Covenant Logistics Group Inc (CVLG) 2002 Q1 法說會逐字稿

Good afternoon. My name is , and I'll be your conference facilitator today. At this time, I would like to welcome everyone to the Covenant Transport Conference Call. All lines have been placed in mute to prevent any background noises. After the speaker's remarks, there will be a question and answer period. If you would like to ask any questions during this time, simply press star, then the number one on your telephone key pad, and questions will be taken in the order they are received. If you would like to ignore your question, press the pound key.

Thank you. Mr. Hogan, you may begin your conference.

Thanks, . We'd like to welcome everybody to our first quarter conference call. David will begin in just a second with some comments that he has regarding the quarter, and I will follow up with the financials. As usual, state in advance during this call, there may be forward looking statements within the meaning of the Private Securities Litigation Act of 1995.

This information is in accordance with the company's current expectation and is subject to certain risks and uncertainties. I'm going to encourage you to review those risks and the company's latest 10K and 10Q. With that, I'll turn it over to David.

Thanks, Joey. Yes, thanks everybody for joining us. You know, just a little bit about the quarter. January was a very good month in terms of the business environment as compared to, relatively speaking, our first quarter. So January's good. February was a little soft, but then in March, each week in March just started getting better and better as the month progressed.

I'm very happy where we're at, at the present time in the month of April, we'll probably talk about that a little bit later. But I feel like that we've got some things that are happening within the marketplace out there that we are say we're kind of cautiously optimistic, only because the last couple of years, every time you get a little excited, you'd have something negative that would happen that would deflate your optimism.

And so I've been, for the last month or so, I've been using the word cautiously optimistic. But I'm going to tell you, it's not too far off, I don't believe, from being pretty optimistic about what we are seeing out there. The economic picture data that continues to come out, one of the main things that we look at is , National Association of Purchase Managers. And that you're probably aware February, March, where the first two times that the number went above fifty in the last what, 18 months.

And, you know, we're seeing new orders coming out very strongly. So we are seeing some things in the economic picture, I believe, that are starting to put some smiles on our faces. And there is no doubt in my mind that there is coming a day, and I don't know if it's today or tomorrow or six months from now, but this capacity's getting ready to get tight.

We have internally said, as well as we have said, you know, some of the analysts out there, and again, your guess is as good as mine, but I've been predicting that by the middle of May that we're going to have customers that are going to start sensing a capacity shortage. I hope that's correct. I still think that that's probably going to be more correct than not. I'm just getting excited about what's going on. Utilization, you know, very stable, but slowly improving. And that's one of the things that we look at.

I'm looking at utilization, before I look at rates, I mean, all that's important, you know, utilization rates, dead head is all important, but the first thing we look at is what are we doing on the utilization. Are we getting miles up? Because believe me, you start throwing a lot of miles and get increased utilization, and the rates are going to follow within a, probably within about a quarter after you start seeing some nice improvements on utilization.

But first quarter, very stable. It's slowly improving. First quarter in ten quarters that was up over a year ago. Impressive we considered that running on average 300 fewer teams. And that's the thing that y'all really need to mark down, folks, is that you know, our utilization was up a little bit. Flat to up, but we're operating 300 less teams on this utilization than we did last year at this time. So when you take that into consideration, utilization is showing me some exciting things.

And that's one of the reasons why I'm starting to get excited out there, is because of the utilization. We reduced our dead head by 85 basis points to 7.3 percent, after being down 65 basis points in the fourth quarter. Team utilization was up four percent in the quarter number one, with solos being flat versus last year. Customers and rates that give you an idea, top 100 accounts represent 72 % of our total volume, you know, it basically goes between 65 and 70, usually.

Our current top 100 is up 24%. We have 18 new accounts in the top 100. Excluding new accounts, the remaining top 100 was up 13%. Last year's top 100 accounts are down eight percent. And we added 14 million annualized of new business in the first quarter. Because when you think about that, folks, the things that, you know, we know is going to happen. It's just a matter of when is it going to happen, is this. Is that if we don't care about adding a truck, and then they our margins get to where we want them to, and we've had discussions on that.

We won't add a truck. That's not our main focus. Our focus is to get the probability back to where Covenant is used to operating this company at for for the last 15 years or so. That's what we're focusing on. So if we don't have that concern about adding a truck, the thing that we know is that marketing is going to bring on X amount of dollars of new business. I mean, first quarter, our annual is 14 million.

If you just do that every quarter, you know, all of a sudden, you're up to about 60 million dollars of annualized business, and we're just filling this bucket. So you give me 60 million dollars of new business, because I'm not adding a truck, and then the accounts that had been down, when you look here at the last year's top 100 went down eight percent, well, I'm going to tell you, all of last year, that number was greater than eight percent.

It mean, it was a big, it started off at 24 percent. It actually entered the fourth quarter, those accounts being down 17 percent. So now we've got them down to where we start off the first quarter with our old accounts being down a negative eight percent, and we're closing that gap. Because the only thing that we're looking for, again, is to fill that bucket. And when we get that bucket full, there's two things going to happen. You're going to see utilization improved very nicely.

And following that, you're going to see rate increases following that. So then you get into the leverage of the company and you know, you can do the math, the analysts all can do the math on that. But that's one of the reasons why we're excited. But transportation was 35% of our volume, retail is 13% of our volume, manufacturing's 12 percent of our volume. Consumer goods is nine percent. Floor covering, seven percent. Food and beverage, seven percent.

Housing and paper packaging, five percent. And auto and electronics, three percent. Three percent. Rates per load of mile were down a penny, while our length of haul increased by about 100 miles. You know, I think the remainder of the year, we will see rates based upon what I just told you, rates will eventually go up. We're trying to, we're out of the market right now, very selectively trying to see, you know, what is going on. But there's coming a day when we will be in the market to increase rates.

