowen and Company -- Analyst

Okay. That's a good way to look at it. Perfect.

David Parker -- Chairman and Chief Executive Officer

Yeah.

Jason Seidl -- Cowen and Company -- Analyst

I want to follow up on a question that Scott asked. He asked about CD trucks. I want to comment on that from another angle. When you look at increased driver pay, look at increased recruiting costs, what on a percentage basis, how much more does it cost you to put a new button in a seat right now?

Joey Hogan -- Co-President & Chief Administrative Officer

Well, the driver pay Q2 over Q3 just in the Dedicated just about 12%, and then you're going to have the increased cost of recruiting, and so it's 20%, probably 15%, 20% from Q2 to Q3. [Inaudible] the rates are up nicely as well too, but rates are up but so are the costs. On the Expedited side, we beginning -- we raised pay as we said in July, and we're going to have another pretty sizable pay increase coming out on the Expedited side in the next few weeks.

Jason Seidl -- Cowen and Company -- Analyst

OK. Fair enough. Switching over a little bit to the warehousing side of things. Obviously, we saw a spike up there in the OR.

How should we look at that business? You talked about partially offsetting some of the costs going forward. Is this where you can get somewhere between 3Q and 2Q in terms of the OR?

Joey Hogan -- Co-President & Chief Administrative Officer

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

Jason Seidl -- Cowen and Company -- Analyst

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

David Parker -- Chairman and Chief Executive Officer

Yeah. I think Jason well we were disappointed. We saw the really good value. The market was recognizing it and we came out big and we want to go after it.

Obviously, the market didn't play with us, and so -- I want our strategy, we want to buy. And so that desire depending on value and the recognition of the value and our progress which remains on the table, where -- I'm not going to comment if we're going to institute a regular program or whatever. But as Tripp said earlier and I said, I think anything around capital structure and/or growth opportunities that make sense, because of where the balance sheet is, is we're looking at everything very, very closely.

Jason Seidl -- Cowen and Company -- Analyst

Well, you're in a much nicer position now than you were a few years ago. That's for sure. Gentlemen appreciate your time as always.

David Parker -- Chairman and Chief Executive Officer

Thank you, Jason.

Operator

Thank you. We'll take our next question.

Unknown speaker

This is [Inaudible]. Joey, could you comment a little bit about your hedging strategy. Fuel hedging strategy. To what degree of you implemented it? To what degree or are you going to implement it? And where do you stand on that?

Joey Hogan -- Co-President & Chief Administrative Officer

None had? We did. We've historically been pretty active in the market. And we've had periods of time where it was really good and period times we haven't. The difference between then and now is there are several chapters where we had to make sure our cost was as fixed as possible.

And so we were well into to take on some additional insurance to -- just to know what our cost was, as we were kind of going through some various transition times. Today with where we are and I can say overall it was negative. But the periods to read some of when we did really well some were really, really cost a lot of money. But our costs are fixed.

So and so we've taken a more let's say aggressive approach and kind of let's call it ride the market if you will. It's not that we're not hedging. We're not interested ever, ever. It's just we're thinking a little bit more -- whenever you want to call it an aggressive approach on that and kind of ride with the market.

Our surcharge program is still really good. The recovery percentage continues to increase. I'm not -- the net cost of fuel after surcharge. We're in pretty good shape and I'm more concerned about the impact the fuel on the economy than I am to us because of the strength of our surcharge program.

Unknown speaker

If you take into consideration the time lag in the surcharge How much does it cover quote-unquote, as a gross statement sort of the swing in energy prices?

Joey Hogan -- Co-President & Chief Administrative Officer

Seventy-five percent.

Unknown speaker

OK. OK. 

Joey Hogan -- Co-President & Chief Administrative Officer

About 75%.

Unknown speaker

OK. And the other quick question is as you restructure Expedited, and you focus more on longer-term customers, in what ways is this change your geographic activity, your lanes? Has it -- did it shrink your average length of haul? Did it take you out of the West Coast? Did it focus you more in the Northeast? But what are the implications?