I just want to make sure that the process is right and that the timing is right on that. Our drivers remain in very good shape. We continue to have more drivers than available trucks, you know, including out of service trucks for things like accidents or maintenance, it's less than two percent of our fleet that's open. So, I mean, we're controlling that very, very nicely. Our continuous improvement program, we're continuing to be very pleased with our efforts to reduce costs.

Even with our inserts and claim expense up two cents per mile, versus a year ago, our after tax cost decreased a penny a mile versus a year ago. We added two point six million dollars of annualized savings in the first quarter, so we continue to look at every item on that P&L statement to try to figure out how can we drive down our cost of operating. And I'm going to turn it over to Joey now, and he's going to go over some of those numbers.

Due to the recent guidance regarding the treatment of shipping and handling charges in the income statement, we've reluctantly made the change in accord of the presentation of fuel surcharge and other revenue. From netting them against the appropriate expense area, to revenue, we have always netted fuel surcharge against the, against fuel expense. And with the recent items, we've had to make that change. Although the line freight revenue continues to be the line that we will discuss regarding changes in our business.

Regarding that fuel surcharge revenue was 1.3 million, versus 5.7 million last year, down 4.4 million. At the end of the quarter, our owner operators were 344, about nine percent of the fleet. And they drove about ten percent of the miles. That compares to 392 last year. And they were about 11 percent of the miles last year. So as far as miles, they were about the same percentage of miles this quarter, this year, first quarter versus last year.

Our capital expenditures, we had a net $15 million of Cap X. In the quarter, expectations for the year continues to be around $80 million. Although our balance sheet did increase about four million dollars during the quarter, bringing our debt to cap to 38%, we reduced our overall indebtedness, including on and off balance sheet debt by five million dollars during the quarter. Our total off balance sheet debt at the end of the quarter was $82 million versus $90 million at the end of December.

Regarding expenses, obviously the big area of reduction is in salaries. It was down 340 basis points versus a year ago. Two main reasons for that, on average, 300 less teams than a year ago, as David mentioned. And the majority of our call savings, or a lot of our call savings program, are focused in this area. Fuel we had, it was obviously up and down. On the positive side, it was 26 cents per gallon less than a year ago, with fuel costs on the negative side, obviously $4.4 million less fuel surcharge.

And we had a $1.4 million swing, versus a year ago, in our purchase commitment and hedge program. Negative swing. Overall, fuel was not an impact at all versus a year ago. With fuel, net of surcharges being 20 cents per mile, this year, and last year. Remember, our program is designed to minimize the volatility of wild swings and fuel prices. And historically, our fuel cost, on an annual basis, is around 19 cents per company mile.

Whether it's the low fuel period of 1998, or high fuel period of 2000, it operates at 19 cents per company mile. Operations and maintenance was up slightly, a negative impact was increased tire and over the road maintenance expense by about $800,000 versus last year. We did have a positive impact, reduced recruiting, and new hire expense due to our trucks being full by about $300,000. Insurance in claims was up about two cents a mile. Obviously we started our new program in March of 2001, which included higher deductibles.

We continue to build reserves as this program develops. We had a pretty good quarter, accident wise, in the first quarter, and were able to reduce our expense about 50 basis points, from 6.3 percent in the fourth quarter to 5.6 percent in the first quarter. And as we discussed in January, we were able to extend our coverage to March of 2003 with only a minimal increase. General supplies. Bad debt expense increased approximately $400,000 over a year ago to continue to account for recently bankruptcy filings.

Appreciation and amortization. As we disclosed in January, we increased the depreciation on our 2001 model year trucks that were not included in our new freight liner agreement. This impact was about a half a cent a mile. In addition, we recognized a $500,000 loss on disposal of trailers in the first quarter of 2002, versus about $100,000 gain last year in the first quarter. Also, as compared to a year ago, we had substantially less trucks financed through operating leases.

And conversely, more trucks being owned and depreciated. It's about 350 more trucks that we own and were being depreciated, although the fleet in total declined, it's just a between operating leases and company owned equipment. In summary, on the expense side, David's already mentioned it, but I want to say it again. Even with their insurance and claims up two cents a mile, our after tax cost per mile did decrease a penny a mile.

charge. Let's quickly just revisit that, as we disclose last quarter, we recognize a 14 cents per share, or two million dollar after tax charge to reflect an impairment tractor value as this charge relates to 325 tractors that were not included in our fourth quarter, 2001 charge. Additionally, we recognize that six cents per share, or 900,000 after tax, item to reflect the early extinguishment of debt, in conjunction with a prepayment of the company's 7.39 percent private placement notes.

We determined that due to an approximate 500 basis points difference between the coupon on the private placement and our current barring rates, combined with a relatively short average remaining life, that the savings moving forward were large enough to warrant the prepayment. Our effective tax rate increase for the quarter, I just want to remind everybody, due to the adoption of our new per diem pay plan that we started in the third quarter of 2001, current tax law, this allows the deductibility of 35% any per diem payments.

As our profitability improves, as well sa the deductibility of our per diem increases to 80 percent, our effective rate will continue, will decrease. In summary, regarding our expectations for the remainder of the year, we will continue on our mission of improving our profitability by constraining our fleet growth, number one. Number two, focus on improving utilization. Number three, focus on improving rates. Number four, lane density, and number five, lowering costs.

I think in the first quarter, we illustrated that we're well on our way towards addressing those five areas. Until we see freight begin to improve significantly, and David's talked about, we feel that our freight revenue for the year will be in the $540 to $550 million range. And earnings for the year will be in the 63 cent to 68 cent per share range. The second quarter will see the largest decline in freight revenue versus a year ago, mainly due to last year in the second quarter, our units did increase.

And so continuing on about 3700 trucks, which is where we are now, into the second quarter, you're going to see the biggest decrease in revenue in the second quarter of about five percent. But earnings should be in the 13 to 15 cent per share range in the second quarter versus four cents a share last year. So with that, , we'll now open it up for questions.

At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone key pad. The first question comes from Ed Wolf.

Hi guys.

Hi Ed.

Joe, I missed at the end, I heard the very end guidance of 13 to 15 cents for the second quarter. What other guidance did you give?

Revenue for the second quarter down about five percent. Revenue for the year, five hundred in freight revenue. Freight revenue for the year, 540 to 550 million and earnings in the 63 to 68 cent per share range.

Hey Dave, you said that at the beginning of what you were doing, that January was very strong. Almost everybody else who's reported has talked about January being very weak. And also, you, most people, the sense I've been getting is January is very weak, February started weak and built a little bit, and March was pretty decent year over year. And April's taken a little bit of a step back, is more in line with a year ago. It sounded from you that January was stronger than that other, what I've been hearing, and also that April might feel a little stronger.

Can you sort of give a sense why you think you might be seeing some strength, or might have seen it in January, and did I read that right, that April feels a little bit better than just even with year over year?

Yes, and, you know, I think a lot of that has to do that, you know, we are just, you know, working the out of bringing on new business and making sure that marketing is doing the job out there. And I think January, as compared to regular Januaries for us, was a good utilization month for us. And we did, I mean, we brought on about 14 million annualized of new business in the first quarter, which is a pretty solid number. And some of that new business came on immediately after the first of the year.

So that helped us in the month of January on new business. And as important as that, the thing, you know, we've been preaching for a year or so, is that I know as the economy improves, those old 100 accounts that we haven't lost, we've only lost three or four accounts. We have not lost much business, but we just had a lot of our business that was down last year to the tune of 17 to 24 percent. And all of a sudden, in the first quarter, is down eight percent.

So that, it's those two numbers that are allowing us to fill that bucket that's going to allow us to be able to see the increase of utilization. So January is I agree with your statement on February. You know, it just kind of started off a little slow, but then it got better the last couple of weeks of February. And then, in March, you know, the first ten days of March, we were saying, hey, I don't know. I'm a little concerned about March is that what's happening here. And then it just kind of started going very nicely for us.

And what ended up the last ten days of March has continued over into the first 18 days of April. So, you know, we are happy in terms of utilization of where our April is. And either because of ISMs at 55, is it because the economy's getting better, is it because we're continuing to bring on new business, I think it's probably all of those. But, you know, I just, if the next two months hold up like April in terms of utilization, going to be happy.

Yes, I hear that. Is there any particular industry, are you seeing it more with LTL, or are you seeing it more with stuff off the ports in the west coast that you can point to? Where's the strength in March and April?

I'll tell you. Ed, we are really seeing that across, really across all lines of our business. God, that's funny, the only, right now, I am satisfied virtually with every region of the country as we speak today. The east coast, it's funny, because the first six weeks up on the east coast, it was very good. And then we went through about six weeks there, where it was weak . But now, the east coast, in the last ten days, is starting to pump pretty decent for us.

And, you know, the port January was very good out in LA. February, I think, predominately because of the Chinese New Year, it fell off, or, you know, out of the ports. March, California was good for us, and so far in April, California, the ports have been good for us. And, you know, I don't know how that's going to happen, Ed, in terms of how, I know how all of y'all, and I know you had a conference call about the port and what's going to happen in, you know, June and July and those kind of things.

And is any of this preloading and those. Maybe it is, but the thing that I look at is this. Is that, keep in mind, from July to December, we literally, in every, all the carriers, we literally can probably load 50 to 100 loads a day out of Los Angeles, and it just keeps building after July all the way up through Christmas. Some of that is port business, but all of that's not port business. Because here, May 15th is a magic day that we use internally because that's when, quote, the produce really starts heavy.

So we'll start hauling our produce, we're hauling now, but it's really when the pricing gets up and things start going well in the produce that starts drying up the amount of trucks in the state of California. So I personally don't think that the import business, even if they go on strike and they have a two month lull or a three month lull, I don't expect this to fill up dramatically, because of all these other things. So that's my take on the port.

Makes sense. I appreciate the time. Thanks a lot, guys. Great job on the .

Your next question comes from .

Hey guys.

Hey David.

I had a question for you regarding owner ops. Sorry, not owner operatives, teams. You know, salaries, wages and benefits came down partially because you were using fewer teams. What to you is the optimal percentage makeup of the company, teams versus single?

A, I'm not sure. B, I tell you, that's something that we are, we have been studying now since we did that a little bit over a year ago. About a year ago in April, I believe it was. So 12 months ago, you know, we were sitting there, 'cause, we were sitting there trying to determine, how do we get our calls so on our driver pay down to where it ought to be in relation to where this economy is going? Because we weren't running those teams the way that we wanted to run them.

And so, after realizing, it took us a year to figure out that maybe this economy's going to be a little bit slower coming back than what we thought it was, we decided we had to make a move to get the cost side down. So we did that on our teams, and the teams that we got are running very dramatically. I want to tell you, it's going to be one of two things. As we, we will, we will increase teams as our customers A, ask us to increase them, B, are willing to pay us for them.

There's no doubt that the teams cost more money than a single guy over here, and, and the pricing has got to be able to pay the difference when that customer is asking for teams. And if they're not willing, then we'll keep them where it's at. If they are willing to increase the pricing and allow us to, you know, make good money on our teams, then we will increase them. So we will, I don't know where the is. Our customers and the economy will dictate what does, is it 13 or is it 2000, 1300 or is it 2000? And we will adjust it going forward, during the economic cycles of good and bad, accordingly to how our customers are willing to pay us and how many miles we're putting on them.

OK. In terms of Cap X, Joey, you said 80 million for the year. Was that gross or net of dispositions?

That's net of dispositions.

OK.

'Cause remember, there's a thousand trucks that are start, being traded in April, that run all the way through December.