Paul Bunn -- Chief Operating Officer

Hey, [Inaudible] this is Paul. No, it's a link to haul and Expedited franchises. Probably, as long as it's been an average of about the last five or six years. So it's an -- I'd say it's more the sign.

Unknown speaker

Great. Thank you, Paul.

Paul Bunn -- Chief Operating Officer

Also, we did make that the long-term contract with the customers versus having some of those customers, we've had a lot of them for years and years and years, but we just turned it up. So that during the downtime that they have got more that they'll be taking off to haul that load than somebody that's a nickel a mile cheaper than are in the cut path. And that's really what the contract does. And so that and then [Inaudible] and again there's no Dedicated quote and the Expedited, but we've got 60% of our freight with engineered.

David Parker -- Chairman and Chief Executive Officer

Yeah.

Paul Bunn -- Chief Operating Officer

And I mean, it's going from A to B to back to A or ABC back to A. And we started this year that number was probably about 20% and we're up at 60% of that. And will probably go up about 70% of the freight that's engineered and the turnover is unbelievable better of that group of drivers that have the consistency.

David Parker -- Chairman and Chief Executive Officer

I say that --

Tripp Grant -- Chief Accounting Officer

And in another way we're taking this stuff -- go ahead.

David Parker -- Chairman and Chief Executive Officer

No, I was going to say that anecdotally, which is a weak insight but it -- but perhaps an insight. Driving it -- I'm in California and driving up to Lake Tahoe or down to the southern part of the state. In the past, I've seen Covenant trucks at a fair -- fair number of Covenant trucks and others.

Paul Bunn -- Chief Operating Officer

Yeah.

David Parker -- Chairman and Chief Executive Officer

Obviously, Gordon and US, etc. It's very unusual over the last three-four months for whatever it's worth. Very few names take. What would I call, brand name long-haul truckers, the Gordon, UGAI, USA freight, etc? It's almost all logistics.

And I find that confusing. Maybe you can enlighten me is why that's the case, especially around the port of LA. It's just that, I'm astounded. You've got – first of all our freight going to in particular California has not changed a bit.

We're still running the same volume [Inaudible] I'd say 90% of them are the same lanes that --

Paul Bunn -- Chief Operating Officer

Yeah.

David Parker -- Chairman and Chief Executive Officer

We've always run. So you're just not seeing the trucks. That's said, as we all know, California is a – it's a own – it's a state into itself. And what's important now watch 200 -- whatever they got 200,000 containers out in the ocean.

And for no wonder, I mean we could have been predicting some of these 10 years ago with some of the craziness of the state of California has. And so, that said, that said, there's a lot of carriers are saying, "hey, Managed Freight a Covenant, let's somebody else that wants to go to California take my assets off it and grow grid out, going to the West Coast". Covenant really does not do that. We'd be committed to California for many years, but that's another reason you're seeing logistics and off-brand that.

Who's that. I guarantee it that those carriers do you -- that you use to see are still controlling the freight, but they're saying why am I going to California let somebody else go.

Paul Bunn -- Chief Operating Officer

Well, I'll leave here a second. And I can totally endorse what you're saying. Thank you very much, David. That has surprised me.

David Parker -- Chairman and Chief Executive Officer

OK.

Paul Bunn -- Chief Operating Officer

Thanks, David.

Operator

Thank you. That concludes today's question and answer session. Mr. Hogan at this time I'll turn the conference back to you for any additional or closing remarks.

Joey Hogan -- Co-President & Chief Administrative Officer

OK. Thanks, everybody, for participating. Victoria, thanks for your help. And we'll talk to everybody next quarter.

Thanks a lot.

Operator

[Operator signoff]

Duration: 49 minutes

Call participants:

Joey Hogan -- Co-President & Chief Administrative Officer

Scott Group -- Wolfe Research -- Analyst

Tripp Grant -- Chief Accounting Officer

Paul Bunn -- Chief Operating Officer

David Parker -- Chairman and Chief Executive Officer

Jack Atkins -- Stephens Inc. -- Analyst

Bert Subin -- Stifel Financial Corp. -- Analyst

Jason Seidl -- Cowen and Company -- Analyst

Unknown speaker

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