I'm sorry?

You're going to have, obviously a large majority over the next three quarters.

Right.

But that said, that eighty million again assumes that 100% of the trucks and any trailers that we trade are financed on balance sheets. So again, we don't know on each package as we move from month to month, quarter to quarter, where it's going to go either on or off. We just look at, we bid it out, whatever's the most economic transactions for us, we will do that. So, conservatively, we give you the number assuming that all of it's on balance sheet.

In light of a lot of the consolidation we've seen in the reefer market, and I know this isn't a huge part of the business, but are you guys stepping in anywhere? Are there any opportunities to grow the business in that respect?

You know, we got our reefers really performing very nicely for us. I mean, at the end of the day, you know, I think we've got what, a thousand. About a thousand refrigerated trailers. And I would say there's about 700 of those trailers that we are really performing nicely for us. So we will, we will take those other 300 and either build into the traffic lanes that we're doing, we're doing some Pacific things on our reefers that I really don't want to announce, because I don't want everybody's brother to know it.

But we're doing some Pacific things in our reefer business that is doing very well on the amount of trust that we're running. And I think we're running about 300 trucks or so in that reefer division. A little bit more than that. Between three and four hundred trucks in our reefer division on about 700 trailers. We'll either keep it there, 'cause the profitability is nice, or we'll increase it if we can, in the lanes that we are doing currently.

OK. I, one more, one question. One of your key customers is looking to expand their business on the ground to a much greater extent than what it is right now. I want to get a sense for how high you would allow, you know, one customer to reach as a percent of revenue.

You know, we have kind of had the number internally that if somebody starts getting over about ten percent of the revenue, then we start kind of looking at it. And we don't have anybody that is there at the present time.

David, it's Gary .

Yes, go, Gary.

And maybe it was addressed earlier. I had to jump off for a second. If it wasn't, could you talk about how far you can, how long you can wait before having to acquire some, one of these new engines if the rules don't change?

Our trucks that we've got coming in this year are in good shape, so I guess it's, what they do, your model changes next April, will be the time that we will have the new engines.

And how many, roughly speaking?

Where we, in the next two years, this year and next year, is about 2,000 trucks, 2,100?

Twenty two hundred, a thousand this year, and 1200 next year. All the trucks this year will have the old engines on them.

It doesn't pay for you to go into the used market and try and find a balance maybe between used and new? That math doesn't work?

I think that we've found that balance. You know, as we extended our trade cycle to four years, Gary. And, you know, the cost of capital versus what you're seeing on our maintenance side going up a little bit, we feel comfortable about where the balance is at right now.

Have you been able to do any bench marking with any of the new engines?

No.

No.

I had Detroit in here yesterday, and, I mean, they don't, you know, we can't even get an engine.

Right.

I mean, no. No bench marking at all.

Thank you.

Thanks, Ed.

Your next question comes from Tom .

Hey, good afternoon.

Hey Tom.

A couple of questions here. Joey, what was the amount of the private placement? The debt that you paid down, and what is your average cost of debt right now?

Private placement was 20 million. Began in advertising last October, five million dollars a year, and the current balance is 20 million. And our current borrowing rate is around, on average, 2.3 to 2.4 percent.

OK. And then, in that other category, other expenses net?

Yes?

What are the components of that?

One point one million interest expense, write out a million of interest expense. And the difference is interest income, and about $200,000 of reversal of the third quarter 2001 interest hedge adjustment that we took in the third quarter of 2001 as rates continue to rise that will slowly begin to reverse itself. Last year, though, that compares to 2.3 million total, of which 2.6 was interest expense, and the difference being interest income and about $200,000 of earnings from .

So interest expense was a significant reduction, and then the other items in there were about the same, versus a year ago.

OK. And then the debt expense is in which category? Do you just net that against revenues?

No, that's general supplies and maintenance.

OK. And you're hedging, I think you said for the rest of the year, what? About 15% of your purchases are currently hedged around a $1.25? Is that correct?

Seventeen percent right now. Where fuel stands today.

OK. And then, OK. That's it. Thanks.

All right, Tom.

Your next question comes from .

Hey guys.

Hey Dan.

Hey Dan.

Just a couple of questions here, and I apologize, I got on the call a little bit late. Some of these have already been answered and/or asked. As it relates to capacity additions, I know, you know, you guys have shown some pretty steady resolve not to, obviously not to add any tractors. What changes that as we move forward? You know, where is the inflection point, David?

Hey, large as margins. I mean, margins are going to drive us, it's going to drive us for the future, for, to me, probably forever. I mean, that's going to, you know, it's the way in which we're going to operate this company. And we're going to get this company, Dan, back down into the 90 top number, that Covenant is used to operating at, our operating ratio. And period. And our goal is to continue to grow. I mean, we're, we got a young management team.

I'm going to be here for another 20 or 25 years, and our goal is to continue to grow, but not at the sake of just adding a truck because it looks pretty running down the road. We're going to add trucks when our customers are willing for us to make the margins that we ought to be making in this industry, and we don't have to get to a ninety before I add a truck, but I want to tell you, we're going to go from, you know, '98, '97s, first quarter this year, '96,

I mean, when we start getting down into the '93 top number, then we will start looking at adding equipment if we in fact know that the '93 is en route to a '90 OR. So it's not that we gotta get to a '90, but we gotta have sole confirmation internally that we're heading to a ninety before I add trucks.

Understood. Could you give us a sense, I guess, Joe, directionally, you know, what's happening to length of haul as you change your business mix a little bit?

I'll answer that, Dan. You know, I'll tell you, the length of haul is interesting. I mean, we have the longest , all those things that, you know, you know about. And, you know, I hear various reports and I won't say that they're wrong, but in the last couple of years, the long hauls got hurt much greater than the short haul. There's more freight in the short haul. Those kind of things that I don't disagree with those. We will continue to grow that short haul.

But also think that there's some great opportunities, is one of the reasons why you're seeing the length of haul that has increased. There's great opportunities that we see on the long haul, there is no doubt that a lot of the companies that have gone broke, and I don't know how much, but you know, quite a few of them that have gone broke in the last couple of years, are your mom pops, small companies, most of them got a reefer hooked up to their truck and they go out to California to haul produce back.

I mean, that is, a lot of those companies are out there. And, you know, we would sit there, trying to figure out over all these years, you know, how do you, on the east to west, the rates would always be higher east to west than rates are coming west to east. And that's a given. That's the way that the business model has always been. But we're starting to see that change somewhat. Gradually, but we are starting to see, I think that the opportunities, if this happens, it's going to be gigantic.

I think the opportunities are there that if the, outbound out of California, continues to be strong, as it has the last couple of years, and as we have seen pricing increase outbound out of California, the days of California acting like you're just trying to get your truck out of there are virtually over with. I mean, it's starting to run head to head with the southeast with, you know, with Midwest almost, not quite, but almost. And the pricing is started rising out of California.

The question is there, is will the pricing rise enough out of California that will allow you, if you elect to, to even lower your rates east to west to capture the business that's going on refrigerated trailers right now, some of our own refrigerator trailers that are going out there with the mom and pops, hauling produce back, so thrilled to get to California just to haul the produce. I think that it has.

I think that it will in the next couple of years, and that's one of the things that we're looking at internally is that marketplace. And we think that, we think are some good opportunities there. But the next couple of years will bear that out. We have not given up on this transcontinental, you know, we know how to make money, good money, in that traffic lane. And I think the pricing, it will continue to increase transcontinentally. And even though it's not as big as the regional , I mean, how big is it? Bigger than we could probably ever get to. I mean, it's a big marketplace.

Understood. OK.

So that's what you're seeing on the length of haul a little bit, Dan.

Appreciate that. Just a couple of housekeeping items here on the income statement then. Depreciation and amortization, just wondering, you know, what sort of expectation should we have now moving through the rest of the course of the year? Joe or David.

You know, we were almost, you know, it's going to be around eleven cents a mile, kind of what to expect. It's going to continue to move up as we trade the '99 model trucks this year and replace it with a slightly higher priced Columbia, with a lower residual, albeit now we will have guaranteed residuals. You know, we talked about, in January, that the trade package will cost us, once we get through it, which is a two year process, about a penny a mile annually.

But, and it will build over time. So, you know, you'll see depreciation move from 10.8 million without the impairment charge, you'll see it move, you know, into that eleven to 12 million, or around eleven cents a mile, as we move forward.

Have there been any changes, I guess, in used trailer market? Are you seeing, you know, reductions, I guess, on that side of the equation? Is that becoming a more competitive market whereby you wouldn't be getting I guess the same level of pricing that maybe you have in past years? And I guess this specifically relates to the change in depreciation schedules in your trailers. What's your trailers?

You know, we've seen a couple things. We've seen more pressure put on the price of the old trailers. I think a lot of that has to do with Wabash flushing out their inventory, and I think that that will bounce back in the next couple of years as they continue to flush out that inventory. We've also, though, seen on the trailer side reduction in price of the new trailers, which kind of has gone hand in hand virtually with the reduction in the price of the use side of it.

So they've kind of gone hand and hand. And, you know, in the trailers, even though there's pressure there, that is at least one item that, you know, you can run these trailers for a long, long, long, long time to see exactly what the market's going to do, long term, versus the trucks when you can't.

Sure, sure. And then just last item here, insurance and claims. Can you talk to us just briefly about accident frequency and severity driven quarter?

I don't know how, if Joey has those. I don't have those. You know, we're very happy where our numbers are, Dan. I mean, our accidents have improved very dramatically. We don't have the major, major accidents as much as we have some incidences out there that happen. Truck stop cop deals, you know, in the truck stop parking, and so those are things that we look at from that standpoint.

Would that suggest, then, I guess, that your major accident levels are, frequency is maybe below trend?

Yes, it, ours is below trend, compared to where it was at. Yes, we are seeing improvement. You know, we really look at five items. We look at what we call critical four. One is construction zone accidents. One is rear end accidents, one is roll over accidents. The fourth one is lane change accidents. I mean, those are the four, and then the fifth one is incidences. Less than ten thousand dollars per incident.

Those are the five that we , but I personally really, we scrutinize. And we are seeing nice deductions on, definitely in the four critical ones. And I'm actually in the last few weeks have seen reductions in the incidences. So, you know, I am, is it where I want it to be at? It never will be until we don't have a wreck. But I'm very pleased where we are at right now, as compared, since we've been self insured for a year.

When it really, even though safety is very important, but, you know, when you did, we add zero deductible, it was very important, but it wasn't something that took up all your time. And now, it can take up a lot of your time.

Thanks, guys.

Your next question comes from Nick .

David, Joey, good morning.

Hey, Nick.

Hey, Nick.

I just wanted to follow on on a comment you made earlier, David. And I'm curious what you think are the factors that may be influencing the rising outbound rates from the state of California, other than perhaps diminished capacity of owner operators. Are there other larger truck fleets that have either disappeared or downsized significantly from these lanes? Or are there other factors you can think of that you attribute to perhaps the rise in rates out of California?

I think you got a couple of things. I think that imports are still continuing to be very big in this country where, you know, port of Long Beach and LA and a little bit of Oakland, the is, Tacoma is continuing to increase in volume. So there's a lot of imports that coming in to the state, so that helps the state of California. And besides that, though, we're, the positive side of, if you're in a slowdown, I do believe that the small carriers continuously run in the transcontinental lanes.

And when they become a cash flow, that's all they're concerned about is cash flow, during recessionary times, that can prove a maybe more to us than some other folks out there that run regional bases. But I'm also starting to believe that during the good times, when things are starting to come back, those carriers are gone. And you've got these regional guys out here that are hauling their regional freight, doing very well,

And they're happy and they're regional, and they don't even run on the transcontinental. So there's only X amount of us that are saying, hey, we are a team player, transcontinental. So as the economy picks up, I'm not so sure that the customers have a gigantic, during a slowdown, they can decide whatever they want. But when the economy starts picking up, I don't know how many choices they truly have got out there.

And so, as a mom and pop have exited, and continue to exit the marketplace, I think it's another thing that will allow us, and is allowing us, to increase pricing out of the west coast.

Is it your sense, or have you observed any of the larger fleets? And I don't know what you'd call larger, 100 to 300 trucks that have actually pulled capacity out of the long haul market, or specifically California lanes?

I think in the last couple of years, besides the ones that have gone out of business, I think that the last couple of years, that everybody has just been looking for about any kind of freight they can find to put on their trucks. So I don't know in the last couple of years that they've made a direct decision that said, I'm getting out of that. I think a lot of them were forced to get out of it, just because they went out of business in those kind of, or downsized their company in half.

And those kind of things. But no, I can't say that I have sit here and said, hey, in the last two years, they have decided to get out of the west coast market. I do see carriers, though, and, you know, we have no problem being there. I do see carriers that sit here and say, I'm going to tell you. If I can't make the money that I didn't even make on the transcontinental lanes, then, you know, then they're not a run in. I've seen some of them pull back a little bit and try to go into other areas. So, to answer your question, yes, I guess I have seen that. I just don't know how, to what extent.

Well, I guess what we're all trying to figure out, those of us that observe the industry, is to what degree and improvement and rates in certain corridors, especially out of California, as a manifestation of diminished capacity. But may manifest itself as the economy recovers throughout the entire trucking business.

Yes.

That's the train of thought I'm trying to understand a little bit better.

Right, right.

Given the nature of your long haul business, it may be more sensitive to this change in capacity as you described it earlier.

Right, right. And you might be right. If, in fact, if, in fact the companies that have gone out of business the last couple of years have ran a lot of the transcontinental lanes, then that could have one impact on that, which is a positive impact. Maybe they weren't running the regional. But I don't know, I looked out here outside my office here, and I see a bunch of little, small mom and pops running regional also, though.

Could you just give us some idea, assuming there's been some capacity diminution, what peak rates were in the past, where you are now, and what you, just, I realize it's totally speculative, but where you think rates might be this fall if, in fact, the economy shows continued improvement? Just to give me some sense of the leverage that might take place?

There is coming a day, Nick, I don't know when, but there's coming a day, in my opinion, where carriers will be . If it's not at one shot, then it's over a 12 month period of time. They're going to be seeing somewhere in the neighborhood of five to eight cents per mile. The carriers are attempting to, we're talking a good game with our customers. We're not lying to the customers, we're telling them all the truth about what's happening in this industry.

But you cannot have insurance going up cents a mile. You can't have engines going up three and four thousands an engine. You can't have depreciation going up one and two cents a mile, and anybody in this industry think that they don't have to pass that on to the customer. They will come, the only thing that everybody is waiting on, because the customers right now are doing more bids, I mean, you, I will tell you, I can count, truly, I think that we probably can count on our left and right hand, the word true partnerships with customers in the last ten years.

And I love my customers as much as anybody. But I wanna tell you. You really find out in the last couple of years who your true partners are. And I want to tell you, we have found out in the last couple of years who our true partners are, and that's going to change. I mean, is it tomorrow, August, September, a year from now? But it absolutely will change, and then they're going to find out who their true partners are.

Because I'm not going to go in to put the screws to them, but I am going to go in, and we are going to say, here's our cost of operating, the same way freight liner is, the same way the trailer people are, the same way the insurance people are. And us truckers have got to get enough guts about us to be able to go in the marketplace and say, we're going to increase our pricing. And that will happen. It's just a matter of when. Because when you both know, if you believe in economics 101, the capacity is drying up in this industry.

And it's continued to dry up. The problem we've had is the economy in the last two years has gone down further than the capacity, faster than the capacity has dried up. But there's a day that it's coming, not to put the screws to our customers, but for us to at least make the same returns that they're making. And if they don't think that's fair, then they need to find out, maybe they need to ship it on a boat or something.

You know, that's the way I look at it. But I'm not going to say that I wanna be at an 80 OR to my customers when they're not there. But I wanna tell you, if they got ten percent margins, then we ought to have ten percent margins, and we should not be embarrassed to ask them for that. They're not embarrassed to tell me that they made ten percent. So, but I want you to know, I love all my customers. fairwall: And none of them are listening, Dave.

I'm, you know, I hope they are. They bought the, you know, we always speak truth to them, and they know that also. They know what we're saying. They've heard this, and virtually every one of my customers have heard this, and they know it's true. They know that it's going to happen, and it's just a matter, you know, of the ones that they want, do they want to do business with a strong carrier, do they want to go and change carriers every three months? But eventually those every three months are going to run out. They're running out now.

Well, one of the arguments has been that with the, perhaps, shrinkage of capacity, given the lack of capital availability to, in many owner operators, then it will take incrementally longer this cycle for that marginal capacity to return to the marketplace so that actually you may find rates rising faster earlier in the cycle than you had in prior cycles. Does that...

Hey, no, let me tell you. You are a hundred percent correct. No, that is happening. That is going to, I mean, the way I see it, Nick, and I want to tell you, the reason why I'm excited about April, and I'm not ready to get up here, I just told you all that if April, May and June have, May and June utilization wise, is similar to April, we're all going to be pretty happy about those numbers. And I can, I think that we will see this capacity starting to take place in the marketplace, but it is.

It is going to happen as you, as we hit the window, as we hit the door, or the wall, when the economy in January 2000 started falling, the same thing's going to happen on the good side of it. We're going to feel like we hit a wall to the good, and we got more business than we know what to do with. And it's just a matter of going to happen. And when it does happen, what you just said there, is I think absolutely is going to happen. That you're going to see greater opportunities for strength.

Because there is truly a barrier of entry in this marketplace as you and i are speaking, I was thrilled. And I don't know if anybody caught this or not, but I was thrilled to see, you know, Federal Motor Carriers' come out and say that new entries into the trucking industry are going to be graded just like they're grading the Mexican carriers, they're asking about the NAFTA to start hauling freight over here.

And that they have got to prove to them, before they're going to get a DOT number issued to them as a new company, they got to A, prove to them that they have got safety guidelines in place in their new start up business, and then I believe it's 18 months after they've started that they will come back in to make sure that they have safety. And that's all we're asking for, fellas, is this.

Is that the new entries that go out here, that have no idea about their costs, and run down to my customer and put a dollar a mile in when their true cost is a dollar ten, but they don't know it for a year until they go out of business, those are the ones that we've got to have the barrier attacked. When you're sitting up here at Covenant and all the other companies doing all the wonderful safety, and trying to make sure you're doing things right, and hiring good drivers, they don't need to be hiring the drivers that could not work for me.

They need to be under the same schedule, and that, besides the finance side, the safety side is starting to attack them now, and that is going to create even more of a barrier of entry, and that just happened in the last couple of weeks.

David, I missed that. Thank you very much. One other quick question, and that is, what's your perception of the impact of a longshoreman's strike, assuming it's relatively short, meaning, you know, a couple of weeks, as opposed to something, not that this is predictable in any way, but something that would be of a longer time frame.

Yes, A, if it's a short time instead of California operating on a A schedule, it's going to be operating on a B schedule. I mean, I just don't think, you know, if I load 150 loads a day out of LA, maybe for that short period of time, I'll load 125 loads.

OK, but with presumably the anticipation of that means that port of entries and other gateways might be used, whether it's Portland or Seattle, and ...

No, they're part of it also.

Well, I was just saying, but the longshoremen might pick a port...

Oh, I've got you.

in the past they have, you know.

Yes.

They pick usually LA or San Fran...

Yes.

...to a lesser extent Oakland.

Yes.

But other than something very long, that I guess is what you're saying is, it doesn't really make much difference. You're going to pick it and move it anyway.

A, that is correct. And also keep in mind something a little bit different on . Number one, if all that happens, whether it's a small one or a little, or a long one, I mean, it's going to affect us somewhat. So I don't want to act like it's not going to affect me at all. But keep in mind, we do have something different out here that a lot of other trucking companies don't have, and it's called 1,000 refrigerated trailers that I'm utilizing about 700 of them right now.

I've got 300 in a fleet that if we sit there and see the longshoremen's strike that is affecting the dry side, then what we will do is crank up those reefers on those other 300, and we will run to California, the produce starts May 15th, and the produce goes until about October 1st. And we will start running our reefers out there, hauling more produce than what we normally would haul.

Thank you, David, very much. I appreciate it.

OK.

The next question comes from John Barnes.

Hey guys, how are you all?

Hey, John.

One quick question, and I'll turn it over. David, if this capacity crunch develops in May, and you need more equipment, can you further slow down your cycle and hold onto some of these 1200 trucks you're looking at turning in? Or will you be able to go out and find equipment elsewhere?

I have no desire to, I have no desire, when we feel the capacity crunch, we will not react until I know that we are sitting there at 93 ORs headed downward, and if that's two or three months down the road, you know, before we say hey, now it's time to add 100 trucks or 200 trucks, if that came about, what we would probably do first, John, would, right now we've got a stop gap on our owner operators. Other words, our number's 350 on our operators. I think right now we're 344 or something like that.

Three hundred and fifty. We are literally only hiring the amount of owner operators on a weekly basis that we lose. So if we lose ten owner operators, we only allow them to bring in ten owner operators. So if we see that, all of a sudden, capacity gets tight, then the first thing we'll do is loosen up that, and maybe take it up to, maybe add 100 more owner operators. That would be the first line of defense.

The second line of defense or trying to react to it, because you will not be able to go to a freight liner or any of the guys till, before October first and think they're going to build you a truck. We're lucky to get the one built. This year they're going to get built. But you could go to the leasing side of the business. You could go to, you know, Hertz or somebody and start leasing trucks that way. The margins are not as great on that, but you're still making money on it and taking care of your customer.

OK. And then, like a couple others, I got on the call a little bit late 'cause of a longer conference call before yours. Joey, can you hit the guidance one more time? I do apologize. But for the second quarter, 13 to 15 cents, and for the year, I got 540 to 550 million in revenue, and what was the EPS range?

Sixty three to 68.

OK. That's what I needed. Thanks so much, guys.

Thanks, John.

The next question comes from .

Hello.

Hey Donald.

Hey Donald.

Hey gentlemen, good quarter. I wanted to review something with you. I was kind of looking at this, and now I, what I did was I just broke out, I assumed the productivity of owner operators and company trucks is the same to project on company miles and owner operators' miles, and I know that's a little flawed, but...

That's about right.

Yes. Backing out the catch up depreciation charge and netting fuel surcharge and fuel expense, I, yes, definitely see you lowered operating costs here by about 1.3 cents a mile. The company so congrats for that. But the reduction really looks like it was entirely driven, no pun intended, by lower wages. I got 5.1 cents a mile lower. Is that...

Hey, I think that's wonderful. I mean, when I look at our driver pay, Don, that's on any industry that, you know, that's running at what, 30 or 40 percent of your costs, I mean...

Well, that's great, but I mean, is that all related to a lower number of teams? Or is there something else I'm missing here?

Most of it is driving from the, we did a couple of things, Don, the last 12 months. One has been the teams, reduction of that. The second thing has been, we're doing a lot of those, remember those dedicated routes where we've gone into our drivers, and they've actually taken, like, a four cent a mile decrease in their pay, but they go to the top of the line, they're first in, they are first out. They also only work, run, will run certain traffic lanes, and so we got, of this 7,000 loads a week, we came up with about, I think about 500 trucks.

About 500 trucks that are running in our own dedicated. Not dedicated out here, you know, Wal Mart or something, but our own dedicated internal that they are getting a lot more miles. So we got five, in lieu of a reduction in the pay per mile. So it's those kind of things. I mean, we did other things. We, you know, we had a program in effect for 15 years that if you had a load that was destined to the east coast, it paid you a penny a mile. The computer would just do it.

And, you know, and that didn't bring on one more driver. I mean, they got X amount, say 30 cents a mile, and if they got, went to one of those destinations that paid them a penny, we grandfathered everybody that currently, but going forward, if new drivers came in, we didn't have that in there. It didn't affect us one bit. Because of the, you know, signing bonuses and those kind, we did a lot of things that allowed us to be able to do that.

So I'm now getting to, you know, what is essentially salaries, wages and benefits around 53.3 cents a mile. Is that safe to hang out that level and going forward, or is some of this temporary?

No, it's not temporary.

Right.

All right, that's a number that actually should continue to slowly decrease over the next few quarters for some things that we did late in the first quarter.

Unless you add a team.

Unless we added...

Unless you go back and add teams, and if you do that, you're going to get paid for them .

That's correct.

Exactly correct.

The current structured, single team mix, our current fleet size, that number should continue to slowly decrease.

Fair enough, gentlemen. Thank you.

The next question comes from Doug Cole.

Good afternoon, guys.

Hey Doug.

Hello Doug.

David, you mentioned a little bit about the transition of your top 100 this year. And you have 18 new entrants into that ranking. How does that turnover compare with, say, last year? What's the typical turnover? Just if they want to kind of try to gauge how successful your all's efforts, you know, to go out there and select the right freight?

Doug, I don't really know, I mean, I'll be glad to, 'cause I don't have it here in front of me, all of last year's and stuff. I mean, I'd be glad if you want to call me later on, I'll be glad to try to figure that out. I only know that last year, I think we lost, what was it, seven accounts?

Seven.

I think we lost, like, seven accounts that were in our top 100 because of bids or something. We lost very little business, but yet it was down 24 in the first, down to 17% on revenue in the, by the fourth quarter, so I know it's not because we lost the customer. So the turnover of customers is still there. It's just that their business went down. But, you know, I could play with those numbers if you wanted to give me a shout.

OK. How would you just characterize some of them? If you think of those, maybe the 18 that fell out, you know, you know, how much, or give us a couple anecdotal evidence, or cases maybe, where you know, that one of them was manufacturing concern who, you know, put down two of his production lines or something.

Yes.

And some of the business was lost on bids. I mean, can you look at it that way?

Yes. Yes, let me just go down through here. I see a couple that we lost that were Transportation Logistics Company because we would not agree to million dollar coverages. That's one of the things that we've done in the last 12 months is that, you know, that we have reduced, we've only got a couple of accounts now that have got insurance of a million dollars. They're just $250 to $500,000 exposure. We have gone to our customers and have said, we can't handle it no more.

We can't afford to haul, you know, your computers if you're going to require a million dollar number. And so we have lost some of those where, just going down the list, two or three of them were accounts that their value of their load was just too high for us, versus the profit margin that they wanted you to make on their account. Some of the USPS, the postal, you know, when they did their thing, went from, you know, we had business with a postal.

That when they did their Fed Ex business, a lot of that freight started going into Fed Ex, and so they started, we lost the business there. So I see post the, a couple of them was just as good news. A couple of them were brokers in the top 100 that you don't want them in the top 100 anyway. So it's business as you replace them, I see a couple of brokers.

That gives me enough. It's gone pretty long. Let me throw one more thing out there. How would you grade the rest of your peers out there? I mean, most of the guys that we have contact with, and that we see, you know, the bigger companies like yourself, seem to be telling a similar story. Look, it doesn't make sense to add equipment until the, you know, returns justify it.

How would you grade the group, and then below then, will the, you know, the 100 to 300 truck carrier that Nick's talking about, well, are there any of those guys that will catch on and, you know?

Here's the way I look at it. Number one, I have never seen a commitment from the CEOs of the large companies like I sense out there right now. I now think everybody virtually is absolutely sick of where they're at. Even during the good times, the margins were not acceptable margins on a lot of carriers. And I think that everybody right now is on the same page that, you know, this thing is just growing to be growing, it's not the answer.

The margins are what are going to drive it. So I feel completely assured that that will continue onward, going forward. I also believe that even your small companies that get through this mess and are able to survive the last couple of years, or maybe the next six months, how, whatever it is that we get out of this thing, the one that survived it, I think there's a couple of things. I think you're going to see those folks right now, they're not going to be able to grow as much.

Even if they wanted to, I think that they probably are surely are looking at their margins. But even if they're not, Doug, I think that their bankers are going for ability to be able to get credit, to be able to get capital. I think it dried up dramatically, and now you got the bankers that are sitting there saying, you want to borrow money and you've got a 98 OR and you want to add 50 more trucks? We're not going to allow you to do stupidity stuff.

So I think now that we've actually got outside forces that are going to help us from creating our own evil empire. So I think that the, either small mom and pops are going to be regulated, even through their sales or outside forces that will not allow them to go and do stupid stuff.

OK, that's all I have. Thanks, guys. OK.

At this time, there are no further questions.

Guys, we appreciate everybody joining us. I know you've got a bunch of conference calls the rest of the day, so we'll get off here. Thank you, we'll see you in a few months.

Thank you for participating on today's conference call. You may now disconnect.